FINANCIAL REGULATION (9628/06)
Letter from the Chairman to Ed Balls MP,
Economic Secretary, HM Treasury
I am writing further to your Explanatory Memorandum
9628/06 on amendments to the Financial Regulation and my subsequent
letter informing you that Sub-Committee A had decided to maintain
the scrutiny reserve pending the publication of a report on financial
management in the European Union. I understand from your officials
that agreement is expected very soon. We have therefore considered
the document a second time in the hope that we will be able to
seek clarification and eventually clear it from scrutiny before
agreement is reached. Whilst I do understand that agreement is
necessary in order for the new Financial Regulation to come into
operation at the beginning of next year, it is unfortunate that
this may occur before our report on financial management is published.
Having reconsidered the Modified Proposal the
Sub-Committee still do not consider that the scrutiny reserve
should be lifted. Whilst we support the general thrust of the
amendments where they seek to improve the management of the Communities'
Budget there remain a number of issues on which we wish to seek
clarification. In order to clear the document from scrutiny before
the Council meeting I would appreciate your prompt reply.
We would like to express our support for measures
to improve and simplify the implementation of the Budget and in
particular for the requirement that Member States submit an annual
summary of available audits and declarations. However would you
please provide more information on what such a summary will entail.
Is it envisaged that the summary will be submitted under the authorisation
of a Minister? What sort of audits and declarations will be included
in the summary and to what level of detail? Will all Member States
be required to submit audits of the same areas and will they be
required to prepare these using similar methodologies and internationally
recognised standards? What use will the Commission put these summaries
to? Finally, why are these audits not being submitted to the European
Court of Auditors?
On the issue of a tolerable level of risk I
noted that in your letter to the Chairman of the Commons European
Scrutiny Committee you express support for introducing different
thresholds of tolerable irregularities. Again, we are broadly
in support of this position. However we would like to know more
about how this would work in practice. Who would take the decision
over what level of errors can be tolerated? On what basis would
they take this decision? Is there a risk that this will lead to
a system where some expenditure is controlled strictly whilst
in other areas more lax controls are operated?
On the issue of the abolition of the centralised
system of ex-ante control we note that the Commission's report
(annexed to EM 11021/05) indicates that the new system is an improvement.
What is the Government's position? Furthermore we are concerned
that the report does not appear to address the effect on the Commission's
administration itself. What assurances have you received from
the Commission that the new system is working well and are you
content?
24 October 2006
Letter from Ed Balls MP to the Chairman
Thank you for your letter of 24 October 2006
concerning your Committee's consideration of the Explanatory Memorandum
referenced above.
Your letter advises that you are unable to clear
this EM from scrutiny and asks for clarification on certain issues.
I should perhaps start by advising you that, following the completion
of its discussions, Council has now reached a position on the
Financial Regulation. However, the UK will continue to abstain
given your Lordship's concerns over this issue. However, the amended
Financial Regulation needs to come into force on 1 January 2007
and conciliation will take place with the European Parliament
on 21 November.
You ask for more information on what an annual
summary of available audits and declarations would entail, whether
this would be submitted under the authorisation of a Minister,
what sort of audits and declarations would be included and to
what level of detail. Although the finer details of this proposal
have yet to be ironed out, it will be a matter for each Member
State to decide under whose authority such declarations are submitted.
For the UK it is likely that this will be done through auditors/accounting
officers. This would mean that the person who already has responsibility
for either the management or auditing of the systems—and
who already submits reports and/or declarations under existing
legislation would also make this summary declaration. International
auditing standards would apply to these declarations and it is
hoped that the European Commission/European Court of Auditors
(ECA) would be able to take assurance from these and thus limit
or better target their own enquiries as a result.
You also ask about tolerable risk. As you are
aware, the ECA currently uses a blanket materiality level of 2%
and, thus, if they find an error above this, within the limited
sample of transactions they look at, the whole of that programme
is deemed to be at risk of error. In areas such as Structural
Funds and external expenditure, which are designed to do the most
good in poorer areas and countries, managing funds to within this
degree of error is a very difficult task. The concept being considered
here would be one in which, perhaps, a higher materiality level
might be acceptable in some high-risk areas of the Budget and
possibly even a reduced materiality level in others where the
risk of mis-spent expenditure is considered low. However, although
Member States were not opposed to the idea per se, Council discussions
on this matter have been unable to resolve the question of how
this will work in practice and it was felt that the Commission
had not adequately thought the proposal through. In particular,
Council was not attracted to the proposal to use Activity Statements
as a means of agreeing levels of tolerable risk. The original
suggestion from the Court of Auditors was that both arms of the
budget authority should agree levels of tolerable risk and that
this would be better done through the next revision of the sectoral
regulations. Council has thus proposed, for the sake of unanimous
agreement, that the text on tolerable risk should be deleted from
the Financial Regulation. However, at the request of the United
Kingdom Government, a requirement that risk must be "adequately
managed" has been included in a new Article 28a(2)(e). The
new Article 28a reads as follows:
1. The budget shall be implemented in compliance
with effective and efficient internal control as appropriate in
each management mode, and in accordance with the relevant sector-specific
regulations.
2. For the purposes of the implementation of
the budget, internal control is defined as a process applicable
at all levels of the management and designed to provide reasonable
assurance on the achievement of the following objectives:
(a) effectiveness, efficiency and economy
of operations;
(b) reliability of reporting;
(c) safeguarding of assets and information;
(d) prevention and detection of fraud and
irregularities;
(e) adequate management of the risks relating
to the legality and regularity of the underlying transactions,
taking into account the multi-annual character of programmes as
well as the nature of the payments concerned".
It is possible there could be further changes
during the conciliation procedure with the European Parliament.
Finally, you refer to the abolition of ex-ante
control and ask what the Government's position is on this, whether
assurances have been made that the new system is working well
and whether we are content. The Government has always supported
the move to abolish the ex ante function. Under this system,
proposals for expenditure were authorised by the Commission's
Financial Controller, but there was little or no attempt to check
whether this authorised expenditure had actually been carried
out. This has now been replaced with a system of ex post
control, which is the responsibility of the Commission's Internal
Audit Service (IAS) to carry out. The IAS is doing a good job,
and its findings contribute to the annual declarations of assurance
given by each Director-General in their Annual Activity Reports.
This is much more akin to the control systems operated by the
UK and other Member States, and it has introduced, as Lord Kinnock's
reforms intended, a new culture of accountability to the Commission.
5 November 2006
Letter from the Chairman to Ed Balls MP
Thank you for your letter of 5 November regarding
EM 9628/06. This was considered by Sub-Committee A at their meeting
on 28 November, and the Sub-Committee decided to clear the Proposal
from scrutiny. I would be grateful if you could let me know whether
any changes were made during conciliation with Parliament.
This Proposal was originally held under scrutiny
as part of the inquiry into Financial Management and Fraud in
the European Union. We are pleased that you have chosen to send
copies of this report to your counterparts in other Member States
and look forward to the Government's formal response in due course.
You will be aware that the scrutiny reserve on the items which
were held in conjunction with the inquiry will not be lifted until
the Report is debated. With this in mind, while we are lifting
the reserve on this Proposal, the Committee will reserve the right
to consider it with the Report on the floor ofthe House.
29 November 2006
| 
