# EUR-Lex - 52005DC0256 - EN

Important legal notice

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# 52005DC0256

**Communication from the Commission - 2004 Synthesis /* COM/2005/0256 final */ **

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[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 15.6.2005

COM(2005) 256 final

COMMUNICATION FROM THE COMMISSION

2004 Synthesis

TABLE OF CONTENTS

1. Introduction 4

1.1. The context of the Synthesis 4

1.2. The 2004 synthesis 5

1.3. Reference framework established by the 2004 synthesis 6

2. Key issues arising from the annual activity reports 6

2.1. Global overview 6

2.2. Reinforcement of the annual activity report process 7

2.3. Synthesis report and assurance statement 8

3. Major cross-cutting issues arising from the annual activity reports and recommendations received 9

3.1. Governance issues 9

3.1.1. Moving from compliance to an effectiveness approach in internal control 9

3.1.2. Commission-wide risk management 11

3.1.3. Performance measurement 11

3.1.4. Externalisation and agencies 12

3.2. Financial management and reporting 13

3.2.1. Roadmap to an integrated control framework 13

3.2.2. Ex-ante and ex-post controls 14

3.2.3. Accounting and financial reporting 15

3.2.4. Budget implementation methods 16

3.3. Human resources 16

3.3.1. Lack of specialised staff 17

3.3.2. Recruitment of officials from the new Member States and training 17

3.3.3. Fine-tuning of reform instruments 18

3.3.4. Mobility 18

4. Conclusions 18

Annex 1 20

Annex 2 24

Annex 3 29

1. INTRODUCTION

1.1. The context of the Synthesis

The synthesis is the last stage in the strategic planning cycle, which starts each year with the annual policy strategy , in which the Commission lays down the priorities and the policy and budget framework for the following year. This framework provides a starting point for preparation of the Commission’s legislative and work programme and of the budget , and is turned into the services’ annual management plans . At the end of each year, each Director-general and Head of service produces an annual activity report , describing the policy results and the management and control situation. These reports are accompanied by a declaration of assurance on the proper use of resources and on the quality of financial management.

Whereas annual activity reports cover both policy and management results, this synthesis focuses on management issues and does not provide an account of the policy achievements during the past year.

In this respect, it should be noted that the Commission reports on its policy results through different means:

- every year the Commission reports to the European Parliament on the Commission’s policy achievements when presenting its annual policy strategy for the following year;

- a specific report on the execution of the Commission’s work programme is issued at the beginning of each year;

- a full description of the EU activities in 2004 is published by the Commission in the form of a General Report, according to Article 212 of the EC Treaty;

- the sum of the annual reports of Directorate-generals and services constitute a detailed account of the policy achievements of the Commission.

In the light of the above, and given the fact that the newly-established Commission has already taken stock of the achievements of its predecessor when defining its strategic objectives for its mandate, it was considered appropriate that the synthesis would focus on management issues. A reflection will be conducted to define the most appropriate way to report annually on the Commission’s policy results.

The annual synthesis is the tool by which the Commission takes stock of the way management issues are addressed by its services and decide appropriate measures to respond to cross-cutting issues. It is also an important accountability tool to inform the other institutions about the state of its management.

It draws on the annual activity reports and declarations of assurance prepared by each Director-general and Head of service.

It also draws on a series of instruments that the Commission uses to monitor its internal procedures - to make sure that they are working properly:

- The twice-yearly overview of the state of internal control in the Commission issued under the responsibility of the Directorate-general for the Budget, which was produced for the second time in April 2005.

- The audit work and advice of the Internal Audit Service , which, in particular, issues an annual audit report and, in 2004, completed the cycle of audits of management and control systems in all services. Also in 2004, the Internal Auditor issued the first six-monthly report on the results of the audits performed by the services’ internal audit capabilities.

- The Audit progress committee keeps the members of the Commission informed about matters arising from internal and external audits or from audit-related matters in the annual discharge resolution by the European Parliament and ensures that the corresponding recommendations are followed up properly.

By adopting the annual synthesis, the Commission takes stock of the management of its services and addresses major horizontal issues raised in their annual activity reports . It also takes decisions on the main recommendations made by both internal and external auditors and the discharge authority and takes into account the key conclusions of the overview on the state of internal control .

Wherever the Commissioners consider that remedial action at Commission level is needed, the synthesis also establishes the appropriate measures, taking into account and, where appropriate, updating the action mapped out by previous syntheses or other horizontal documents.

1.2. The 2004 synthesis

The 2004 synthesis presents the first opportunity for the new Commission to consider the situation resulting from the 2004 annual activity reports of its directorates-general and services.

For 2004, these reports acknowledge that significant achievements have been made and identify areas requiring further improvement. They also raise a series of key issues, which are addressed in the second part of this synthesis. The Commission notes an overall improvement in the quality of the annual reports.

Recommendations from internal and external auditors and the conclusions of the overview on internal control indicate that Commission services have made progress on management and control measures, as well as in terms of accountability. Clearer definition of responsibilities at all levels, a basic framework and conditions under which services should operate in order to improve accountability, and arrangements for political supervision, by the Commissioners of the work of the administration are now in place. The same documents also identify areas where services should make further efforts and pinpoint lessons to be learned. The third part of this synthesis deals with major cross-cutting issues in this context.

The 2004 synthesis comes at a time when the Commission’s ambitious reform programme launched in 2000 has essentially achieved its aim: the policy priorities set steer its action and decentralised financial management and control has increased responsibility at all levels, from Commissioners to individual members of staff, ensuring better value for money for EU citizens.

The Commission considers that the framework now in place will enable it to achieve its aim of improving the effectiveness, efficiency and quality of its work. In future the main task will be to fine-tune the procedures built on that framework, increasing rigour where necessary and simplifying controls where permissible.

1.3. Reference framework established by the 2004 synthesis

Some of the cross-cutting or sectoral issues on which the Commission takes a position in this synthesis stem from the services’ annual activity reports , in particular from deficiencies explicitly disclosed (reservations). These include the need: to reinforce internal control where budget implementation tasks are delegated outside the Commission; to pay more attention to ex-post controls and supervision; and to continue to develop a common methodology for quantifying shortcomings by ‘families’ of services operating in the same context.

Other recommendations in reports such as the Internal Auditor’s annual report or the overview on internal control include possible Commission-wide risk management, promoting the Commission’s accountability through the annual activity reports and the synthesis, the signing-off of the accounts by the Accounting Officer, and the roadmap to an integrated control framework.

Producing a proper answer to these issues must be considered a task for the medium term. This is why this synthesis concludes with a series of objectives (see Annex 1) which address cross-cutting issues critical to management performance. Through an integrated control framework, more comprehensive risk management, certification of the integrity, consistency and reliability of the accounts and other measures, the Commission commits itself to carry out the improvements in performance made possible by the reform. The success of the Commission’s ambitions will be met through the effective functioning of internal control processes, confirmed by other EU institutions, such as the Court of Auditors.

2. KEY ISSUES ARISING FROM THE ANNUAL ACTIVITY REPORTS

2.1. Global overview

Having examined the annual activity reports and, in particular, the declaration of assurance signed by each Director-general and Head of services, the Commission notes that:

- Concerning administrative expenditure , in one service (the Paymaster Office) the “Resource Director” did not sign his statement because he felt that weaknesses linked to the operation by the office of the new information system for calculating pay and pensions, which is still in constant evolution, were too important. After verification of the issues underlying this refusal, the Head of service concluded that these issues, which were already known, were not of such a nature as to affect the reasonable assurance accompanying the annual activity report. The issue was referred to the Commissioner responsible, who decided to ask for an independent analysis to check the veracity and the materiality of the issues and the internal controls in place to mitigate the associated risks.

- With regard to action carried out directly by the Commission’s services , it was possible to lift the previous reservations related to ex - post controls for most services. A clearer definition of the acceptable level of error could lead to a better balance between the risks actually faced and the controls to be performed, in particular ex-post controls. In the research area , one persisting problem is the frequency of errors for grants based on the reimbursement of actual costs declared by the beneficiaries. Simplification measures to be introduced by the revised Financial Regulation proposed by the Commission, more focused and harmonised ex-post controls plus improved management conditions under the 6th Framework Programme will help mitigate this problem, even if problems such as reimbursements made on the basis of actual costs related to the current legal framework subsist for the moment. In addition, further measures aimed at simplification have been announced in the 7th Framework Programme and will be implemented in due course.

- Where EU funds are implemented by shared management with Member States , the services concerned were better able to identify the shortcomings affecting budget implementation by national authorities and, in certain cases, to circumscribe their impact in monetary terms as well as on the reasonable assurance. Further work is under way and should be continued in order properly to disclose the materiality and the impact of weaknesses affecting management and control systems rather than individual transactions. Measures to be proposed under the roadmap to an integrated control framework or already proposed in the context of the financial perspectives 2007-2013 could secure greater assurance from Member States.

- In the area of decentralised management with third countries , the considerable risk inherent in this management method calls for closer attention to the control framework in order to guarantee that the necessary assurance is obtained on this type of operation.

- Representations in Member States and delegations in third countries are subject to reservations carried over from previous years. Services are defining action on the management and control systems to be put in place in delegations and representations, to facilitate the lifting of reservations as soon as possible. In particular, following an evaluation of the organisation of the external service and a special report of the Court of Auditors on Devolution of external aid management in Delegations carried out in 2004, restructuring is planned for 2005, notably of information systems and control missions.

An overview of the trends in all the reservations over recent years is given in Annex 3 to this synthesis.

Conclusions

The situation in the services, as depicted by their annual activity reports, is globally satisfactory. The main issues highlighted by the reservations are generally recurring weaknesses, already pointed out in previous years and for which remedial action is being taken. Therefore, a number of measures still need to be developed or improved and properly implemented to better support the services’ reasonable assurance as regards legality and regularity of the underlying transactions, in particular but not exclusively, in the framework of shared and decentralised management. In this respect, the roadmap to an integrated internal control framework and the associated commitment of all financial actors concerned will be instrumental to providing the Court of Auditors with a solid basis on which its opinion could be elaborated. Specific cross-cutting issues requiring attention at Commission level are addressed later in this synthesis.

2.2. Reinforcement of the annual activity report process

The processes for the annual activity reports have been amended and stabilised. In the 2004 annual activity reports, services were asked to describe in more detail their management environment and the main risks faced. In general, the reservations are more precise and coherent and their impact on the services’ reasonable assurance on the use of resources and on the legality and regularity of operations is often supported by an explicit reasoning.

The Court of Auditors recommended that for funds under shared management the results of Member States’ controls should be reported in the services’ annual activity reports. This has been ensured by the services concerned.

During and after the peer review of potential reservations for the services’ 2004 annual activity reports, three ‘families’ of services started working towards a more consistent approach to assess the seriousness (materiality) of the weaknesses detected for their budgetary area and to determine the potential financial impact of systemic weaknesses.

The Court of Auditors acknowledged the progress accomplished already based on the services’ 2003 annual activity reports but nevertheless stated that the extent of the reservations expressed by some departments is not compatible with the reasonable assurance given. Moreover, as the overview on internal control indicates, some services still need in their annual activity reports to describe more fully the environment in which they operate, including the risks they face, in particular risks that remain even after mitigating action has been taken.

Conclusions

More focused and explicit annual activity reports : Although good progress has been achieved in several cases, Commission departments should continue to reinforce the explanation of their environment and the risks faced, including risks that remain even after mitigating measures have been taken. The impact of their environment and risks on management and controls has to be made more explicit and in most cases fuller explanations should be given on the overall impact of reservations on the reasonable assurance.

More balanced reporting : A reflection on the possible simplifications to strike a better balance between policy results and internal control and financial management issues at level of both annual activity reports and synthesis will be held in the second half of 2005. In addition, guidance to the services will be reinforced and will integrate all instructions referenced in several Commission decisions in one global set.

Common methodology by ‘families’ : with the assistance of central services, a common methodology to determine the materiality threshold of weaknesses, including systemic ones, will be prepared for the 2005 annual activity reports in order to assess more coherently their impact on the reasonable assurance for ‘families’ of shared management , research and internal policies .

2.3. Synthesis report and assurance statement

In its discharge resolution for 2003, the European Parliament invited the Commission to convert the annual synthesis of services’ annual activity reports into a consolidated assurance statement on the Commission’s financial management and controls as a whole.

The objective underlying this proposal is to strengthen the expression of accountability upon which the Court of Auditors may base the formulation of its statement of assurance. The annual synthesis report already contains the Commission’s position on the main management and control issues and, in its annual report for 2003, the Court indicated that the synthesis report already analysed, for the first time, the assurances provided by the control and supervisory systems.

Moreover, the synthesis is an act through which the Commission exercises its political responsibility, by analysing the annual activity reports and related declarations and by adopting a position on major horizontal issues, including appropriate action on issues requiring remedy at Commission level. This approach is based on the reform, which decentralised the management responsibilities to Directors-general and Heads of services, under the political supervision of the relevant Commissioner.

The present system therefore provides the assurances sought from a management perspective. Within this system, further progress can be made in most cases by strengthening the accountability expressed in services’ annual activity reports, through more precise reservations and better definition of the impact of the reservations on the reasonable assurance accompanying the annual activity reports.

Conclusions

Promoting the Commission’s accountability : The quality of the annual activity reports of a number of services should further be improved, in terms of a clearer wording of reservations and definition of their impact, to strengthen the assurances given by the Commission’s services and assessed by the Commission in the synthesis report. In this context, the responsibility of Commissioners for following up implementation of the action plans and the state of affairs in the services in their portfolio can be recalled.

3. MAJOR CROSS-CUTTING ISSUES ARISING FROM THE ANNUAL ACTIVITY REPORTS AND RECOMMENDATIONS RECEIVED

3.1. Governance issues

The reform established a reinforced management and control framework and new instruments, such as the services’ annual activity reports, to allow the Commission to give a proper account of the tasks for which it is responsible. Diversified implementation methods have been put in place, in particular through delegation to third parties in the budgetary area.

The Commission now faces the challenges of enhancing the effectiveness of its supervisory and control systems, of reinforcing risk management at departmental level and of developing Commission-wide risk management, as well as improving supervisory arrangements for agencies.

3.1.1. Moving from compliance to an effectiveness approach in internal control

After a first phase where the services’ efforts focused on the design of internal control systems and on compliance with the internal control standards (the services considered that they complied on average with 93% of the baseline requirements at year-end), the services are now concentrating on improving how effectively these systems work and the way their components operate.

As the Commission aims to achieve efficient and effective management and controls, services constantly have to fine-tune their control systems in order to ensure that they offer real help to managers and that controls focus on the most risky issues. Consolidation of control systems by moving towards a full effectiveness approach, embedding internal control and risk analysis in everyday management beyond the sphere of financial management, is a logical development of the reform launched in 2000.

Areas warranting special attention include procurement procedures, contracts and grant awards, notably the selection process. There is also a need to tackle the risks of double funding and of overpayment; to reduce the frequency of errors and some simplification of the grant procedures is welcome. There is a call for more proportionality in setting up cost-effective management and control systems and the overview on internal control mentions the following fields where there is room for improvement: supervision in the financial domain, embedding risk management in everyday management and achieving better proportionality in setting up cost-effective management and control systems. This implies regularly reviewing the relevant financial scoreboard and the adequacy of the supervisory and control systems, checking the potential for dependence on some contractors, and taking account the results of ex-post controls and audit recommendations. In this context, there is a need to set an acceptable level of risk or error, if possible in agreement with the other institutions.

The Internal Auditor recommends that particular attention be paid to preventing risks of double funding, collusion, conflict of interests, insider trading, concentration of Community funds on certain contractors or beneficiaries and dependence on contractors in case of outsourcing.

Moreover, although the experiences encountered by small Directorates-general, offices and delegations vary, certain difficulties in implementing Commission-wide standards are noted in the overview on internal control . In some cases the lack of resources is underlined, while in other cases the need to fine tune competencies and responsibilities is noted. Another issue related to the offices is their reliance on contract agents (up to 40%). This situation, if not carefully handled, could, in the transitory period, create difficulties in the building up of competencies and know-how as well as problems during handovers. The overview on internal control underlines the risk for business continuity in the offices if the new selection process of contract agents is not carried out on time. Finally, a triennial evaluation of the Commission’s recently created administrative offices is planned and will be carried out. It should consider simplification measures in particular.

Concerning inter-institutional offices , measures to remedy a possible lack of delimitation of responsibilities are being taken in the ongoing review of the financial regulation, in the form of direct delegation of the authorising officer’s powers from each institution to the office.

Conclusions

Further enhancing the cost-effectiveness of the supervisory and control systems : Services should continue to tighten up monitoring of the effectiveness of their internal control, with the assistance of central services. The internal control coordinator in each service should carry out a regular review of the effectiveness of internal control, based on available information on results of controls, exceptions made and relevant scoreboards, in order to enhance related procedures or modify control systems. This review should be conducted, at least, in the context of the twice-yearly information to Commissioners and of the annual activity report.

3.1.2. Commission-wide risk management

Regularly, in principle once a year, Commission services perform a risk assessment exercise. A stronger methodology is being developed, based on a pilot exercise involving several services that started in 2004, linking risk management more clearly to the planning process.

Alongside the risk management carried out at service level, several activities regularly carried out help with raising awareness of risks and with developing appropriate measures to address them from the perspective of the Commission as a whole. This is the case for resource allocation to priority activities at the beginning of the strategic planning cycle and for the prior assessment of possible positive and negative impacts of major initiatives. On management issues, regular reporting lines are now established and functioning well between the Commissioners and the departments of which they are in charge. A group of Commissioners scrutinises all investigations launched by the anti-fraud office in order to draw the College’s attention to serious issues. Auditors and the overview on internal control point out cross-cutting and systemic shortcomings on an annual basis. The Audit Progress Committee is improving the follow up process on the main audit recommendations having an impact at Commission level.

The Internal Auditor and the European Parliament consider, however, that the Commission’s risk management culture needs strengthening and see a need for a Commission-wide risk management methodology.

The Internal Auditor notes that risk management should be embedded in each service’s regular management process and suggests a Commission-wide approach to risk management, resulting in a consolidated risk overview at the Commission level allowing for a complete top down view of key risks.

Conclusions

Developing Commission-wide risk management : The Commission-wide methodology which will be set up by the autumn of 2005 will introduce risk assessment into the decision-making process on priorities and resource allocation. This will be given firmer shape in the management plans and annual activity reports of services. In the medium-term, the methodology should also address how to deal with risk management within ‘families’ of similar activities in services.

3.1.3. Performance measurement

Most services carried out a review of objectives and indicators at both planning and reporting stages with the help of central services so as to improve, in particular, the quality of the documents and reports (‘activity statements’) submitted by the Commission to the budgetary authority alongside the annual preliminary draft budget.

The Internal Auditor and the European Parliament consider that the quality of objectives and indicators can still be further improved and additional steps can be taken to measure and evaluate performance. The Court of Auditors has also invited the Commission to produce indicators covering the legality and regularity of the operations and measuring the performance of internal control systems.

The overview on internal control and the Internal Auditor also point out the need to take fuller account in the policy-making process of the lessons from past experience, for instance the results of evaluations.

Conclusions

Reviewing performance measurement and evaluation : The Commission will analyse the existing objectives and indicators in the context of a peer review by ‘families’, to review how objectives and indicators can become more operational tools for management within the Commission.

3.1.4. Externalisation and agencies

In its communication of February 2004 on the financial framework for 2007-2013, the Commission underlined the need to focus its activities on the development and monitoring of policies under the Treaty and identified as principles for administrative governance “less direct management, better control of delivery and greater cost-effectiveness”.

When implementation tasks are externalised through executive agencies , to which the Commission delegates powers to implement a Community programme or project, internal control requirements identical to those in force in the Commission apply, which allows the Commission to exercise full supervision.

By contrast, regulatory agencies - i.e. non-executive Community agencies are autonomous bodies. While most of these agencies are, at least in part, funded by the Commission’s section of the budget, the Commission has only limited control over their activities. However, regulatory agencies’ action may under some circumstances impinge on the Commission’s responsibility. In this respect, the overview on internal control raises the question of mechanisms allowing the Commission to monitor such agencies. Following the White Paper on European Governance, the Commission has already launched an initiative to try to define the operating framework for the creation, operation and supervision of European regulatory agencies, to be agreed with the European Parliament and Council. This draft framework aims, in particular, at setting out the respective responsibilities of the regulatory agencies and the different institutions. Moreover, the necessary monitoring arrangements should be clarified in order to allow the Commission fully to exert its political and budgetary responsibility, if required.

Conclusions

Full Commission responsibility on executive agencies : Regarding the operation of executive agencies, the Commission will fully exert its supervision duties as foreseen. The next synthesis will report for the first time on operation of the newly created executive agencies.

Clarifying the respective responsibilities of the Commission and regulatory agencies : Interinstitutional negotiations should be pursued in 2005 based on the Commission’s draft interinstitutional agreement on a framework for regulatory agencies. The respective roles and responsibilities of the Commission services and the regulatory agencies will be clarified in parallel.

3.2. Financial management and reporting

Financial management has been overhauled with a recast Financial Regulation, which entered into force in 2003, the introduction of activity-based budgeting in 2004 and the transition to accrual-based accounting with effect from January 2005.

The Commission is now proposing to the other institutions a roadmap to an integrated control framework, which will provide the Commission and its stakeholders with greater assurance as to the legal and regular use of EU monies, including under shared management with Member States. Ex-post controls will also be better focused and harmonised, in particular by ensuring increased consistency at the level of ‘families’ of services.

For the tenth time, the European Court of Auditors presented an annual statement of assurance which was largely positive about the reliability of the accounts, commitments and own resources, but which indicated that the Court cannot provide assurances for all payments, but only for administrative expenditure.

The Commission considers that one of its objectives should be to create the conditions allowing the Court to deliver a statement of assurance accompanied by only minor criticisms. This implies not only renewed efforts by the Commission in a number of areas, but also active participation in the initiative by Member States, since, under the Treaty, although the Commission bears sole responsibility for implementation of the budget, approximately 80% of the budget is implemented by Member States under shared management .

In the area of accounting and financial reporting, major steps forward were taken in 2004, when preparations were made for the transition to accrual accounting so that the general accounting related to the EU’s general budget could start to function on a full accrual basis from January 2005, as planned. In 2004 the Commission implemented the first budget based solely on the activity-based structure. The concomitant challenge of adapting the budgetary reporting was also met.

2004 was the second year of implementation of the recast Financial Regulation and the services’ annual activity reports show that the new rules have now filtered through into management practices. Reservations indicating certain teething problems observed during 2003 could be lifted in the 2004 reports.

The conclusions of the synthesis action on ‘co-financing’ advocated greater simplification through wider use of flat-rate payments. The Commission is amending the Implementing Rules of the Financial Regulation, aiming in particular at simplification for small value contracts and grants and at proportionate controls based on analysis of the risks. At the same time, the proposal for the first triennial revision of the Financial Regulation has been adopted and will now be discussed with the other institutions. This revision will streamline the different methods of budget implementation, establish a legal basis for extended use of lump-sum grants and focus on further simplification and proportionality, striking a better balance between control requirements and the risks and costs involved. The revision of the Financial Regulation will be accompanied by further revision of its implementing rules.

3.2.1. Roadmap to an integrated control framework

The Court of Auditors ’ opinion on the single audit and the Parliament’s discharge recommendation for 2003 mark the starting points for a Community internal control framework . This integrated internal control framework is needed in order to link up a logical chain, where controls performed at earlier stages can be used more effectively at the later levels for underpinning their assurance of the legality and regularity of the underlying transactions. Controls should be proportionate in order to strike an appropriate balance between the costs and benefits (in both monetary and political terms).

Based on the assurance provided through this integrated internal control framework, and on the achievements already brought about by the reform, the Commission aims to obtain an annual declaration of assurance from the Court of Auditors, which would contain more focused and limited observations on the legality and regularity of payments. A Communication adopted in parallel to this synthesis lays down the main political principles for such an integrated internal control framework, the respective responsibilities of the different players, including those at Member State level, and the procedure which should lead to adoption of a roadmap before the end of the year.

The establishment of an integrated internal control framework which, in particular, would provide a means of sharing audit results at all management levels will reinforce efficiency and effectiveness. The scope for simplification of the management of the EC funds needs to be explored, ensuring that the control requirements are proportionate to the risk.

Substantial steps have already been undertaken prior to the adoption of the roadmap to an integrated internal control framework, including new provisions in the new legislative proposals for financial management in Agriculture and Structural aid under the next Financial Perspectives. An additional improvement is the harmonisation exercise during the abovementioned peer review of potential reservations, which has started reflecting on a basis for the determination of the ‘acceptable levels of error’. As the overview on internal control points out, in order, to set common thresholds by families of services, control methodologies need to be calibrated and harmonised within each family.

Conclusions

Moving towards an integrated control framework : The Commission will invite the EU institutions concerned to develop a common approach to this framework, which includes stronger assurance at Commission level through services’ annual activity reports and greater assurances from the Member States implementing the Community budget under shared management. Those assurances will be underpinned more clearly by sound internal control procedures, assessment and reporting mechanisms, including sharing of audit results at all levels.

3.2.2. Ex-ante and ex-post controls

Ex-ante and ex-post controls are important components of the internal control framework applied by the Commission. Services’ annual activity reports show a continuous improvement in general, but an insufficient level of ex-post controls in certain cases, which have given rise to a few reservations. The overview on internal control indicates that services should prepare to improve their reporting on their control strategy and implementation thereof so that more evidence may be obtained for the declaration on reasonable assurance. The need for further harmonisation and calibration of ex-post controls according to the various budgetary areas has also been pinpointed by the Internal Auditor , who suggests that services’ annual activity reports and their synthesis give a fuller account of the results of these controls.

An Ex-post control network was set up in the second half of 2004, to define guidelines, allow the sharing of good practices among services and ensure a common language and understanding as regards ex-post controls.

Progress in this area should be made possible by the roadmap to an integrated control framework, which will, in particular, help to strike a better balance between the cost of controls and their expected benefits, as also suggested by the Internal Auditor . In addition, the latter recommends adoption of a clearer strategy for ‘closure audits’ at the end of a programming period for shared and de-centralised management and formulation of more precise guidelines for ex-post controls conducted by national agencies under indirect centralised management .

The experiments by some services with recourse to independent audit certificates on cost claims by beneficiaries should continue, so that conclusions can be drawn onto the impact of such certificates on ex-post control quickly. In parallel, greater recourse to flat-rate payments for some grants should change the nature of ex-post control by allowing better targeted, more qualitative and dissuasive controls.

Conclusions

More coordinated and efficient ex-ante and ex-post controls : Harmonisation of methodology and definition of common audit strategies, at least at the level of ‘families’ of services operating in the same budget area, have to be continuously enhanced. In the context of the roadmap to an integrated internal control framework, services operating in the same budget area will explore the most appropriate way to organise resource sharing by ‘families’, either by closer coordination (joint audits, common methodology, sharing of results) or synergies (where the lead service performs audits on behalf of smaller services). This will progressively allow harmonisation, better focusing of ex-post controls and improved efficiency.

3.2.3. Accounting and financial reporting

The Internal Auditor and discharge authority recommend that the Accounting Officer sign off the Commission's accounts and also be upgraded to ‘Chief Financial Officer’ to act as a central counterweight to the Commission’s departments.

Based on the key principles of the administrative reform, which provide for decentralisation of management and control tasks and greater accountability at service level, the Commission services remain fully responsible for the legality and regularity of the underlying transactions. The declaration of assurance made by Directors-general in their annual activity reports should certify that the accounts for which they are responsible are accurate and exhaustive.

The Accounting Officer should sign off the accounts, certifying that (s)he has made the checks that (s)he considers necessary and is satisfied that they have been prepared in accordance with the accounting rules, methods and accounting systems established under his/her responsibility, that (s)he has made any adjustments which are necessary for a true and fair presentation of the accounts in accordance with Article 136 of the Financial Regulation, and that they are therefore reliable. The Accounting Officer should be adequately informed by the Directorates-General in order to be able to exercise this responsibility, and should be empowered to make the checks on this information which (s)he considers necessary. In line with existing responsibility of Director-Generals for the underlying transactions and the reliability of the information made available to the Accountant, the declaration of assurances made in the Annual Activity Reports should certify that the accounts for which they are responsible are accurate and exhaustive.

Conclusion

Proposals for revision of the Financial Regulation to this effect were adopted by the Commission on 3 May 2005.

3.2.4. Budget implementation methods

In the area of centrally managed funds , the Internal Auditor has called for stricter rules for the award of grants, an issue which also gave rise to a reservation in one service’s annual activity report with reference to a non-governmental organisation. The overview on internal control highlighted the need for appropriate supervisory arrangements to detect and promptly correct weaknesses identified in relation to procurements and grants (selection process, audit trail, double funding, overpayments), which is also underpinned by reservations in some services’ annual activity reports .

Concerning shared management and fund management through national agencies , The Internal Auditor has pointed to the need to obtain statements of assurance from Member States’ management authorities on top of the validation of national control systems to be performed by the Commission’s services before making payments. The Commission made similar proposals in the area of agricultural expenditure, for which a political agreement has been reached in the Council. The Internal Auditor also underlined the importance of increased information from national agencies to the Commission.

Where Member States manage and control budget implementation under shared management , the action in response to the previous synthesis allowed clarification of the existing chain of control under agriculture and structural funds models plus identification of remaining problems and possible solutions. The Court of Auditors has in turn insisted on the Commission’s responsibility to check that adequate control systems are in place and are operating effectively in Member States and to ensure the legality and regularity of the underlying transactions. It has also emphasised the need to set an accepted level of confidence and a materiality threshold in this respect.

Conclusions

The roadmap to an integrated internal control framework will make the flow of information more transparent and should make it possible to obtain firmer assurances from the Commission’s internal processes as well as from third parties entrusted with budget implementation tasks for the Commission.

Services are called upon to make use of the simplification measures to be introduced by the amended rules implementing the Financial Regulation, in particular concerning the use of flat-rate grants as an alternative means of funding to reimbursement of actually incurred costs, where appropriate.

3.3. Human resources

The new reform-driven staff regulations have entered into force, providing, inter alia, for a linear career structure and modernisation of working conditions, as well as new measures on discipline and whistle-blowing.

The simplification of some instruments, such as the staff appraisal system, is designed to ensure efficient and effective human resource management.

The new staff regulations entered into force on 1 May 2004, accompanied by several packages of implementing provisions adopted by the Commission. A series of other measures to produce further increases in efficiency included guidelines for redeployment and rules concerning the appraisal of senior management.

In addition, emphasis was placed onto improving the working conditions of Commission staff. Solutions, taking into consideration both the needs of staff and the available resources, were put forward to move on policies designed to reconcile private and professional life: part-time work, flexitime, teleworking, parental and family leave.

3.3.1. Lack of specialised staff

Some services’ annual activity reports indicated that staff shortages were posing a problem to their operations in some cases. In one particular case the shortage was the result of a short-term need to deal with the IT challenges posed by the implementation of the new Staff Regulations. Some of these reports also pointed out more specific problems concerning the availability of adequate human resources, in both quantitative and qualitative terms, stemming from the difficulty of attracting candidates, notably from the ten new Member States, with specific profiles (financial or audit, scientific, linguistic and IT profiles).

The overview on internal control identifies a lack of competent specialists in financial and specific areas; this creates difficulties in dealing with mobility in particular in small services, delegations and representations.

Conclusions

The action plan presented in July 2004, with the aim of fostering the recruitment of experts and developing training of staff already in place, will be continued. The Commission will contribute to the work programme of the interinstitutional European Personnel Selection Office in order to ensure that competitions continue to provide adequate numbers of successful candidates to fill vacant posts. Recruitment drives will have to be maintained, especially in some services, and action should be taken where shortfalls are identified. The Commission will also continue to monitor the situation closely and will propose measures to improve recruitment procedures.

In addition, resources will be aligned with policies not only in quantitative but also in qualitative terms to make sure that staff assigned to certain policies have the skills and qualifications necessary to perform their duties. With this objective in mind, recruitment procedures will be further improved and specialised training will be provided by building on measures already undertaken.

3.3.2. Recruitment of officials from the new Member States and training

Many services’ annual activity reports underlined that attainment of the targets for the recruitment of officials from the new Member States had been delayed, basically because of the late availability of reserve lists. Training continued to play a significant role in the human resource policy of the DGs. Most DGs reported the adoption of a Strategic Training Framework and noted increases in the average number of training days per official.

3.3.3. Fine-tuning of reform instruments

In 2004 the vast majority of the legal instruments necessary for the reform of personnel policy were in place. In the years to come emphasis will have to be placed on the consolidation of this process and on increased ownership as well as on fine-tuning simplifying the provisions where such a need can be seen.

Conclusions

The simplification of procedures will be a key objective to increase both efficiency and customer satisfaction. In particular, specific measures will be presented to simplify and improve the staff appraisal system.

3.3.4. Mobility

Most services report that they dealt with mobility issues in the framework of their Mobility Plans without any serious problems, even though the overview on internal control points to some difficulties linked to compulsory mobility for sensitive posts.

In 2004 mobility within and between Directorates-general and services affected 15% of Commission staff (officials and temporary agents) including those staff members who voluntarily decided to change jobs (voluntary mobility) and those who were required to change jobs (compulsory mobility) because of either the redeployment exercise following enlargement or because they occupied a sensitive post for more than 5 years.

The results of an internal survey confirm that the Guidelines on Mobility have led to a significant improvement in the way in which mobility is managed in the Commission. Good practices are being disseminated with the aim of bringing about a system of career management by which the Commission can ensure that the ‘right person is in the right job at the right time’ so that its resources are used as effectively and efficiently as possible. This work is being supported by the development of tools such as the e-CV which will provide an overview of the skills and competences of all Commission staff. While the experience of mobility has overall been positive, some adverse effects of compulsory mobility for sensitive posts, such as loss of expertise and intuitional knowledge, were noted and an evaluation of the impact of this policy would be welcomed by the Resource Directors.

4. CONCLUSIONS

The 2004 synthesis report enabled the new Commission to take stock for the first time of the management of its services and to address major issues raised in the services' 2004 annual reports, by both internal and external auditors and by the discharge authority.

This synthesis establishes a reference framework ensuring consistency and explaining the rationale behind the proposed initiatives, contributing among other things to the objective of obtaining an assurance statement from the Court of Auditors with only marginal reservations in a mid-term perspective. It sets in motion a process whereby each year the syntheses which follow will take stock of the state of play on these initiatives. It is not a question of launching a new reform. Now the time has come to take the system in place up to cruising speed and fully develop its performance potential based on the following strands:

- Promoting the Commission's accountability : a synthesis report solidly based on assurances from the Directors-general and Heads of services' plus accrual based accounts signed by the Accounting Officer.

- Enhancing effective performance management : effectiveness and ownership of supervisory and control systems, forward-looking and solid daily management embedding the risk management dimension.

- Reinforcing the Commission’s responsibility and monitoring capacity through an integrated internal control framework and a more consistent approach to risks by ‘families’ of services.

Annex 1

Synthesis: multiannual objectives

This annex summarises the Commission’s objectives addressing the major cross-cutting issues identified in the 2004 synthesis. To meet these objectives, a series of initiatives will be launched, some of which are already identified in this synthesis. The table below will be adapted annually on the occasion of the synthesis reports to include the progress achieved and additional initiatives as appropriate.

Governance issues |

Objective | Initiative(s) to meet the objective | Responsible service(s) and timetable |

Achieving effective functioning of internal control system and ownership of internal control concepts and processes at all level in each DG and service. | To ensure the effectiveness of internal control, with the assistance of central services, the internal control coordinator in each service should carry out a regular review of the effectiveness of internal control issues, based on available information on results of controls, exceptions made and relevant scoreboards, in order to enhance related procedures or modify control systems. This review should be conducted, at least, in the context of the twice-yearly information to Commissioners and of the annual activity report. | All services. , continuous action with the support and guidance of DG BUDG and the ICC network. |

Promoting Commission’s accountability through a synthesis report solidly based on assurances from managers in the annual activity reports. | The Commission will continue fully to exert its accountability, by using the synthesis to bring transparency to the critical crosscutting issues emerging from services’ assurances. The latter will give a full account on whether the assurance is consistent with the reservations identified. | All services, according to the guidelines on annual activity reports. |

Establishing effective and comprehensive risk management making it possible to identify and deal with all major risks at service and Commission level and to lay down appropriate action to keep them under control, including disclosing resources needed to bring major risks to an acceptable level. | The Commission-wide methodology which will be set up by the autumn of 2005 will introduce risk assessment into the decision-making process on priorities and resource allocation. This will be given firmer shape in the management plans and annual activity reports of services. In the medium a term perspective, the methodology should also address how to deal with risk management within ‘families’ of similar activities in services. | DG BUDG, SG and IAS for methodology by the autumn of 2005, all services for application, starting from 2006 annual management plans. By 2007 the Commission should have gained sufficient experience to submit concrete proposals in this context. |

Clarifying the respective roles and responsibilities of Commission services and regulatory agencies. | Interinstitutional negotiations should be pursued in 2005 based on the Commission’s draft interinstitutional agreement on a framework for regulatory agencies. The respective roles and responsibilities of the Commission services and the regulatory agencies will be clarified in parallel. | SG, BUDG and services concerned, starting in 2005. |

Activity-based management |

Objective | Initiative(s) to meet the objective | Responsible service(s) and timetable |

Making objectives and indicators a policy and management tool allowing, on the one hand, the Commission to monitor its performance and, on the other, stakeholders to assess the outcome of the Commission’s work and its benefit for citizens. | The Commission will analyse the existing objectives and indicators in the context of a peer review by ‘families’ and with the support from the central services, to review how objectives and indicators can become more operational tools for management within the Commission. | SG, BUDG and services concerned, continuous task, starting from the 2006 annual management plans and the 2005 annual activity reports. |

Reinforcing annual activity reports to ensure better accountability. | Commission departments should give, where needed, a fuller explanation of their environment and the risks faced, including risks that remain even after mitigating measures have been taken. The impact of their environment and risks on management and controls should be made more explicit and in most cases fuller explanations should be given on the overall impact of reservations on the reasonable assurance. A reflection on the possible simplifications to strike a better balance between policy results and internal control and financial management issues at the level of both annual activity reports and synthesis will be held in the second half of 2005. Guidance to the services will be reinforced and will integrate all instructions referenced in several Commission decisions in one global set. With the assistance of central services, a common methodology to determine the materiality threshold of weaknesses, including systemic ones, will be prepared for the 2005 annual activity reports and in order to assess more coherently their impact on the reasonable assurance for ‘families’ of shared management, research and internal policies. | All services in the 2005 annual reporting exercise. SG, DG BUDG and all services before end 2005. Services concerned, SG and DG BUDG by November 2005. |

Financial management and reporting |

Objective | Initiative(s) to meet the objective | Responsible service(s) and timetable |

Enhancing accountability by establishing a comprehensive integrated internal control framework in line with the requirements set out in the ECA’s opinions on ‘single audit’. | A Roadmap setting out the action which has to be taken by the Commission and by the Member States’ administrations to bridge the gap identified between the current control framework and the defined features of the integrated internal control framework will be adopted by the Commission and submitted to the other institutions concerned for approval. | DG BUDG and other services concerned by the end of 2005. |

Improving efficiency and strengthening accountability by further harmonisation and better focusing of ex post controls. | Further attempts have to be made to achieve closer harmonisation of methodology and definition of common ex-post control strategies, at least at the level of ‘families’ of services operating in the same budget area. Specific proposals and possible action in this respect will be progressively explored and the next synthesis report will clearly identify the progress made and remaining weaknesses to be addressed. | All services with the assistance of DG BUDG, continuous action. |

Increasing responsibility and accountability at the level of the Commission as a whole by the signing-off of the accounts by the Accounting Officer. | Under the proposed amendments to the Financial Regulation submitted to the legislator, the Accounting Officer will sign off the accounts. | Accounting Officer by the entry into force of the amendments to the Financial Regulation. |

Making financial management more efficient by applying simplification measures. | Services are called upon to make use of the simplification measures to be introduced by the amended rules implementing the Financial Regulation, in particular concerning small value contracts and grants and proportionate controls based on the analysis of risks. In the coming years, any further simplification introduced by the revised financial regulation will have to follow this process. | All services concerned as from the entry into force of the amendments to the rules implementing the Financial Regulation. |

Human resources |

Objective | Initiative(s) to meet the objective | Responsible service(s) and timetable |

Simplifying procedures to increase both efficiency and customer satisfaction. | Specific measures will be presented to simplify and improve the Commission’s staff appraisal system (Career Development Re view). | DG ADMIN by the end of 2005. |

Aligning resources and needs better to make sure that staff have the skills and qualifications necessary to perform their duties, in particular in areas such as financial management, audit, science, linguistics and IT. | Following the conclusions of the evaluation on the Strategic Alignment of Human Resources, an action plan will be devised by the end of 2005. Provision of specialised training and measures to improve the recruitment procedures and, in particular in areas where a shortage of skilled staff is identified. An analysis of human resource devoted to internal control will be progressively carried out as requested by the Court of Auditors | DG ADMIN, by the end of 2005. DG ADMIN, EPSO., ongoing tasks. All services, based on guidelines to be drawn up by DG ADMIN, SG and DG BUDG by the end of 2005. |

Annex 2

State of play on the action under the 2003 Synthesis

This annex reports on the action based on the previous syntheses or on other documents such as the reform White Paper and summarised by the 2003 synthesis. Action still in progress will be carried over in the multi-annual objectives of the 2004 synthesis and reported on in subsequent syntheses.

INTERNAL CONTROL FRAMEWORK ISSUES

Source | Action | Status |

2002 Synthesis (§ 5.4.5.) | Internal control standards: enhance ownership by DGs and services. | On-going. The Central financial service has been offering support with methodologies and training since autumn 2004. DGs should continue reinforcing and fine-tuning their control systems in order to ensure that they work effectively. Training and support provided to DGs on internal control should continue. Action included in the objectives set in Annex 1. |

2002 Synthesis (§ 3.3.2.) | Communication of the revised management and control framework. | On-going. In 2004 DGs and services made efforts to communicate internally the revised management and control framework under the coordination of the Resource Directors/Internal Control Coordinators Network and with the support of DG BUDG. These efforts should be continued with a fuller focus on enhancing effective internal control systems. Action included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.4.1.) | Internal Controls in Delegations. | Action almost completed. An inter-service group was set up in 2003 to facilitate implementation of the internal controls. Baseline requirements were adapted to Delegations in 2004, combined with a number of trainings course for Heads of Delegation. The assessment exercises conducted by the Heads of Delegation took place in July and December 2004. The results show that implementation of the internal control standards is well on track. compliance with the baseline requirements was verified through on-the-spot control missions in 2004. Action included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.4.3.) | PRESS A (situation of Relays and Networks and Representations). | Action almost completed. Relays and networks: measures were adopted by Communication COM(2004)196, so that the new scheme could be fully operational with effect from 1 January 2005. Representations: A self-assessment was conducted in October/November 2004 resulting in corrective measures. Instructions have been given and implementation will be monitored. Action included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.4.3.) | PRESS B (integrating the Representations in the Member States into the rotation schemes of the Directorate-General for External Relations). | Action completed. The memorandum of understanding signed between DG PRESS and DG RELEX and the solutions proposed by the working group set up by the 2002 Synthesis have been implemented and followed up. |

2001 Synthesis (Action 2) | Evaluation of the devolution exercise. | Action completed. The final report on the evaluation of the devolution exercise (SEC (2004) 561) was published in May 2004. A study made by an external consultant in October 2004 identified options for further devolution of administrative matters and the implications for RELEX K in that framework. RELEX K is currently analysing the options in order to propose an action plan. These administrative aspects of the action will be included in the objectives set in Annex 1. |

2001 Synthesis (Action 2) | Re-examination of the scope for synergies between the services involved in External Relations. | Action completed. The new Commission has examined the scope for synergies between the services involved in External Relations and decided on certain transfers of responsibilities between the services. |

ACTIVITY-BASED MANAGEMENT/STRATEGIC PLANNING AND PROGRAMMING

Source | Action | Following steps |

2002 Synthesis (§ 3.3.2.) | Management risk assessment. | On-going. Alongside the regular risk management at service level performed under internal control standard No 11, several activities carried out as a daily practice contribute to acquiring awareness of the risks and to responding appropriately. Following evaluation of the pilot exercises carried out in 2004, the Commission is developing a common methodological framework for Commission-wide risk management. An interservice group was set up early in 2005 to that end. Action included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.4.6.) | Follow-up by services. | Action completed. This has now become a routine action generally performed well by services and monitored by central services, and which will not deserve being specifically flagged in the syntheses in the future. |

HUMAN RESOURCES

Source | Action | Following steps |

2002 Synthesis (§ 5.3.1.) | Human resources B. (review of the situation of scarce skills by DG for Personnel and Administration). | Action almost completed. The measures proposed in the Communication for DG ADMIN have largely been undertaken. In particular, DG ADMIN, in close collaboration with DG BUDG has made available a wide range of training courses in the area of financial management, audit and control resulting in a commensurate increase in the number of training days to 10 550 (53% increase compared to 2003). Also, a competition for candidates from new Member States was launched at the end of 2004 in the field of finance and budget. Additional competitions are planned by EPSO in 2005. Action included in the objectives set in Annex 1. |

Court of Auditors, 2002 AR, (§ 1.73) | Estimate of human resources devoted to internal control. | Action to be continued. Estimate of human resources devoted to internal control, with a view to striking the right balance between the costs of control and the expected benefits, has been proven not obvious as many different aspects can be covered depending on the specific environment of DGs and related management modes. A thorough analysis of the job descriptions in the job information system will be needed in this respect. Action included in the objectives set in Annex 1. |

FINANCIAL MANAGEMENT AND REPORTING

2002 Action | Description | Status |

2002 Synthesis (§ 5.3.3.A) | Shared management – Follow-up of Action 12 in the 2002 Synthesis. | Action completed. The final report of the interservice group was adopted early May 2005. It identifies the current procedures in the control chain as recommended by European Court of Auditors' opinion No 2/2004 and the areas for improvements as well as possible action. The necessary action in this context will be covered in the frame roadmap towards an integrated internal control framework. Follow-up included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.3.3.B) | Audit in Shared management. | Action ongoing. Action in being taken in the audit field, aiming in particular at developing the “contract of confidence” initiative between the Commission and the Member States, at setting up a network of audit units involved with shared management in the Commission and at increasing coordination on the Structural Funds and the Cohesion Fund. |

2002 Synthesis (§ 5.3.4.) | Co-financing. | Action completed. The outcome of this action is reflected in the ongoing amendment of the Financial Regulation and of its Implementing Rules. Services are called upon to take benefit, where appropriate, from these simplification measures as soon as the new rules enter into force. Follow-up included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.3.2. A) | Recovery. | Action completed. Performance indicators (i.e. ageing balances, quality of debtor, status of the files) have been defined by the Accountant and are generally presented in the e annual management plans of the services most concerned by this issue. As any other indicators, they will be object of follow-up and quality improvement where needed. Follow-up included in the objectives set in Annex 1. |

2002 Synthesis (§ 5.3.7.) | Accounting framework. | Action completed. Major steps forward were taken in 2004, where the preparations for the transition to accrual accounting were completed to allow the general accounting to start to function on a full accrual basis from 1 January 2005. |

White Paper (Actions 11 and 74) | Development of a database of legal entities and of a database of contracts. | Action completed. A database of legal entities and a database of contracts have now been developed. From 1 January 2005, no payment can be made unless the recipient legal entity has been registered and validated in the FEL database. From April 2005, all contracts signed during the year must be registered in ABAC Contracts. |

GOVERNANCE ISSUES

2002 Action | Description | Status |

2001 Synthesis (Action 7) | Interoperability. | Action completed. communications on both interoperability (SEC(2004) 1265) and IT governance (SEC(2004)1267) were adopted by the Commission in 2004. The implementation phase has started and a number of activities are ongoing (corporate portal and data-warehouse, IT Enterprise Architecture...) and will be monitored and reported upon. |

White Paper (Action 9b) | Electronic signatures. | Action essentially completed. In the framework of the system of electronic administration and document-filing, in July 2004 the Commission adopted a decision adding provisions on the use of electronic and numeric documents to its rules of procedure. This decisions lays down the use of electronic signatures within the Commission in cases where a signed original document is required, which will be applied generally as soon as the implementing rules are adopted, by the end of 2005. |

2002 Synthesis (§ 3.3.2. and § 3.3.3.) | Coordination of the Commission’s audit community and Audit Progress Committee: Audit overview. | Action almost completed. Efforts have been made onto wider and more consistent use of the Audit Management Software, although it is not used by all Internal Audit Capabilities. The Audit Progress Committee reviewed its charter, specifying that it will review the IACs critical recommendations, through the bi-annual report prepared by the IAS on the basis of finalised audit reports sent by the IACs. The Internal Auditor of the Commission chairs Auditnet, the network of IACs. |

2002 Synthesis (§ 3.3.3.) | Audit methodology. | Continuous action. Implementation of audit recommendations accepted has improved and remains an ongoing and continuous task for the Commission’s services. This process will be facilitated by the introduction of new functions in the Audit Management Software for the follow-up. Guidelines on follow-up have been presented by the Internal Audit Service to the services’ Internal Audit Capabilities and to the Audit Progress Committee. |

Annex 3

Trends in services’ reservations

This annex sums up the reservations expressed by Commission services. In services' 2004 annual activity reports, 32 reservations were expressed (after 49 in 2002 and again in 2003). The reservations are more precise and coherent, better circumscribed and, in most cases, explicit explanations are given of their impact on the services' reasonable assurance on the use of resources and the legality and regularity of operations. 'Families' of services have started working towards a more consistent approach to assess the materiality of weaknesses detected for their budgetary area and to determine the potential financial impact of systemic weaknesses.

The main deficiencies lying behind the reservations are generally recurring weaknesses, already pointed out in previous years and for which remedial action is in progress. The services provided overall conclusions on the combined impact of reservations on the declaration as a whole and, in the light of those reservations, reached a positive conclusion that the assurance provided in the declaration can be maintained.

The table set out below gives an overview of the reservations issued by the services in 2002, 2003 and 2004 by 'families' of services.

DG | 2004 reservations | 2003 reservations | 2002 reservations |

AGRI | 3 | 1. EAGGF Guidance: MS control systems 2. IACS in Greece; 3. "Hilton" beef | 5 | 1. EAGGF Guidance programmes; 2. International Olive Oil Council; 3. Import of Basmati rice; 4. IACS in Greece; 5. "Hilton" beef | 5 | 1. EAGGF Guidance programmes; 2. International Olive Oil Council; 3. Import of Basmati rice; 4. IACS in Greece; 5. Export refunds |

REGIO | 3 | 1. Management and control systems for ERDF in one Member State; 2. Management and control systems for the Cohesion Fund in one Member State - 2000/06; 3. Management and control systems of ISPA in one candidate country | 5 | 1. Management and control systems for ERDF in Greece - 2000/06; 2. Management and control systems of URBAN & INTERREG - 2000/06; 3. Management and control systems for ERDF in Spain - 2000/06; 4. Management and control systems for the Cohesion Fund in Greece, Spain and Portugal - 2000/06; 5. Management and control systems of ISPA | 4 | 1. ERDF post-2000; 2. Cohesion Fund post-2000; 3. Community Initiatives 2000-2006; 4. Cohesion Fund pre-2000 |

EMPL | 1 | 1. European Social Fund - Member states' management and control systems of some operational programmes | 1 | 1. European Social Fund - Member states' management and control systems | 1 | 1. European Social Fund - Member states' management and control systems |

FISH | 1 | 1. FIFG: Insufficient implementation of management and control systems for two national programmes in one Member State | 1 | 1. FIFG expenditure. Analysis of the Management and Control systems not yet completed for all Member States | 1 | 1. FIFG expenditure. Analysis of the Management and Control systems not yet completed for all Member States |

JRC | 1 | 1. Cash flow - competitive activities | 1 | 1. Cash flow, assets and liabilities from competitive activities | 1 | 1. Sound financial management: income and cash management |

RTD | 1 | 1. Frequency of errors in shared cost contracts | 1 | 1. Frequency of errors in shared cost contracts | 2 | 1. COST secretariat; 2. Frequency of errors in shared cost contracts |

INFSO | 2 | 1. Frequency of errors in shared cost contracts; 2. Research staff working on operational tasks | 2 | 1. Frequency of errors in shared cost contracts; 2. Research staff working on operational tasks | 2 | 1. Frequency of errors in shared cost contracts; 2. Research staff working on operational tasks |

ENTR | 2 | 1. Frequency of errors in shared-cost contracts in the research area; 2. Uncertainty regarding cost claims of the European Standardisation Organisations | 2 | 1. Frequency of errors in shared-cost contracts in the research area; 2. Financial management of conferences organised under the Innovation Programme | 1 | 1. Frequency of errors in shared-cost contracts in the research area |

TREN | 4 | 1. Frequency of errors in shared cost contracts; 2. Contractual environment of DG TREN in Luxembourg; 3. Nuclear safety; 4. Inventory in nuclear sites | 6 | 1. Frequency of errors in shared cost contracts; 2. Burden of the past; 3. Contractual environment of DG TREN in Luxembourg; 4. Expertise for control of nuclear security; 5. Nuclear safety; 6. Verifications under Art. 35 of the Euratom Treaty | 5 | 1. Frequency of errors in shared cost contracts; 2. Burden of the past; 3. EURATOM security control Office; 4. Expertise for control of nuclear security; 5. Nuclear safety |

EAC | 0 | 0 | 3 | 1. Burden of the past (observation in 2002 AAR); 2. On the spot controls (observation in 2002 AAR); 3. Implementation of Art. 35 of FR Implementing Rules | 0 | 0 |

ENV | 0 | 0 | 2 | 1. Potentially abnormal RAL 2. Grants - Eligible costs | 5 | 1. Shortcomings in the development of financial circuits ; 2. Excessive potential abnormal RAL ; 3. Excessive payment delays ; 4. Declaration of eligible costs in relation to grants ; 5. Verifications under Article. 35 of the Euratom Treaty |

SANCO | 0 | 0 | 0 | 0 | 0 | 0 |

JLS | 2 | 1. Weakness of the systems for management of the European Refugee Fund in the United Kingdom and Luxembourg; 2. Implementation of ex-post on-the-spot controls still incomplete | 0 | 0 | 3 | 1. Internal control standard 16: Separation of tasks 2. Internal control standard 17: Supervision 3. European Refugee Fund |

ESTAT | 2 | 1. Errors in the declaration of eligible costs in relation to grants; 2. Insufficient number of ex-post controls carried out in 2004 | 3 | 1. Errors in the declaration of eligible costs in relation to grants; 2. Weakness in project management procedures; 3. Insufficient number of ex-post controls carried out in 2003 | 2 | 1. Project management; 2. Ex-post control |

TAXUD | 0 | 0 | 1 | 1. Monitoring of the application of preferential treatment | 0 | 0 |

MARKT | 0 | 0 | 0 | 0 | 1 | 1. Late payment of expenses for experts |

COMP | 0 | 0 | 0 | 0 | 0 | 0 |

ECFIN | 0 | 0 | 0 | 0 | 2 | 1. Macro-financial assistance to third countries; 2. Internal financial management |

TRADE | 0 | 0 | 0 | 0 | 0 | 0 |

AIDCO | 0 | 0 | 1 | 1. Partnership with an NGO association | 0 | 0 |

ELARG | 1 | 1. Gaps in Romania's and Bulgaria's capacity to manage and implement increasing amounts of aids | 3 | 1. Inherent risk in decentralised systems; 2. Gaps in systems and transaction audits; 3. Uncertainties regarding claims of financial intermediaries | 3 | 1. System audits in candidate countries; 2. Closure audits; 3. Uncertainties regarding claims of financial intermediaries |

ECHO | 1 | 1. Non-compliance with the contractual procurement procedures by a humanitarian organisation for projects funded by ECHO | 0 | 0 | 0 | 0 |

DEV | 0 | 0 | 0 | 0 | 1 | 1. Financial operations and procedures |

RELEX | 2 | 1. Internal control standards in Directorate K; 2. Internal control standards in Delegations | 2 | 1. Internal control standards in Directorate K; 2. Internal control standards in Delegations | 2 | 1. Internal control standards in Directorate K; 2. Internal control standards in Delegations |

PRESS | 2 | 1. Relays and networks - major centres; 2. Functioning of Representations in EUR-15 | 3 | 1. Relays and networks; 2. Representations; 3. Copyrights - press cuts | 2 | 1. Relays and networks; 2. Representations |

ADMIN | 0 | 0 | 0 | 0 | 1 | 1. Charlemagne |

DIGIT | 0 | 0 | - | - |

PMO | 1 | 1. Council's sickness insurance office; | 2 | 1. Council's sickness insurance office; 2. Paul Finet Foundation | - |

OIB | 0 | 0 | 1 | 1. Lack of long-term planning of buildings policy. | - |

OIL | 0 | 0 | 0 | 0 | - |

EPSO | 0 | 0 | 0 | 0 | - |

OPOCE | 0 | 0 | 0 | 0 | 2 | 1. Secondary legislation project; 2. Consolidation project |

BUDG | 2 | 1. Accrual accounting for the Community and the European Development Fund budgets; 2. Subsystems of SINCOM 2: access control | 3 | 1. Accrual accounting; 2. Sincom subsystems; 3. Accounting management of European Development Fund | 2 | 1. Accrual accounting; 2. Sincom subsystems |

SG | 0 | 0 | 0 | 0 | 0 | 0 |

GOPA | 0 | 0 | 0 | 0. | 0 | 0 |

SJ | 0 | 0 | 0 | 0 | 0 | 0 |

SCIC | 0 | 0 | 0 | 0 | 1 | 1. Freelance interpreters |

DGT | 0 | 0 | 0 | 0 | 0 | 0 |

IAS | 1 | 1. Audit of Community agencies | 1 | 1. Audit of Community agencies | 0 | 0 |

OLAF | 0 | 0 | 0 | 0 | 0 | 0 |

TOTAL | 32 | 49 | 49 |