17 Financial management: internal audits
and discharge
(a)
(34285)
14431/12
+ ADD 1
COM(12) 563
(b)
34302
14652/12
+ ADDs 1-2
COM(12) 585
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Commission Report: Annual report to the discharge authority on internal audits carried out in 2011 (Article 86(4) of the Financial Regulation)
Commission Report on the follow-up to the discharge for the 2010 financial year (Summary)
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Legal base |
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Document originated | (a) 28 September 2012; (b) 3 October 2012
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Deposited in Parliament | (a) 4 October 2012; (b) 9 October 2012
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Department | HM Treasury
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Basis of consideration | EMs of 22 October 2012 and 24 October 2012
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Previous Committee Report | None
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Discussion in Council | None planned
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Committee's assessment | Politically important
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Committee's decision | Cleared
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Background
17.1 The annual audit by the European Court of Auditors (ECA)
of the EU Budget is the basis which informs the decision and recommendation
of the Discharge Authority (the Council and the European Parliament)
on whether to discharge the Commission from its responsibility
for that year's EU Budget. The ECA's report on the 2010 EU Budget
was published in November 2011. The Council made its recommendation
on discharge to the European Parliament in February 2012, which
in turn granted discharge in June 2012, signalling the closure
of the EU accounts for 2010.
17.2 The Council and the European Parliament deliver
recommendations and observations to the Commission as part of
this process. The Commission is obliged to report to the Council
and the European Parliament on the action it has taken, intends
to take or is unable to follow up in response to the two institutions,
in accordance with Article 319(3) TFEU, Article 147 of the Financial
Regulation and Article 119(5) of the European Development Funds
Financial Regulation.
17.3 The Internal Audit Service (IAS) was set up
in July 2001 as an independent service for the Commission. Directorates-General
were also each given small internal audit units, known as Internal
Audit Capabilities, which are supervised by the IAS. The Commission
is required, under Article 86 of the Financial Regulation, to
submit an annual report to the Discharge Authority about the work
of the IAS.
The documents
17.4 The Commission Report, document (a), covers
IAS audits carried out in 2011. The document summarises the audits
carried out and the findings made. Details of the objectives and
scope of each audit, and statistics showing the number of recommendations
accepted by those audited, can be found in the accompanying Staff
Working Document.
17.5 In 2011 the IAS issued 78 reports covering 23
audits, 50 follow-up audits, one consultancy review/management
letter[47] and
one report on the overall audit opinion. In all, 160 audit recommendations,
none of which were critical, were made and all but two were accepted.
Findings and Commission comments are summarised under the following
headings.
GOVERNANCE
17.6 The IAS performed a number of audits of the
governance arrangements within the Commission:
- a number of audits of the governance
structures to prevent or detect fraud were carried out;
- recommendations were made for improving governance
arrangements in two Directorates;
- these included improvements in raising fraud
risk awareness in vulnerable areas, clearly assigning anti-fraud
roles and responsibilities, developing an anti-fraud strategy,
strengthening anti-fraud controls at Member State level for shared
management, improving the follow-up of and reporting on identified
fraud cases, identifying "red-flags", making sure that
anti-fraud checks are embedded in control systems and working
towards better cooperation between Directorates, including on
specific risks;
- action plans to address the findings are scheduled
for delivery during 2012;
- one Directorate was found to have developed ground-breaking
anti-fraud initiatives these should be built upon to help
develop a common fraud strategy for the area concerned as a whole;
- in relation to Business Continuity Management
(BCM) a follow up audit was carried out in the Secretariat and
three Directorates;
- a qualified audit opinion was expressed, giving
reasonable assurance regarding the achievement of the business
objectives, except for one issue relating to BCM supervision;
and
- the Commission is evaluating the most appropriate
and effective measures to resolve this issue.
PERFORMANCE AUDITS
17.7 In its resolution on the discharge for 2009,
the European Parliament invited "the Internal Audit Service
to allocate part of its resources to an examination of whether
the spending by the main DGs is efficient, economical and effective
and thereby completing the current financial and compliance audits".
Consequently, the IAS included a number of performance audits
in its 2010-2012 strategic audit plan. In 2011 it delivered its
first performance audits on the Entrepreneurship and Innovation
Programme (EIP) in the Enterprise and Industry Directorate-General
(ENTR) and on the operational activities of Humanitarian Aid funded
operations (Directorate General-ECHO):
- recommendations for improvement
related to the EIP included development of meaningful and stable
indicators for similar action under the EIP successor programme,
improvement of performance measurement in evaluations and in guidance
on performance aspects to the Executive Agency for Competitiveness
and Innovation, to which it was considered that more projects
could be outsourced;
- the Commission's proposal for the Programme for
Competitiveness of Enterprises and SMEs (COSME) under the next
Multiannual Financial Framework (MFF) pays due heed to the results
of this review;
- recommendations for improvement in the operational
activities of Directorate-General ECHO included addressing weaknesses
in moving from relief aid to development assistance, mainstreaming
of Disaster Risk Reduction and disaster preparedness methodologies
in projects and improvements in co-ordination of activities with
other Directorates;
- the action plans in response to the findings
are scheduled to deliver improvements by the end of 2012;
- an audit was also carried out on the effectiveness
and efficiency of the monitoring by Internal Market and Services
(Directorate-General MARKT) of the application of public procurement
rules in the Member States;
- it concluded that the Directorate-General should
take a more proactive, preventive approach, in partnership with
the Member States;
- in particular, the collection, analysis and reporting
of information should be enhanced and enforcement action better
prioritised and targeted; and
- the Commission took the review recommendations
into consideration in its proposals for revised public procurement
legislation.
CONTROL STRATEGIES
17.8 Under this heading a number of reviews are reported:
- in relation to research, reviews
were carried out in two Directorates;
- improvements have been made in the efficiency
and co-ordination of research policy audits;
- in relation to external aid a review was carried
out of Development and Cooperation, EuropeAid (Directorate-General
DEVCO) and improvements were recommended in the supervision and
controls over both decentralised and centralised calls for proposals
and, more specifically, strengthening of monitoring mechanisms
and controls, in order to obtain assurance on the effectiveness
and transparency of the grant award process and compliance with
the established rules;
- other improvement recommendations covered staff
training, enhanced data inputting controls through improved training
and a more rigorous data review process;
- where improvement action has not yet been taken
action plans are in development;
- in relation to pre-accession programmes a review
of the Instrument for Pre-Accession Assistance for Rural Development
(IPARD), managed by Agriculture and Rural Development (Directorate-General
AGRI), highlighted the delays in implementing the IPARD programmes,
resulting in poor financial execution and a possible budget loss;
- the review recommended that Directorate-General
AGRI do more to establish the steps and timeline of the pre-accreditation
process up to the conferral decision and give better guidance
and communication to candidate countries and their pre-accreditation
bodies;
- actions have been agreed to improve guidance,
revise the conferral process and provide regular evaluation of
bottlenecks up to the end of 2012; and
- in relation to the Trans-European Transport Network
Executive Agency a review of the Agency's control strategy concluded
with a satisfactory audit opinion, confirming that executive agencies
can constitute a workable and effective management model for further
development in the next MFF.
THE GLOBAL NAVIGATION SATELLITE SYSTEMS (GNSS) PROGRAMMES
17.9 Three reviews were carried out of two programmes
under this heading ¯
European Geostationary Navigation Overlay Service (EGNOS) and
Galileo:
- a review of governance, risk
management and project management concluded with an adverse audit
opinion, recommending more stability in these space programmes
and in their governance structure;
- other recommendations were that leadership of
the Commission Programme Manager be strengthened, the Commission
and the European Space Agency (ESA) focus more on their respective
roles, the role of the GNSS Agency be clarified and stabilised
and the human resources strategy be improved in relation to temporary
staff to ensure continuity of personnel;
- a review of actions, grants and procurement management
resulted in a qualified opinion;
- this recommended that a new review of the ESA's
internal control system be organised in line with the Financial
Regulation requirements for indirect centralised management;
- the conditions for allowing open competitive
tenders should also be strengthened and the use of negotiated
procedures should be limited to exceptional cases;
- a further recommendation was tightening up ESA's
reporting requirements to create a better link between payments
and deliverables, with a view to better planning, supervision
and monitoring of ESA;
- action was agreed to re-perform (outsource) the
assessment of ESA's systems and procedures;
- a review of accounting for fixed assets, financial
circuits and financial management concluded with an adverse audit
opinion on the completeness and valuation of fixed assets;
- the review recommended that Directorate-General
ENTR strengthen its supervision of fixed assets management and
develop an appropriate accounting strategy;
- it should work with the Budget Directorate (Directorate-General
BUDG) and the Accounting Officer to determine appropriate valuation
and accounting methodologies for the different fixed asset streams;
- in addition to this new assessment of the ESA's
internal control system, Directorate-General ENTR's ex post
audits should take all available information into account, notably
the qualifications expressed by the ESA's Board of Auditors on
the Agency's annual accounts;
- the Commission immediately took action to address
these issues;
- a new Deputy Director-General was assigned to
oversee the whole programme;
- measures were adopted to improve the administrative
processes;
- external consultants have been recruited to assist
in the valuation and accounting;
- in October 2011, the first two operational satellites
were successfully launched; and
- the Commission adopted, in November 2011, a proposal
for a new Regulation on the implementation and exploitation of
European Satellite Navigation Systems.[48]
FINANCIAL MANAGEMENT PROCESSES
17.10 Under this heading:
- reviews concentrated mainly
on two processes at Commission level (management of guarantees
and recoveries) and on the management of procurements in three
operational services (infrastructure and logistics in Brussels,
Directorate-General HR and the Joint Research Centre);
- in addition, the series of GNSS programme audits
also covered some financial activities, notably grants and procurement
management, financial circuits and financial management;
- the multiple Directorate review identified areas
for improvement in the management of financial guarantees;
- a follow-up review of recovery procedures showed
adequate implementation of the recommendations, contributing to
more stringent processes;
- the follow-up reviews of procurement procedures
showed that the systems and procedures in the reviewed services
had been significantly improved; and
- overall, the conclusions on financial management
processes in the Commission are positive.
INFORMATION TECHNOLOGIES
17.11 Reviews focused on IT governance, IT project
management and IT security. Particular attention was given to
the management of sub-contracted activities, where outsourced
services might exacerbate the inherent risks of failure to meet
business needs, budget overrun and breaches in the security of
the systems. The review findings demonstrated the need to strengthen
governance and IT risk management in administrative departments
and for IT projects. In particular, the role of senior management
in overseeing IT investments should be enhanced. Other areas for
improvement relate to IT security.
CONCLUSIONS
17.12 The IAS said that the response to the audit
recommendations contributes to steady improvement of the Commission's
internal control framework and that, on the basis of the work
carried out in 2011, the following conclusions can be drawn:
Performance Audits
- the first performance audits
produced positive results, but highlighted the need for better
links between the activities of Directorates, more relevant performance
indicators for certain programmes and better performance measurement
in evaluations;
- for the next MFF the Commission has proposed
radical simplifications and included in all sectoral programmes
general and specific objectives and key performance indicators
with a view to improved performance reporting;
- a standard clause on evaluation requires a final
evaluation report on whether each programme's objectives have
been achieved;
Control Strategies
- with a view to strengthening
the controls on the way EU research policy is run, the review
in two Commission research-related departments underlined the
need for a common audit strategy in the research area, with no
fewer than eight Commission departments;
- the interconnected nature of research means that
there are bound to be common beneficiaries, requiring a more co-ordinated
audit approach;
- in the external aid area the review recommended
stronger supervision and controls in the European Development
Fund grant management process, both at Commission headquarters
and in the EU Delegations;
- the action plans were designed to improve supervision
of devolved expenditure, notably by improving the Delegations'
reporting, rationalising the control programmes and monitoring
control activities;
- the measures were considered adequate but have
yet to bear fruit;
- separation of tasks between the Commission and
the European External Action Service presents new risks, which
are being addressed;
- reviews of the control strategies of the Structural
Funds Directorates-General in 2010 concluded that they are on
the right track;
- this work will be continued in 2012 in the cohesion
area, by way of audits covering the closure of the previous programming
period for the European Regional Development Fund, the Cohesion
Fund and the European Social Fund and implementation of controls
over the 2007-13 programming period, to seek reasonable assurance
that Directorates-General are effectively addressing the issue
of the persistently high rate of error;
Management of major industrial programmes
- reviews of the GNSS Programmes
concluded that the Commission should ensure it has the capacity
to run such complex programmes, as they require large-project
management skills which are not readily found internally;
- they also require management responsibility to
be assigned at an appropriately high level and a stable governance
structure;
- the Commission took immediate action to address
these issues by adopting its proposal for a new Regulation on
implementation and exploitation, which will provide a new framework
for the financing and governance of the EGNOS and Galileo programmes
for 2014-2020;
Financial management processes
- the follow-up reviews on financial
management processes have shown much improvement over recent years,
so the conclusions in this area are positive;
- work is still needed to ensure
that the control framework remains robust despite pressure on
resources;
IT governance
- the Commission has taken a
number of initiatives, such as establishing Activity Based Management
and IT Steering Committees, the High Level Group on IT, the IS
Project Management Board and the Special IT Working Group on office
automation, all of which have improved IT governance;
- in 2010 and 2011, the IT rationalisation process
was initiated;
- to this end, many Commission IT systems were
reviewed and assessed in 2011, with a view to limiting the number
of local IT systems and IT staff and to streamlining existing
systems and this work is ongoing; and
- it is essential that any rationalisation decisions
be based on a thorough and objective analysis of the costs and
benefits of each option under consideration.
17.13 The Report, document (b), is to the Discharge
Authority in relation to the Commission's follow-up to the 2010
discharge. It summarises two accompanying Staff Working Documents
which reply to the requests of, respectively, the European Parliament
and the Council. Of the 428 requests identified by the Commission
(an increase of 44% compared with 2009):
- 337 were from the European
Parliament's discharge resolution;
- the Commission agreed to take action on 95 requests,
but considers that actions have already been taken or are ongoing
for 217, though in some cases the results will need to be assessed;
- due to reasons related to the existing legal
framework or its institutional prerogatives, the Commission did
not accept 25 requests;
- the remaining 91 were Council recommendations
to the European Parliament, 24 of which the Commission agreed
to take action on;
- it considers that actions have already been taken
or are ongoing for 66 requests, though in some cases the results
of the actions will need to be assessed; and
- one request was not accepted.
17.14 Principal follow-up action in the Commission's
Report concerns:
Closer monitoring of the use of Financial Engineering
Instruments (FEIs)
- the Commission has committed
to improving the monitoring of FEIs and plans to continue to do
so for the next programming period with its proposal to further
enhance monitoring mechanisms, including detailed reporting requirements
for financial instruments under shared management;
- in February it presented a detailed analysis
of FEIs, together with an assessment of the experience, including
lessons learned and inherent risks, by both the Commission and
the Member States in implementing FEIs in cohesion policy;
- in a report on FEIs within the European Regional
Development Fund, the ECA formally recommended that the Commission
introduce greater guidance on the use of FEIs to ensure sound
financial management, specifically, by aligning best practice,
setting indicative leverage ratios and indicators and defining
minimum revolving periods for recycled funds;
- the Commission has responded by introducing rules
for leverage and recycling into the common provisions for programmes
and the new Financial Regulation and undertakes to continue to
seek consistency across the new regulatory landscape;
- for the 2011 discharge procedure, the Commission
plans to provide the Discharge Authority with a newly established
annual report on FEIs, their subsequent evaluation and audit results;
- the Commission has introduced two additional
processes ¯
an analysis per Member State on the use of FEIs and a thematic
audit on implementation of a sample of FEIs, enabling it to report
in detail on FEIs in forthcoming Annual Activity Reports (AARs
¯
summary documents issued by each Directorate General on its progress
against planned objectives);
Accountability chain
- the Commission has introduced
a specific section into AARs analysing annual summaries provided
by Member States and anticipates that this accountability chain
will be enhanced with the introduction of national management
declarations under the new Financial Regulation;
- it also updated the instructions for the preparation
of AARs to further improve their quality, guidance provided and
the estimation of the residual error rate and risks compared to
the ECA's assessment;
- it reaffirms its political accountability for
the EU Budget, via the Annual Synthesis Report;
- with regards to the European Parliament's call
for Commissioners to append their signatures to AARs, the Commission
makes the point that the reports are management tools for Directorates
General to express their results and assurance and that the Code
of Conduct and the standing instructions already require Commissioners
to hold regular meetings with their Directors-General, including
at least two per year to discuss all issues related to internal
control, audit and fraud;
- the Commission addresses the issue of differing
error rates found by the IAS and the ECA by explaining their alternative
approaches;
- the former seeks assurance on the quality of
control systems and the latter makes an assessment of the accuracy
of the accounts and legality and regularity of the accounts' underlying
transactions;
- furthermore, the ECA's error rates refer to broad
policy areas, whilst the IAS is concerned with individual programmes;
The increased use of pre-financing
- the Commission agrees on the
need for pre-financing to be regularly checked, but explains its
increased use in recent years as a reflection of the spending
cycle of multiannual programmes and the beginning of the 2007-13
programming period;
- additional pre-financing in the context of the
package to tackle the effects of the economic crisis in 2009-10
and the increased use of FEIs in Structural Funds, which are also
presented as pre-financing in the annual accounts, also contributed
to the increase;
- in the new Financial Regulation, a provision
has been made for regular clearance of pre-financing following
the timing and economic substance of underlying projects;
- the Commission observes a decrease in the amount
of pre-financing in 2011, which is to be expected as the current
MFF draws to an end;
Effective sanctioning mechanism in the area of
cohesion policy
- the Commission considers the
preventive and corrective measures it currently has in place (interruptions,
suspensions and financial corrections) to be sufficient in aiding
its supervisory role;
- it however agrees on the need for their further
improvement and strengthening in some areas;
- its proposals for the 2014-2020 programming period
largely address long standing concerns of the European Parliament
with the introduction of net financial corrections to Member States
"where irregularities affecting annual accounts sent to the
Commission are detected by the Commission or by the ECA"
(under the common provisions on all structural instruments and
streamlining procedures and conditions under which payments can
be interrupted or suspended);
- the Commission's proposals also put a focus on
results and effectiveness through objectives based strategic programming,
thematic concentration, a performance review framework, common
indicators and focus on the quality of monitoring data, with the
possible sanction of payment suspensions if that data is not reliable;
and
- it also intends to reinforce its supervisory
role and the accountability of Member States by clarifying the
use of different sanctioning mechanisms at its disposal.
17.15 The Commission also makes summary remarks on
various policy groupings and horizontal issues, such as corporate
governance of the Commission, responsibility of Member States
(particularly to voluntarily provide national declarations of
expenditure under the new Financial Regulation), clarification
regarding Member States' liability for loans provided under the
European Financial Stabilisation Mechanism and transparency (where
the Commission maintains that, through for example publishing
information relating to beneficiaries of EU funds under direct
management, it is fulfilling its responsibilities under the current
Financial Regulation). Specific issues it covers are:
- the Commission reasserting
its ownership of the Evaluation Report and commitment to producing
it together with the other documents it produces on evaluation
issues;
- the Commission, in response to a call to identify
weaknesses in Member States and regions beset by high rates of
error in cohesion policy, presented a working document in November
2011 with that analysis and affirms its commitment to monitor
these areas;
- it says it only resumes interrupted payments
when satisfied that systems are adequate;
- the Food for Deprived People programme is to
be continued in its current form until the 2013 annual plan and
is proposed to be financed by the cohesion budget in accordance
with the MFF proposal for 2014-2020;
- regarding the EDFs, the Commission undertakes
to ensure greater consistency and effectiveness between partner
countries and co-ordination and complimentary action between geographical
and thematic programmes and instruments;
- it considers that budgetary support instruments
have already been enhanced with rigorous and well-defined conditions
(as recommended by the European Parliament); and
- it undertakes to present a 'roadmap' on implementation
of the Common Approach in relation to decentralised agencies and
joint undertakings by the end of 2012.
The Government's view
17.16 In relation to the internal audit Report, document
(a), the Financial Secretary to the Treasury (Greg Clark) says
that:
- as the UK is a net contributor
to the EU Budget, the Government takes the management of EU funds
extremely seriously;
- it considers that this Report provides a useful
summary of the work of the Commission's IAS and shows that it
has an important role to play in improving the Commission's governance
and internal control;
- it is encouraging to note that almost all 2011
audit recommendations were accepted and progress had been made
towards reducing the number of outstanding recommendations; and
- there are no direct policy implications for the
UK following this Report.
17.17 On the Report on the Commission response to
the 2010 discharge, document (b), the Minister, noting that the
Government welcomes it, says that:
- it provides a helpful summary
of the actions taken by the Commission in response to the recommendations
of the Council and the European Parliament; and
- the Government would expect these actions to
lead to improvements in the management of the EU Budget over the
longer term.
17.18 The Minister comments further that:
- the Government reiterates its
strong support for sound financial management and budget discipline
in relation to EU Budget expenditure;
- it is encouraged that the Commission accepted
all Council recommendations with the exception of the single issue
of greater decentralisation of Commission aid management, which
the UK has pushed for a number of years;
- it is, however, clearly unacceptable that for
the 17th year in a row the ECA has been unable to sign off the
EU Budget, due to an unacceptable number of errors in the transactions
carried out that year;
- that is why, in February, the Government took
the unprecedented step, together with the Netherlands and Sweden,
of voting against the sign-off of the EU's accounts for 2010 and
issued a joint statement calling for immediate improvements;
- this sent the strongest possible message that
financial management in the EU must urgently improve; and
- the Government has called on the Commission and
Member States to pursue greater simplicity of rules, make payments
and the use of EU money more transparent and imbed better management
practices in programmes, such as SMART (specific, measurable,
attainable, relevant and time-bound) objectives.
The Minister continues that the Government broadly
welcomes the positive statements of intent set out by the Commission,
but has a number of specific observations on the Commissions'
response:
- the Government agrees that
FEIs have the potential to leverage the EU Budget significantly
by attracting external investment to programmes;
- however, these substantial long-term funds must
be monitored effectively to ensure both financial propriety and
ongoing value for money and must not put upward pressure or liability
on to the EU Budget;
- the Commission's plan to increase monitoring,
to ensure consistency, and to introduce recommended rates and
ratios of leverage is therefore to be welcomed, in so far that
it does not imply disproportionate administrative burdens;
- the Government welcomes any effort to improve
the quality and consistency of AARs, and accepts that accountability
should not be diluted within Directorates-General;
- however, it is cautious regarding the Commission's
hope that Member States will undertake to voluntarily disclose
their national management declarations, as provided for in the
new Financial Regulation;
- without compulsory disclosure, the concern is
that many Member States will not do so;
- the Government cannot see any argument against
enhancing transparency via compulsory disclosure;
- the Government does not support the proposals
for pre-financing, which, as well as increasing pressure on the
EU Budget early in the MFF period, raises the potential to reduce
transparency in the Budget;
- the Government welcomes the Commission's plans
for an increasing focus on results to be implemented through thematic
objectives, the use of common output indicators and a performance
framework;
- however, the proposed performance reserve should
be limited to a voluntary mechanism at Member State discretion;
- the Government believes much can still be done
to improve transparency across the EU;
- it would like to see more robust provisions for
Member States to disclose data on the use of EU citizens' money,
ideally in a consistent, machine-readable format;
- other examples are annual statements of expenditure
(as the UK does together with the Netherlands, Sweden and Denmark),
and the compulsory rather than voluntary disclosure of national
management declarations;
- the Government does not agree that the Food for
Deprived People programme fits in with the objectives of the European
Social Fund; and
- this proposal covers the provision of goods found
on the open market and therefore represents a 'social measure'
which should not be funded from the EU Budget, but by individual
Member States.
17.19 The Minister concludes that the Government
will be looking to see the Commission follow through on these
proposed improvements and will continue to engage with it and
other Member States to push for further improvements to the implementation
of the EU Budget.
Conclusion
17.20 Whilst clearing the Report on internal audits,
document (a), we draw it to the attention of the House for the
evidence it shows of some improvement in the Commission's internal
management. As for the Report on the Commission response to the
2010 discharge, document (b), it illustrates continuing
efforts to increase that improvement and, whilst clearing it,
we draw it also to the attention of the House.
47 Management letters provide management with advice,
usually derived from the findings of a series of audits or from
a consultancy engagement, and do not lead to a formal follow up
by auditors. Back
48
(33511) 17844/11 + ADDs 1-2: see HC 428-xlviii (2010-12), chapter
5 (25 January 2012); HC 86-ii (2012-13), chapter 1 (16 May 2012);
HC 86-vii (2012-13), chapter 1 (4 July 2012); and Gen Co Debs,
European Committee C, 11 July 2012, cols 3-14. Back
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