REPORT on the financial statements of the European Environment Agency (EEA, Copenhagen) (Financial year 1996), together with the Agency's replies (97/C 393/05)

1.1. This report is addressed to the Management Board of the European Environment Agency, pursuant to Article 13 (4) of Council Regulation (EEC) No 1210/90 of 7 May 1990 (1).

1.2. The Court of Auditors has examined the financial statements of the European Environment Agency for the financial year 1996. The budget was implemented under the responsibility of the Executive Director pursuant to Article 13 (1) of Regulation (EEC) No 1210/90. His responsibilities include the preparation and presentation of the accounts (2) in accordance with the internal financial provisions provided for in Article 14 of Regulation (EEC) No 1210/90. Article 188c of the Treaty establishing the European Community requires the Court of Auditors to audit these accounts.

1.3. The Court conducted its audit in accordance with generally accepted auditing standards in so far as they are applicable in the Community context. The Court carried out tests on the account books and records and also such additional auditing procedures as it considered necessary in this context. The main observations resulting from the Court's audit are presented in the second part of this report.

1.4. The observations set out in paragraphs 1.6 to 1.15 show that there are accounting practices in use at the Agency which are not consistent with the regulations. There are also certain sums for which no justification could be given.

1.5. Subject to the above reservations, the Agency's financial statements for the financial year 1996 are reliable and the legality and regularity of the underlying transactions are, on the whole, guaranteed.

MAIN OBSERVATIONS CONCERNING THE IMPLEMENTATION OF THE BUDGET OF THE EUROPEAN ENVIRONMENT AGENCY (EEA, COPENHAGEN) FOR THE FINANCIAL YEAR 1996

Budget and general accounts

1.6. The accounts continue to be kept on two different computerized accounting systems: commercial software is used for the general accounts and another tool is used for the budget accounts. This double system would require regular (at least monthly) reconciliations of the two sets of accounts. No such reconciliation was made during the financial year 1996. Furthermore, for the financial year 1996, such reconciliation was complicated by the consolidation of a substantial proportion of the general account entries (the various budget accounts were grouped into five major expenditure accounts in the general accounts; several non-budget entries concerning various credit or debit operations in respect of staff were also grouped together in a single account in the general accounts).

1.7. Another weakness of this accounting system is the impossibility of checking a posteriori the level of appropriations during the year and thus of ensuring that available appropriations have not been exceeded.

1.8. Furthermore, it was noted that a balance of approximately ECU 0,02 million was shown on the balance sheet (sundry accounts payable) for which the Agency was unable to provide the Court with the appropriate supporting documents (see consolidation problem mentioned in paragraph 1.6).

1.9. The Agency's budget accounts are still behindhand and could not provide the authorizing officers and the Financial Controller with the information they need if the former are to commit themselves legally in respect of third parties and the latter to give his approval to the proposals for commitments that are submitted to him. For this reason, the Agency has had to set up a parallel system for monitoring the implementation of the budget so as not to exceed available appropriations, as it did during the previous financial year (see report on the implementation of the 1995 budget), and to enable the authorizing officers to check at all times the level of commitment of the appropriations for which they are responsible (failure to observe Articles 58 and 59 of the implementing provisions for the Commission's Financial Regulation, which also apply to the EEA, as the Agency has not adopted its own implementing provisions).

1.10. As the Sincom 2 system is unlikely to be available within a reasonable time, the Agency should preferably seek an alternative solution so as to have an effective accounting system at its disposal.

1.11. The methodology applied during the financial year 1996 complied neither with accounting rules nor with the Communities' financial regulations and ultimately led to the financial statements (trial balance, balance sheet and revenue and expenditure account) being submitted after the deadlines had expired.

1.12. The approach adopted by the Management Board for drawing up and submitting the financial statements is thus not a relevant one.

1.13. On the basis of the aforementioned observations, it may be concluded that the situation in respect of the accounts must be improved without delay.

1995 commitments not entered in the accounts

1.14. During the financial year 1995, the Agency placed several orders for goods and/or works by making accounting commitments without ensuring that the necessary funds were available. Moreover, no appropriations were carried forward and the resulting payments had to be made using appropriations belonging to the financial year 1996 (failure to comply with the budgetary principle of annuality).

1996 payments recorded in 1997

1.15. Several payments made after 15 January 1997 were mistakenly charged to current 1996 appropriations, whereas they should have been charged to appropriations carried forward from 1996 to 1997.

The Financial Controller

1.16. The serious problems noted in Copenhagen further highlight the need for a Financial Controller to be present at all times.

1.17. The other significant consequence is the serious delay in authorization (approval) in respect of the commitment and settlement of expenditure under Title III (operating expenditure) as a result of the requirement that the corresponding documentation be sent to Brussels.

Appropriations carried over; contracts

1.18. The percentage of appropriations carried forward remains very high (93,1 % for appropriations under Title III).

1.19. A significant number of contracts were signed at the end of the financial year.

1.20. Restricted tendering procedures are used too frequently.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 15 and 16 October 1997.

For the Court of Auditors

Bernhard FRIEDMANN

President

(1) OJ L 120, 11. 5. 1990, p. 4.

(2) Pursuant to Article 13 (3) of Council Regulation (EEC) No 1210/90 the accounts for all the Agency's revenue and expenditure for the financial year 1996 were to be prepared by 31 March 1996. The accounts were signed by the Executive Director of the Agency and sent to the Commission, the management board and the Court of Auditors on 26 March 1997. They were received by the Court on 31 March 1997. The short form of these financial statements is presented in the tables annexed to this report.

ANNEX

TABLE 1 BALANCE SHEET FOR THE FINANCIAL YEARS 1995 AND 1996

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Source: Prepared by the Court on the basis of the Agency's data.

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(1) This amount corresponds to the fixed assets.

(2) The negative balance for the balance carried forward and capital accounts is not a loss of capital. It results from the application of the Financial Regulation concerning revenue (only sums collected) and expenditure (payments plus appropriations carried over).

(3) In the 1995 financial statements the part of the Commission subsidy still to be paid at the end of the financial year was included in the assets. With effect from 1996, in accordance with the regulations, this sum is included in the liabilities.

REPLIES OF THE EUROPEAN ENVIRONMENT AGENCY

Budgetary and general accounts

Point 1.6 - Budget and accounting systems

The Agency suffers from the lack of an integrated and automated budget and accounting system. This problem is common to the new Agencies; no software package available on the market addresses the needs of the Agencies. In the past, the Agencies tried to initiate a joint development of an integrated budget and accounting system. These efforts had to cease in favour of the Commission's new system Sincom 2 / SI2; however, its development was plagued by significant delays.

As a consequence, the Agency tried to overcome this lack of an integrated system with a temporary solution by using two (not integrated) software packages readily available on the market.

Until now, the Agency had suffered from the delays encountered by the Commission in the development of Sincom / SI2. Given the above circumstances, the Agency had to work in 1996 (and 1997) without an integrated budget and accounting system. The absence of an integrated system was frequently stressed by the Agency.

During 1997, the Agency continued to follow the recently encouraging development of SI2 but in view of repeated delays in the past with SI2, and the recommendation of the Court of Auditors (point 1.10), the Agency conducted in parallel, a detailed analysis of software packages available on the market, including the required modifications. For 1998, the Agency plans using SI2.

Point 1.6 - Grouping of accounts

The Agency will implement the Court of Auditor's recommendation of monthly reconciliation; however, due to the long delays of closing the accounts for 1996, reconciliation will be made for the first six months of 1997 and for the first nine months of 1997. For 1998, monthly reconciliation is foreseen.

Since January 1997, the budgetary accounts are no longer grouped into expenditure accounts of the general ledger; each budget account has its corresponding expenditure account in the general ledger. Non-budgetary charges have their corresponding accounts and are not grouped together.

Point 1.7

The requirements for the Agency's new integrated and automated budget and accounting system, as described above, include the ability to check a posteriori appropriation levels. Consequently, a fully operational system will include this feature.

Point 1.8

With the help of the Commission, the Agency could clarify the balance of + ECU 0,020 million in the balance sheet for which no appropriate supporting documents could be provided at the time of the audit. The correction of booking errors made during 1996, as well as the correct booking of payments made after 15 January 1997, resulted in a reduction of this balance to - ECU 0,002 million.

Point 1.9

The delay in the budgetary accounts observed during 1996 is now eliminated. The accountant keeps the budgetary and general accounts up-to-date and the authorizing officers can use this information as a basis for their decisions before committing themselves. The Financial Controller has no access to this information yet; however, it is planned to give the Financial Controller access to the integrated system described above. The Financial Controller's access shall include the Financial Controller's approval in the form of an electronic visa.

In 1996, the Agency compensated with a parallel system for (a) the lack of an integrated system for monitoring and implementing the budget and (b) the accounts not being up-to-date or centralized. This measure of compensation helped to avoid overspending; however, the Agency recognizes the inefficiencies of such an approach. In 1997, the accounts are centralized and up-to-date; therefore, this parallel system is no longer needed.

Point 1.10

The Agency has followed this advice and conducted a detailed analysis of alternative systems that are available on the market and which could be used by the Agency after modifications, as outlined above. In view of (a) the recent progress with the Commission's user interface SI2; (b) Turin's presentation of an Agency-specific automated system using the SI2 system for 1998, and (c) the potential benefits of a standardization for the Agencies and the resulting efficiency, the Agency will use SI2 for its integrated and automated budget and accounting system.

Point 1.11

The accountant is instructed to comply with and to strictly observe the accounting rules and the Financial Regulation. This and the improvements described above should allow the accountant to prepare and submit the financial statement within the deadline foreseen.

Point 1.12

The Court has briefed the Executive Director in detail about the problems observed and the possible solutions to be implemented. The Executive Director will continue to assure the implementation and application of the measures listed in this response and regularly receives briefings from the accountant. In addition, the Agency's accounting capacities will be strengthened. The Executive Director will inform the Management Board of these corrective measures formally.

Point 1.13

The Agency has implemented, as outlined above, several corrective measures already and expects to put into operation its integrated budget and accounting system, the most significant improvement, in 1998.

1995 commitments not entered in the accounts

Point 1.14

The source of the problem is the overspending in 1995. In 1996, no overspending occurred because the Agency used parallel systems for budget and accounts. The improvements as described above will prevent future overspending and thereby assure that the principle of annuality will be observed.

1996 payments recorded in 1997

Point 1.15

These mistakes have been corrected and are reflected in the final version of the Agency's financial statements for 1996. The correction of these mistakes contributed to the reduction of the unexplained balance of + ECU 0,020 million in the balance sheet.

The Financial Controller

Point 1.16

The Agency would very much welcome having the Financial Controller on site. This would not only reduce delays; but more importantly, it would give the Agency the possibility of benefiting from daily and on-site advice and counsel.

Point 1.17

As stated above, the Agency would prefer the Financial Controller to be on site. In regard to facilitating the Financial Controller's authorization, the integrated system will allow the Financial Controller to access the Agency's financial data and related information and to give an electronic visa; this should reduce, although not totally eliminate, the forwarding documents to Brussels.

Appropriations carried forward - Contracts

Point 1.18

In 1995, 93,1 % of Title III appropriations were transferred to the following year; mainly due to the difficulties encountered when setting up the Agency. In 1996, these transfers were reduced to 79,8 % and in 1997 a further reduction is expected. However, it should also be noted that many payments will always be made in the following year because numerous Title III contracts end in the following year.

Point 1.19

The execution of the budget is closely monitored and efforts are made to reduce the volume of transactions at the end of the financial year.

Point 1.20

The Agency will make efforts to emphasize more open calls for tenders.