ANNUAL REPORT concerning the financial year 1991

(92/C 330/01)

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 1992

Aldo ANGIOI (President)

André J. MIDDELHOEK

John CAREY

Josep SUBIRATS

Carlos M. MORENO

Richie RYAN

Ole Joergen WARBERG

Konstantinos ANDROUTSOPOULOS

Daniel STRASSER

Bernhard FRIEDMANN

Maurice THOSS

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INTRODUCTION (*)

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THE MANAGEMENT AND AUDITING OF THE COMMUNITY'S FINANCES

0.1. In the case of the execution of the general budget as well as in the case of the execution of the European Development Funds, the Court's observations on its audit of the Community's finances are generally of two main types:

(a)firstly, there are errors and mis-statements which arise largely as a result of inadequate drafting of rules and regulations;

(b)secondly, even when the legislative framework is well conceived, organizational failure may mean that errors or irregularities occur and are not detected and corrected.

0.2. Price compensation aid to producers of beef and veal and olive oil provides examples of the above: in both cases it is often very difficult to check the eligibility of beneficiaries of this aid, which means, bearing in mind, in addition, the large number of such beneficiaries (several million), that this item of Community expenditure cannot be correctly audited. The errors of conception affecting these aid schemes cannot be rectified at a reasonable cost.

0.3. Generally speaking, significant progress needs to be accomplished in order to make the reform of the Structural Funds fully effective. Additionality, which is a key legal requirement of Structural Fund financing, has not yet been defined with the clarity needed to establish it in practice. Certain basic notions concerning training measures have not been adequately defined, resulting in difficulties of interpretation with regard to financing, in particular in the case of Objectives 3 and 4 of the Structural Funds reform. Accounting problems with the deflator concept should have been anticipated.

0.4. For the whole of the external aids, be it developing countries or East European countries, counterpart fund rules and responsibilities are not clear, so that misunderstandings as to how the funds are to be used persist. Similar legislative oversights have occurred more recently, in particular with regard to aid to the countries of Central and Eastern Europe.

0.5. Accounting and control requirements are not always sufficiently considered when aid schemes are proposed. This greatly complicates management of the schemes and creates sometimes insuperable difficulties for proper accounting.

0.6. The Court was obliged to record certain organizational failures which affect the accounting and control of EC finances, both centrally, at the Commission, and in Member State or third-country administrations with responsibility for handling EC funds. These shortcomings may be observed in the structure and staffing of the departments responsible for financial management, accounting or control, and they result in an absence of the necessary information, badly kept documentation and files, inadequate supervision, inadequate (or completely non-existent) manuals of procedure and no separation of key functions. The general quality of the internal control systems is thereby impaired.

0.7. One of the Commission's main computerized accounting systems (Sincom - budget/expenditure accounts) has not been conceived in the most appropriate way; the procedures for modifying programmes are defective and there is a high risk of loss of control. Moreover, the system is too complex because its development was not preceded by any substantial simplification of the financial rules and regulations.

0.8. Accounting arrangements for Structural Fund expenditure treat payments of advances and fund transfers to intermediaries as if they were final payments to ultimate beneficiaries. The use of constant prices in operational programmes and the resulting indexation calculations complicate the accounting and financial management, necessitate an increasing volume of work and cause mistakes and other difficulties. In regions affected by industrial decline, large financing operations still concern measures that were approved just before the reform of the Funds, which proportionately reduces the effect of this reform. Greater attention should be paid to monitoring the use of Community aid and to developing sample checks on the certificates supplied by the national administrations or on the eligibility of measures financed with Community funds.

0.9. Controls over the way in which third parties carry out contract work for the Commission are often insufficient. Regarding aid to eastern Europe, the tasks of planning, implementation and control of the programmes are largely contracted out to consultants, which means that authorizing officers and the Financial Controller are required to improve their checking so as to ensure the regularity of the expenditure. The management of the European Year of Tourism by an outside contractor was also inadequately supervised.

0.10. Inadequacies in the accounting and internal control were observed in the Commission departments responsible for development aid. These inadequacies concern the organization of the financing, some of the procedures used by the authorizing officers, the Financial Controller and the accounts departments, as well as the operating of the computerized system for managing the appropriations. There is still no proper separation between the authorizing and accounting functions for the European Development Funds. The lack of suitably qualified staff prevents delegations from adequately accounting for and monitoring aid project imprests. There is no regular reconciliation between the delegation accounts and the Commission central accounts, between which several discrepancies have been noted by the Court.

0.11. Contrary to the provisions of the Financial Regulation, the practices in use at the Commission for the collection of funds due to the Community, including own resources, do not distinguish between the proposal to establish a debt and the issue of the relevant recovery order, thus hampering effective control of receipts. Difficulties in relation to the establishment and collection of own resources arise because of shared management between the Community and Member States.

0.12. The Commission's checks on the administrative organization and internal control procedures in the Member States are too limited for the Commission to be able to judge the accuracy of the accounting for Community revenue at national level. In the field of traditional own resources, Court audits have revealed that the national administrative systems do not ensure that total own resources are made available in time. The separate accounts in Member States, consisting of established entitlements not yet collected, were found to be unsatisfactory.

0.13. Despite its responsibility, under Article 205 of the EEC Treaty, for the implementation of the budget, the Commission has in many cases failed to ensure that national accounting and control arrangements for EC expenditure are adequate. Unfortunately, as the Court has frequently observed, national administrations tend to give low priority to accounting and control of Community finances. The Court's audit of EAGGF-Guarantee expenditure in Member States over the past year has found many supporting documents to be missing or inadequate. Major differences were discovered between national accounting records and amounts declared to the Commission by one Member State; in another there were unexplained discrepancies between central book-keeping and data source systems. Moreover, some national controllers depend too much on documentary examinations of registers, while neglecting independent third-party evidence and firms' financial records and doing too little stock-checking and quality testing.

0.14. In the Commission's services, the Court's auditors have difficulty in finding full supporting documentation for financial operations, often as a result of poor filing, which must be a significant factor in the weak administration of contracts and of aid schemes in general. For closely similar actions, files have widely varied content and structure, while arrangements for storage of and access to documentation, which constitutes an essential part of the financial management, are also of very unequal quality.

0.15. The Commission has taken a number of recent initiatives to try and improve matters. Within the context of the major changes in the EAGGF-Guarantee, it has proposed the establishment of an integrated administration and control system for compensatory aids linked to the amount of land cultivated or the number of animals owned by farmers. The Court's audit experience with regard to the quality of land registers, crop registers and animal marking schemes shows that it is very difficult and expensive at present to control these types of aid.

0.16. There are some legal limitations on the Commission obtaining detailed information on the nature and effectiveness of control measures applied by the Member States to EC operations. The Court of Justice has recently ruled (Case C-303/90) that the Commission was not competent to issue a 'code of conduct`, in application of a Council regulation provision concerning national controls on Structural Fund actions, since it would thus impose on Member States obligations with regard to control matters going beyond those specifically laid down in the regulation itself. It would therefore appear that every detail of what information on national controls the Commission requires and how and when it is to be communicated have to be incorporated into a Council regulation, unless Member States are prepared to provide the information voluntarily.

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Observations on the Commission's revenue and operating appropriations and on the European Development Funds

PART I

CHAPTER 1 (*) Own resources

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