Documents considered by the Committee on 15 September 2010 - European Scrutiny Committee Contents

1   Financial management




COM(10) 185




+ ADDs 1-2

COM(10) 261




+ ADD 1

COM(10) 260

Commission Report on the functioning of the Inter-Institutional Agreement on budgetary discipline and sound financial management

Commission Communication: More or less controls? Striking the right balance between the administrative costs of control and the risk of error

Draft Regulation on the Financial Regulation applicable to the general budget of the European Union (recast)

Legal base(a)and (b) —

(c) Article 322(1) TFEU; co-decision; QMV

Documents originated(a) 27 April 2010

(b) 26 May 2010

(c) 28 May 2010

Deposited in Parliament(a) 25 May 2010

(b) and (c) 4 June 2010

DepartmentHM Treasury
Basis of considerationThree EMs of 18 August 2010
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate in European Committee B after receipt of further information


1.1  The Inter-Institutional Agreement on budgetary discipline and sound financial management provides for many aspects of the planning, preparation, execution and control of the EU Budget. The agreement is between the Council, the European Parliament and the Commission — it has no legal base but is politically binding. It is an important tool of budgetary discipline and includes a multiannual Financial Framework. The Financial Framework is intended to ensure that, in the medium term, EU expenditure develops in an orderly manner and within the limits of own resources. It contributes to budgetary discipline by setting ceilings on the amount of funds available to the EU Budget in broad policy areas for each year it covers.

1.2  The current Inter-Institutional Agreement was agreed in June 2006 and its Financial Framework spans spending over 2007-2013.[1] This Financial Framework is structured around six broad policy areas or 'headings' — sustainable growth, preservation and management of natural resources, citizenship, freedom, security and justice, the EU as a global player, administration and compensations.

1.3  The current agreement is being replaced presently as part of the implementation of the Lisbon Treaty.[2]

1.4  Errors inevitably arise when EU money is spent. These are typically involuntary, not fraudulent, errors in spending — for example, misinterpretation of eligibility criteria when using EU funds. But preventing and detecting errors requires controls, which cost money. The concept of a tolerable risk of error captures the idea that reducing the error rate beyond a certain point requires an increase in the cost of controls which outweighs the benefit from the resulting financial corrections (spending returned to the budget).

1.5  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 EU Budget. The concept of tolerable risk for EU funds was first introduced by the Court,[3] which made it clear that "transactions can rarely be absolutely free of error, and a degree of tolerance in their accuracy is therefore acceptable".[4] 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.

1.6  In December 2008 the Commission suggested in a Communication an approach to tolerable risk and illustrated the efficient control costs for two EU funds. The annexed Staff Working Document outlined in more detail the model and the specificities of the work carried out. Together these documents provided 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 EU. (However the illustrations were based on relatively dated data from the 2000-2006 Financial Framework budgetary cycle.) The Commission hoped the Communication would stimulate further debate and provide a basis for institutional agreement on the way forward in analysing the tolerable risk of error.

1.7  When the previous Committee first considered the Communication, in February 2009, it heard that the Government welcomed it as a basis for further discussion on the issue of tolerable risk of error. However, it also heard some cautionary remarks from the Government. It 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. When the Committee considered the matter again, in October 2009 it noted that the Commission had pointed out that its Communication was not a proposal, but was intended to stimulate discussion, and that with this in mind, the Commission was likely to come forward with a further Communication towards the end of 2010 or early in 2011, by which point the benefits of simplification of funding procedures, then being implemented might be beginning to be seen and it would be sufficiently far into the cycle of the current Financial Framework for the use of 2007-2013 data to be feasible.[5]

1.8  Formation, implementation and audit of the EU General Budget are governed by the Financial Regulation, Council Regulation (EC, Euratom) No 1605/2002, and rules in the Implementing Regulation, Commission Regulation No 2342/2002. The Financial Regulation is subject to a triennial (or, if necessary, earlier) revision.

The documents

1.9  The Commission Report, document (a), on the functioning of the Inter-Institutional Agreement focuses on three areas — implementation procedures related to the Financial Framework, inter-institutional collaboration and sound financial management of EU funds.


1.10  An analysis of implementation procedures forms the bulk of the Report, covering: procedures for adjusting the Financial Framework, flexibility in the framework and revisions of it.

Procedures for adjusting the Financial Framework

1.11  The Commission notes that a number of adjustments to the Financial Framework are provided for in the Inter-Institutional Agreement:

  • technical adjustments to all spending ceilings may be made annually to reflect inflation;
  • spending allocations to Member States under the cohesion policy may be altered to take account of higher or lower than expected growth;
  • the Commission has the right to propose adjustments to the ceiling for total payments to the EU budget across the Financial Framework in order to accommodate changes to spending profiles during policy implementation; and
  • money for the Structural Funds, the Cohesion Fund, rural development and the European Fund for Fisheries intended to be spent in 2007 but not in fact disbursed in that year may be reallocated. This applied only to the first year of the current financial perspective, allowing for time taken to set up programmes under Regulations agreed in 2006. It does not allow funds not spent (or under spent) to be reallocated as a matter of course.

The Commission concludes that these procedures seem to be functioning well. It has not needed to adjust the ceiling on total payments. And adjustments for implementation of structural and other funds went smoothly, involving amounts far lower than in 2001 — €2.03 billion (£1.77 billion) in 2007 compared to €6.15 billion (£5.35 billion) in 2001.

Flexibility in the Financial Framework

1.12  There are three sources of flexibility in the current Inter-Institutional Agreement:

  • the difference between the Financial Framework ceiling for funds committed to a policy heading in the EU budget for a given year and the value of commitments actually entered in the EU budget for that area in that year is 'margin'. Margins under policy headings may be reallocated to other policy headings, if the Budgetary Authority (the Council and the European Parliament) agrees, in order to fund previously unanticipated projects;
  • the agreement provides for the use of special flexibility instruments that sit above the Financial Framework ceilings, which vary in size and may be mobilised under different conditions for different purposes. There are currently four such instruments — the Emergency Aid Reserve, the European Solidarity Fund, the European Globalisation Adjustment Fund and the Flexibility Instrument; and
  • the Commission has flexibility to appropriate more funds for a multiannual project or policy programme than the amount stated as required in the legislative act establishing that project or policy programme — the 'financial envelope'. Any change in excess of 5% of a programme's financial envelope is permitted only if new, objective and long-term circumstances arise for new spending and is subject to careful assessment. All changes must remain within the existing ceilings for the policy area concerned.

The Commission concludes that:

  • margins are becoming tight;
  • large margins under the heading for preservation and management of natural resources, which covers spending on the Common Agricultural Policy, have afforded scope for redeployments;
  • this margin, however, is expected to shrink, reducing overall flexibility; and
  • the Flexibility Instrument has been used to respond to a wide range of EU priorities, particularly for recurring international crises and emergencies, owing to insufficient margins.

Revisions of the Financial Framework

1.13  The current Inter-Institutional Agreement allows for the Financial Framework to be revised and the agreement itself may also be amended. The agreement provides for spending ceilings to be revised by up to 0.03% of EU gross national income (GNI) by qualified majority voting the Council, to which the European Parliament must assent, and revisions in excess of 0.03% of EU GNI require unanimity in the Council, and again the European Parliament must assent. The Commission reports that:

  • the Financial Framework was revised in 2007, by €1.59 billion (£1.39 billion), for implementation of the European Global Navigation Satellite System programmes EGNOS and Galileo and financing for the European Institute of Technology;
  • a second revision was made in 2009, by €5.00 billion (£4.35 billion), to finance the European Economic Recovery Plan;
  • in both cases these revisions did not change the overall ceilings — the total amounts, expressed in current prices, of funds committed and payment appropriated to the EU budget over all headings and for all years — of the current Financial Framework;
  • the Financial Framework was also revised to increase, exceptionally, the size of the Emergency Aid Reserve for 2008, in order to respond to soaring food prices in developing countries using a €1.00 billion (0.87 billion) Food Facility; and
  • the institutions agreed on the procedures to adjust the Financial Framework, though their use led to protracted negotiations.   


1.14  The Inter-Institutional Agreement sets out provisions relating to the improvement of inter-institutional collaboration during the budgetary procedure. The Lisbon Treaty has altered the annual budgetary procedure, requiring most of these provisions to be altered. Nevertheless, the Commission notes that two aspects of the existing guidelines should receive particular attention:

  • it encourages the Council and the European Parliament to pay greater attention to its comments on the European Parliament's amendments to a draft annual budget in order to improve implementation; and
  • it notes progress made during 2009 on the procedure on information regarding pilot projects and preparatory actions, which may be built on in the future.

1.15  The agreement includes provisions on fisheries agreements, requiring the Commission to keep the European Parliament properly informed of policy implementation on a quarterly basis, and on the Common Foreign and Security Policy, requiring the Council to meet the European Parliament at least five times each year. The Commission finds that these provisions have worked well and need not be modified.


1.16  The Inter-Institutional Agreement prioritises sound financial management aiming at a positive Statement of Assurance (commonly referred to as the DAS, from the French acronym), from the European Court of Auditors, for all EU funds. Audit authorities in Member States are required to produce an assessment of the compliance of management and control systems with EU Regulations in an annual summary. The Commission reports that:

  • it is committed to continuing to work with Member States to maximise the added value of annual summaries, including proposals to reinforce these requirements to be put forward during the triennial revision of the Financial Regulation, that is document (c);
  • it undertakes financial programming in order to indicate the orientation of future spending, submitting a document to the budgetary authority twice a year. The format of the financial programming document was revised in 2009 to highlight better any changes since the last financial programming and the new format appears to be a valuable tool for supporting political decisions;
  • reports by the Commission to the Budgetary Authority on the activities financed by the European Investment Bank, the European Investment Fund and the European Bank for Regional Development to support investment in research and development, Trans-European Networks and small and medium enterprises have been running smoothly; and
  • a positive overall assessment can be made of provisions in the agreement regarding the sound financial management of EU funds.

1.17  The Commission's conclusions are:

  • the Inter-Institutional Agreement has proved invaluable in facilitating budgetary discipline and ensuring smooth budgetary procedure. Overall, its track record, in particular of the Financial Framework, can be regarded as quite positive;
  • given adjustments already made to the Financial Framework and the potential for new spending pressures during the remaining period that it spans, further redeployments of funds, revisions to the Financial Framework or use of special flexibility instruments may be necessary;
  • other financing possibilities outside the scope of the current agreement, such as European Investment Bank loans or intergovernmental financing, could be examined; and
  • limited margins suggest that more flexibility will be needed in the future.

1.18  The Commission Communication, document (b), and two accompanying Staff Working Documents develop its ideas on the concept of tolerable risk of error. The document is in five parts — background and objective of the present Communication, why decide a tolerable risk of error, how tolerable risk of error levels could be decided, Commission proposals and a conclusion.


1.19  The Commission, recalling that the European Court of Auditors currently uses a 2% materiality level when assessing whether spending meets the rules and regulations surrounding each EU policy objective (the "legality and regularity of transactions"), says:

  • the Court gives a policy group a "green light" if it concludes that the overall error rate is below 2%;
  • it only gives an overall positive DAS if all policy groups receive a green light;
  • the 2% materiality threshold was decided before reliable information on the cost of controls became available;
  • despite, in recent years, the Court's annual audit report showing declining error rates, the level of error in some areas is still significantly above the 2% threshold;
  • the Court therefore remains unable to give a positive DAS;
  • two approaches might help achieve a positive DAS;
  • first, simplify rules and regulations to reduce errors that arise from misinterpretation — recent steps in this direction have helped, but too much simplification risks diluting policy objectives;
  • second, greater controls to detect ineligible spending and drive the error rate below 2% — but controls cost money; and
  • with new data, the Communication is to explore a cost-benefit approach to setting new tolerable error rates — weighing control costs with the benefit from resulting corrections.


1.20  The Commission says that:

  • a tolerable risk of error approach recognises that complex rules, extended control chains, and high control costs do not allow a 2% error rate to be achieved in a cost-effective manner in all areas;
  • instead, it sets the tolerable error rate to balance the financial impact of errors, the costs of control and related recoveries, and the sound management of EU funds; and
  • a decision on tolerable risk of error would not result in errors being overlooked — any errors detected, even beneath the tolerable risk of error ceiling, would be corrected.

The Commission comments further that there are also considerations beyond a simple financial cost-benefit trade-off:

  • beneficiaries often consider controls overly burdensome — any increase in controls might discourage appropriate beneficiaries from participating, increasing the risk of failing to achieve policy objectives; and
  • political priorities and reputational risk — as comes with high profile public spending — might also motivate alternative tolerable risk of error rates.


1.21  The Commission notes that it has included the concept in the triennial revision of the Financial Regulation proposal, document (c). It says that:

  • this would establish a legal framework for tolerable risk of error rates; and
  • actual tolerable risk of error rates would be adopted by the co-legislator (the Council and the European Parliament) following inter-institutional discussion and consultation with the European Court of Auditors.


1.22  The Commission says that it will progressively propose tolerable risk of error levels for each policy area, or significant part of an area. In this Communication it proposes levels for two areas — research, energy and transport and the European Agricultural Fund for Rural Development. The two Staff Working Documents accompanying the Communication give details of the proposals.

Research, energy and transport

1.23  The Commission notes that:

  • payments in this policy area were €7.20 billion (£5.90 billion) in 2008;
  • 76% of this was on research projects in multi-annual framework programmes;
  • control activities in this area cost €267 million (£218 million); and
  • the error rate is estimated at 3%.

The Commission discusses several models and narrowing in on two of these illustrates their main findings:

  • with Model 1 an additional €90 million (£74 million) of control activities gives a reasonable probability of pushing the average error rate below 2%;
  • assuming errors were fully recovered, this 1% reduction in error rate recovers €72 million (£59 million);
  • from a purely financial viewpoint, there is a loss of €18 million (£15 million);
  • with Model 2 reducing the number and cost of on the spot controls and accepting a higher error rate of 3.5% saves €6.50 million (£5.30 million) as control costs are lowered by €8 million (£6.50 million), while recovered amounts only decrease by €1.50 million (£1.20 million); and
  • on balance, the Commission proposes a tolerable risk of error level in the range 2-5%.

European Agricultural Fund for Rural Development

1.24  The Commission notes that:

  • rural development is the second pillar of the Common Agricultural Policy;
  • payments in this policy area in 2008 were €8.50 billion (£6.90 billion), 16% of total agriculture expenditure;
  • the error rate for the European Agricultural Fund for Rural Development is estimated at 2.8%;
  • complex rules and eligibility conditions make spending on policy objectives hard to verify in this area; and
  • the cost of control is high — for example, the analysis shows that the relative cost of control for the fund is nearly three times higher than for the European Agricultural Guarantee Fund, which received a green light from the European Court of Auditors in 2008.

The Commission says that:

  • analysis shows that the cost of increasing controls to achieve a 2% cent error rate would be five times higher than the predicted recovery;
  • reducing the error rate below 2% though simplification of the eligibility rules alone, however, would risk jeopardising policy objectives;
  • it concludes, therefore; that a tolerable risk of error above 2% is necessary for the European Agricultural Fund for Rural Development;
  • it proposes a tolerable risk of error level in the range 2-5%; and
  • the target for the first pillar of the Common Agricultural Policy (direct payments to farmers and market support) would remain at 2%.


1.25  In its conclusion to the Communication the Commission:

  • reiterates its view that for both "Research, energy and transport" and "Rural development" the tolerable risk of error lies in the range 2-5% and asserts that a DAS error rate in the middle of this range can be justified;
  • says it will make tolerable risk of error proposals for "Administrative Expenditure" and "External Aid, Development and Enlargement" before the end of 2010 and for remaining areas in 2011 and, to further reduce the error rate after 2013, will propose simplification of the legislation; and
  • recalls its proposal of enshrining the concept of tolerable risk of error in the revised Financial Regulation.

1.26  In document (c) the Commission presents its proposal for the triennial revision of the Financial Regulation. It is accompanied by a Staff Working Document showing what the Commission intends as consequential amendment of its Implementing Regulation. In assessing potential changes to the Financial Regulation the Commission has highlighted four benchmarks:

  • reducing administrative burdens;
  • facilitating the leveraging of budget appropriations, wherever possible;
  • improving delivery instruments and simplifying the rules and procedures; and
  • ensuring sound financial management and protecting the financial interests of the EU.

The Commission suggests that reform is necessary with a view to adapting the financial rules to the new requirements of budget implementation and where basic principles create disproportionate burdens or may unduly impede efficiency. It bases its proposals on five objectives:

  • to introduce more flexibility in the application of the budgetary principles, to better suit operational needs and alleviate unnecessary administration burdens;
  • to streamline relations with implementing partners to which the Commission entrusts the management of programmes, in particular taking account the nature of such partners and the financial risks associated;
  • to shift the regime of grants from real cost-based management towards a performance-based scheme, in order to better target policy objectives;
  • to ensure sound financial management, while leaving Authorising Officers significant room for manoeuvre; and
  • to modernise the system of risk management and control measures so as to make them more proportional to the probability of errors and the costs involved.

1.27  The Commission proposes exceptions to the basic budgetary principles of unity, universality, specification, annuality and sound financial management by:

  • simplifying the rules governing interest generated by pre-financing (Article 5 and 5a), as they generate excessive administration burdens and represent a small proportion of the EU budget;
  • suppressing the obligation to recover pre-financing interest so that national agencies will be allowed to re-use interest generated for the programmes they manage — interest generated by EU bodies will continue to be recovered annually. The Commission estimate that the loss to the EU will be +/- €15 million (£12.3 million) each year;
  • providing for a dual regime for assigned revenue (Article 18) to distinguish between internal assigned revenue (re-use of funds initially assigned by the Budget Authority) and external assigned revenue (revenue collected and assigned by various donors to a specific programme);
  • clarifying the rules on transfers of appropriations and allowing for more flexibility in the adoption procedure of some transfers decided by the Commission (Articles, 21, 23 and 26); and
  • introducing, in financial management, the concept of tolerable risk of error (Article 28b), as discussed in document (b). This would allow the Council and the European Parliament to set a cost-effective level of control for each policy area, providing the Discharge Authority (after audit the European Parliament "discharges", on the basis of recommendations from the Council, the annual budget) with a more appropriate basis to judge the quality of the Commission's management of risk.

1.28  On implementation of the budget the Commission proposes numerous possible amendments, including:

  • on the grounds that current provisions concerning methods of implementing the budget are overly complicated, streamlining methods of implementation from five to two modes (Article 53), making a clear distinction between when the budget is implemented directly by the Commission and when the budget is implemented indirectly by the Commission through shared management with Member States or other entities;
  • amending Articles 53a to 53c to strengthen the responsibility of Member States and entrusted entities to meet common requirements for all types of indirect management;
  • new provisions to harmonise control and audit obligations and management declarations of assurance across Member States;
  • introducing more proportionality in ex-ante controls (Article 53c) so as to take into account the nature of the task entrusted, the experience and the operational and financial capacity of the entities concerned;
  • on the rules relating to pre-financing, amending Article 81 to allow for a single pre-financing payment — this should provide recipients of EU grants with more security on the amounts they receive, as the Commission would approve the eligibility of cost on a regular basis through interim payments;
  • to change the current situation, in which the Financial Regulation only covers bank accounts opened for cash management under the responsibility of the Accountant, adding Article 61(4) to enable the Authorising Officer to open a fiduciary account on behalf of the Commission for the implementation of a programme under indirect management by a financial institution;
  • strengthening rules on recovery through the addition of Article 73b, to ensure that recoveries are not treated less favourably by Member States than they treat claims on their own territory;
  • reviewing provisions on procurement in order to simplify the rules, take into account the specific status of the European Investment Bank and define the scope of some provisions more precisely;
  • including in Article 93 a new provision to allow derogation from the obligation of exclusion for overriding requirements of general interest, in particular to preserve the service continuity of the institution;
  • extending, in Article 95(3), access to the central database of exclusions to include the European Central Bank and the European Investment Bank;
  • as the last revision of the Financial Regulation made limited modifications to the rules on grants which have been insufficient to alleviate administrative burdens imposed on operational services and beneficiaries (because of excessive similarity between procurement and grant rules and procedures, although objectives often differ, and of controls that focus on real cost, as opposed to expected results of projects), shifting the grants regime (Articles 108-120) towards a performance-based system — this would be based on agreed indicators and objectives, and include a simplification of lump sums, standard scale of unit costs and flat rates that are disconnected from any verification of actual costs of implementation;
  • maintaining, however, the real cost-based regime as the default regime;
  • reviewing the real-cost regime to provide clarification on various types of costs and the recovery of possible profit from any actions;
  • reviewing, rather than abandoning, the stipulation in Article 113, on the principle of degressive award, that operating grants that are renewed for a period exceeding four years, shall be decreased after the fourth year, unless specified in the basic act or in the financing decision for grants awarded under Article 49(6) point (d);
  • on the procedures for the award of grants, amending Article 114, and the appropriate rules in the Implementing Regulation, to remove excessive administrative requirements in line with the principle of proportionality;
  • allowing Authorising Officers to refrain from requiring certification of eligibility when certification has already been approved in another award of a grant and when there is a material impossibility to provide such certification;
  • increasing, in the Implementing Regulation, the threshold for very low grants from €25,000 (£20,438) to €50,000 (£40,875);
  • amending Article 120(2) on the rules governing subcontracting and grant redistribution to allow a beneficiary to redistribute its grant by way of subsidies to third parties, achieving this by removing and relaxing some of the current restrictions where the redistribution of funds is the primary aim of the action, if appropriate guarantees are provided by the first ranking beneficiary — it is asserted that this should improve implementation of programmes targeting large groups of similar single identities, such as universities bidding for funding under the Erasmus programme;
  • laying down in Article 120a, on separate provisions for the award of prizes, that prizes would be subject to the same principles of transparency and equal treatment as grants, but recognising that prizes constitute different EU contributions;
  • proposing that award conditions and criteria for prizes exceeding €500 (£409) should be approved by the Commission;
  • introducing Articles 120b and 120c to provide provisions for financial contributions that are combined with financial instruments managed by International Financial Institutions, such as loans, guarantees, equity or quasi-equity investments or participations, as such specific provisions are necessary to reflect the specificities of their implementation, while respecting the principles of responsibility and sound financial management;
  • amending Articles 143 and 144, concerning annual and special reports of the European Court of Auditors, in order to better reflect current practices and to streamline the timetable
  • establishing in Article 144a new provisions to formalise the practice of the Court of producing statements of preliminary findings resulting from its audits;
  • introducing new provisions to enable the Commission to create and manage EU trust funds for external actions, following an agreement with other donors (Article 164) — these trust funds would be used to intervene in emergency, post-emergency or thematic actions, and would pool EU budget contributions with funds from other donors;
  • adding Article 179(3)b to provide institutions the option of exploring the possibility of raising loans, in order to purchase real estate assets, as institutions would benefit from the simplification of the current system and could profit from lower interest rates due to the EU AAA rating in financial markets;
  • amending Article 184 in order to remove the need to review the Financial Regulation every three years, with a to future revisions being made whenever it proved necessary, without identifying specific time frames;
  • introducing in Article 185a a separate financial regulation model applicable to public-private partnerships, which should include a set of principles necessary to ensure sound financial management of EU funds (as set out in Article 53b) and provide partnerships with the opportunity to apply their own rules in accordance with national laws; and
  • setting out in Article 53(1) 2(G) private bodies would be entrusted with implementation of a public-private partnership and managing EU funds through indirect shared management.

The Government's view

1.29  In her Explanatory Memorandum on the Commission Report on the Inter-Institutional Agreement, document (a), the Economic Secretary to the Treasury (Justine Greening) tells us that:

  • as is said in the Government's Coalition Agreement, it will strongly defend the UK's national interests in the forthcoming EU budget negotiations;
  • the EU Budget should only focus on those areas where the EU should add value; and
  • it is keen to limit contributions to the EU Budget, at a time when consolidating public finances is a key priority across the EU.

1.30  The Minister comments further that:

  • the framework for the EU Budget, including the current Inter-Institutional Agreement and Financial Regulation, is being revised in light of the Lisbon Treaty;
  • the Government acknowledges the Commission's Report as a contribution to ongoing debates on the EU's future budgetary framework, but has reservations about some of its conclusions;
  • it is concerned, in particular, that the type of flexibility proposed by the Commission might undermine fiscal discipline, weaken incentives for sound financial management, and increase the cost exposure of the UK;
  • the Report also notes that revisions to the Financial Framework might be made to meet new spending requirements — the Government is clear that funds for such purposes must be found by redeployment within the existing Financial Framework rather than by increasing the aggregate ceilings of the framework;
  • the Government believes that EU expenditure must be subject to budgetary discipline and appropriate principles of sound financial management; and
  • it will continue to push for the EU budgetary framework to support these objectives.

1.31  In her Explanatory Memorandum about the Communication on the tolerable risk of error concept, document (b), the Minister tells us that, while it is a helpful step towards better understanding of the trade-offs involved in setting acceptable error rates, the Government believes it is too soon to draw firm conclusions or agree new levels of tolerable risk, saying that:

  • before firm conclusions can be drawn the full impact of the simplification of procedures, guidance and regulations governing the 2007-2013 financial programme Regulations needs to play out;
  • there is, moreover, scope for further simplification of rules and regulations;
  • further responsibility needs to be taken by Member States to improve the management of EU funds at national level — increasing the tolerable risk of error could hinder progress in this area; and
  • it is important to be mindful of unintended consequences — a narrow focus on financial cost-benefit analysis could overlook additional benefits of greater controls, for example, if higher tolerable risk of error lowers the intensity of controls, this could open the door for greater fraud and other deliberate abuse of EU funds.

1.32  The Minister continues that:

  • while it is right to first promote simplification efforts and allow these to play out before revising acceptable error rates, there will ultimately be a limit to how much can be done;
  • error rates have fallen in recent years, but achieving a positive DAS, without some changes to the current system, looks unlikely; and
  • the tolerable risk of error approach will eventually allow a fairer view of different expenditure areas, to underscore where the problems in financial management of the EU budget really lie.

1.33  Turning, in her third Explanatory Memorandum, to the proposed revision of the Financial Regulation, document (c), the Minister first reiterates that the Government's overarching objectives in relation to the EU Budget are to protect the UK's financial interests, push for greater value for money and ensure sound financial management in EU expenditure. She then tells us that the Government welcomes the broad objectives of the Commission's proposal and is pleased that it focuses on alleviating unnecessary administrative burdens, streamlining methods of implementation and modernising the system of risk management and control measures — in particular, the Government supports the Commission's acknowledgement that international financial instruments (such as the European Investment Bank) should increasingly play a role alongside the budget. The Minister comments that there are however elements of the Commission's proposal that are of concern to the Government, including:

  • the proposal adds new administrative burdens to the control and audit obligations of Member States in the area of Structural and Cohesion Funds, without a convincing justification;
  • it raises the possibility of raising loans to finance the purchase of EU institution buildings, which may present additional spending implications, and which the Government will question closely;
  • introduction of a tolerable risk of error may divert efforts to simplify rules and regulations and will require further discussions before a firm conclusion can be drawn on the Commission's proposal; and
  • the Government believes that the revision should go further in addressing the lack of transparency on how different institutions currently deal with assigned revenue, and in taking more significant steps required towards a risk-based approach to audit and management of EU funds.


1.34  Given both the even greater importance of budgetary discipline at the present time and their relevance to the debate now beginning on the Financial Framework for the period 2014-2020 we recommend these documents be debated in European Committee. However this debate should not take place until the Minister is able to provide us with a read out of the preliminary reactions in the Council's Budget Committee to the Commission's proposals for the Financial Regulation, including the matter of tolerable risk of error levels.

1   See  Back

2   (31401) 7183/10: see HC 5-xiv (2009-10), chapter 6 (17 March 2010). Back

3   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

4   The DAS [Statement of Assurance] methodology, European Court of Auditors: see  Back

5   (30320) 17592/08 +ADD 1: see HC 19-viii (2008-09), chapter 8 (25 February 2009) and HC 19-xxvii (2008-09), chapter 33 (14 October 2009).


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