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COURT OF AUDITORS

In accordance with the provisions of Article 248(1) and (4) of the EC Treaty, Articles 143 and 181(2) of Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities and Articles 116 and 135(2) of the Financial Regulation of 27 March 2003 applicable to the Ninth European Development Fund, the Court of Auditors of the European Communities, at its meetings of 7 and 14 September 2006, adopted its

ANNUAL REPORTS

concerning the financial year 2005

The reports, together with the institutions' replies to the Court's observations, were transmitted to the authorities responsible for giving discharge and to the other institutions.

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GENERAL INTRODUCTION

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(1)  This chapter consolidates the information previously presented in the Statement of Assurance chapter as well as in the individual income and expenditure chapters.

(2)OJ C 107, 30.4.2004.

(3)  COM(2006) 9 final of 17.1.2006.

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ANNUAL REPORT ON THE IMPLEMENTATION OF THE BUDGET

(2006/C 263/01)

TABLE OF CONTENTS

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(1)  The annexes related to the Annual report on the implementation of the budget can be found at the end of this publication.

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CHAPTER 1

The Statement of Assurance and supporting information

TABLE OF CONTENTS

Statement of Assurance

Reliability of the accounts

Legality and regularity of the underlying transactions

Information in support of the Statement of Assurance

Introduction

Reliability of the accounts

General background

Audit scope and approach

The Commission's management of change

Consolidated opening balance sheet as at 1 January 2005

Consolidated financial statements as at 31 December 2005

Legality and regularity of underlying transactions

The Court's approach

Audit results 2005

STATEMENT OF ASSURANCE

I.

Pursuant to the provisions of Article 248 of the Treaty the Court has examined the ‘Final annual accounts of the European Communities’ consisting of the ‘Consolidated financial statements and the consolidated reports on implementation of the budget’ for the financial year ended 31 December 2005 (1).

II.

In accordance with the Financial Regulation of 25 June 2002, the ‘Consolidated financial statements’ for the financial year 2005 are prepared for the first time on the basis of accounting rules adopted by the Commission's Accounting Officer which adapt accruals based accounting principles to the specific environment of the Communities (2), while the ‘Consolidated reports on implementation of the budget’ continue to be primarily based on movements of cash. The change-over to accruals based accounting required a restatement of the opening balance sheet as at 1 January 2005 and important changes in the presentation (3) and content (4) of the ‘Consolidated financial statements’.

III.

The ‘Final annual accounts of the European Communities’ are consolidated by the Commission's Accounting Officer and approved by the Commission. The Court's responsibility is to provide, based on its audit, the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions.

IV.

The Court carried out its audit in accordance with its own policies and standards which are based on international standards that have been adapted to the Community context. Through its audit, the Court has obtained a reasonable basis for the opinion expressed below. In the case of revenue the scope of the Court's audit work was limited. Firstly, VAT and GNI own resources are based on macroeconomic statistics for which the underlying data cannot be audited directly by the Court, and secondly, the audits of traditional own resources cannot cover the imports that have not been subject to custom supervision.

Reliability of the accounts

V.

In the Court's opinion, the ‘Final annual accounts of the European Communities’ were drawn up in accordance with the provisions of the Financial Regulation of 25 June 2002 and accounting rules adopted by the Commission's Accounting Officer. Except for the effects of the observations in paragraphs VI to VIII, they present fairly, in all material respects the financial position of the Communities as of 31 December 2005, and the results of their operations and cash flows for the year then ended.

VI.

The Court notes that, in the context of a complex exercise (see paragraph II), the existing financial reporting framework has not been consistently applied, in particular for cut-off, and that accounting systems in certain Directorates-General of the Commission were not able to ensure the quality of financial information which led to multiple corrections after the presentation of the provisional accounts (see paragraphs VII and VIII).

VII.

The Court's audit has identified errors in amounts registered in the accounting system as invoices/cost statements and pre-financing which, after corrections made to the provisional accounts, still have the following net financial impact on the elements of the consolidated financial statements listed below (see also paragraph VIII):

(a)

The consolidated opening balance sheet as at 1 January 2005, which adjusted the consolidated closing balance sheet as at 31 December 2004 on the basis of the new accruals based accounting principles, overstates the accounts payable by some 47 million euro and overstates the total amount of long-term and short-term pre-financing by some 179 million euro. As a result, the net assets are overstated by some 132 million euro.

(b)

The errors identified in (a) above affected the consolidated closing balance sheet as at 31 December 2005 which overstates the accounts payable by some 508 million euro and the total amount of long-term and short-term pre-financing by some 822 million euro. As a result the net assets are overstated by some 314 million euro.

VIII.

The Court's audit also confirmed the general reservation of the Director-General for Education and Culture covering the lack of assurance as regards the correctness of its share of the total amounts, included in both the consolidated opening balance sheet as at 1 January 2005 (assets amounting to 572,5 million euro and liabilities amounting to 198,5 million euro) and the consolidated closing balance sheet as at 31 December 2005 (assets amounting to 382,7 million euro and liabilities amounting to 187,3 million euro). Given the incidence of omissions and double or wrong postings within this Directorate-General, it is not possible to quantify the over- or understatement in its share of the assets and liabilities.

Legality and regularity of the underlying transactions

IX.

In areas where the supervisory and control systems are implemented in a manner which provides for an adequate risk management, the transactions underlying the final annual accounts of the European Communities, taken as a whole, are legal and regular. This is the case for revenue, commitments and payments for administrative expenditure and pre accession strategy with the exception of the SAPARD Programme. Moreover, for Common Agriculture Policy (CAP) expenditure the Court's audit shows that, where properly applied, the integrated administration and control system (IACS) is an effective system to limit the risk of irregular expenditure.

X.

Without calling into question the opinion expressed in paragraph IX, the Court emphasises that, in the area of pre-accession strategy, significant risks still exist at the level of the implementing organisations in the acceding and candidate countries for all programmes and instruments.

XI.

The Court notes that in the other areas, payments are still materially affected by errors and the Commission and the Member and other beneficiary states need to make an increased effort to implement adequate supervisory and control systems, so as to improve the handling of the attendant risks. These areas are listed below, namely: Common Agricultural Policy, Structural measures, Internal policies and External actions.

(a)

In CAP expenditure, the Court found evidence that expenditure which is not subject to IACS, or where IACS is not properly applied or where it has only been recently introduced poses greater risk because control systems are not as effective. In addition, IACS inspection results are insufficiently verified and validated by an independent body and claims for EU aid are not usually checked on the spot by the latter. Clearance systems and post payment checks for CAP subsidies not covered by IACS do not provide reasonable assurance as to compliance with Community legislation. The Court concluded that CAP expenditure, viewed as a whole, was still materially affected by errors.

(b)

In structural measures, the Court again found that the Commission does not maintain effective supervision to mitigate the risk that the controls delegated to Member States fail to prevent reimbursement of overstated or ineligible expenditure. For both programming periods (1994 to1999 and 2000 to2006), the Court found that expenditure was not free of material irregularities. Some programs for the 1994 to 1999 period were closed without a sound basis.

(c)

In internal policies, despite the progress made in certain areas, the Court's audit revealed weaknesses in the supervisory and control systems which led to a material incidence of errors in payments to beneficiaries. Errors arise mainly from complicated cost reimbursement systems and unclear procedures and instructions governing the different programmes.

(d)

In external actions, the improvements of the Commission's supervisory and control systems have not yet had an impact at the implementing organisation level, where a material level of errors still exists, which can be attributed to the lack of a comprehensive approach to the supervision, control and audit of these organisations.

14 September 2006

Hubert WEBER

President

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(1)  The ‘Final annual accounts of the European Communities’ make up Volume I of the annual accounts of the European Communities financial year 2005.

(2)  The accounting rules adopted by the Commission's Accounting Officer are inspired by International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or, in their absence, International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.

(3)  The ‘Consolidated financial statements’ comprise the balance sheet, the economic outturn account (including segment reporting), the cash flow table and the statement of changes in net assets.

(4)  The main new elements are pre-financing, accounts payable and cut-off.

(5)  See paragraphs 1.51 and 1.52 of the Court's Annual Report concerning the financial year 2004 and chapter 2 of the present Annual Report.

(6)  Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 248, 16.9.2002, p. 1).

(7)  Communication from the Commission — Modernisation of the Accounting System of the European Communities (COM(2002) 755 final of 17.12.2002).

(8)  See paragraph 1.8 of the Annual Report concerning the financial year 2002, paragraph 1.25 of the Annual Report concerning the financial year 2003 and paragraph 1.44 of the Annual Report concerning the financial year 2004.

(9)  For instance at the United Nations Headquarters and the Organisation for Economic Cooperation and Development or in Australia, Denmark, France, Spain, Sweden, the United Kingdom and the United States.

(10)  The new set of 15 accounting rules adopted by the Commission's Accounting Officer are based on the International Public Sector Accounting Standards (IPSAS) and for accounting transactions that are not yet covered by the IPSAS, on the relevant International Accounting Standards (IAS) / International Financial Reporting Standards (IFRS).

(11)  According to Article 59 of the Financial Regulation, each institution lays down in its administrative rules the staff of an appropriate level to whom it delegates the duties of the Authorising Officers for implementing revenue and expenditure, the scope of the powers delegated and the possibility to sub-delegate them. In the Commission, delegation is in general given to Directors-General and Heads of services.

(12)  Within each Directorate-General, the Resource Director is responsible to manage the budgetary and human resources available. He has specific responsibilities for matters concerning audit, internal control, financial management and related information systems.

(13)  ABAC Workflow is an IT-module which is the entry point for most budgetary and accounting data.

(14)  EuropeAid Co-operation Office, European Communities Personnel Selection Office, Office for Official Publications of the European Communities, Office for the Administration and Payment of Individual Entitlements, Directorates-General for Informatics, Education and Culture, Humanitarian Aid and External Relations (see also the Annual Report concerning the financial year 2004, paragraphs 1.38 to 1.42).

(15)  Directorates-General for Agriculture and Rural Development, Employment, Social Affairs and Equal Opportunities, Communication, Regional Policy and Research.

(16)  Strengthening of controls supporting accounting information, pre-financing, posting transactions in a timely manner, cut-off procedures, definition and formalisation of the Accounting Correspondent's role, legal entities, local IT systems, training, choice of object codes, culture change in an accruals based environment and validation of the opening balances.

(17)  Link between a recovery and the related commitment not mandatory in ABAC, invoices and supplier statements, accounting reporting from SAP and matching a guarantee to a corresponding framework contract upon entry in ABAC Guarantee.

(18)  The reservation of the Director-General of the Joint Research Centre concerning the lack of clarity on the status of some parts of the balance sheet and economic outturn and the quality of the data in some of the postings concerned is primarily of a technical nature.

(19)  This decision was based on the IPSAS ‘control concept’.

(20)  Although the Accounting Rule No 1 explains the different criteria to be followed for consolidation, the reasons for excluding the EDF from the consolidation scope are not disclosed.

(21)OJ C 162, 5.6.2001, p. 1.

(22)  As concerns the long-term and short-term receivables, the Commission should obtain the figures for the European Agricultural Guidance and Guarantee Fund (EAGGF) debtor's ledger as at 31 December rather than indicating the figures as at the end of the EAGGF year (i.e. as at 15 October).

(23)  See paragraph 1.23 of the Annual Report concerning the financial year 2002, paragraphs 1.10(e), 1.14 and 1.15 of the Annual Report concerning the financial year 2003 and paragraph 1.17 of the Annual Report concerning the financial year 2004.

(24)  See paragraphs II(d) of the 2002 and III of the 2003 and 2004 Statement of Assurance.

(25)  The initial total amount of pre-financing obtained for the Commission before deduction of eligible expenditure was 64 600 million euro.

(26)  See paragraphs 1.30 to 1.32 of the Annual Report concerning the financial year 2004.

(27)  The audit on the Directorate-General for Education and Culture was conducted by the Commission's internal audit service under the supervision of the Court.

(28)  The initial gross amount of current payables before deduction of (the part of) invoices/cost statements already paid amounted to approximately 35 000 million euro, which was transferred into the new accounting system at the beginning of 2005.

(29)  See paragraphs 1.34 and 1.35 of the Annual Report concerning the financial year 2004.

(30)  To this amount, accrued charges deducted from short-term pre-financing representing some 6 400 million euro have to be added.

(31)  The Commission has eliminated the practice that has been criticised by the Court in past years in connection with the Communities' pension liabilities, whereby a parallel recognition of receivables and payables has the effect of neutralising the impact on the economic outturn, as it does not show the change from one year to another (see paragraphs 1.31 and 1.32 of the Annual Report concerning the financial year 2002, paragraph 1.10(h) of the Annual Report concerning the financial year 2003 and paragraph 1.20 of the Annual Report concerning the financial year 2004).

(32)  See paragraphs 1.10 and 1.11 of the Annual Report concerning the financial year 2002, paragraph 1.11 of the Annual Report concerning the financial year 2003 and paragraphs 1.12 and 1.13 of the Annual Report concerning the financial year 2004.

(33)  See Chapter 2 ‘Management of Internal Control Systems’, point 2.2.2.1 ‘Expenditure under the Guarantee section’

(34)  In February 2006, the Court approved a revision of the DAS approach which will be implemented for the first time for the financial year 2006.

(35)  Agriculture, structural measures, internal policies, external actions, administration and pre-accession strategy.

(36)  With regard to expenditure, the Financial Regulation distinguishes between the following cases (Article 53): the Commission implements the budget on a centralised basis (administrative expenditure and internal policies); the management of transactions is shared with the national authorities in the Member States (EAGGF-Guarantee and Structural Funds); the Commission decentralises the implementation of certain aspects of its operations to beneficiary countries after having carried out an ex ante check (pre-accession strategy) and the Commission may manage jointly certain operations with international organisations.

(37)  ‘Other auditors’ means any public or private person called upon to give an auditor's assessment of operations that are financed in whole or in part from the Community budget, but whose obligation does not stem from the Community regulations.

(38)  Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L 357, 31.12.2002, p. 1).

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CHAPTER 2

Commission internal control

TABLE OF CONTENTS

Introduction and audit scope

Audit Findings concerning the Commission's Management Representations

The Commission's Synthesis Report

Annual activity reports and declarations of Directors-General

Process of preparation

Declarations of Directors-General

Indicators

Audit Findings concerning Internal Control Standards

Overall conclusion and recommendations

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(1)  The action is foreseen by the 2004 synthesis (multiannual objective No 3). See Annex 1 of the 2004 synthesis report (COM(2005) 256 final of 15.6.2005) and Memorandum to the Commission: ‘Towards an effective and coherent risk management in the Commission services’ (SEC(2005) 1327 of 20.10.2005) and the document ‘Risk management implementation guide’ of 15.11.2005.

(2)  See Communication from the Commission to the Council, the Parliament and the Court of Auditors COM(2006) 9 final and Communication to the Commission SEC(2006) 49 of 17.1.2006.

(3)  See Article 53 of the Financial Regulation (OJ L 248, 16.9.2002, p. 1).

(4)  Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Policy Achievements in 2005 (COM(2006) final 124 of 14.3.2006).

(5)  Communication from the Commission to the European Parliament, the Council and the European Court of Auditors (COM(2006) 277 final of 7.6.2006).

(6)  Annex 1 of the 2005 synthesis includes 15 measures related to the following categories: performance management and internal control, governance, financial management and reporting and human resources. Most of these actions are the follow-up of the multi-annual objectives included in the 2004 synthesis.

(7)  See also Annual Report of the Court of Auditors concerning the financial years 2003 and 2004, paragraph 1.67.

(8)  Secretariat-General, Directorate-General for Budget and Directorate-General for Personnel and Administration.

(9)  Note to Directors-General and Heads of Service — Circular on the annual activity reports for year 2005 SEC(2005) 1533 of 15.11.2005.

(10)  This is a process, organised by groups of Directorates-General, to improve consistency and coherence between reservations.

(11)  See part 3.1 and appendix 3 of the circular on the annual activity reports for year 2005. According to these guidelines, a system weakness is considered as material if it satisfies both qualitative and quantitative criteria. Specific implementing rules were further developed by the Directorates-General of the families of shared management and research, aiming to have common materiality criteria and quantification methodology, as laid down in multiannual objective No 6, established by the 2004 synthesis report (COM(2005) 256 final of 15.6.2005), Annex 1.

(12)  In particular, the existing guidelines establish the threshold as a function of the budget for the activity in question, i.e. 2 % of the value of the activity concerned (COM(2003) 28 final of 21.1.2003).

(13)  In part 1, section 1.2 of the relevant circular, it is foreseen that the scorecard of the service for the year 2005 should ensure a balance between impact, output, workload, management and legality and regularity indicators.

(14)  Appendix 6 of the circular on the annual activity reports for year 2005 foresaw the publication of a supplementary document on performance indicators. This procedure was suspended awaiting the results of the working group on standard objectives and indicators for horizontal activities.

(15)  The guidelines for the annual activity reports specify that reservations should not make the declaration meaningless and that, in extreme cases, the Director-General may not be able to provide the required assurance. In order to remedy weaknesses, action plans, including deadlines for implementation, should be drawn up.

(16)  Directorates-General for Communication, Education and Culture, Office for Infrastructures and Logistics in Brussels.

(17)  Directorates-General for Information Society and Media, Justice, Freedom and Security, External Relations.

(18)  See also Annual Report of the Court of Auditors concerning the financial years 2003 and 2004, paragraph 1.67.

(19)  In 2005, the analysis extended to the information included in the annual activity reports (and not only to the declarations). The assessments made in 2003 and 2004 have been adapted in view of presenting a comparable situation for 2003, 2004 and 2005.

(20)  Even though in some cases (management and control systems in the Member States in 2000 to 2006 for several programmes of structural measures and error frequency for the Sixth Framework Programme of Research) they were dealt with in the annual activity reports.

(21)Impact of these most important reservations on the Director-General's assurance in the Court's view:

A: reasonable assurance that the internal control systems ensure the legality and regularity of the underlying transactions with no or insignificant qualifications

B: reasonable assurance with qualifications that the internal control systems ensure the legality and regularity of the underlying transactions (errors < 2 % or system weaknesses whose financial impact < 10 % of the budget concerned)

C: no assurance (errors > 2 % or system weaknesses whose financial impact > 10 % of the budget concerned)

(22)Evidence given by the Annual Activity Report for the Court's audit conclusions:

In 2005, the analysis extended to the information included in the annual activity reports (and not only to the declarations). The assessments made in 2003 and 2004 have been adapted in view of presenting a comparable situation for 2003, 2004 and 2005.

A: sufficient evidence for the Court's DAS conclusions (clear and unambiguous)

B: sufficient evidence for the Court's DAS conclusions after corrections (with immaterial inaccuracies or missing information of minor importance)

C: insufficient evidence for the Court's DAS conclusions (with material inaccuracies or missing information of major importance, for example: negligence of the problems of shared management, cover of the previous financial year, lack of quantification, unusable information)

(23)Evolution:

+ improvement

= constant

– regression

(24)  Although included in the Annual Activity Reports.

(25)  For CAP expenditure, where IACS is properly applied.

(26)  For CAP expenditure, which is not subject to IACS or where IACS is not properly applied.

Source: Court of Auditors.

(27)  Directorates-General for Agriculture and Rural Development, Employment, Social Affairs and Equal Opportunities, Regional Policy.

(28)  E.g. Directorates-General for Agriculture and Rural Development, Communication, Education and Culture, Employment, Social Affairs and Equal Opportunities, Enterprise and Industry, Environment, Information Society and Media, Justice, Freedom and Security, Regional Policy, Research, Health and Consumer Protection, Energy and Transport, EuropeAid Cooperation Office, Office for Infrastructures and Logistics in Brussels.

(29)  Standards Nos 11 ‘Risk analysis and management’, 12 ‘Adequate management information’, 14 ‘Reporting improprieties’, 17 ‘Supervision’, 18 ‘Recording exceptions’, 20 ‘Recording and correction of internal control weaknesses’, 21 ‘Audit reports’ and 22 ‘Internal audit capability’.

(30)  Directorates-General for Agriculture and Rural Development, Budget, Competition, Education and Culture, Economic and Financial Affairs, Enlargement, Employment, Social Affairs and Equal Opportunities, Enterprise and Industry, Fisheries and Maritime Affairs, Information Society and Media, Regional Policy, Research, EuropeAid Cooperation Office, Eurostat.

(31)  SEC(2006) 567 of 28.4.2006.

(32)  The number of baseline requirements increased from 71 to 75. Two of the baseline requirements selected for 2005 were strengthened in comparison with 2004.

(33)  Directorates-General for Agriculture and Rural Development, Budget, Competition, Education and Culture, Employment, Social Affairs and Equal Opportunities, Research, Regional Policy, EuropeAid Cooperation Office.

(34)  In particular, internal control standards 11 ‘Risk analysis and management’ and/or 17 ‘Supervision’.

(35)  In compliance with Article 86 of the Financial Regulation.

(36)  See Communication from the Commission to the Council, the European Parliament and the European Court of Auditors on a roadmap to an integrated internal control framework (COM(2005) 252 final of 15.6.2005) and Annual Report of the Court of Auditors concerning the financial year 2004, paragraph 1.85.

(37)  Common agricultural policy, structural measures and internal policies including research.

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CHAPTER 3

Budgetary Management

TABLE OF CONTENTS

Introduction

Observations

Budget increased for the first full year of enlargement

Almost all of the budget used

Outstanding budgetary commitments continue to increase

Higher spending rate on structural operations required over the next three years

Decommitments under the year n + 2 rule have been limited

Conclusions and recommendations

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(1)  Detailed information on budgetary implementation for 2005 can be obtained from the Commission document entitled ‘Report on budgetary and financial management — Financial year 2005.’ See http://ec.europa.eu/budget/publications/fin_manag_account_en.htm

(2)  For more explanation on the carry over of appropriations, see point 7.3 of Annex I.

(3)  The budgetary surplus — which differs from the economic outturn — is a reflection of the extent to which the budget has not been spent. It is not a reserve which can be accumulated and used in future years to finance expenditure. The unused revenue that the surplus represents is offset against the own resources to be collected for the following year.

(4)  See paragraph 3.2.

(5)  See paragraph 2.12 of the Court's 2003 Annual Report.

(6)  Early or mid 2009 in certain cases.

(7)  In the past, closure has been a difficult period in the programming cycle: ‘The administrative and financial constraints connected with completion of the 1994 to 1999 programmes contributed largely to the delays in starting up programmes for the 2000 to 2006 period.’ COM(2002) 528 final, page 4.

(8)  The final date for eligibility of expenditure under the 2000 to 2006 programmes is normally the end of 2008, in line with the n + 2 rule. However, the final 5 % balance of a programme can only be paid after Member States have submitted satisfactory closure documents, for which the deadline is early 2010. In practice this means that some payments will be made in 2010 and 2011.

(9)  Commission reply to paragraph 2.23 of the Court's 2004 Annual Report. See also the Commission's reply to paragraph 2.48 of the Court's 2003 Annual Report: ‘The “N + 2” rule should result in a stabilised level of outstanding commitments over the next few years...’.

(10)  4 % of the appropriations allocated to each Member State were placed in reserve for distribution to the best performing programmes in three tranches from 2004 to 2006.

(11)  For example, in the case of 79 million euro decommitted from a programme following the year n + 2 rule in the Netherlands, 24 million was allocated to the same programme from the Performance Reserve.

(12)  See Commission reply to paragraph 2.16 of the Court’s 2003 Annual Report: ‘The overlap of programme cycles for multiannual programmes tends to smooth the pattern of payments over time. For example, at the beginning of a new Structural Fund programme period, payments made in respect of programmes of the previous period normally compensate for the still low level of payments under current programmes before they reach cruising speed.’

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CHAPTER 4

Revenue

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Scope of audit

Legality and regularity of underlying transactions

Functioning of supervisory and control systems

Commission supervisory and control systems

Supervisory and control systems in Member States

Conclusions and recommendations

Follow-up of previous observations

Traditional own resources: B-account adjustment

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(1)  Contains surplus from previous financial year and miscellaneous revenue.

(2)  The traditional own resources are collected by Member States on behalf of the European Union, retaining 25 % to cover collection costs.

(3)  In contrast to traditional own resources, the VAT and GNI own resources are contributions resulting from the application of uniform rates to Member States' harmonised VAT assessment bases or to the Member States' GNI, calculated according to Community rules.

(4)  Belgium, the Czech Republic, Germany, Ireland, Luxembourg, Malta, the Netherlands, and the United Kingdom. In addition, the traditional own resources accounting systems were reviewed in Italy, Poland and Sweden.

(5)  Belgium, the Czech Republic, Germany, Ireland, Italy, Greece, Spain, Finland and the United Kingdom.

(6)  Article 18 of Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 implementing Decision 94/728/EC, Euratom on the system of the Communities' own resources (OJ L 130, 31.5.2000, p. 1), as amended by Regulation (EC, Euratom) No 2028/2004 (OJ L 352, 27.11.2004, p. 1).

(7)  Article 6(5) of Regulation (EC, Euratom) No 1150/2000.

(8)  Council Regulation (EC) No 515/97 of 13 March 1997 on mutual assistance between the administrative authorities of the Member States and cooperation between the latter and the Commission to ensure the correct application of the law on customs and agricultural matters (OJ L 82, 22.3.1997, p. 1), as last amended by Regulation (EC) No 807/2003 (OJ L 122, 16.5.2003, p. 36).

(9)  Special Report No 1/2005 (OJ C 202, 18.8.2005).

(10)  Reservations relate to the use of reliable quantitative data and an acceptable methodology in the production of VAT statements by Member States and make it possible for corrections to be made to these statements after the four year time limit set in Community legislation.

(11)  No reservations have been set for the ten new Member States as they submitted their first VAT statements in 2005.

(12)  Document based on a common model by which the National Statistical Offices communicate the GNI figures to Eurostat each year. These figures serve as a basis for the calculation of the GNI own resource.

(13)  With the exception of a mission to Germany.

(14)  See Annual Report concerning the financial year 2004, paragraphs 3.36 to 3.37.

(15)  Reservations in respect of the GNI resource relate to sources and methods used by Member States for the compilation of national accounts aggregates and make it possible to adjust GNI aggregates after the four year time limit set in Community legislation.

(16)  As yet no reservations are in place for any of the ten new Member States as their ESA 95 inventories do not have to be submitted until the end of 2006.

(17)  Austria, Belgium, Denmark, Germany, Greece, France, Ireland, Italy, the Netherlands, Spain and Portugal have submitted revised figures for some of the outstanding reservations to enable the Commission to take a decision.

(18)  See Annual Report concerning the financial year 2004, paragraphs 3.43 to 3.44 and the corresponding Commission replies.

(19)  Commission Regulation (EC) No 1889/2002 of 23 October 2002 on the implementation of Council Regulation (EC) No 448/98 completing and amending Regulation (EC) No 2223/96 with respect to the allocation of financial intermediation services indirectly measured (FISIM) within the ESA (OJ L 286, 24.10.2002, p. 11).

(20)  ‘Changes to National Accounts in 2005’, Eurostat paper dated 14 February 2006.

(21)  Article 2(7) of Council Decision 2000/597/EC, Euratom of 29 September 2000 on the system of the European Communities' own resources (OJ L 253, 7.10.2000, p. 42).

(22)  Belgium, Germany, Spain, France, Italy, Latvia, Hungary, Poland, Slovenia and Sweden.

(23)  The Czech Republic, Germany, Malta and the United Kingdom.

(24)  Goods that have arrived and been included on a summary customs declaration, but which are awaiting the formalities necessary for them to be assigned a definite customs-approved treatment or use (such as release for free circulation).

(25)  The United Kingdom. Under the Community Customs Code additional customs duty cannot normally be charged more than three years after the original customs debt was incurred.

(26)  Austria, Belgium, Finland, the Czech Republic, the Slovak Republic and Sweden.

(27)  This element was not fully implemented in any of the Member States visited.

(28)  This element was fully implemented in Belgium, the Czech Republic, Austria, the Slovak Republic and Sweden.

(29)  Occurred in Austria, the Slovak Republic, Finland and Sweden.

(30)  This element was fully implemented in the Czech Republic and Sweden.

(31)  COM(2005) 217 final, 25.5.2005.

(32)  See Annual Report concerning the financial year 2004, paragraphs 3.21 to 3.22.

(33)  The write-down entered in the balance-sheet is 759,2 million euro.

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CHAPTER 5

The common agricultural policy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

The audit scope

Integrated Administration and Control System (IACS)

Area aid

The Integrated Administration and Control System (IACS) in the New Member States

Animal premiums

Olive oil

Rural development

EU-15

Temporary Rural Development Instrument for new Member States

Export refunds

Ex-post scrutiny of subsidies paid to traders and processors

The Commission's clearance of accounts

Certifying bodies

Conformity clearance

Audit of the Commission's Clearance of Accounts units

Conclusions and recommendations

Follow-up of previous observations

Rural development: support for less-favoured areas

The organisation of the system for the identification and registration of bovine animals in the European Union

Special Reports issued since the last Annual Report

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(1)  EAGGF-Guarantee only. For EAGGF-Guidance see Chapter 6.

(2)  Others: production, processing or consumption aid paid to producers or organisations of producers or processors and administrative expenditure.

(3)  Intervention: public and private storage, fruits and vegetables withdrawal arrangements, compulsory and voluntary distillation.

(4)  Council Regulations (EEC) No 3508/92 (OJ L 355, 5.12.1992, p. 1) and (EC) No 1782/2003 (OJ L 270, 21.10.2003, p. 1) covering animal premiums and area aid.

(5)  Council Regulation (EEC) No 386/90 (OJ L 42, 16.2.1990, p. 6).

(6)  Council Regulation (EEC) No 4045/89 (OJ L 388, 30.12.1989, p. 18) covering payments above a specified threshold of export refunds, processing and transformation subsidies, cotton, olive oil, tobacco and some RD measures.

(7)  The SAPS replaces all direct aid with a single payment. It involves payment of a uniform amount per hectare of agricultural land. Eight of the ten new Member States (excluding Malta and Slovenia) apply it.

(8)  Conformity corrections declared and amounting to 174,4 million euro (Spain) and 0,21 million euro (Netherlands) are not included because they cannot be allocated to individual paying agencies.

(9)  Accounts disjoined from the Financial Decision.

(10)  The Court examined the reports and certificates of these 31 paying agencies in respect of which a sample of transactions was selected for testing.

Source: Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2005.

(11)  The Czech Republic, Lithuania, Hungary, Poland and Slovakia.

(12)  Malta and Slovenia.

(13)  ‘The materiality criteria used in DG AGRI’ (for reservations and their combined impact on the declaration) ‘are those recommended by the Commission in the Communication COM(2003) 28 of 21 January 2003 on the “Guidelines for assessment of materiality for deficiencies in Member States management and control systems under shared management for the purposes of Annual Activity Report” agreed in 2005 between the structural funds’ Directorates General. In qualitative terms the materiality of a deficiency is judged on [...]. In quantitative terms the materiality threshold used is the 2 % level recommended at Commission level’. DG AGRI Annual Activity Report 2005 (March 2006), paragraph 3.1. Materiality criteria used.

(14)  The Commission has readjusted these data in 2004.

NB 1: Remote sensing involves the use of satellite or aerial photography to check IACS applications.

NB 2: Test performed in year N are relevant to payments made in year N + 1.

Source: IACS statistics submitted by Member States to DG AGRI.

(15)  Expressed as a percentage of the areas claimed by the inspected farmer.

(16)OJ L 17, 24.1.2004, p. 7.

(17)  ‘Agricultural parcel: shall mean a continuous area of land on which a single crop group is cultivated by a single farmer’ (Commission Regulation (EC) No 796/2004 (OJ L 141, 30.4.2004, p. 18), as last amended by Regulation (EC) No 1187/2006 (OJ L 214, 4.8.2006, p. 14), Article 2(1a));

‘Reference parcel: shall mean a geographically delimited area retaining a unique identification as registered in the GIS in the Member State's identification system...’ (Commission Regulation (EC) No 796/2004, Article 2(26));

‘The identification system for agricultural parcels ... shall operate at reference parcel level such as cadastral parcel, or production block...’ (Commission Regulation (EC) No 796/2004, Article 6(1)).

A production block has in practice often natural boundaries and may be made up of a number of cadastral parcels.

(18)  As required for claim year 2004 by Article 4 of Commission Regulation (EC) No 2419/2001 (OJ L 327, 12.12.2001, p. 11), as last amended by Regulation (EC) No 118/2004 (OJ L 17, 24.1.2004) and as required by Article 6 of Regulation (EC) No 796/2004 for claim years after 2004.

(19)  In the absence of any information the financial impact of this failure cannot be established.

(20)  In a sample of 30 inspection reports analysed, representing claim payments totalling 23 800 euro, overpayments and underpayments totalling 3 122 euro due to inadequate analysis of inspection reports were found. The differences add up to 13 % of payments.

(21)  Regulation (EC) No 1782/2003, Article 143c.

(22)  The Czech Republic, Hungary, Slovakia, Slovenia and Malta.

(23)  The Commission has readjusted these data in 2004.

NB 1: A claim is fully rejected when a difference of more than 20 % is found between the number of animals declared and that determined to be eligible, or when the difference is the result of irregularities committed intentionally.

NB 2: Test performed in year N are relevant to payments made in year N + 1.

Source: IACS statistics submitted by Member States to DG AGRI.

(24)  One transaction was also audited in Portugal. No significant errors were detected.

(25)  Council Regulation (EC) No 864/2004 (OJ L 161, 30.4.2004, p. 48).

(26)  Commission Regulation (EC) No 27/2004 (OJ L 5, 9.1.2004, p. 36).

(27)  Agri-environment, early retirement, afforestation and compensatory payments for less-favoured areas and areas subject to environmental constraint.

(28)  Semi-subsistence farms undergoing restructuring, producer groups, compliance with Community standards, technical assistance, complements to direct payments.

(29)  Council Regulation (EC) No 1257/1999 (OJ L 160, 26.6.1999, p. 80).

(30)  Regulation (EEC) No 386/90.

(31)  Annual Report concerning the financial year 2004, paragraph 4.12.

(32)A posteriori verification of recipes under Commission Regulation (EC) No 1520/2000 (OJ L 177, 15.7.2000, p. 1).

(33)  Analysis of data reported to the Commission under Commission Regulation (EC) No 2390/1999 (OJ L 295, 16.11.1999, p. 1) shows that all EUR-15 Member States (with the exception of Greece and Spain, which did not provide the data, and Luxembourg, which had an insignificant number of transactions) had to varying extents carried out checks on such consignments.

(34)  Affixing customs seals to consignments which have not been subject to a physical check does not contravene current legislation.

(35)  Denmark abandoned this procedure from 1 February 2006.

(36)  Regulation (EEC) No 4045/89.

(37)  Regulation (EEC) No 4045/89, in the first ‘whereas’ in the preamble, links the Regulation to the Member States’ duty to ‘deal with irregularities and to recover sums lost as a result of irregularities or negligence’.

(38)  The current system is that only irregularities over 4 000 euro are subsequently reported to OLAF under Council Regulation (EC) No 595/91 (OJ L 67, 14.3.1991, p. 11).

(39)  The critical aspect in checking the legality and regularity of the transactions is the existence and accuracy of the information declared by the beneficiaries, much of which can only be verified by physical inspection at the level of the final beneficiary.

(40)  The reports of the 31 certifying bodies from which transactions were tested (see Table 5.1).

(41)  The Commission has addressed the latter aspect by an enquiry started in 2002. Even though it found widespread weaknesses in the management of delegated bodies by AGEA (Italy) which have persisted, the Commission does not intend to impose a financial correction. Furthermore, no separate Article 8 letter pursuant to Commission Regulation (EC) No 1663/95 (OJ L 158, 8.7.1995, p. 6) has been sent to date in order to follow up the results of the mission to France carried out in 2003.

(42)  AGEA (payment checks and procedures, debtors, computer security, internal audit, delegated bodies), OPEKEPE (payment checks and procedures, debtors, internal audit, delegated bodies), ARDA (payment checks and procedures, accounting, computer security, delegated bodies), ONIFLHOR (written procedures, debtors, computer security, delegated bodies). The paying agencies concerned declared some 7 418 million euro which are to be further analysed by the Commission.

(43)  In 2005 only the certifying body for OPEKEPE was evaluated on the spot. In addition, as part of the Commission's review of accreditation ten missions were carried out to new Member States.

(44)  The selection of the ten conformity audits was made at random, taking into consideration materiality. This procedure resulted in a selection of conformity audits in the field of arable crops (3), animal premiums (2), rural development (2), export refunds (1), olive oil (1) and fruit and vegetables (1).

(45)  ‘The audit put in evidence risks that may affect the capacity of these Teams to perform effectively the assigned activities to provide the Director General, as AOD in the context of shared management, with the satisfactory assurance that management and control systems put in place by the Member States ensure the legality and regularity of underlying transactions.’

(46)  In order to estimate the level of irregularities, an appropriate sampling method should be clearly defined (Opinion of the Court No 2/2004 on the single audit model, paragraph 48) and the legality and regularity of expenditure should be verified at the level of the final beneficiary (Opinion of the Court No 1/2005 on the financing of the CAP, paragraph 24).

(47)  Council document 5971/06 ADD1 — Discharge to be given to the Commission in respect of the implementation of the budget for the financial year 2004.

(48)  European Parliament resolution accompanying the decision concerning discharge in respect of the implementation of the general budget of the European Union for the 2002 financial year (Commission) (SEC(2003) 1104-C5-0564/2003-2003/2210(DEC)).

(49)  COM(2004) 648 of 30 September 2004 and the working document which accompanied it.

(50)  Council Regulation (EC) No 1698/2005 (OJ L 277, 21.10.2005, p. 1).

(51)  Council document 5665/05 ADD 2 of 17 February 2005 — ‘Discharge to be given to the Commission in respect of the implementation of the budget for the financial year 2003 — Council’s conclusions on the Court of Auditors’ special reports — Annex 9’.

(52)  European Parliament resolution containing the comments which are an integral part of the decision on the discharge for implementing the general budget of the European Union for the financial year 2003, Section III — Commission (SEC(2004) 1181 — C6-0012/2005-2004/2040(DEC) — SEC(2004) 1182 — C6-0013/2005-2004/2040(DEC)).

(53)  Commission staff working document SEC(2005) 1193 of 26 September 2005.

(54)  The Court examined its implementation by the Commission and in selected Member States (Germany (North Rhine-Westphalia), Spain (Aragon), France, Ireland, Italy, the Netherlands and the United Kingdom (England)).

ANNEX 5.1

Evolution of key observations — Agriculture

ANNEX 5.2

IACS monitoring elements — classic aid schemes

Source: Court of Auditors, review of paying agencies' IACS system (abstract).

ANNEX 5.3

IACS monitoring elements – single area payment scheme (SAPS)

Source: Court of Auditors, review of paying agencies' IACS system (abstract).

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CHAPTER 6

Structural operations: regional policy, employment and social policy, rural development and fisheries

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Specific characteristics of structural operations

The Court’s audit

Current Structural Funds programmes

Project expenditure affected by errors

Controls by Member States fail to meet key regulatory requirements

Previous Structural Funds programmes

Failure to make corrections and lengthy delays in closing programmes

Project expenditure affected by errors

Controls fail to meet key regulatory requirements

The Cohesion Fund

Financial corrections and reporting of recoveries in the Structural Funds

Limited extent of net financial corrections

Inadequate reporting of recovery action by Member States

Conclusions and recommendations

Conclusions

Recommendations

Follow-up of previous observations

Special Reports issued since the last Annual Report

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(1)  Project promoters range from private individuals to associations, private or public companies to local, regional or national bodies.

(2)  Structural Funds objectives have since been regrouped for the 2000 to 2006 programme period.

(3)  For multifund programmes, each Fund part of a programme is counted separately.

Source: Table prepared by the Court of Auditors on the basis of data provided by the Commission.

(4)  The programmes audited were: ERDF Objective 1 programmes in Spain, Ireland (Industrial Development) and Portugal (Regional Development); ESF Objective 1 Germany (Sachsen), ESF Objective 3 Sweden and EAGGF-Guidance Objective 5a Denmark (Improving Efficiency of Agricultural Structures).

(5)  The Commission has proposed to relax the provisions concerning the time period for retention of supporting documents for the next programming period (2007 to 2013). In its Opinion No 2/2005, the Court has pointed out the serious limitations this would place on its audit prerogatives and on the scope for checks on programmes at the end of the period.

ANNEX 6.1

Follow-up of key observations in recent Statements of Assurance

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CHAPTER 7

Internal policies, including research

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and regularity of transactions

Over-declaration of costs

Supervisory and control systems

Audit certification system for FP6

The Commission's ex-post financial audits

Supervision of National Agencies in the field of education and culture

Conclusions and recommendations

Special Reports issued since the last Annual Report

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(1)  Management of some programmes such as the European Refugee Fund and the Schengen Facility is however shared with Member States; the Commission manages parts of the Socrates, Leonardo and Youth programmes through national agencies.

(2)  E.g. the Sixth Framework Programme for research and technological development (FP6), the Financial Instrument for the Environment (LIFE), Trans European Energy Networks (TEN-Energy).

(3)  See e.g. the following model contracts: FP5, Article 23, Annex II; FP6, Article 19, Annex II; Ten-T, Article II, 14.1.

(4)  Opinion No 1/2006 of the European Court of Auditors on the proposal for a regulation of the European Parliament and of the Council laying down the rules for the participation of undertakings, research centers and universities in actions under the Seventh Framework Programme and for the dissemination of research results (2007 to 2013).

(5)  Feasibility Study for harmonisation at European level of safety and rail traffic management.

(6)  Opinion No 2/2004 of the European Court of Auditors on the 'single audit model', paragraph 48.

(7)  Annual Report concerning the financial year 2004, paragraph 6.10 and Opinion No 1/2006, paragraphs 41 and 42.

(8)  Only interim and/or final payments that meet certain criteria have to be certified.

(9)  In its Synthesis of the Commission's Management Achievements in 2005 (COM(2006) 277 final).

(10)  Opinion No 1/2006 of the European Court of Auditors, paragraphs 74 to 77.

(11)  Annual Report concerning the financial year 2004, Chapter 6, Annex 1.

(12)  Excluding TEN-T.

(13)  Audits finalised in 2005 relating to Media have been included in the statistics of DG INFSO.

(14)  Annual Report concerning the financial year 2003, paragraphs 6.32 and 6.33.

(15)  609 million euro in payments for 2005.

(16)  Article 35 of the Implementing Rules of the Financial Regulation applicable to the general budget of the European Communities.

(17)  The sample comprised 11 out of 44 audit reports finalised.

(18)  Opinion No 1/2006 of the European Court of Auditors, paragraphs 58 to 70 and 94.

ANNEX 7.1

Internal policies — Assessment of key aspects previously observed

ANNEX 7.2

Supervisory and control systems

COMMENTS OF THE COMMISSION TO COMMISSION’S SUPERVISORY AND CONTROL SYSTEMS RELATIVE TO THE NATIONAL AGENCIES (NA)

The Commission’s supervision and control systems relating to NAs include external auditors. The contracted audit firm and the contractual conditions were subject to change in the middle of the reporting period in  order to improve the quality of the audits and the reports. Positive results were apparent already at the end of 2005.

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CHAPTER 8

External actions

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and regularity of underlying transactions

Transactions carried out at Delegation level

Transactions carried out at implementing organisation level

Supervisory and control systems

Risk analysis

Information and communication

Commission control and audit activities

Internal audit

Decentralisation under CARDS

Conclusions and recommendations

Follow-up of previous observations

Verifications of United Nations organisations

Introduction

The Financial and Administrative Framework Agreement (FAFA)

Progress in 2005 in seeking agreement with the UN on aspects of financial control

Conclusion

Special Report No 25/98 concerning activities undertaken by the European Union in the field of nuclear safety in Central and Eastern Europe (CEEC) and in the New Independent States (NIS) from 1990 to 1997

Introduction

Intervention strategy clarified but not free of shortcomings

Human resources and programme management have improved

Project implementation has improved, but some problems persist

Involvement of beneficiaries has improved slightly

Conclusion and recommendations

Special Reports issued since the last Annual Report

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(1)  Aid provided through the European Development Funds is reported separately as it is not financed from the general budget.

(2)  The CARDS programme promotes stability and peace in the Western Balkan Countries.

(3)  More than 60 % of the CARDS commitments in 2005.

(4)  The Delegations visited were those of Albania, Colombia, Croatia, India, Georgia and Lebanon.

(5)  Paragraph 7.17.

(6)  See the Annual Report concerning the financial year 2004, paragraph 7.21.

(7)  See the Annual Report concerning the financial year 2004, paragraph 7.19.

(8)  See the Special Report No 3/2006 concerning the European Commission Humanitarian Aid Response to the Tsunami, paragraph 37.

(9)  The geographic directorates are: Asia and Central Asia; Europe, the Southern Mediterranean, Middle East and Neighbourhood Policy; Latin America.

(10)  Most elements function, but some need to be improved.

(11)  The Internal Audit Capability focused on system analysis and has not yet tested the systems; in the case of DG ECHO, testing started in 2005, according to the Commission, and this procedure will be completed during 2006.

(12)  Improvements are necessary for external audits commissioned by implementing organisations; new measures, introduced by the Commission should have an impact for 2006.

(13)  The Annual Reports concerning the financial years 2001 and 2004 described the difficulties of the Court in accessing data from UN agencies. The Annual Report concerning the financial year 2004 recommended that the Commission should clarify with UN agencies the Court's right of access to projects managed by them. In 2005 no UN agencies were selected for the Court's audit work for the Statement of Assurance.

(14)  Paragraph 171 of the resolution included in the report on the discharge for implementation of the European Union general budget for the financial year 2004 A6-0108/2006.

(15)  Article 13 of the Financial and Administrative Framework Agreement (FAFA) establishes a working group to meet at least once a year to promote a regular exchange of information on all matters arising out of the Agreement.

(16)  In a case of a UN project in Indonesia, after initial reticence DG ECHO was given access in 2005 through the proper application of FAFA.

(17)OJ C 35, 9.2.1999.

(18)  Council Recommendation on the discharge for 2000.

(19)  COM(2000) 493 final, 6.9.2000.

(20)  RAC (reste à contracter).

(21)  See Article 166 (2) of Council Regulation (EC, Euratom) No 1605/2002 of 15 June 2002 (OJ L 248, 16.9.2002, p. 1): ‘Financing agreements with the beneficiary third countries..... shall be concluded by 31 December of year n+1 at the latest, year n being the one on which the budgetary commitment was made. The individual contracts and agreements which implement such financing agreements shall be concluded no later than three years following the date of the budgetary commitment. Individual contracts and agreements relating to audit end evaluation may be concluded later.’

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CHAPTER 9

Pre-accession strategy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the statement of assurance

Scope of the audit

Audit findings

Legality and regularity of the underlying transactions

Supervisory and control systems

Conclusions and recommendations

Special Reports issued since the last Annual Report

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(1)  The eight new Member States (Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia, the Slovak Republic) and the two accession countries (Bulgaria, Romania) and the candidate country Croatia.

(2)  Poland, Hungary and Restructuring in the East, Council Regulation (EEC) No 3906/89 (OJ L 375, 23.12.1989, p. 11).

(3)  Council Regulation (EC) No 2500/2001 of 17 December 2001 concerning pre-accession financial assistance for Turkey (OJ L 342, 27.12.2001, p. 1), corrected by OJ L 285, 23.10.2002, p. 26.

(4)  Instrument for Structural Policies for Pre-Accession, Council Regulation (EC) No 1267/1999 (OJ L 161, 26.6.1999, p. 73).

(5)  Special Accession Programme for Agriculture and Rural Development, Council Regulation (EC) No 1268/1999 (OJ L 161, 26.6.1999, p. 87).

(6)  EDIS was granted to the eight new Central and Eastern European Member States where specific implementing agencies were accredited to implement the Phare and ISPA programme without the Commission's ex-ante control of tendering and contracting.

(7)  The first Phare programme in Croatia was committed in 2005. In order to test Croatia's management capacity the Court audited transactions financed under the CARDS programme and implemented by the national authorities.

(8)  See Annual Report concerning the financial year 2004, paragraphs 8.24-8.26.

(9)  Latvia, Poland.

(10)  See Annual Report concerning the financial year 2004, paragraph 8.18.

(11)  Labelled as ‘actualisation costs’ and ‘costs for unforeseen circumstances’.

(12)  Paragraph 4.70.

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CHAPTER 10

Administrative expenditure

TABLE OF CONTENTS

Administrative expenditure of the institutions and Community bodies

Introduction

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and regularity of underlying transactions

Supervisory and control systems

Specific observations

Parliament

Council

Commission

Court of Justice

Court of Auditors

European Economic and Social Committee

Committee of the Regions

European Ombudsman and European Data-Protection Supervisor

Overall conclusion

Special Reports issued since the last Annual Report

European Union Agencies

The European Schools

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(1)  The Council adopted its ICS in July 2005, but, at the end of 2005, was still preparing an action plan to implement them; the Court of Justice had not implemented several ICS; at the Parliament an optimal level of implementation had not yet been attained; some ICS had not been fully implemented at the Committee of the Regions.

(2)  Secretarial assistance allowance payments may be made to a paying agent contracted by the MEP to handle, in whole or in part, the administrative management of his or her secretarial assistance allowance.

(3)  The Commission departments responsible for most of the administrative expenditure are the following: Directorate-General for Personnel and Administration, Directorate-General for Translation, Directorate-General for Interpretation, Directorate-General for Communication, Directorate-General for External Relations, Office for Infrastructures and Logistics — Luxembourg, Office for Infrastructures and Logistics — Brussels, Office for the Administration and Settlement of Individual Entitlements, European Personnel Selection Office, Publications Office.

(4)  Commitment appropriations.

(5)  In 2005 this body's provisional headquarters were in Brussels.

(6)  This body's provisional headquarters were in Brussels for part of 2005.

(7)  In 2005 the Commission was responsible for managing this body's budget. There was no special report on the implementation of this budget.

(8)  In the case of all agencies other than OHMI and OCVV, which are essentially self-financing, the Commission plays a decisive role in appointing the director and certain members of the Management Board, states its position regarding the work programmes, proposes and pays the amount of the administrative subsidy, consolidates the accounts and appoints one of its officials as the internal auditor for all the agencies.

(9)  The agreement to set up the group that was concluded in 1998 provided for one of the agencies to manage the group and incorporate its transactions into the agency's own accounts. This has not been done since the financial year 2000.

(10)  Total revenue and expenditure as foreseen in the budget of each European School and the Office including all modifications made to the budgets initially adopted.

(11)Source: European Schools.

(12)Source: 2005 Annual report of the Secretary General to the Board of Governors of the European Schools.

N.B.: Variations in totals are due to the effects of rounding.

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CHAPTER 11

Financial instruments and banking activities

TABLE OF CONTENTS

Introduction

The Tripartite Agreement with the EIF

The phasing-out of risk capital operations

Background

European Community Investment Partners (ECIP)

MEDIA Programme

Phasing-out of risk capital operations managed by DG ECFIN

Conclusions and recommendations

The Guarantee Fund for External Actions

The European Coal and Steel Community in Liquidation

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(1)  Risk capital is investment in high-risk enterprises but with growth aspects, such as investments in start-up firms, small businesses and new technologies.

(2)  For example, the European Investment Fund (EIF) and the European Bank for Reconstruction and Development (EBRD).

(3)  Annual Report concerning the financial year 2004, paragraph 1.19 and Table 1.1; Annual Report concerning the financial year 2003, paragraph 1.10 and Table 1.1; Annual Report concerning the financial year 2002, paragraphs 1.18 to 1.22; Annual Report concerning the financial year 2001, paragraph 9.20.

(4)  Out of the total amount, 130,3 million euro concern loans and conditionally repayable advances.

(5)  Regulation (EC) No 772/2001 of the European Parliament and of the Council of 4 April 2001 (OJ L 112, 21.4.2001, p. 1) stipulated inter alia that the Commission shall take the necessary steps to close and liquidate the ECIP projects.

(6)  For instance, three cases, totalling 207 000 euro. These are amounts exceeding initial commitments and paid by error to incorrect bank accounts. Initial commitments could be exceeded because only global commitments were entered into.

(7)  MEDIA I 1991 to 1996 (almost closed, with the exception of two cases, all financial assets, 26,7 million euro were written off at the end of 2003 and there is no intention to make further recoveries), MEDIA II 1996 to 2000, MEDIA plus 2001 to 2006 (still ongoing).

(8)OJ L 321, 30.12.1995, p. 25.

(9)  With effect from 1 January 2006, the management and programme administrative tasks have been transferred to the new ‘Education, Audiovisual and Culture Executive Agency’ of the Commission.

(10)  In 9 of 32 transactions tested, the estimated overall amount is some 1,1 million euro. This includes one contested case which has not been followed up since 2003, accounting for estimated 1 million euro.

(11)  Such as the sending of reminder letters.

(12)  Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 (OJ L 293, 12.11.1994, p. 1), as last amended by Regulation (EC, Euratom) No 2273/2004 of 22 December 2004 (OJ L 396, 31.12.2004, p. 28).

(13)  Principally the EIB, but also Euratom external lending and EC macro-financial assistance (MFA) loans to third countries.

(14)  Management agreement between the EIB and the European Community, as last amended on 28 April 2002 and 8 May 2002.

(15)  Protocol on the financial consequences of the expiry of the ECSC Treaty and on the Research Fund for Coal and Steel (OJ C 80, 10.3.2001, p. 67).

(16)  Maturity is the time when the principal amount of a bond must be repaid.

(17)  Junior debt is a debt that is either unsecured or has a low priority. It is similar to a subordinated debt.

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