ANNUAL REPORT concerning the financial year 1990 VOLUME I

The report, together with the institutions' replies to the Court's

observations, was transmitted to the authorities responsible for giving

discharge and to the other institutions by 30 November 1991

Aldo ANGIOI (President)

André J. MIDDELHOEK

John CAREY

Josep SUBIRATS

Carlos M. MORENO

Richie RYAN

Fernand HEBETTE

Ole Joergen WARBERG

Konstantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

FOREWORD 1. This 14th annual report (on the financial year 1990) of the Court of Auditors of the European Communities is in two volumes.

2.The first volume contains observations on the operating budget of the Commission and on the consolidated accounts of the European Communities, along with observations on the European Development Funds. The Commission's replies to the Court's observations conclude this first volume.

3.The second volume contains all the observations that concern the administrative appropriations of the institutions. Three chapters are each devoted to one institution and are followed by the replies received from the institution concerned. The last chapter deals with the European Schools. This volume contains, in addition, a list of reports and opinions that have been adopted by the Court of Auditors over the last five years, together with a financial and statistical annex.

4.The key to the abbreviations and symbols used in this report is given on the first page of Annex II (Volume II).

5.The references to the Official Journals in which the annual reports in respect of previous financial years were published are listed below:

- 1977: OJ C 313, 30.12.1978

- 1978: OJ C 326, 31.12.1979

- 1979: OJ C 324, 31.12.1980

- 1980: OJ C 344, 31.12.1981

- 1981: OJ C 344, 31.12.1982

- 1982: OJ C 357, 31.12.1983

- 1983: OJ C 348, 31.12.1984

- 1984: OJ C 326, 16.12.1985

- 1985: OJ C 321, 15.12.1986

- 1986: OJ C 336, 15.12.1987

- 1987: OJ C 316, 12.12.1988

- 1988: OJ C 312, 12.12.1989

- 1989: OJ C 313, 12.12.1990

6.Unless otherwise stated, the observations set out in this report refer to the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977) as amended by Council Regulations (EEC) N° 1252/79 of 25 June 1979 (OJ L 160, 28.6.1979, p. 1), N° 1176/80 of 16 December 1980 (OJ L 345, 20.12.1980, p. 23), N° 1600/88 of 7 June 1988 (OJ L 143, 10.6.1988), N° 2049/88 of 24 June 1988 (OJ L 185, 15.7.1988, p. 3) and N° 610/90 of 13 March 1990 (OJ L 70, 16.3.1990, p. 1).

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Annual report of the Court of Auditors concerning the financial year 1990

INTRODUCTION (*)

(*) The Commission's replies are on page 211.

DEVELOPMENT OF THE COMMUNITY

0.1. It is inherent in the role of the Court of Auditors that most of the observations in its annual reports have a retrospective character. The present report is no exception. This introductory chapter, however, brings together certain observations which in the Court's view are of relevance to the future development of the Community's institutions and policies.

0.2. Several factors combine to make an assessment of this sort timely. In the first place, the Community has, in the wake of the Single European Act and with a view to the establishment of the internal market by 1993, recently decided to speed up the progress towards political and economic union. Achievement of a sufficient degree of economic convergence, which is one of the key elements of progress, will depend inter alia on the Community's ability to spend money wisely. It is in any case now clear - and some signs of this are apparent in the present report - that the Community budget is entering an extremely difficult period, in which the agricultural guideline policy which was established in 1988 will be put under severe pressure.

0.3. Simultaneously, major international developments such as the unification of the two Germanys and the opening up of Central and Eastern Europe are of potentially great significance for the Community budget. As Chapter 12 of this report shows, the Community's cooperation and active fostering of the process of transition in these countries towards a market economy will require the real needs of their economies to be evaluated and administrative inefficiencies to be overcome, if Community financial resources are to be used both economically and effectively.

SUBSIDIARITY

0.4. Efforts to maximize the share of responsibility borne by national (and where appropriate local) authorities for day-to-day implementation of Community policies are in many cases commendable from the point of view of sound financial management. The Court has previously drawn attention to the risk that the doctrine of subsidiarity will be used to excuse inadequate performance by the Commission. It is essential that the Commission, as the Community's unique and central executive agency with political responsibility for the use made of taxpayers' money, should ensure that Member States provide it with sufficient information to monitor the quality of their day-to-day management and should be ready to initiate remedial action as necessary.

0.5. The chapter in the present report (Chapter 9) about compensatory allowances paid under the EAGGF (Guidance) regime provides a vivid illustration of the possible consequences when the Commission adopts a passive approach to the management of the structural Funds. The original target of the aid was a minority of the farming population in less-favoured areas who suffered from certain specific handicaps, such as poor-quality terrain. However, the areas have been extended and the number of beneficiaries has been increased to the point where the aid is no longer fulfilling its original objective and is having a perverse impact on other Community objectives, for example in connection with the environment.

0.6. Subsidiarity implies, inter alia, a state of affairs in which Member States devote equal care and attention to the safeguarding of Community and national assets, and perceive the Commission as a source of guidance and advice in optimizing their use of Community funds. An observation in Chapter 3 (3.45-3.47) shows that relations between the Commission and Member States are still some way from this ideal condition. In the case in question, the Commission imposed a heavy financial correction on a Member State for weak administration of a Community sheep and goat premium scheme, although the Member State's difficulties were partly due to a failure by the Commission to exercise its own role as supervisor and counsellor.

0.7. The Court's observations on the structural Funds (7.18-7.22) provide another illustration of the reasons why subsidiarity is a difficult principle to put into practice. Here the Court concludes that the concept of partnership, which is vital to the successful reform of the structural Funds, has yet to be developed in a satisfactory manner.

SOUND FINANCIAL MANAGEMENT

0.8. The Treaty confers on the Commission, as the institution responsible for implementing the budget, a trusteeship role. This role has now been made more explicit by Article 2 of the Financial Regulation which came into effect in March 1990. This Article specifies economy and cost-effectiveness as two guiding principles for implementing the budget. This provision has important implications for all the institutions. Where budgetary objectives are defined in terms of ceilings on expenditure, as is the case with the agricultural guideline, it will not be permissible to treat such ceilings as targets. Decisions to increase expenditure in certain markets, as the Commission did in 1990 (3.4) when the guideline was in no danger of being breached, will need very convincing justification in future if their legality is to be above question. More generally, the availability of appropriations on a budgetary line can never in itself be sufficient justification for using those appropriations without due regard to the principles of sound financial management.

0.9. An important element in the Community's structural policies has been the concept of 'additionality` which is the subject of observations in Chapter 6 of this report. The common interpretation of this concept appears to be based on the principle that more means better, which is the negation of Article 2 of the Financial Regulation. The decision to double the amount of money available for the structural Funds by 1993 will only achieve its objective of reducing the differences in economic performance between the regions if the funds are spent with due regard to the principles of sound financial management. The Court underlines the importance of its recommendation (6.45) that the Commission should give more precision to the concept of additionality.

0.10. If the effectiveness of aid is to be properly measured, suitable quantitative and financial criteria have to be fixed by appraisal prior to the start of projects or programmes. Monitoring and evaluation can then be carried out by comparison with these criteria.

0.11. Point 6.20 of this report draws attention to the virtual lack of prior appraisal in the reform of the structural Funds and to the implications of this lack for future evaluation. Point 7.48 notes that Member States rarely present quantified objectives in their regional development plans; even when they do, the validity of these objectives in terms of the proposed development strategy is not always clear.

0.12. In Chapter 10 the Court reports that it was unable to satisfy itself that the economic and industrial development objectives of an NCI loan project had been achieved, due to the absence of verifiable criteria. The chapter on aid to Central and Eastern Europe makes it clear that a large quantity of food aid, which was delivered to Poland without any prior analysis of needs, was not actually required.

0.13. The chapters of this report dealing with development cooperation highlight the weaknesses in the management and control of financial resources which can arise when third parties (for example non-governmental organizations, the EIB, the ACP Secretariat) are involved in the implementation or administration of development programmes. The years ahead are likely to see substantial increases in the funds available for development cooperation, for example as a result of the revised Mediterranean policy, the new policy framework for Asia and Latin America and the fourth Lomé Convention. A similar increase can therefore be expected in the involvement of third parties. The Commission's role should be to ensure that any such third party is capable of managing and reporting on the use of funds it receives, and that the Commission itself has the resources, procedures and systems to prepare sound proposals, to manage the physical and financial implementation of development projects, and to monitor effectively the actions undertaken by beneficiaries. Otherwise, the principles of sound financial management will not be satisfied, and the objectives of the Community's policy in this area will not be achieved.

0.14. The Commission should do much more to ensure that Community funds are not committed without adequate prior appraisal, that results are evaluated in terms of objectives and that the lessons learned are used to correct ongoing programmes and improve the design of future ones.

THE PERSISTENCE OF WEAK FINANCIAL MANAGEMENT

0.15. Numerous observations in this report refer to similar observations in previous years, for example those concerning non-Annex II products in Chapter 4; less-favoured areas (EAGGF-Guidance); recovery of sums wrongly disbursed by the Social Fund; co-financing with NGOs of development aid projects; management of bursaries by the EDF; and execution of Sysmin projects. To some extent this is also the case for EAGGFGuarantee - manipulation of the Guarantee budget, negative expenditure, inadequate discharge of responsibilities by the paying agencies and the particular problems associated with the sheep and goat premium.

0.16. In order to determine the extent to which observations made in past years remain valid, the Court examined the system established by the Commission for following the action taken in order to remedy deficiencies pointed out by the Court.

The Commission's system of follow-up

0.17. In its replies to the 1985 Court of Auditors' annual report, the Commission stated:

'Follow-up action to comments made by the supervisory authorities - by the European Parliament in its resolution accompanying the discharge decision and by the Court of Auditors in its annual report and special reports - is of constant concern to the Commission.

The Commission considers it essential to respect its undertakings to these institutions. Thus, in order to have an overall view of the action taken and, where appropriate, to make the necessary adjustments, the Commission has set up an internal procedure to keep it informed each year of the undertakings given to the supervisory authorities, the measures planned or already in force by way of follow-up action and the schedule for their implementation. This procedure was first applied in spring 1986.`

It has reiterated its position in replies to the Court's subsequent annual reports.

0.18. Following its system-based approach the Court has examined the Commission's follow-up procedures in order to find out whether and to what extent this system can be used as a reliable basis for the review of actions taken by the Commission as a result of the Court's observations.

0.19. The procedure was operated by three staff of a unit within Directorate-General XIX (Budgets), responsible for, inter alia, obtaining information on follow-up from the other Directorates General. The exact nature of the system has not been easy to establish given that no documentation describing it exists.

0.20. When compiling reports on measures taken, Directorate-General XIX relied on information, submitted at its request, from the other Commission departments. However, some Directorates-General failed to provide it with all the information requested. Often what was received was late, incomplete and in need of clarification. Directorate-General XIX does not have the staff to carry out an in-depth analysis of such information it receives. There is no comprehensive inventory of the undertakings given to the Court and thus no check that they are being met.

Effectiveness of the follow-up procedure

0.21. The Court has attempted to evaluate the effectiveness of the follow-up system in the context of EAGGFGuarantee. A selection of 50 observations was taken from the Court's annual and special reports covering the period 1983-88. A questionnaire was sent to Directorate-General VI (Agriculture). The answers given were incomplete and sometimes of very limited value. It was unclear what action, if any, had been taken to redress the weaknesses indicated. In many cases the undertakings themselves had been couched in extremely vague terms.

0.22. Given the deficiencies of the system, the Commission has recently decided to abandon it entirely. Attempts during the past five years to develop a computerized system have so far come to nought. The Commission needs a system which:

(a)includes a comprehensive inventory of all undertakings given and the extent to which they have been met, such as measures taken by the Commission, by Member States, implementation dates, reports regarding the effectiveness of the measures, etc.;

(b)comprises clear practical instructions to be carried out by DG XIX and other Directorates-General;

(c)checks the consistency of the undertakings given in replies to the Court of Auditors' reports with those given to the Parliament;

(d)includes an assurance that the different services take the necessary measures;

(e)provides access to the system for the Court of Auditors.

0.23. Whilst the Court is able to conduct its own research into measures taken, this would imply repeating the work of its earlier enquiries, which is neither practical nor desirable. On the basis of its examination of the Commission's system, the Court was unable to determine whether the Commission has respected the undertakings given.

CHAPTER 1 (*) Financial audit of the Commission's revenue, operating expenditure and financial accounting and the consolidated accounts

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THE IMPLEMENTATION OF THE BUDGET IN 1990

The adoption and presentation of the budget

Adoption of the budget

1.1. The general budget for the financial year 1990 was finally adopted on 13 December 1989

, the budgetary procedures having been completed within the time-limits specified in the Treaties. At that time, the amount fixed for appropriations for commitment was 48 846,5 Mio ECU, whilst the amount for appropriations for payment was 46 716,8 Mio ECU. These amounts were subsequently modified by three supplementary and amending budgets on 16 February 1990

, 11 July 1990

and 12 December 1990

, as a result of which the appropriations for commitment were increased progressively to 49 207,9 Mio ECU and the appropriations for payment to 46 928,2 Mio ECU.

Presentation of the budget

1.2. For the record, the Court wishes to point out that the true volume of budget authorizations is larger than the above figures indicate, if the revenue that is entered in the form of negative expenditure (1 366,4 Mio ECU of agricultural co-responsibility revenue, intra-Community compensatory amounts and the EAGGF Guarantee Section clearance) and the expenditure entered as negative revenue (1 514,8 Mio ECU for the costs of collecting own resources) are taken into account. The total volume of funds available for payment that emerges from a study of the general budget is in fact 49 809,4 Mio ECU.

The utilization of appropriations

Rates of utilization of the available appropriations

1.3. Using the information on which the Commission's revenue and expenditure account is based, the Court compiled a number of tables setting out in detail the changes in and utilization of appropriations for the year. These figures are published in Tables 1.1 and 1.2. An analysis of the main areas of activity is given in the introductions to the various specialized chapters.

The utilization rates in the light of the financial perspective

1.4. The Court also grouped together, in Table 1.3, the figures for budget implementation with reference to the 'financial perspective`

.

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Carry-overs of appropriations

1.5. In the sphere of the EAGGF Guarantee Section, 407 Mio ECU were carried over to 1991 with the approval of the budgetary authority, although the Court's scrutiny showed that not all the basic conditions laid down in Article 7(1) and (3) of the Financial Regulation had been satisfied (for further details see paragraphs 3.14-3.17).

1.6. In the case of the ESF, of the 217,8 Mio ECU carried forward to 1991, 200 Mio ECU were for the operational programmes ready for commitment or decided at the end of 1990, but the list used to validate the carry-overs does not tally with the programmes finally committed against the appropriations that were carried over. Furthermore, these appropriations were committed for measures that had already been carried out in 1990, whereas the relevant operating rules, contained in Council Regulation (EEC) N° 4255/88 of 19 December 1988 (OJ L 374, 31.12.1988, p. 21), provide that the Commission is to rule on aid applications before the measures are started.

The use of national currencies to implement appropriations authorized and booked in ecus

1.7. Examination of the implementation of the Commission decisions relating to the adaptation of fishing capacity (see paragraphs 5.17-5.18) revealed a rather confused situation in the accounts, due to the fact that the decisions are adopted in budgetary ecus, whereas the eligible expenditure is effected in national currencies. Fluctuations in the various exchange rates used at the times when payments are validated and then effected make it impossible to predict the amounts that will be finally paid to the Member States, as they are sometimes greater and sometimes less than the amounts actually due. This problem is common to most of the operations financed by the budget (see in particular paragraphs 6.22-6.34). In its opinion on the amendment to the Regulation laying down detailed rules for the implementation of certain provisions of the Financial Regulation, the Court stated that it was in favour of implementing the budget in ecus to the fullest extent possible, so as to prevent this type of distortion, which also affects the monitoring of commitments (need for periodic revaluation), the implementation of appropriations (the effect of the revaluation) and the accounting.

Administrative expenditure charged to the section of the budget devoted to operating expenditure

Background to the enquiry

1.8. Over a period of several years, the Court has noticed in the course of its audits that administrative expenditure (staff expenditure, official travel expenses, purchases of equipment, etc.) has been charged to operating appropriations, which, in turn, has gradually had an effect on the observance of the principle of budget specificity, on which the budgetary authority depends for the exercise of its powers. The object of this principle is to ensure that the appropriations made available are not diverted from their objectives.

1.9. For a long time this phenomenon, which is commonly known as 'mini-budgets` and by definition does not appear in the accounts, remained marginal. The Court confined itself to mentioning the anomalies encountered, especially as this practice has gradually come to be covered by ad hoc budget remarks at the initiative of the Commission, or sometimes of the budgetary authority itself.

1.10. In 1989 the Court decided to carry out an audit in order to quantify this phenomenon. The results of that audit are set out in the paragraphs which follow.

Quantification of the mini-budgets

1.11. Up till the end of 1990, the administrative expenditure in question was posted to headings to which operating expenditure (subsidies, projects, etc.) was also booked, so that it was not possible to identify it, or a fortiori the accounting system, from the budget classification. The Commission did, however, endeavour to develop a system of booking codes and analytical codes to make it possible to extract administrative expenditure from the operating expenditure accounts by computer. The Court carried out certain checks which gave rise to the following observations.

1.12. Whilst the remarks against item B9960, which refer to Council Regulation (EEC) N° 3906/89 of 18 December 1989 (OJ L 375, 23.12.1989, p. 11), do authorize the charging of costs related to the initial period of operation of the measures financed, they do not provide authority for charging administrative expenditure of the 'mini-budgets` kind to these appropriations, even after the appropriations had been increased by supplementary and amending budget N° 2. This item is, however, mentioned in the list of budget headings including mini-budgets which followed the Internal Regulations adopted by the Commission on 22 May 1990 with the intention of providing a formal framework for the mini-budgets. It gave rise to commitments totalling some 3,4 Mio ECU, which were thus effected without authorization in either the budget or the Regulation. The Financial Controller noticed this, but considered that the list of mini-budgets compiled by the Commission constituted an adequate legal base.

1.13. The Internal Regulations prescribed, for each budget heading and mini-budget, an upper limit for the amount to be charged to operating appropriations. These upper limits have not always been respected and the procedure for adjusting them has not always been followed either. For example, the upper limit against item B4702 was exceeded by at least 0,9 Mio ECU of commitment appropriations. Similarly, within Title 6, the limits against Chapters 63, 66 and 67 were exceeded by 0,075 Mio ECU, 0,786 Mio ECU and 4,589 Mio ECU respectively.

1.14. Conversely, the revenue and expenditure account for 1990 (pp. 345-347) shows an amount of 201,360 Mio ECU for mini-budget commitment appropriations implemented, whereas the Commission's estimates give a figure of 276,452 Mio ECU. This is equivalent to an overall utilization rate of 72,8%, which is rather low.

1.15. This same rate is particularly low (10,6%) in the case of the support measures for the development of the single financial market (Item B7752). In the case of the European Social Fund (Item B6000), the rate is 4,8%, as only 0,593 Mio ECU of commitment appropriations were used, compared with the upper limit of 7,8 Mio ECU. In Chapters 64 and 68 the respective limits were 12,7 Mio ECU and 2,2 Mio ECU, of which only 7 Mio ECU and 1,5 Mio ECU were used up.

1.16. This state of affairs is not satisfactory. It raises questions concerning the way in which the upper limits were estimated and the accounting system operated, as it is not possible to use the latter to identify mini-budget expenditure correctly.

1.17. In this respect the value of the estimates for Articles 940, 990 and 995 is particularly doubtful. They predicted that 100% of the expenditure would be charged by way of mini-budgets, which is surprising in itself, as, logically, the mini-budgets must be additional to expenditure on the measures for which the mini-budget appropriations provide back-up support. Moreover, in the lists published on page 347 of Volume II of the revenue and expenditure account, the execution of these headings - contrary to the indications given by the Commission in its reply - mainly takes the form of intervention expenditure.

1.18. As for the question of identifying mini-budgets through the accounting system, the Commission's use of booking codes and analytical codes remains arbitrary and the accuracy of the data thus produced cannot be guaranteed. Throughout 1990 the Commission modified the contents of the booking codes and analytical codes, rendering them increasingly complex. The codes entered by the authorizing officers in the accounting documents (proposals for commitment and payment orders) do not always tally with those which appear on the lists sent to the Court. Finally, it was frequently observed that intervention expenditure was mixed with mini-budget expenditure. This was especially apparent in the case of subsidies (expenditure on various Community measures) and supplies of services (mini-budget expenditure). For example, for Items B3010, B3870, B4702, B6310, B6320, B6472, B9300, B9304, B9311 and B9360 personnel expenditure was posted to operational codes. For items B6451 and B6751 costs arising from translation work, meetings, press conferences and the hire of meeting rooms were booked to operational codes.

1.19. A further aspect dealt with in the study concerns the application of the Commission's Internal Regulations to mini-budget expenditure financed from carried-over appropriations, appropriations made available for re-use, or payment appropriations belonging to financial years following the one during which the commitment was entered into. The Commission's Internal Regulations do not make it clear whether they apply to these categories of appropriations. The Directorate-General for Budgets takes the view that they do not. In practice, however, mini-budgets, some of them representing substantial amounts, receive finance from these appropriations (Chapter 60 provides an example of revenue available for re-use: 3,5 Mio ECU). Most of the mini-budgets are grafted onto headings which comprise differentiated appropriations, but if the application of the Internal Regulations is confined to the appropriations for the year, the heterogeneity of mini-budget expenditure becomes a problem: some of the expenditure is governed by the Internal Regulations (booked to the appropriations for the year) and some is not (posted to other types of appropriations).

1.20. The conclusion that inevitably follows from all these findings is that in 1990 the system established by the Commission in order to identify and control mini-budgets was unreliable. On the other hand, as the Court was not given sufficient access to the Sincom system (see paragraphs 1.109-1.116) it had to rely on the Commission to extract the mini-budget data from the accounts. It was not possible, from the Court's checks on the listings forwarded, for it to verify their validity, or, in consequence, that of the listings published in the revenue and expenditure account. Nevertheless, in the informatics field, the Court did, in another context, examine in greater detail (see Volume II, paragraphs 17.32-17.35) an amount of 25,8 Mio ECU of expenditure, including 10,7 Mio ECU for services, financed by appropriations from Part B of the budget. This amount should be compared with the 42,4 Mio ECU, including 9 Mio ECU for services, financed by appropriations from Part A of the budget. The comparison illustrates the extent of the mini-budget phenomenon.

1.21. For the record, in the 1991 budget the total for the mini-budgets, which are specifically identified in the interests of transparency, represents 9,634 Mio ECU in Part A and 183,325 Mio ECU in Part B. To these amounts are to be added the administration-related appropriations required for the realization of the Community research objectives (i.e. a total of more than 300 Mio ECU) and an undefined volume of appropriations concerning the mini-budgets associated with some of the structural Funds (the European Social Fund in particular).

The infrastructure quotient

1.22. In view of the increasing volume of personnel costs financed by means of mini-budgets, the Commission departments responsible for the institution's administration have been obliged to place an ever-increasing volume of infrastructure resources (premises, furnishings, telephones, electricity, etc.) financed from Part A of the budget at the disposal of these people. The corresponding Part A appropriations have not, however, increased at the same rate and quickly proved inadequate. In order to satisfy the demand, the Commission introduced a method of financing based on budget headings supporting mini-budgets.

1.23. In order to do this, the Commission calculated an infrastructure quotient (equal to the total infrastructure costs normally booked to Part A divided by the number of persons working for the institution). For 1990 the quotient was fixed at 13 433 ECU per person. The Commission decided that, on this basis, each operating appropriation heading used to finance outside personnel should support 89,887% of the infrastructure cost thus calculated, multiplied by the number of persons identified as being financed from these operating appropriations. This corresponded to an amount of 12 074 ECU for every person concerned. In some cases the Commission has not always been logically consistent. For example, it posted 805 980 ECU to the appropriations for the countries of Eastern Europe, i.e. 100%, instead of the 89,887% of the infrastructure quotient, on the basis of 60 posts, half of which were still unoccupied at the year-end, which was in contradiction with the Internal Regulations, which prescribed that the actual situation as regards staff employed at the end of the year should be taken into account.

1.24. This procedure is irregular. For example, as a result of these methods part of the rent of the Berlaymont building and substantial removal costs were financed from the Phare programme without following the criteria for breaking expenditure down which the Commission itself established when instituting the infrastructure quotient. In order to comply with the Financial Regulation, the Commission should have initiated a transfer procedure, with the approval of the budgetary authority, so as to furnish Part A with the necessary appropriations, and should then have committed and charged this infrastructure expenditure.

Observance of the financial perspective

1.25. Both the mini-budget phenomenon and the mechanism of the infrastructure quotient raise the question of the limits on administrative costs imposed by the financial perspective. After the 1990 revision, item 5 of the financial perspective (see Table 1.3) set a mandatory upper limit of 4 930 Mio ECU for appropriations for commitment. It is clear that had the administrative expenditure openly charged to Part B of the budget (mini-budgets) and the administrative expenditure that was charged to it without budgetary authorization (the quotient) been taken into account as administrative costs, the upper limit for item 5 would have been exceeded in the 1990 financial year. It is impossible to exclude the possibility that the extent of the mini-budget phenomenon is due, indirectly, to the imposition of the ceiling for item 5.

The management of mini-budget expenditure

1.26. It should also be noted that very decentralized management methods have evolved alongside the use of mini-budgets and have, to a large extent, escaped control by both the central departments responsible for administrative expenditure and the Financial Controller, with the result that, for example, computer equipment has been purchased, but in some cases has not been inventoried.

1.27. In the context of personnel management, and having regard to the relevant budget remark and the provisions of Article 3(a) of the Conditions of Employment of Other Servants of the European Communities, which defines temporary staff as being paid out of the global appropriations entered for that purpose, Item A1110

is the only one which can be used to provide financing for auxiliary staff. This category is, however, mentioned specifically in the schedule in Annex 1 of the Internal Regulations and has, for a long time, been financed partly from the mini-budgets in Part B of the budget.

1.28. The case of auxiliary staff also illustrates the problems engendered by the variety of categories in which appropriations may be classified. Some auxiliary staff are managed by the Directorate-General for Personnel and Administration using Part A appropriations, which may not be carried over. Others are under the management of the operational Directorates-General concerned, using appropriations, in some cases differentiated ones, which are subject to more flexible carry-over rules. In consequence the management procedures (recruitment, management, payment, etc.) applied to this category of staff are not uniform.

Conclusion

1.29. The Financial Regulation was amended in 1990 and the Community legislative authority specified in Article 19(1) that 'the Commission section [of the budget] shall consist of:

- a 'Part A` for the staff and administrative expenditure of that institution ...

- a 'Part B` for operating expenditure ...`.

1.30. It is true that paragraph (2) of the same Article 19 continues to provide that within each section the items of revenue and expenditure are to be classified according to their type or the use to which they are assigned. The retention of this Article in the revised Financial Regulation must not, however, be allowed to weaken the import of paragraph (1).

1.31. Taking a strict interpretation of Article 19(1) of the Financial Regulation, mini-budgets, in legal terms, cease to be exceptions justified by the existence of covering remarks in the budget and become cases of failure to comply with the Financial Regulation. This state of affairs is aggravated by the fact that, in terms of budget implementation, the mini-budgets are currently managed according to the rules governing the underlying appropriations (differentiated or non-differentiated appropriations, compulsory or non-compulsory expenditure), especially where transfers and carry-over are concerned, whereas if they appeared in Part A the only rules applicable to them would be the specific provisions relating to staff or administrative expenditure. Under those rules appropriations relating to remunerations and allowances payable to the staff of the institution may not be carried over (Article 7(1) of the Financial Regulation).

1.32. These shortcomings are such that it is not possible to exploit the positive aspects of the mini-budget system (the advantages of decentralized management, the allocation of administrative resources according to operational objectives).

1.33. In the interests of transparency, the budgetary authority made certain changes to the layout of the 1991 budget, where most of the mini-budgets are specifically identified, but it appears highly likely that the weaknesses that have been found thus far in the mechanisms for identifying the expenditure to be booked by way of mini-budgets will radically affect this transparency. The case of the priority publications programme, though posing certain problems of its own, illustrates some aspects of this suggestion rather well.

The specific case of the priority publications programme

1.34. Each year the Commission draws up its publications programme for the following year. Since 1988 the programme has been broken down into an 'ordinary` programme and a 'priority` programme, the object of the latter being to put the Commission's priority political activities into published form

.

1.35. From the beginning, the resources allocated to the priority programme have been centralized, whereas the appropriations for the ordinary programme continue to be handled by the various originating departments. The mechanism used for financing the programme owes its origins to the fact that the budget does not provide any appropriations for this purpose. The division of appropriations between the ordinary programme and the priority programme 'does not follow a budgetary approach but a purely administrative one, whereby the various budget headings which could bear publications expenditure are tapped, in the context of the annual publications programme approved by the Commission, of a fraction of their available resources for the purposes of the priority programme`

. This tapping of resources provides the mechanism whereby the financial resources are in fact centralized under the authority of the Secretary-General, but without formally depriving the authorizing officers for these various headings of their authorizing powers. It involves a number of budget headings, mainly in Part B of the budget (operating expenditure), the remarks for which provide that they may be used for administrative purposes. As can be seen, these are, in part, mini-budget headings.

1.36. Chapter 34 (Article 341) of Part A (Commission - Administrative appropriations) of the general budget for the financial year 1990 provided appropriations to cover expenditure on the publication, publicity and promotion of the Commission's publications. In 1990 these appropriations amounted to 2,8 Mio ECU. However, if the expenditure associated with the priority publications programme (PPP) had been booked to this Article, quite regularly, the appropriations would have had to be augmented by 3,6 Mio ECU, which is tantamount to under-estimating the requirements by approximately 56%.

1.37. The mechanism which has been established makes it possible for the Commission, with all the resources it obtains by tapping operating appropriations, to publish, at will, the documents which it considers have political priority, whether or not they are related to the general objective of the budgetary heading to which they are being booked. The irregularities to which this mechanism gave rise in 1990 concerned a total of 3,4 Mio ECU and are detailed in Table 1.4. The table is based on an analysis of the orders placed for implementation of the priority programme.

1.38. Centralized at the administrative level, but decentralized in budgetary terms, the system for managing the priority publications programme appropriations has not been efficient either. The dispersion of responsibility for authorization, implementation and supervision has made it impossible to monitor them in a way which might have satisfied internal and external control requirements. Thus:

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(a)the Commission department responsible for coordination of the PPP was not able to provide financial statements covering its implementation at a moment's notice;

(b)no-one noticed that there was no delegation of signature for two budget headings in the department responsible for placing orders (Publications Office);

(c)as the Commission itself admits

, the majority of the Directorates-General concerned have not accepted this form of financial 'solidarity`, which has accordingly remained non-existent at the level of budgetary implementation.

1.39. For 1990 the PPP initially provided financing for 34 publications. Work started on only 15. Of those 15, five were completed after 16 months of work (position at the end of April 1991).

1.40. At the end of 1990 the PPP coordinating committee decided to amend the initial Commission Decision of December 1989 by adding 17 new publications to the initial programme and deleting others. The expenditure commitment that had been passed before the initial decision was not amended to take account of the new titles that had been inserted. This sort of approach once again proves that the choice of budget headings within the operating part of the budget is made with a total disregard for whether or not the title of a publication bears any relation to the wording of the items concerned.

1.41. In general terms, if the way a priority programme is implemented does not reflect its priority nature as initially defined, it may be asked whether such a programme is not justified by its financing 'facilities`.

1.42. The details supplied by the Commission were somewhat vague, but a rough estimate (see Table 1.5) showed that payments effected in 1990 amounted to no more than about 19% of the orders placed and that substantial carry-overs of appropriations were to be expected, whereas if the payments had been booked to administrative appropriations correctly such carry-overs would have been excluded under Article 7 of the Financial Regulation.

1.43. The Commission's Financial Controller played an active role in operating the PPP mechanism, through his membership of the corresponding interdepartmental committee. Furthermore, in most cases he gave his approval for taking funds from the operating appropriations to finance administrative expenditure, on condition that the remarks against these items included a comment providing a broad justification for this type of action. Using this approach, the entering of miscellaneous remarks makes it possible to charge to a particular heading expenditure which has nothing to do with the meaning and scope of the heading itself.

The role of the Financial Controller

Withholding of approval by the Financial Controller and the overruling of such refusal

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1.44. During 1990 the Court noticed, in a document which was sent to the Council, a reference to the withholding of approval by the Financial Controller. In this case the Financial Controller had refused to approve an operation which sought to regularize the anomaly mentioned by the Court in paragraph 1.113(a) of its 1989 annual report, by booking the operation retrospectively to the 1989 financial year. Apart from this instance, the Court is not aware of any cases in which approval has been withheld. Due to the limitations on the Court's access to the Commission's computerized accounting system (Sincom) (see paragraphs 1.109-1.116) and data-bases, it was not possible to check whether the Court's information was complete.

1.45. If this information proved to be accurate, however, and if only one operation was the object of approval being withheld during 1990, that would be somewhat surprising, given the number of operations subject to scrutiny by the Financial Controller and the numerous cases of irregularity noted by the Court in the present chapter where the Financial Controller ought to have refused to approve the operations submitted to him (in particular, mini-budgets, priority programme, observations on the legality and regularity of the operations passed to the accounts during the year). On the other hand, this state of affairs would confirm the fears expressed by the Court in the annual report concerning the financial year 1988, where it noted (paragraphs 3.13 and 3.14) that 'the tendency for the Financial Controller to give an opinion on all decisions prior to commitment in the accounts ... clearly entails a risk ... that of having to criticize decisions to which he had previously given his approval, ... the outcome of his technical checks is compromised`.

1.46. Moreover, in some cases the Financial Controller approved 'as exceptions` operations which he considered irregular in respect of the principle of budgetary specificity, justifying ex post his final position with considerations of overall sound financial management. This attitude comes down to agreeing to render the principle of budgetary specificity devoid of meaning (Articles 202 of the EEC Treaty and 26 of the Financial Regulation). In addition, it undermines the system of approval in the same way as the practice of granting 'conditional approval`, which the Court criticized in the annual report concerning the financial year 1979 (paragraph 4.35)

and which is now expressly prohibited by Article 38(2) of the Financial Regulation.

1.47. In addition, the Court has not been formally notified of any cases in which a refusal of approval has been overruled.

OBSERVATIONS ON THE LEGALITY AND REGULARITY OF THE OPERATIONS PASSED TO THE ACCOUNTS DURING THE YEAR

Supporting documents used to validate operations passed to the accounts

1.48. Generally speaking, the Commission does not observe the statutory time-limits for forwarding supporting documents to the Court. This omission seriously affects the possibility of the Court's auditing them. For example, the supporting documents for December 1990 operations, which the Commission acknowledged represented 30% of the payment volume, were not forwarded until the end of May 1991, by which time the Court had virtually finished drafting the observations which it was required to send to the institutions by 15 July 1991. In the Court's view, the Commission would not have any problem in meeting the statutory deadlines if it established a more easily manageable system for forwarding accounting documents at monthly intervals.

1.49. The Court has access to individual files on the spot, but that does not justify sending incomplete supporting documents to the Court. Scrutiny of the documents that were forwarded revealed the following main weaknesses:

(a)in the case of the EAGGF Guidance Section and the ERDF, the Court is frequently not in a position to audit payments satisfactorily, as the payment orders are all too often accompanied by documents which do not provide valid support for the payments made or do not provide an adequate basis for appraisal of the terms on which transactions were effected. There were even cases in which payment orders were forwarded without any supporting document;

(b)in the case of aid to non-member countries, examination of a sample of renewable advances for local project costs revealed a number of payments which did not have adequate supporting documents. The latter should normally provide details of the advances used previously and furnish evidence of such use. This was frequently not the case.

Traditional own resources

Implementation of the separate accounting system

1.50. According to the provisions of Article 6(2) of Council Regulation (EEC, Euratom) N° 1552/89 of 29 May 1989

, the Member States must keep accounts of established entitlements and must also keep separate accounts of established entitlements that have not been recovered and for which no security has been provided. They may follow similar procedures where established entitlements for which security has been provided have been challenged. In plain terms, the traditional own resources are covered by two accounting systems: the main accounting system in the case of established, recovered or secured and unchallenged entitlements, and a separate system in the case of the other established entitlements. Every Member State is required to send the Commission a monthly statement for the main accounts and a quarterly statement for the separate accounts.

1.51. Although the Regulation has been in force since 1 January 1989, some Member States did not begin to send quarterly statements for the separate accounts until 1990. The Commission received nine statements for the fourth quarter of 1990. Denmark informed the Commission that it did not have any separate accounts and Spain and the Netherlands did not provide any statement.

1.52. The breakdown of the data supplied varies from one Member State to another. Only two statements followed the standard form proposed by the Commission. In some statements either information was missing or there were differences in the carry-over of established entitlements that had not been recovered.

1.53. At the beginning of March 1991, the Commission undertook to record entitlements notified to it in the statements for the separate accounts. For this purpose it made out 12 recovery orders, three of which, however, for the reasons given above, did not include any amount; in spite of that, it did not take any corrective action vis-à-vis the three Member States concerned.

1.54. The Court wishes to point out that the object of the separate accounts is to make it easier for the Commission to monitor the action taken by Member States to recover own resources which have been established but not recovered or guaranteed. Article 78 of the Financial Regulation states that the revenue and expenditure account is to include a table of revenue containing, inter alia, all the entitlements established in the course of the financial year and the amounts still to be collected at the end of the year. These obligations cannot be properly discharged unless the accounts made up and forwarded are clear and reliable.

The EAGGF

The EAGGF Guarantee Section

National controls over expenditure

1.55. Payments made by the Member States are entered in the Commission's revenue and expenditure account on the basis of the Member States' monthly declarations. In its Annual Report concerning the financial year 1989, the Court commented on the inadequacy of certain paying agencies' controls over guarantee expenditure in Belgium and Spain, in respect of measures for which the responsibility for verifying and authorizing claims does not rest with the paying agencies. The Court's findings in Italy confirm that such deficiencies are common to several Member States, and can, and do, result in the disbursement of significant sums in response to ineligible claims (see paragraphs 3.31-3.44).

1.56. Council Regulation (EEC) N° 729/70 of 21 April 1970

requires Member States to keep sufficient records to allow the Commission to monitor the expenditure. However, this Regulation, while providing a statement of principles, does not contain sufficient guidance with regard to the question of practical application, and, in cases where powers are delegated to bodies other than the paying agencies, it is not clear which body is responsible for keeping the records. The Commission should propose an implementing regulation which will define the paying agencies' responsibilities with more precision (see paragraphs 3.45-3.47).

1.57. In the context of the control on processed agricultural products, France refused to provide the Court with all of the results of the controls laid down by the applicable Community regulations (see paragraph 4.1.33).

Central accounts for expenditure

1.58. In 1990, the Commission was unable to commit the expenditure declared by the Member States within the two months stipulated by Article 100 of the Financial Regulation because problems with its new computerized accounting system, Sincom, delayed input of data from Member States' declarations. As a result, at the end of July 1990 some 8 190 Mio ECU of expenditure had not been committed on time.

Coordination of checks on elements common to guarantee and guidance expenditure

1.59. An examination of the compensatory allowances paid by the EAGGF Guidance Section to farmers in certain less-favoured areas (see paragraphs 9.40-9.41) has shown that many of the problems associated with the administration of that scheme are similar to those experienced with several guarantee measures.

1.60. The allowance can be paid per animal or per hectare of land cultivated, two formulas widely used under the Guarantee Section. The essential control in both cases consists of verifying the actual situation on the farm by means of on-site inspection or an administrative control which will offer the guarantee of an adequate level of reliability. The responsibility for, and the extent and depth of, the inspection are factors that vary from Member State to Member State. It is also possible for some farmers to escape inspection entirely if the Member State adopts a system that is limited to claimants making a declaration (see paragraph 9.26).

1.61. No coordination exists to ensure that optimum use is made of resources dedicated to inspection tasks, so that the absurd situation may arise in which the same farm is inspected on a number of occasions under different guarantee and guidance schemes. No account is taken of the proportion of all income derived from the EAGGF that is received by individual farmers when selecting which holdings to inspect.

1.62. Without a system of identification for all animals eligible for Community aid and a comprehensive and up-to-date land registry system, the effectiveness, and hence the validity, of the aid payments will continue to be called into question. The Court's previous observations

on the suckler cow premium and the set-aside scheme also illustrated these problems.

The EAGGF Guidance Section

1.63. The reimbursement corresponding to expenditure effected on the basis of national legislation which derogates from the Community regulations (aid for deer, allowance on the basis of pasture areas and not on the number of livestock units) cannot be considered regular, even if such measures have been approved by the Commission, nor can reimbursements in respect of expenditure effected on the basis of an unconventional interpretation of Article 15(1)(b) of Council Regulation (EEC) N° 797/85 of 12 March 1985 (OJ L 93, 30.3.1985, p. 1) for areas under cereals intended for animal fodder (see paragraphs 9.15-9.17) be considered regular either.

Veterinary measures

1.64. Examination of the last two commitments for the year concerning the veterinary measures charged under Articles 380 and 381 (allocated 1,750 Mio ECU and 41,123 Mio ECU respectively) shows that the commitment procedures normally applied during the year were not observed and that the amounts committed corresponded exactly to the amounts of the appropriations still available, whereas each of these accounting commitments in fact corresponded to larger commitments: 88 000 ECU out of an actual commitment of 700 000 ECU for Article 380 and 3,1 Mio ECU out of an actual commitment of 10,2 Mio ECU for Article 381.

1.65. Examination of the 933 000 ECU paid out in 1990, from the commitments carried over from 1989, against Article 380 in respect of varroa-mite disease in bees shows that there was no legal basis for these payments, since the basic regulation had not been adopted, even though appropriations for this type of measure had been entered in the budget since 1986.

1.66. Two decisions, concerning 970 000 ECU committed against heading 380, under Council Decision 89/455/EEC of 24 July 1989 on pilot projects for the control of rabies, served to finance pilot projects which were already completed or under way before they were forwarded to the Commission for approval, which is in breach of the provisions of Article 4 of the aforementioned Decision.

Fisheries

1.67. Article 36 of the Financial Regulation provides that 'all measures which give rise to expenditure chargeable to the budget must be preceded by a proposal for commitment of expenditure from the relevant authorizing officer`. In contrast, the proposals for commitment concerning the financial consequences of the fisheries agreements are drawn up after the decisions or regulations which, since they finalize these agreements, effectively commit the Community vis-à-vis non-member countries. In this respect, the Court would point out that, in several previous annual reports

, it has raised the problem posed by the heterogeneity and the excessive flexibility of the Commission's practices in matters of commitments in respect of the provisions of Article 36 (previously Article 32) of the Financial Regulation.

1.68. The Commission made the first payments in respect of four new or renewed fisheries agreements after the deadline dates laid down in these agreements, because they had been drawn up very late and even, in one case, after the deadline in question.

1.69. Where the fisheries agreement with Greenland is concerned, in 1990 the Commission not only paid the financial compensation of 34,25 Mio ECU in respect of 1990 but also paid out in advance the 34,25 Mio ECU due in respect of 1991. In order to make this payment, which constitutes a transfer of expenditure from one financial year to the previous one, it had to have 14,5 Mio ECU transferred from Chapter 100.

1.70. According to Articles 26(2) and 24(2)(a) of Council Regulation (EEC) N° 4028/86 of 18 December 1986 (OJ L 376, 31.12.1986, p. 7), only 50% of Member States' expenditure in respect of the laying-up of vessels measuring not less than 12 metres in length is refundable. Three payments for reimbursements of premiums for final withdrawal amounting to around 40 000 ECU were irregular, since the vessels concerned did not meet this condition.

1.71. Still on the subject of the reimbursement of premiums for the final withdrawal of fishing vessels, it should be noted that the authorizing officer did not observe that, in 1989, Italy submitted a second application in respect of three vessels for which a first application had already been submitted and the reimbursement executed. This entailed the payment of 320 000 ECU twice over, and the undue payment should be recovered.

The social field

1.72. In the ESF field, the 'accounting officer` determines the due date for recoveries, 'after` the Financial Controller has given his approval, whereas Article 28(2) of the Financial Regulation states that the purpose of the Financial Controller's approval shall be to 'establish` that the due date is indicated by the 'authorizing officer`.

1.73. Furthermore, the cancellation of commitments which have become superfluous because the measures concerned have not been carried out, or have only partly been carried out, is not undertaken until long after the event. In 1990 there was no record of any cancellation of commitment having been identified either before or after appraisal of the applications for final payment submitted to the ESF.

1.74. Lastly, financing of 230 000 ECU for the Fondation Europalia Internationale was provided in 1990 on the basis of a Commission commitment of 17 April 1990 and a contract of 30 May 1990. This financing was for an event that had already been organized in Brussels in 1989 (Europalia Japan) and in fact amounted to a commitment to make good the final deficit. However, the explanatory report provided for in the contract is not included in the dossier. A press dossier, which predates the contract, has been substituted for it. Since it is impossible to justify this 1989 expenditure under the 1990 budget, the Financial Controller ought to have withheld his approval.

Research and energy

1.75. For certain research programmes, COST and Téléman in particular, and for measures in the field of information technology and telecommunications, a certain number of researchers are paid for by other research programmes, e.g. the radiological protection and Esprit programmes. The revenue and expenditure account does not therefore give a true picture of the real costs of these programmes.

1.76. The monitoring of commitments is not satisfactory. A sample taken of 29 commitments in respect of the 'Esprit I` programme showed that 18 commitments to a value of 2,76 Mio ECU ought to have been cancelled at the end of 1990.

Operations under Title 9

Aid to non-member countries

1.77. The total volume of outstanding commitments doubled between the end of 1985 and the end of 1990, rising from 1 256,6 Mio ECU to 2 685,6 Mio ECU. A total of 595 commitments amounting to 301,6 Mio ECU, or 26,5% of the total outstanding by way of commitments entered into from 1978 to 1988, gave rise to no payments in 1989 and 1990:

(a)95% of these 'dormant` commitments concern Chapters 93 (Asia and Latin America) and 96 (Mediterranean);

(b)for Chapter 93, a single dormant commitment was cancelled, whereas examination of a sample of 51 entries totalling 27,7 Mio ECU showed that 30 commitments to the value of 6,3 Mio ECU should have been cancelled (e.g. 0,242 Mio ECU for a supply of fertilizers which was completed in 1987; 0,898 Mio ECU for a solar energy programme in Pakistan which has in theory been completed since 1986; 0,150 Mio ECU in operating aid for the Indian commercial office in Brussels in 1983 and, lastly, 0,755 Mio ECU concerning three measures in agricultural advisory work in Zimbabwe which have been finished since 1987);

(c)twelve entries concern 'blocked` commitments, some of which date from 1985 and 1986 and on which, for various reasons, a start had still not been made by the end of 1990.

1.78. The Court observes that the departments responsible for cooperation with non-member countries have no adequate system for identifying dormant commitments, and no regular procedures for showing balances, although these tasks are major responsibilities for the authorizing officer in the management and control of the utilization of budgetary appropriations.

1.79. Examination of the transactions charged to Title 9 also leads the Court to recommend the introduction of an individual code for 'third parties` concerned by cooperation measures. Such a code would allow individual files to be drawn up and would thus facilitate the evaluation of the overall relations between the Commission and any one contractor who receives financing under several budget headings. This would also improve coordination with other sources of financing.

Aid to the countries of Eastern Europe

1.80. The Commission decided, in a perfectly regular manner, in December 1989 and January 1990 to grant emergency medical aid to Romania totalling 11,12 Mio ECU. In the three Commission Decisions concerning this matter

, it is expressly laid down that this aid is to be charged to Article 950 of the 1990 budget, 'Aid to disaster victims in developing and other third countries`. The commitment proposals were correctly charged to Article 950 in January and February 1990.

1.81. At the time of the extension of the Decision concerning economic aid on behalf of Hungary and Poland to other countries of Central and Eastern Europe

, however, the Commission re-charged the commitments and payments in respect of this emergency aid to Article 996, 'Aid for the economic restructuring of Poland and Hungary`. The Court takes the view that re-charging this expenditure to Article 996 lays the Commission open to censure.

1.82. In fact, Article 2 of the Council Regulation concerning the extension of economic aid to other countries of Central and Eastern Europe stipulates that this Regulation is to enter into force on the third day following its publication in the Official Journal, i.e. on 24 September 1990. This Regulation can therefore not have any retroactive effect. There is, therefore, no legal basis for the emergency medical aid, which was decided before this Regulation came into force. Moreover, no provision for re-charging expenditure is made in the Financial Regulation or in its implementing procedures.

1.83. To the extent that the aim of this re-charging was to allow new measures in the field of aid to developing and other third countries, appropriations should have been transferred from one chapter to another. The budgetary authority should have taken the transfer decision in order to comply with the principle of budgetary specificity.

OBSERVATIONS ON THE PRESENTATION AND KEEPING OF THE ACCOUNTS

The financial balance sheet of the Communities

1.84. One of the principles used in drawing up a consolidated balance sheet is that intergroup balances cancel out at group level. The amounts thus shown in the balance sheet relate solely to external transactions. The Commission does not follow this principle when preparing the consolidated balance sheet. There is no consolidation adjustment for items which have been included in the reciprocal account of one institution but have not been included by the other. A number of these debtor (2,5 Mio ECU) and creditor amounts (0,2 Mio ECU) could not be eliminated at the time of consolidation this year. It is recommended that the reconciliation of the balances on the reciprocal accounts be improved so that the amounts completely cancel out or that an adjustment on consolidation be made which ensures that the balance sheet is clear of interinstitutional transactions.

The keeping of the accounts in the Commission's balance sheet

1.85. Preliminary to the audit of the balance sheet for 1990, the Court studied some of the Commission's main accounting systems in order to update its permanent audit files. For example, it prepared a documented description of the internal control systems relating to payments, receipts, personnel advances and liaison accounts. An evaluation of these systems and of those of the JRC has given rise to the following observations.

Treasury management

1.86. An important aspect of treasury management is that of cash conservation and one of the objectives in this area would be the maintenance of minimal bank balances. This will only be achieved if the treasury section is operating in accordance with a definite and well thought- out policy of fund management.

1.87. In practice the official who determines the level of funds held in each of the Commission's bank accounts relies on his experience and some hand-written notes, passed on by his predecessor.

Information concerning payments

1.88. Treasury management implies collecting information and processing it to produce timely decisions. Accurate information is required regarding the amounts which will be required for expected future payments and the relevant payment dates.

1.89. It was observed at Directorate-General XIX (and also at Ispra) that such information is lacking. Often the first intimation the treasury section receives that a large payment is due is when the payment order is presented for execution. If a number of such payment orders arrive simultaneously, the result can be seriously depleted balances which have to be replenished hurriedly, or balances which are too high because a safety margin must be maintained to cope with such eventualities.

1.90. It is to be recommended that the information flow from the initiators of payments to the section responsible for their execution should be improved. The information regarding payment proposals validated by authorizing officers, which is available from Sincom, should be used for this purpose.

Cash transmission

1.91. One component of funds management is cash transmission, using techniques which minimize total cost and reduce transmission risks. Transmission risk will be minimized if internal controls such as the segregation of duties are adhered to. Where computer systems are involved, it is imperative that security of the system should be maintained.

1.92. An official in the treasury section has, amongst other tasks, the responsibility for arranging transfers of funds. During the year, in the interests of the efficient processing of payments, he operated the transmission system, to which he should not have had access because he has no password. Restricted access through password protection is an integral feature of a secure system, which should not be circumvented whatever the circumstances. If it is deemed necessary that the official should have access, taking other facets of the principle of segregation of duties into consideration, this use should be formalized.

Reconciliation of accounting systems

1.93. The accounting system operated by the treasury section is a stand-alone system, i.e. not a module of Sincom. The accounting entries for payment orders are made in detail to the bank accounting system and thereafter posted at a lesser level of detail to the general accounts.

1.94. This situation requires regular reconciliations of the two systems to be carried out, to ensure that entries are correctly reflected in both systems. At the time of the Court's review of the system, this reconciliation was four to five months behind schedule. This procedure is important from both an accounting and a management information point of view. The task should be assigned to a specific official or section and carried out systematically.

Balance-sheet items

1.95. At Ispra, the inventories have not been physically verified in recent years, if at all. This has a direct impact upon the balance sheet of Ispra. The accounts affected are 'Furniture and equipment`, 'Office furniture` and 'Scientific and technical materials`. For these accounts the value in the balance sheet is taken directly from the inventory listings at the year end. If these figures are unreliable, the accounts figures are equally so. For 1990 the balances account for 43,58% of Ispra's total assets. The consolidated balance sheet of the Communities is also affected as follows:

(a)Furniture and equipment at Ispra accounts for 19,68% of the 'Tangibles` heading within 'Fixed assets`;

(b)'Office supplies` and 'Scientific and technical materials` make up 7,3% of the 'Inventories` figure.

1.96. While it is the task of the Commission in general to see that the Financial Regulation is being respected, Directorate-General XIX has responsibility for the production of the balance sheet and, as such, should ensure that systems are put in place which will provide reliable accounting data for processing.

1.97. In addition, this year an important posting error occurred whilst entering balances relating to NCI and Euratom operations. The relevant balance sheet items are on the liabilities side under the heading 'accrued expenses`:

(a)'interest accrued but not due on borrowings, lines of credit and swaps` reads 99 698 014,90 ECU for the NCI when it should read 16 720 228,25 ECU,

(b)the 'other` heading under 'accrued expenses` shows an amount of 16 720 228,25 ECU for NCI swap operations instead of the correct figure of 99 698 014,90 ECU.

This error also has an impact on any comparison made with last year's values and note 5.28 in the consolidated balance sheet.

The revenue and expenditure account: recording of payments, payments on account and advances

1.98. In its report on the financial year 1987, the Court, when it came to discuss the mechanisms for recovering payments on account, urged the Commission 'to adapt its system and accounting procedures so that it will be able to grasp immediately the legal nature of the payments made, so that it is possible at any time to distinguish between final and non-final payments`. Later, in its Opinion N° 1/89 of 9 February 1989

concerning a proposed general revision of the Council Regulation amending the Financial Regulation of 21 December 1977 applicable to the general budget, the Court expressed the view that accounting systems ought to supply consolidated statements of the financial situation, in which it would be possible to single out immediately those sums that corresponded to final expenditure and those that corresponded to operations that had not yet been settled. In this annual report the Court wishes to take its thoughts on this matter further.

1.99. Article 45 of the Financial Regulation states: 'The payment order shall be accompanied by the original supporting documents ... certified in respect of or accompanied by a certificate confirming ... the receipt of the supplies and the performance of the service...`.

1.100. Article 46 of the same Regulation also provides as follows, in paragraph 1: 'The authorizing officer may make payments by instalment in accordance with the rules governing the policy concerned or in accordance with contractual provisions. Where this occurs, the first payment order shall be accompanied by documents establishing the creditors claim to payment of the instalment in question.` In paragraph 2, it is stated that 'the authorizing officer may grant advances to personnel...`.

1.101. Lastly, Article 71 provides as follows: 'Except for the advances referred to in Article 99 [EAGGF-Guarantee advances] any advance (...) shall be entered in a suspense account and settled at the latest during the financial year which follows the payment of this advance`.

1.102. There is confusion in how these provisions are applied because in the various applicable texts, in particular the operating rules and the contracts, the terms 'payments`, 'payments made on account` and 'advances` are sometimes used as if their semantic content were identical and on other occasions as if it were different.

1.103. A strict interpretation of the aforementioned rules, based on the premise that the Financial Regulation is consistent, should lead to the conclusion that a payment is a different thing from a payment made on account, which, in turn, is different from an advance. It therefore requires disbursements to be classified in one of these three categories according to the particular characteristics in each case. Payments and payments on account are entered as budgetary expenditure chargeable to the financial year during which they are made. Advances are entered in a suspense account outside the budgetary accounts, and are charged to the budgetary accounts at such time as the proof that they have actually been utilized is provided.

1.104. In practice, because of the contents of the operating rules or of the agreements and contracts signed by the Commission, the confusion alluded to in paragraph 1.102 is such that transfers of funds with no effective counterpart are described either as payments on account or as advances, but are treated as payments on account and entered directly in the budgetary accounts for the year during which they are made.

1.105. Sampling of the operations entered in the 1990 revenue and expenditure account reveals that these transfers to the bank accounts of the recipients (Member States, non-member States or private individuals) are found mainly in the fields of the structural Funds and development aid, where they accounted for around 6 000 Mio ECU paid out in 1990 (see Table 1.6). In order to obtain an idea of the volume represented by these operations at the end of the financial year 1990, a probably equally substantial sum should be added to this figure for the balances outstanding from previous financial years.

1.106. In practice, each authorizing department has set up a more or less reliable system for recording and monitoring transactions which have not yet reached a final state (payments on account or advances).

1.107. The Court recommends a re-examination of the provisions of the regulations concerning payments on account and advances so as to ensure that the current confusion does not persist. This concerns:

(a)in the first instance, the Financial Regulation itself, which, in this respect, is still burdened with the lack of consistency that betrays its origins, namely, the merging of a regulation applicable to the centralized management of administrative expenditure (including the provisions concerning payments and advances) with specific financial rules applicable to the non-centralized management of various common policies;

(b)secondly, it also concerns the various rules concerning the operational policies, of which the provisions that apply to advances and payments on account are not always coordinated.

1.108. In any case, the Court considers that the Commission should reorganize its accounting information system without delay so that it allows non-final operations (advances, but also payments on account, in so far as they concern operations still outstanding) to be identified quickly, so as to ensure that they are properly monitored and to provide information on the implementation of Community policies.

The computerized budgetary accounting system (Sincom)

1.109. The budgetary accounts for the financial year 1990 are the first to have been entirely produced using a computerized system (Sincom). The system has not yet been in use for long enough for the Court to make any general observations. However, certain specific observations may already be made.

1.110. The Sincom accounting system, which was launched one year after the first appropriations were made available again, was not modified so as to ensure separate monitoring of appropriations which have been made available again, which are lumped together indistinguishably under the label 'commitment appropriations not automatically carried over`. Annex B2 of Volume II of the revenue and expenditure account, which presents a statement of payments made in respect of the appropriations which were made available again in 1990, is the result of an ex-post analysis carried out by Commission staff. This anomaly seemed to have disappeared by 1991.

1.111. Nor is the Sincom system adequately structured for recording the appropriations entered following a contribution from third parties. Thus, in the case of the Community programme in education and training for technology project (Comett II), which is open to EFTA members, those countries' contributions (4,9 Mio ECU) are entered as revenue under the revenue item which is provided for this purpose. At the same time, in the Sincom system, they entail entering an appropriation for the same amount under expenditure Item B6310, 'Cooperation between universities and industry: training in new technologies`, in an account corresponding to the appropriations which are managed by external offices and carried over to the following financial year by the budgetary authority. In the 'Report on the implementation of the budget`, this amount is presented as deriving from transfers. In both cases, the accounting statements misrepresent the real situation.

1.112. This anomaly in the system is aggravated by the fact that, in at least one case, the appropriation entered following a contribution from a third party is not shown in the revenue and expenditure account. This is the case with an appropriation for 0,566 Mio ECU entered under heading A3052 which gave rise to a commitment of 0,495 Mio ECU and a payment of 0,187 Mio ECU (including a subsidy of 0,185 Mio ECU for the 'The Wall` concert in Berlin).

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1.113. Likewise, the consistency checks carried out by the Court's staff to ensure that they understood the part of the Sincom database to which the Court was given access identified discrepancies between the sum of the transactions recorded as entered in the accounts (the only ones accessible to the Court) and the balances shown in the accounts. These errors, which were found in the old system of the central accounting unit (CAU), are usually subject to correction after the revenue and expenditure account is published. When brought to the Commission's attention, they were corrected, since the anomaly had disappeared in the final accounts. Since the Court does not have access to all the information contained in the Sincom system, and particularly not to operations which have been refused by the system or by the managers of the system (authorizing officer, Financial Controller, accounting officer), it is not currently in a position to identify and evaluate these anomalies and the corrections which were made.

1.114. In this respect, the conditions on which the Court is granted access to Sincom remain unsatisfactory. While the Commission has undertaken to allow the Court open access to the computer programs and other components of the Sincom system, it has adopted a restrictive approach where access to the data contained in the system is concerned.

1.115. In spite of an initial promise, in October 1989, that the Court could have access to all the Sincom data in consultation mode, the Commission reneged on this promise when the system started to operate. In response to a formal request for the authorized Court officials to be allowed to consult, without restriction, all data prepared and stored on Sincom CB/D magnetic data-carriers, the Commission suggested in July 1990 that access for the Court should be granted selectively, and the parameters of the system were arranged in such a way that the Court could not access all the data it contained, and particularly not the data amended or rejected by the system.

1.116. This attitude breaches the first paragraph of Article 87(1) of the Financial Regulation, which provides that all 'documents and data created or stored on a magnetic medium` should be placed at the Court's disposal. In particular, however, experience has shown that this is a very real hindrance to the Court's work:

(a)it deprives it of the information which would allow it to check that the internal control procedures of the system are working properly;

(b)it can lead the auditors to make misguided assessments, since they are not informed when data are missing from amongst those to which they are given access;

(c)it obliges the auditors to identify, by deduction, whole slabs of information which are absolutely necessary for their work and to submit the corresponding requests for these one by one;

(d)it does not allow all the search and sort procedures inherent in the system to be made available to the Court;

(e)and, generally speaking, many of the Court's officials have to cope with anomalous reactions from a system which was initially designed to provide open access (the 'function forbidden for non-EEC` and 'unauthorized` messages are displayed).

CHAPTER 2 (*) Revenue

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IMPLEMENTATION OF THE BUDGET

2.1. As can be seen from Table 2.1, the out-turn for revenue for the financial year 1990 was 99,0 %:

(a)in the case of traditional own resources, customs duties collected were 90,6 % of the total forecast and agricultural levies 101,6 %. Customs duties recovered in 1990 were 9,4 % down on the forecasts. This shortfall was due to the fall in the value of the dollar, the main invoicing currency, which neutralized the effects of any price rises or increases in the volume of imports

;

(b)the VAT and GNP-based own resources for the year were collected as anticipated in the budget, with due regard for the amendments made by the supplementary and amending budgets (SAB) (see paragraph 2.2); the GNP-based resources recovered on the basis of the initial budget were refunded subsequent to SAB N° 2, when it was decided that these resources need not be called up;

(c)an amount of 1 527,8 Mio ECU was recovered on the basis of Member States' annual VAT statements for the financial year 1989 (1 191,2 Mio ECU) and the Commission's controls of those relating to previous years (336,5 Mio ECU);

(d)in the case of VAT relating to the 1989 financial year, the balances referred to in (c) and remaining to be recovered in December 1990 (1 191,2 Mio ECU) were established in terms of the assessment bases mentioned in the annual statements; the results of the Commission's controls were not taken into account when the balances were established in 1990; it was noted that two Member States were late sending their statements (12 September and 9 November) and that as of the year-end the Commission had made control visits to only four Member States;

(e)as regards the statements for previous years, there were 16 unresolved 'reserves` according to the list which the Commission now keeps, following the observations made by the Court of Auditors in the annual report concerning the financial year 1988

.

2.2. The method of establishing the amount remaining to be financed

by the third and fourth resources, as well as the incidence of that amount on the calculation and recovery of the resources, gave rise to the following observations:

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(a)regarding the surplus from the preceding financial year: pursuant to Article 7 of the Council Decision of 24 June 1988 relating to the system of the Community's own resources

and Article 32 of the Financial Regulation, the balance from each financial year is to be entered in the budget for the following financial year; in fact, the surplus of 5 080,1 Mio ECU from the 1989 financial year was entered successively:

- in the initial budget, to the extent of 2 598 Mio ECU, of which 819 Mio ECU was the surplus of own resources resulting from the transfer from the EAGGF Guarantee Section chapters to the EAGGF monetary reserve;

- in SAB N° 1 for the same amount;

- in SAB N° 2 for 4 300 Mio ECU, as the GNP resource was to be called up only to the extent of the amount of financial compensation to the United Kingdom, where it exceeded 1,4 % of the VAT assessment base (four Member States: Belgium, Denmark, Greece and Italy);

- in SAB N° 3 to the extent of 4 464,2 Mio ECU, in order to finance an additional VAT refund to the Kingdom of Spain;

(b)regarding the incidence of the 1989 surplus on the calculation of VAT resources: when SAB N° 2 was being established it became clear that, having regard to the financing requirements, there was no need to call up the GNP resource and that, furthermore, after re-estimating the United Kingdom correction at 2 285 Mio ECU, instead of 2 432,3 Mio ECU, the budget could be balanced by raising to 4 300 Mio ECU the 1989 surplus that had been entered in the 1990 budget, thus leaving a balance of 780 Mio ECU which was not transferred to 1990; this latter amount thus represents a call on VAT resources in excess of requirements;

(c)regarding the EAGGF monetary reserve: faced with a surplus of resources, the Commission budgeted for the EAGGF monetary reserve to be financed by means of the VAT resource, without first amending the calculation of the resource; in the budget, however, the breakdown of the amounts of reserve financing to be borne by the Member States was calculated in terms of their VAT assessment bases, capped where appropriate, not in terms of their GNP. The result of this method of calculation was that an amount of 1 024 Mio ECU for the EAGGF monetary reserve was included in the resources provided in the budget by way of VAT; because this amount was not needed to balance the budget and was therefore not taken into account when the monthly twelfths were finally determined, the VAT resources were reduced by 1 024 Mio ECU.

2.3. The above techniques gave rise to the following observations:

(a)some reservations may arise regarding the legality of the various partial entries of the 1989 surplus, and their effect is seriously detrimental to budgetary transparency. In the case of surpluses like that for 1987

or deficits like those for 1984 and 1985

, the practice of spreading the entries for the balances over several budget years contravenes the principles of universality and annuality;

(b)in draft SAB N° 2 the Commission made the amount of own resources accruing from VAT coincide with the amount to be financed by the third and fourth resources by carrying over only part of the surplus from the previous year, on the assumption that a theoretical surplus of resources must be neutralized by a partial carry-over, without making a reduction in the uniform VAT rate; SAB N° 2 is at present the subject of an action by the Council before the Court of Justice, which demonstrates the necessity for greater legal and budgetary transparency; in fact, the regulations do not specify explicitly whether, or how, the calculation is to be adjusted in cases where the full amount of the VAT-based own resource is not needed to cover expenditure fully;

(c)the Decision of 24 June 1988 on the system of own resources is based on the assumption that the VAT own resource is not sufficient to cover all expenditure. This in turn has repercussions on the financing of the monetary reserve, which is called up only if it is needed to meet EAGGF requirements; by virtue of Article 10 of Council Regulation (EEC, Euratom) N° 1552/89 of 29 May 1989 implementing the Council Decision of 24 June 1988 concerning the system of Community own resources

, on the one hand, the additional resource - to the exclusion of the own resources for the EAGGF monetary reserve - is credited on the first working day of each month, and, on the other hand, at the end of the financial year, each Member State is debited the amount resulting from the application to its GNP of the uniform rate used for the preceding financial year, as amended in the light of the use of the EAGGF monetary reserve; the deduction of the resources earmarked for the EAGGF monetary reserve from the VAT resources does not correspond to a correct implementation of the Regulation and has consequently led to the application of a uniform VAT rate which is not in accordance with Article 2(4) of the Council Decision of 24 June 1988.

2.4. With regard to the refunds of a pro rata proportion of the VAT and GNP resources to Greece, Spain and Portugal, which were entered in Chapter 86 of the budget, it was noted that:

(a)the amounts relating to the provisional twelfths were in fact refunded directly, whereas those relating to the balances and adjustments are simply a book-keeping device, in that the Member States concerned make the amounts available net of these balances and adjustments;

(b)during 1990 the Commission nevertheless requested that the amounts paid should include the balances and adjustments, pending an increase in the appropriations available; one Member State refused this request and paid a net amount of 310 Mio ECU, instead of the 547 Mio ECU due;

(c)in order to regularize the situation, the appropriations for Chapter 86 were increased by SAB N° 3; this increase was not, however, sufficient to allow the refund to this Member State, namely 236 Mio ECU, to be taken fully into account; settlement of 96 Mio ECU was carried forward to the financial year 1991; the result was that only 451 Mio ECU (instead of 547 Mio) were entered as revenue in 1990.

2.5. These practices call for the following comments:

(a)despite the fact that the amounts of the adjustments and refunds concerned were known at the time when SAB N° 3 was drafted, the Commission did not propose including the necessary amounts for expenditure and revenue in that budget;

(b)the payment orders for the refund were made out after the net amount had been recovered, thereby obscuring the netting-out of revenue and expenditure

.

THE VAT RESOURCE

Procedure for making the resource available and the Court's enquiry

2.6. The amounts due in respect of the VAT resource are made available in several stages:

(a)the amounts entered in the budget for each Member State are paid over in the form of monthly twelfths;

(b)in the course of the following year, the final situation is established on the basis of the Member States' annual statements (corrected, if necessary, after checks by the Commission) and sums still due or paid in excess are paid over or refunded, as appropriate;

(c)in subsequent years, further payments or refunds are made if such adjustments become necessary as a result of the additional corrections made following discussion of the annual statements.

2.7. The object of this section is to examine the factors entering into the calculation process relating to:

(a)the VAT revenue collected in the Member States and the techniques employed in passing it to the accounts;

(b)the corrections made to the above revenue in order to ensure uniform treatment of the revenue base with a view to establishing the figures for corrected revenue;

(c)the compensations made to the intermediate base, or assessment base (obtained by dividing the corrected revenue by a weighted average rate), in order to obtain, finally, a harmonized definitive assessment base.

2.8. The Court examined the statements of each of the 12 Member States. It did not investigate the calculation of the weighted average rate (WAR), which will be examined at a later date, although, in order to assess the pertinence of certain corrections and compensations, it did refer to documents provided by the Member States which showed how the weighted average rates were calculated.

The revenue collected

2.9. The Community's VAT own resources are calculated on the basis of the net revenue collected by the Member States in the course of each calendar year

, the latter being dependent on the particular characteristics of the national systems.

Amounts collected to be taken into consideration

2.10. In most cases the amounts to be taken into account are not immediately identifiable in the Member States' accounts for the execution of the budget. For example:

(a)in the central accounts, VAT revenue from miscellaneous sources is not always identified separately, and in some cases it is grouped with other revenue or with VAT revenue that is to be disregarded under the regulations;

(b)where the accounts relating to the implementation of the budget do not correspond to the calendar year or - more often - where the accounts for the budget year have not been finalized by 31 July following the end of the financial year, the Member States provide interim figures which sometimes prove to be lower than the final revenue;

(c)some Member States (France, in particular) identify in the form of 'corrections` amounts collected and to be included in or excluded from the calculation of the harmonized base, whilst others apply a direct correction to the amounts of revenue collected;

(d)in one Member State (Denmark), which does not have a cash-based accounting system, the amount collected has to be reconstructed.

2.11. These features are sources of error and may have the effect of concealing amounts collected that should be taken into account. For example:

(a)an adding-up error slipped into the amount declared in one annual statement for 1988; it was notified by the Member State concerned (Spain) in October 1989 and in 1990 gave rise to the recovery of 110 Mio ECU of resources;

(b)in the case of another Member State (Italy), there have, since 1982, been difficulties in accounting for revenue collected following steps taken to settle outstanding VAT debts. Not until 1990 did the Commission recover an amount of 6,9 Mio ECU relating to revenue collected in 1986, 1987 and 1988. Despite the fact that the Court had already raised this problem in its annual report concerning the financial year 1984

, the Commission has been unable to recover more substantial sums relating to the years 1982 to 1985.

Delays in passing VAT revenue to the accounts

2.12. Delays of between several days and six months in entering VAT revenue in the accounts were observed. Although the longest delays occurred in the Member States in which collection is not centralized, a similar situation was sometimes also observed in Member States with centralized collection systems:

(a)some Member States (in particular, France, Ireland, Portugal and the United Kingdom) were slow to cash the cheques sent to them, or entered them for dates after the date of encashment;

(b)in cases where payments were effected by means of bank transfers, other Member States (including Belgium and Greece) entered the revenue for the date on which the credit advice was received;

(c)in cases where financial institutions were responsible for collection (including Spain and Italy), they could be authorized to retain revenue for several days before it was transferred;

(d)in cases where collection was carried out at local level, it was noted that, in addition to straightforward delays in centralizing the revenue, there were variations in the entering of amounts collected but not verified at central level;

(e)finally, in cases where the revenue was collected by autonomous regions there was frequently no effective centralization of the revenue collected and the amounts to be entered were established according to the national financing rules in those regions.

2.13. These delays cannot be ignored, for the simple reason that they could result in the same carry-overs being made every year. In fact they may occur at irregular intervals and vary from year to year:

(a)one Member State (France) experienced a strike in the VAT collection agencies at the end of 1989, and the same thing had occurred in others (Italy and the United Kingdom) in previous years;

(b)in one Member State (Italy) it was found that from one year to another the amount of revenue collected and not yet transferred to the Treasury had doubled, causing an unjustified postponement of own resources in 1990 estimated at 275 Mio ECU.

2.14. These postponements are a drain on the own resources by reason of the mere fact that they delay the entering of these resources and also because of the losses that may arise from the effect of monetary depreciation on the amounts carried over. Furthermore, other data used in the resources calculation change from year to year: for example, the weighted average rate, the solutions and modifications adopted by the Member States in determining the assessment base and the rate applied to that base and the GNP which determines whether it is to be capped or not.

Changes to the collection systems

2.15. Application of the principle whereby net revenue is to be collected over a calendar year poses particular problems in cases where a Member State makes significant changes to its VAT collection systems during the year. In the absence of adequate transitional provisions, these changes are frequent sources of controversy between the Member States and the Commission.

2.16. In 1990 the Commission recovered the sum of 22,2 Mio ECU of VAT resources from the Kingdom of Spain by an ad hoc reconstruction of the VAT base in order to take account of 12 months of collection in 1986 instead of the 11 months or three quarters actually collected.

2.17. Problems occurred in the case of two other Member States which had modified their collection schedules:

(a)in the case of the first (Italy), the 13th monthly payment collected in 1988 after the payment dates had been brought forward was deducted by the Member State concerned from the revenue declared for 1988; an adjustment of 175 Mio ECU was recovered by the Commission in 1990;

(b)in the second case (Denmark), the dates of VAT refunds to exporters were brought forward, thereby leading to a reduction in the net revenue collected during the 1988 financial year.

2.18. As Regulation (EEC, Euratom) N° 1553/89 of 29 May 1989 concerning the definitive system for the collection of VAT own resources opted beyond any doubt for the so-called 'revenue method`, based on revenue actually collected during the calendar year, it is now important that the Commission and the Member States abide by this rule so as to ensure the proper functioning of the own resources system.

Corrections and compensations

Introduction

2.19. For the financial year 1989 the C