33 FINANCIAL MANAGEMENT
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COM(08) 866
| Commission Communication: Towards a common understanding of the concept of tolerable risk of error
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| Legal base | —
|
| Department | HM Treasury
|
| Basis of consideration |
Minister's letter of 23 July 2009 |
| Previous Committee Report |
HC 19-viii (2008-09), chapter 8 (25 February 2009)
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| To be discussed in Council
| None planned |
| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
33.1 The European Court of Auditors currently uses a 2% materiality
threshold as the general acceptable level of error for all expenditure
areas. This measure is also used by the Court in drawing its conclusions
on the legality and regularity of underlying transactions in its
annual reports on implementation of the Community Budget. The
concept of tolerable risk for Community funds was first introduced
by the Court,[121]
which made it clear that "transactions can rarely be absolutely
free of error, and a degree of tolerance in their accuracy is
therefore acceptable".[122]
The Court has further indicated that, because of the inherent
risk of some funds, 2% is not necessarily the right benchmark
for balancing the costs and benefits of control in some areas
of the budget. And so it has called on the Commission to propose
rates of tolerable risk of error and for these to be decided upon
at political level.
33.2 In this Communication the Commission suggests
an approach to tolerable risk and illustrates the efficient control
costs for two Community funds. The annexed Staff Working Document
outlines in more detail the model and the specificities of the
work carried out. Together these documents provide guidance on
how the concept of tolerable risk could be analysed and examples
to illustrate how varying levels of tolerable risk could provide
cost efficient controls for the Community. In presenting this
Communication, in December 2008, the Commission hoped it would
stimulate further debate and provide a basis for institutional
agreement on the way forward in analysing the tolerable risk of
error.
33.3 When we considered this document, in February
2009, we heard that the Government welcomed the Communication
as a basis for further discussion on the issue of tolerable risk
of error. However, we also heard some cautionary remarks from
the Government. We commented that, for all these caveats, this
Communication was, as the Government acknowledged, a basis for
further discussion of the issue of tolerable risk of error. We
concluded that, before considering the document further, we wanted
to hear from the Government as to developments in carrying forward
the issues raised. Meanwhile the document remained under scrutiny.[123]
The Minister's letter
33.4 The Economic Secretary to the Treasury (Ian
Pearson) writes now to tells us that there have been some initial
discussions of the Commission's Communication at meetings of the
Budget Committee, saying that:
- the start of this work was
welcomed, however there were still some concerns about the methodology
used by the Commission;
- it was felt that there were some key points which
needed to be looked at going forward — that is, the quality
of data needs to be improved, the scope for improving existing
systems needs to be examined carefully and simplification must
be taken forward in order to reduce inherent risk;
- there was focus on the fact that, in order to
take this issue forward, data on the current programming period,
that is the Financial Framework 2007-2013, would be more pertinent
and that it would therefore be necessary to wait until 2010 for
such data to be available in sufficient detail;
- it was felt therefore that a lot more work needed
to be done before an informed view can start to be taken on the
concept of tolerable risk;
- the Commission pointed out that its Communication
was not a proposal, but was intended to stimulate discussion;
and
- with this in mind, the Commission is likely to
come forward with a further Communication towards the end of 2010
or early in 2011, by which point the benefits of simplification
may be beginning to be seen and it would be sufficiently far into
the cycle of this Financial Framework for the use of 2007-2013
data to be feasible.
The Minister adds that this Communication would be
the basis for further discussion and the Government would form
a view in the light of such a Communication.
Conclusion
33.5 We are grateful to the Minister for this
account of where matters stand on the issue of tolerable risk
of error. We now clear the document, but note that, in due course,
we will be paying close attention to this matter when the next
Communication on the subject, which the Minister foreshadows,
is deposited.
121 Opinion 2/2004 of the Court of Auditors of the
European Communities on the single audit model (and a proposal
for a Community internal control framework) OJ No. C 107, 30.4.04,
p.1 and (26652) 10326/05: see HC 34-v (2005-06), chapter 43 (12
October 2005). Back
122
The DAS [Statement of Assurance] methodology, European Court of
Auditors: see http://eca.europa.eu/portal/page/portal/audit/StatementofAssurance.
Back
123
See headnote. Back
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