# C_2007274EN.01013001.xml

| 15.11.2007 | EN | Official Journal of the European Union | C 274/130 |
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15.11.2007

EN

Official Journal of the European Union

C 274/130

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THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

(2007/C 274/02)

| I. | Pursuant to the provisions of Article 248 of the Treaty the Court has audited:






  (a) | the ‘Final annual accounts of the European Communities’ (1) which comprise the ‘Consolidated financial statements’ (2) and the ‘Consolidated reports on implementation of the budget’ (3) for the financial year ended 31 December 2006; and |
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I.

Pursuant to the provisions of Article 248 of the Treaty the Court has audited:

(a)

the ‘Final annual accounts of the European Communities’ (1) which comprise the ‘Consolidated financial statements’ (2) and the ‘Consolidated reports on implementation of the budget’ (3) for the financial year ended 31 December 2006; and

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| (b) | the legality and regularity of the underlying transactions within the legal framework of the European Communities. |
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(b)

the legality and regularity of the underlying transactions within the legal framework of the European Communities.

Management's responsibility

| II. | In accordance with Articles 268 to 280 of the Treaty and the Financial Regulation, management (4) is responsible for the preparation and fair presentation of the ‘Final annual accounts of the European Communities’ and the legality and regularity of the underlying transactions:






  (a) | The management's responsibility concerning the ‘Final annual accounts of the European Communities’ includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, on the basis of the accounting rules adopted by the Commission's accounting officer (5), and making accounting estimates that are reasonable in the circumstances. According to Article 129 of the Financial Regulation, the Commission approves the ‘Final annual accounts of the European Communities’ after the Commission's accounting officer has consolidated them on the basis of the information presented by the other institutions (6) and bodies (7) and established a note, accompanying the final consolidated accounts, declaring, inter alia, that he has a reasonable assurance that these accounts present a true and fair view of the financial position of the European Communities in all material aspects. |
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II.

In accordance with Articles 268 to 280 of the Treaty and the Financial Regulation, management (4) is responsible for the preparation and fair presentation of the ‘Final annual accounts of the European Communities’ and the legality and regularity of the underlying transactions:

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(a)

The management's responsibility concerning the ‘Final annual accounts of the European Communities’ includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, on the basis of the accounting rules adopted by the Commission's accounting officer (5), and making accounting estimates that are reasonable in the circumstances. According to Article 129 of the Financial Regulation, the Commission approves the ‘Final annual accounts of the European Communities’ after the Commission's accounting officer has consolidated them on the basis of the information presented by the other institutions (6) and bodies (7) and established a note, accompanying the final consolidated accounts, declaring, inter alia, that he has a reasonable assurance that these accounts present a true and fair view of the financial position of the European Communities in all material aspects.

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| (b) | The way in which management exercises its responsibility for legality and regularity of underlying transactions depends on the method of implementation of the budget. In the case of direct centralised management, implementation tasks are performed by the Commission's departments. Under shared management, implementation tasks are delegated to Member States, under decentralised management to third countries and under indirect centralised management to other bodies. In the case of joint management, implementation tasks are shared between the Commission and international organisations (Article 53 to 57 of the Financial Regulation). Implementation tasks have to comply with the principle of sound financial management, requiring designing, implementing and maintaining effective and efficient internal control including adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings to recover funds wrongly paid or used. Regardless of the method of implementation applied, the Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the European Communities (Article 274 of the Treaty). |
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(b)

The way in which management exercises its responsibility for legality and regularity of underlying transactions depends on the method of implementation of the budget. In the case of direct centralised management, implementation tasks are performed by the Commission's departments. Under shared management, implementation tasks are delegated to Member States, under decentralised management to third countries and under indirect centralised management to other bodies. In the case of joint management, implementation tasks are shared between the Commission and international organisations (Article 53 to 57 of the Financial Regulation). Implementation tasks have to comply with the principle of sound financial management, requiring designing, implementing and maintaining effective and efficient internal control including adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings to recover funds wrongly paid or used. Regardless of the method of implementation applied, the Commission bears the ultimate responsibility for the legality and regularity of the transactions underlying the accounts of the European Communities (Article 274 of the Treaty).

Auditor's responsibility

| III. | The Court's responsibility is to provide, on the basis of 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. Except as described in paragraph IV, the Court conducted its audit in accordance with the IFAC and INTOSAI International Auditing Standards and Codes of Ethics, in so far as these are applicable in the European Community context. These standards require that the Court plans and performs the audit to obtain reasonable assurance whether the ‘Final annual accounts of the European Communities’ are free from material misstatement and the underlying transactions, taken as a whole, are legal and regular. |
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III.

The Court's responsibility is to provide, on the basis of 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. Except as described in paragraph IV, the Court conducted its audit in accordance with the IFAC and INTOSAI International Auditing Standards and Codes of Ethics, in so far as these are applicable in the European Community context. These standards require that the Court plans and performs the audit to obtain reasonable assurance whether the ‘Final annual accounts of the European Communities’ are free from material misstatement and the underlying transactions, taken as a whole, are legal and regular.

| IV. | 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 imports that have not been subject to custom supervision. |
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IV.

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 imports that have not been subject to custom supervision.

| V. | In the context described under paragraph III, an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the final consolidated accounts and the legality and the regularity of the underlying transactions. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the final consolidated accounts and of material non-compliance of the underlying transactions with the requirements of the legal framework of the European Communities, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the final consolidated accounts, and supervisory and control systems implemented to ensure legality and regularity of underlying transactions, in order to design audit procedures that are appropriate in the circumstances. An audit in this context also includes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made, as well as evaluating the overall presentation of the final consolidated accounts and the annual activity reports. |
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V.

In the context described under paragraph III, an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the final consolidated accounts and the legality and the regularity of the underlying transactions. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the final consolidated accounts and of material non-compliance of the underlying transactions with the requirements of the legal framework of the European Communities, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the final consolidated accounts, and supervisory and control systems implemented to ensure legality and regularity of underlying transactions, in order to design audit procedures that are appropriate in the circumstances. An audit in this context also includes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made, as well as evaluating the overall presentation of the final consolidated accounts and the annual activity reports.

| VI. | The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for its statement of assurance. |
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VI.

The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for its statement of assurance.

Opinion on the reliability of the accounts

| VII. | In the Court's opinion, except for the effects of the matters described in paragraph VIII, the ‘Final annual accounts of the European Communities’ present fairly, in all material respects, the financial position of the Communities as of 31 December 2006, and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the Commission's accounting officer. |
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VII.

In the Court's opinion, except for the effects of the matters described in paragraph VIII, the ‘Final annual accounts of the European Communities’ present fairly, in all material respects, the financial position of the Communities as of 31 December 2006, and the results of their operations and cash flows for the year then ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the Commission's accounting officer.

| VIII. | The Court's audit has identified errors in amounts registered in the accounting system as invoices/cost statements and pre-financing which have the effect of overstating the accounts payable by some 201 million euro and the total amount of long and short term pre-financing by some 656 million euro. |
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VIII.

The Court's audit has identified errors in amounts registered in the accounting system as invoices/cost statements and pre-financing which have the effect of overstating the accounts payable by some 201 million euro and the total amount of long and short term pre-financing by some 656 million euro.

| IX. | Without calling into question the opinion expressed in paragraph VII, the Court notes that, due in part to the complex system of financial management and despite improvements made, weaknesses in the accounting systems of certain institutions and Directorates-General of the Commission still put at risk the quality of financial information (in particular for cut-off and employee benefits). This led to a number of corrections after the presentation of the provisional accounts. |
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IX.

Without calling into question the opinion expressed in paragraph VII, the Court notes that, due in part to the complex system of financial management and despite improvements made, weaknesses in the accounting systems of certain institutions and Directorates-General of the Commission still put at risk the quality of financial information (in particular for cut-off and employee benefits). This led to a number of corrections after the presentation of the provisional accounts.

Opinion on the legality and regularity of the underlying transactions

| X. | In the Court's opinion, revenue, commitments and payments for Administrative expenditure, Pre-accession strategy, with the exception of the Sapard Programme, and External actions, for those payments managed and controlled directly by Commission delegations, are free from material error. In these areas the supervisory and control systems are implemented in a manner which provides for an adequate risk management. Moreover, for common agriculture policy (CAP) expenditure the Court's audit shows that, where properly applied, the integrated administration and control system (IACS), in particular in respect of the Single Payment System, is an effective system to limit the risk of irregular expenditure. |
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X.

In the Court's opinion, revenue, commitments and payments for Administrative expenditure, Pre-accession strategy, with the exception of the Sapard Programme, and External actions, for those payments managed and controlled directly by Commission delegations, are free from material error. In these areas the supervisory and control systems are implemented in a manner which provides for an adequate risk management. Moreover, for common agriculture policy (CAP) expenditure the Court's audit shows that, where properly applied, the integrated administration and control system (IACS), in particular in respect of the Single Payment System, is an effective system to limit the risk of irregular expenditure.

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

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

| XII. | In the Court's opinion, in the other areas of expenditure payments are still materially affected by errors, although to different levels, and the Commission and the Member and other beneficiary states need to make further efforts 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 a marked reduction in the estimated overall level of error in underlying transactions. However, it still remains just above the materiality threshold. Clearance systems and post payment checks for CAP subsidies not covered by IACS provide limited assurance as to compliance with Community legislation. Furthermore, claims for EU aid are not usually checked on the spot by the independent bodies in charge of the certification of the accounts of paying agencies. |
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XII.

In the Court's opinion, in the other areas of expenditure payments are still materially affected by errors, although to different levels, and the Commission and the Member and other beneficiary states need to make further efforts 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 a marked reduction in the estimated overall level of error in underlying transactions. However, it still remains just above the materiality threshold. Clearance systems and post payment checks for CAP subsidies not covered by IACS provide limited assurance as to compliance with Community legislation. Furthermore, claims for EU aid are not usually checked on the spot by the independent bodies in charge of the certification of the accounts of paying agencies.

| (b) | In Structural measures, the Court found that control systems in the Member States are generally ineffective or moderately effective, and that the Commission maintains only a moderately effective supervision to mitigate the risk that the control systems in the Member States fail to prevent overstated or ineligible expenditure. Therefore, the reimbursement of expenditure to structural policies projects is subject to material error. |
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(b)

In Structural measures, the Court found that control systems in the Member States are generally ineffective or moderately effective, and that the Commission maintains only a moderately effective supervision to mitigate the risk that the control systems in the Member States fail to prevent overstated or ineligible expenditure. Therefore, the reimbursement of expenditure to structural policies projects is subject to material error.

| (c) | In Internal policies the Court's audit revealed that the supervisory and control systems do not sufficiently mitigate the inherent risk of the reimbursement of overstated costs, resulting in a material level of error in payments to beneficiaries. |
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(c)

In Internal policies the Court's audit revealed that the supervisory and control systems do not sufficiently mitigate the inherent risk of the reimbursement of overstated costs, resulting in a material level of error in payments to beneficiaries.

| (d) | In External actions, despite the improvements of the Commission's supervisory and control systems, a material level of error was detected at the level of implementing organisations, due to continued weaknesses in the systems designed to ensure the legality and regularity of transactions at this level. |
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(d)

In External actions, despite the improvements of the Commission's supervisory and control systems, a material level of error was detected at the level of implementing organisations, due to continued weaknesses in the systems designed to ensure the legality and regularity of transactions at this level.

| XIII. | The Court emphasises that its audits in the area of CAP expenditure, structural measures and internal policies show that complicated or unclear eligibility criteria or complex legal requirements have a considerable impact on the legality and regularity of underlying transactions. For example, because of the often complex eligibility conditions, the agri-environmental measures in Rural Development are prone to a significantly higher incidence of error than the non-rural development part of CAP expenditure. |
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XIII.

The Court emphasises that its audits in the area of CAP expenditure, structural measures and internal policies show that complicated or unclear eligibility criteria or complex legal requirements have a considerable impact on the legality and regularity of underlying transactions. For example, because of the often complex eligibility conditions, the agri-environmental measures in Rural Development are prone to a significantly higher incidence of error than the non-rural development part of CAP expenditure.

| XIV. | The Court notes the improvements introduced by the Commission as regards its internal control framework and the positive impact they have on the assessment of the operation of supervisory and control systems and of the impact of relevant reservations on the assurance provided by the Commission's Directors-General declarations. However, the Court continues to find weaknesses in those assessments, namely as regards their impact on the assurance concerning the legality and regularity of underlying transactions. |
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XIV.

The Court notes the improvements introduced by the Commission as regards its internal control framework and the positive impact they have on the assessment of the operation of supervisory and control systems and of the impact of relevant reservations on the assurance provided by the Commission's Directors-General declarations. However, the Court continues to find weaknesses in those assessments, namely as regards their impact on the assurance concerning the legality and regularity of underlying transactions.

27 September 2007

Hubert WEBER

President

European Court of Auditors

12, rue Alcide De Gasperi, L-1615 Luxembourg

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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 2006.

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(2)  The ‘Consolidated financial statements’ comprise the balance sheet, the economic outturn account (including segment reporting), the cash flow table, the statement of changes in net assets and a summary of significant accounting policies and other explanatory notes.

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(3)  The ‘Consolidated reports on implementation of the budget’ comprise the consolidated reports on implementation of the budget and a summary of budgetary principles and other explanatory notes.

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(4)  At the level of the European Institutions and bodies management includes the Members of the Institutions, Directors of the Agencies, Authorising Officers by delegation and sub-delegation, Accounting Officers and the leading staff of financial, audit or control units. At the level of Member and Beneficiary States, management includes Authorising Officers, Accounting Officers and the leading staff of paying authorities, certifying bodies and implementing agencies.

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(5)  The accounting rules adopted by the Commission's accounting officer are derived from 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. In accordance with the Financial Regulation, the ‘Consolidated financial statements’ for the financial year 2006 are prepared for the second time on the basis of these accounting rules adopted by the Commission's accounting officer, which adapt accruals based accounting principles to the specific environment of the Communities, while the ‘Consolidated reports on implementation of the budget’ continue to be primarily based on movements of cash.

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(6)  Before the adoption of the final annual accounts by the institutions, the different accounting officers sign them off, thereby certifying that they have a reasonable assurance that the accounts present a true and fair view of the financial situation of the institution (Article 61 of the Financial Regulation).

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(7)  The final annual accounts are drawn up by the respective directors and sent to the Commission's accounting officer together with the opinion of the management board concerned. In addition, the respective accounting officers sign them off, thereby certifying that they have a reasonable assurance that the accounts present a true and fair view of the financial situation of the bodies (Article 61 of the Financial Regulation).

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