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

5 Financial management



European Court of Auditors' Opinion No 6/2010 (pursuant to Article 322, TFEU) on a proposal for a Regulation of the European Parliament and of the Council on the Financial Regulation applicable to the general budget of the European Union
Legal base
Document originated
Deposited in Parliament5 November 2010
DepartmentHM Treasury
Basis of considerationEM of 8 December 2010
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate in European Committee B, together with a draft Regulation to recast the Financial Regulation and related documents, already recommended for debate


5.1 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. In May 2010 the Commission presented its proposal for the triennial revision of the Financial Regulation. It was accompanied by a Staff Working Document showing what the Commission intends as consequential amendment of its Implementing Regulation. We have recommended that draft Regulation and related documents for debate in European Committee B.[25]

5.2 As required under Article 322 TFEU the European Court of Auditors received requests by the Council and the European Parliament, on 23 September 2010 and 23 June 2010 respectively, for a formal Opinion on the draft Regulation.

The document

5.3 In the response, this Opinion, the European Court of Auditors discusses twelve main issues. First, Article 18 of the draft Regulation suggests a dual regime for assigned revenue, with a distinction drawn between external assigned revenue (from Member States, third countries, etc) and internal assigned revenue (proceeds from certain transactions, such as the sale of vehicles, equipment, etc). The Commission proposes amending carry over rules (Article 10) so that external assigned revenue will be carried over until fully spent and internal assigned revenue will be carried over for one year. The Court:

  • reasons that allowing external assigned revenue to be carried over until fully spent is justified as those wishing to contribute to, for example, research or aid programmes will want to be able to identify that their funds have been used for the purposes intended; but
  • believes that internal assigned revenue is unnecessary, as internally-generated receipts can be dealt with through the usual budgetary procedures.

5.4 Secondly, Article 28b introduces the concept of a tolerable risk of error, which allows the legislative authority to determine the appropriate level of tolerable risk, based on an analysis of the cost and benefit of controls, for each policy area. The Court:

  • suggests that the Commission should look at the weaknesses in the present systems and analyse the costs and benefits of various possible changes;
  • says that, where it is impractical to obtain a high level of compliance with scheme rules, a number of options would appear possible, including simplifying the scheme rules, redesigning the programme, tightening controls, tolerating a higher level of non-compliance, or, if necessary, terminating the activity;
  • indicates, however, that Article 28b seems to use the concept of a tolerable risk of error solely as a basis for deciding what level of irregular use of funds should be regarded as acceptable, ex post;
  • suggests, therefore, that the budgetary authority (the European Parliament and the Council) should consider whether the Financial Regulation should require the Commission to estimate likely levels of non-compliance, to undertake an impact assessment and to assess the likely overhead and control costs before putting forward new spending proposals; and
  • highlights that considerable uncertainty surrounds the definition and application of the concept of tolerable risk.

5.5 Next, the Commission proposes aligning administrative arrangements for expenditure, the management of which is shared with Member States, with the current arrangements for agriculture (Article 53 and 53a). The Court suggests that the Commission's proposal will not simplify administrative expenditure and that it prompts a number of questions, including:

  • the costs of the change in administrative arrangements;
  • how easily the financial systems for agriculture can be applied to other areas of expenditure;
  • whether the proposal is compatible with the Commission's declared objectives of moving to a performance-based system of reimbursements; and
  • how the Commission would make use of the information generated by the proposed arrangements.

The Court also highlights that it would be possible to obtain a management declaration for each expenditure stream without insisting that each have the same administrative arrangements.

5.6 Fourthly, Article 61(4) would allow authorising officers in charge of the implementation of a programme or action to open, in agreement with the authorising officer of the Commission, fiduciary accounts in the name of the Commission and on its behalf. The Court has previously audited the management of fiduciary accounts and concluded, among other things, that no clear rules for setting up fiduciary accounts were established. Therefore, the Court recommends that the Implementing Regulation should establish detailed rules for existing fiduciary accounts use and monitoring.

5.7 Fifthly, the Court reasons that the inclusion of a specific legal basis for the use of financial instruments under Articles 120b and 120c is appropriate. However, it:

  • notes that ownership of financial instruments will require further clarification, as it is not clear whether the Commission expects to record all financial instruments in the balance sheet of the EU; and
  • recommends that the Commission includes, within the implementing rules, appropriate policies for monitoring the use of financial instruments, including those implemented under direct management.

5.8 Next, the Commission proposes a number of changes relevant to the Court's annual reports (Articles 129, 143 and 144a) and special reports (Article 144). On the proposed amendments to the Court's annual reports, it:

  • regards the proposed timetable change to Article 143(1) as inappropriate, as it would significantly reduce the time available to the Court for preparing its observations;
  • suggests, therefore, that it would be best to leave existing formal deadlines unchanged; but
  • if the budgetary authority takes the view that certain deadlines should be brought forward, believes the same approach will be necessary in respect of deadlines for the Commission.

As for special reports the Court suggests the subparagraph of Article 144 that requires the Court to adopt the definitive version of the special report within one month of receiving the replies is obscure, as the its current practice is to adopt special reports immediately after it has received the final version of the replies from the institutions concerned. In addition, the Court indicates that the final subparagraph of Article 144(1) will constrain its ability to produce special reports in a way which maximises their value to readers, as the Court understands that most national audit bodies invite the comments of the auditee on the draft report and then summarise their comments within the text of the report.

5.9 Seventhly, Article 164 introduces a basis for the possible creation of EU trust funds, which would follow the model for trust funds operated by the World Bank and United Nations. The Court raises a number of issues to which the budgetary authority should give due weight when considering the proposal, including:

  • the administrative and accounting activities involved — these could be highly complex, but are not recognised in the Commission's draft text on specific bank accounts;
  • allowing the Commission to charge a management fee of 7% of contributions for administrating a trust fund, which is based on administrative overheads allowed in other areas of the budget, rather than on an evaluation of the additional costs of running trust funds; and
  • the number of audits to which each individual trust fund would be subject, including those of the Internal Audit Service, of the Court and of an independent external auditor — these arrangements can be compared to those of established managers of trust funds, which typically involve the preparation of a consolidated statement of trust funds, covered by a single audit.

5.10 Eighthly, Article 185a provides a basis to introduce, explicitly, the concept of public-private partnerships and to entrust a special body with their implementation. This provides for a 'light model financial regulation', which would lay down a set of principles to ensure sound financial management. However, the Court:

  • is concerned that no provisions are made for consulting it;
  • considers it important that the Financial Regulation should in no way restrict the capacity of the Court to audit the use of EU funds; and
  • proposes, therefore, that the words "and after consulting the Court of Auditors" should be added to the second sentence of this Article.

5.11 Next, in connection with clearance of pre-financing, the Court:

  • suggests the budgetary authority should consider strengthening Article 81, to avoid an excessive build-up of uncleared items; and
  • points out that it should be possible for the Commission to tackle the problems of high levels of uncleared pre-financing by adopting a target for reducing these levels and monitoring progress via annual activity reports.

5.12 Tenthly, Title VII on the presentation of the accounts and accounting simplifies and reduces the text on the presentation of the accounts. The Court:

  • welcomes the simplification of the current text of this title, but takes the view that it would be useful to set out the responsibility of the Commission's accounting officer to ensure that the accounts are properly prepared;
  • advises modifying Article 123 to state that the accounts are to be drawn up in accordance with the 'internally accepted accounting standards for the public sector', but allowing the accounting officer a true and fair override; and
  • suggests that the accounting office would therefore be allowed to adopt a treatment different from that required by the standards only where it is necessary to show a true and fair view.

5.13 Penultimately, the Court indicates that the addition of Article 185(4), which deals with the audit of EU agencies, has the potential to provide a basis for an improved audit framework for the agencies and should be adopted, subject to some changes:

  • Court approval should be a pre-requisite to the appointment by an agency of a private sector auditor;
  • the Court must have the ability to conduct any audit procedures deemed necessary to form its opinion, so should not be obliged to rely completely on the work of others; and
  • a private sector auditor should provide the Court with the external auditor's opinion on reliability and undertake a set of agreed procedures in respect of legality and regularity.

5.14 Finally, the Court suggests that the budgetary authority may wish to consider asking the Commission whether there is scope for simplifying and consolidating reports, as the Financial Regulation provides for a number of reports by the Commission and the Treaty requires an annual evaluation report on EU finances (Article 318 TFEU).

The Government's view

5.15 The Economic Secretary to the Treasury (Justine Greening) first comments 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 says that the Government welcomes the European Court of Auditors' Opinion on the Commission's proposal to revise the Financial Regulation and believes that the Court's input provides useful analysis and recommendations as to how the Financial Regulation can improve financial management.


5.16 This document adds usefully to consideration of the draft revision of the Financial Regulation, which, as noted above, we have already recommended for debate in European Committee B. Accordingly, we recommend that this document should be debated on the same occasion.

25   (31571) 9193/10 (31652) 10346/10 + ADDs 1-2 (31662) 10561/10 + ADD 1: see HC 428-ii (2010-11), chapter 1 (15 September 2010) and HC 428-x (2010-11), chapter 2 (8 December 2010). Back

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