2 Financial management
| (31201)
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| European Court of Auditors: Annual report on the implementation of the budget
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| Legal base | — |
| Department | HM Treasury |
| Basis of consideration | EM of 2 December 2009
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| Previous Committee Report | None
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| To be discussed in Council | February 2010
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Committee B together with the Commission's 2008 report on the fight against fraud and related documents, which we have already recommended for debate
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Background
2.1 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 (agencies etc) created by the Community. The ECA publishes
its main Annual Reports, on activity carried out under the General
Budget and on the European Development Funds (EDFs),[5]
on a particular financial year about 12 months after the end of
that year. In addition to these Annual Reports, the ECA also publishes
annually Special Audit Reports on agencies etc and, throughout
the year, Special Reports on its audits of particular areas of
revenue or expenditure. We regularly, but not always, report on
the Special Reports. The main Annual Reports include the ECA's
Statements of Assurance for the financial year in question.
2.2 The Annual Reports and Statements of Assurance[6]
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.
2.3 While the ECA's Annual Reports contain some material
relating to fraud and irregularities, they are not primarily concerned
with fraud against the EC's resources. We reported on the Commission's
2008 Annual Report, Protection of the financial interests of
the Communities: Fight against fraud, and related documents
in October and December 2009, and have recommended them for
debate once this present document is available.[7]
The document
2.4 This document is the ECA's report of the audit
of the General Budget accounts for 2008. It is over 250 pages
long and in considering the report we have been assisted by the
Explanatory Memorandum of 2 December 2009 from the Economic Secretary
to the Treasury (Ian Pearson). As well as providing the Government's
views on the report, it contains a useful summary of the report's
introduction and of each of the subjectspecific chapters
in the report. It also lists references in the document to the
UK, which we annex.
2.5 The first part of the report is a general introduction
to the audit in which the ECA notes that:
- the report covers the second
year of the 2007-2013 Financial Framework (or as previously known,
the Financial Perspective), which sets the limits for each financial
year's budgets;
- its assessments are chiefly based on its testing
of the regularity of transactions, as well as an evaluation of
the effectiveness of the main supervisory and control systems
governing the revenue or expenditure involved; and
- the conclusions of this work form the basis for
the Statement of Assurance.
2.6 The report itself is set out, apart from the
actual Statement of Assurance, in two columns with the ECA's observations
and comments in the first and the Commission's responses (or,
where appropriate, those of other EU institutions and bodies)
alongside in the second. It has chapters on the Statement of Assurance
and supporting information, the Commission internal control system,
budgetary management — bringing together and consolidating
information from individual revenue and expenditure chapters,
revenue and each of the seven activity based budgeting (ABB) policy
areas of expenditure (agriculture and natural resources, cohesion,
research, energy and transport, external aid, development and
enlargement, education and citizenship, economic and financial
affairs and administrative and other expenditure). The report
also lists in an annex the Special Reports published by the ECA
since its last annual report.
2.7 The first chapter of the report contains the
ECA's Statement of Assurance. In this chapter the ECA:
- gives an unqualified positive
Statement of Assurance on the reliability of the EU accounts for
the second year running;
- gives an unqualified positive Statement of Assurance
on the legality and regularity of the underlying transactions
in the areas of revenue, education and citizenship, and administration
and other expenditure, estimating that errors in these areas have
a financial impact of less than 2% — that is, below the
threshold of materiality;
- notes that in the area of agriculture and natural
resources the underlying transactions are in all material respects
legal and regular, except for rural development, where some issues
need to be addressed;
- notes that in the area of economic and financial
affairs the underlying transactions are in all material respects
legal and regular, except for the Sixth Framework Programme for
Research and Technological Development — within this policy
area the supervisory and control systems in relation to enterprise
need to be addressed, with particular attention to weaknesses
in the Sixth Framework Programme;
- is unable to give a positive Statement of Assurance
on the legality and regularity of expenditure in the areas of
cohesion, research, energy and transport and external aid, development
and enlargement — these policy areas are materially affected
by error, though to differing levels;
- comments that complicated or unclear legal requirements
have an impact on legality and regularity of transactions in the
policy areas of agriculture and natural resources, cohesion, research,
energy and transport and economic and financial affairs;
- identifies further progress in the Commission's
supervisory and control systems, with particular reference to
reservations given in the assurance of Directors-General and greater
consistency of these with the ECA's findings; but
- notes that the Commission is not yet able to
demonstrate that its actions to improve supervisory and control
systems have been effective in mitigating the risk of error in
areas of the budget identified in the Statement.
2.8 The second chapter of the report concerns the
Commission's progress in improving the effectiveness of its internal
supervisory and control systems in order to ensure the legality
and regularity of transactions financed by the budget. In it the
ECA says that:
- all Directors-General declared
that they had reasonable assurance that the resources allocated
to them had been used for the correct purposes and that the internal
controls which they had established ensured the regularity of
the underlying transactions;
- of the Directorates-General or services to issue
a declaration in 2008, twelve contain at least one reservation,
chiefly regarding the regularity of the underlying transactions;
- the number of reservations fell from 17 in 2007
to 15 in 2008;
- it scrutinised the 2008 Annual Summaries provided
by the Commission to determine whether the requirements of the
Financial Regulation have been met and whether Member States had
provided supplementary information;
- not all Member States complied with the requirements,
but the quality of the analysis in the Annual Summaries has improved
in comparison to last year, adding value to the declarations of
the Directors-General;
- the Commission has implemented the sub-actions
in its action plan towards an integrated internal control framework;
and
- however, the Commission is yet to show that its
actions to improve supervisory and control systems have been effective
in minimising the risk of error in some areas of the budget.
The ECA recommends that specific and further attention
be focused on the areas of expenditure where it still finds high
error levels and advocates an assessment of the cost and value
of controls, simplified future policy proposals and progress in
the mechanism through which financial corrections, withdrawals
or recoveries are intended to rectify errors.
2.9 The third chapter of the report concerns budgetary
management, that is the rate of implementation of the budget,
execution of programmes, especially cohesion policy expenditure,
amending budgets and outstanding commitments. The ECA, observing
that total appropriations for commitments were €132.30 billion
(£120.60 billion) and payments €117.00 billion (£106.70
billion) — respectively 4.7% and 1.7% higher than in 2007
— and overall the commitment and payment appropriations
were below the Financial Framework ceilings by €2.20 billion
(£2.00 billion) and €14.00 billion (£12.80 billion)
respectively, says that:
- the ten amending budgets voted
during the year 2008 meant an aggregate increase in appropriations
for commitments of €1.40 billion (£1.30 billion) and
a decrease in appropriation for payments of €4.60 billion
(£4.20 billion);
- it welcomes the significant figure for payment
appropriations, since reducing these through amending budgets
is good financial management — adjusting flexibly to in-year
changes and reducing budgetary surplus;
- it has noted an increase in outstanding budgetary
commitments (which arise where expenditure programmes take a number
of years to be completed and commitments are made in years before
the consequent payments) of 11.8% compared to the previous year;
and
- the largest components of the outstanding commitments
are from Structural Funds, which represent around 66% of the total
amount, and Cohesion Funds, which represent around 13.4%.
The ECA recommends the Commission to encourage Member
States to transmit the remaining compliance assessment documents
of the Management and Control Systems — with emphasis on
speed and quality — to avoid further delays in interim payments
and higher outstanding budgetary commitments.
2.10 The fourth chapter of the report deals with
the revenue for financing of the budget — consisting of
14.2% from Traditional Own Resources (customs duties, including
those on agricultural products, and sugar levies), 14.8% from
VAT-based contributions, 60.1% from GNI based contributions, 0.3%
from the UK correction and 10.6% from miscellaneous revenue (including
surplus from 2007, refunds and interest payments). In this chapter
the ECA says it:
- found Member States' statements
and payments on Traditional Own Resources were free from material
error, as were their payments based on VAT and GNI levels, and
other types of revenue were also free from material error; and
- detected as in previous years, problems with
B accounts[8] regarding
delayed establishment and recovery of duties and a lack of national
directions to estimate the amount of debts whose recovery is unlikely.
The ECA therefore recommends that the Commission:
- reinforces its work to ensure
the correct use of B accounts and to keep under close scrutiny
the establishment and recovery of these duties;
- should continue to use both physical checks at
import and post-clearance audits of operators to safeguard the
interests of the Community.
2.11 In this chapter the ECA also continues to highlight
with concern the Commission's reservations regarding VAT and GNI-based
own resources. It recommends that the Commission redoubles its
efforts to reach a solution with the Member States concerned,
so that the VAT reservations are lifted and the relevant corrections
to VAT bases made as soon as possible. With regards to GNI, it
recommends that the Commission puts in place specific rules for
examinations of GNI inventories, since current on-the-spot control
visits do not always give reasonable assurance on the accuracy
of data.
2.12 The remaining seven chapters of the report examine
implementation of the budget for each of the ABB policy areas
of expenditure and report the detail of the problems uncovered
by the audit, including those noted in earlier audits.
The Government's view
2.13 The Minister says that the Government welcomes
the unqualified positive Statement of Assurance given by the ECA
for the second time on the reliability of the EU accounts and
the increase in the percentage of the budget receiving a green
light, that is an error rate of below 2%, to 47% of the budget.
He comments further that:
- the Government remains concerned
about the level of errors in Cohesion Funds and the lack of a
positive Statement of Assurance on the majority of payments made
from the budget;
- having a qualified statement year after year
affects confidence in EU expenditure and the public's perception
of the value of membership of the Union;
- much more needs to be done by both the Commission
and Member States to achieve the mutual aim of a positive statement
of assurance on the budget;
- the Government remains committed to improving
its management of EU expenditure and in October this year published
the second Consolidated statement on the use of EU funds in
the UK;[9]
- this statement is audited by the National Audit
Office and presented to Parliament and helps to increase assurance
of the UK's use of EU funds;
- the Government is taking the lead in encouraging
Member States to take greater responsibility for the roughly 80%
of the budget that is co-managed and hopes that such initiatives
will contribute to the achievement of a positive Statement of
Assurance in the future;
- the Government welcomes the ECA's comments that
such initiatives promote transparency of EU expenditure and have
the potential to reduce error rates by ensuring increased operational
effectiveness of systems;
- the Government welcomes the recommendations of
the ECA relating to the considerable impact of complex and unclear
legal requirements on the legality and regularity of underlying
transactions in the areas of agriculture and natural resources,
cohesion, research, energy and transport and economic and financial
affairs;
- the Government is committed to working with the
Commission to simplify procedures and reduce errors that occur
through complexities and unclear regulations;
- the Government notes the ECA's statements relating
to the cost and value of controls and expects the Commission to
bring forward proposals on the costs of controls of research,
energy and transport, rural development, external aid and administrative
expenditure in 2010;
- the Government welcomes this analysis, given
its concerns over the costs of controls, but believes that before
an informed view can be taken on any proposal for different levels
of tolerable risk, further simplification of guidance and regulations
must take place, and the impact of simplification must be analysed
— in addition, both the methodological basis of the Commission's
proposal about tolerable risk and information relating to 2007-13
programmes should be further analysed;
- the Government welcomes the ECA's assertion that
the Commission has completed the sub-actions under the action
plan towards an integrated internal control framework;
- it will take time for the impact of this plan
to take full effect but the Government is hopeful that it will
have a positive impact on internal control systems and error rates;
and
- in relation to the ECA's references to the UK,
the Government is producing an official response for the Commission
and will send us a copy.
Conclusion
2.14 As in previous years, the European Court
of Auditors (ECA) identifies weaknesses in the procedures for
financial control and management, such that again it is unable
to give a wholly unqualified Statement of Assurance for the General
Budgets. The document identifies some positive developments in
improving management of the Community's financial resources and
we note the Minister gives a relatively positive assessment of
the situation. But the need for further improvements in financial
management and control remains clear.
2.15 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 above we have decided previously to recommend that
once this present document was available it should be debated
in European Committee with those documents and we now so recommend.
2.16 Such a debate will provide an opportunity:
- to consider again 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 justification for the relative
optimism about future improvements in financial management expressed
by the Ministers.
Annex: Specific References to
the United Kingdom
| Chapter
| Note/Paragraph reference
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| 2 | Table 2.1
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| 4 | 4.16, 4.18, 4.26, Table 4.1, Table 4.2
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| 5 | 5.11, 5.32, 5.36, 5.37, 5.38, Annex 5.1 — table 2.1, Annex 5.2
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| 6 | Annex 6.1 — table 2.1
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| 11 | Table 11.3
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5 For the latter see (31188) in chapter 1 in this Report. Back
6
The Statement of Assurance is often referred to as the DAS, from
the French déclaration d'assurance. Back
7
(30811) 12139/09 + ADDs 1-2 (30819) (30864) 12668/09 + ADD 1:
see HC 19-xxvii (2008-09), chapter 2 (14 October 2009) and (31051)
14998/09 + ADD 1: see HC 5-iii (2009-10), chapter 2 (9 December
2009). Back
8
B accounts cover amounts that are challenged or not secured. Back
9
See http://www.hm-treasury.gov.uk/d/statement_eufunds151009.pdf.
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