++++

ANNUAL REPORT

CONCERNING THE FINANCIAL YEAR 1980

ACCOMPANIED BY

THE REPLIES OF THE INSTITUTIONS

TRANSMITTED TO

THE AUTHORITIES RESPONSIBLE FOR GIVING DISCHARGE

AND TO

THE OTHER INSTITUTIONS

ON 30 NOVEMBER 1981

IN ACCORDANCE WITH ARTICLE 84 OF THE FINANCIAL REGULATION OF 21 DECEMBER 1977

CONTENTS

INTRODUCTION*5*

PART I**

CHAPTER 1 - GENERAL COMMENTS*11*

CHAPTER 2 - ACCOUNTING MATTERS*20*

CHAPTER 3 - REVENUE*31*

CHAPTER 4 - THE EAGGF GUARANTEE SECTION*41*

CHAPTER 5 - THE EAGGF GUIDANCE SECTION*65*

CHAPTER 6 - THE SOCIAL SECTOR*74*

CHAPTER 7 - THE EUROPEAN REGIONAL DEVELOPMENT FUND*85*

CHAPTER 8 - RESEARCH , ENERGY , INDUSTRY , ETC.*96*

CHAPTER 9 - COOPERATION WITH DEVELOPING COUNTRIES AND NON-MEMBER STATES*103*

CHAPTER 10 - STAFF EXPENDITURE*116*

CHAPTER 11 - OPERATIONAL EXPENDITURE*128*

CHAPTER 12 - EXTERNAL BODIES AND SUBVENTIONS*134*

CHAPTER 13 - LOANS AND BORROWINGS*141*

PART II - THE EUROPEAN DEVELOPMENT FUNDS*147*

ANNEXES

ANNEX I - ALLOCATION OF RESPONSIBILITIES AMONG MEMBERS OF THE COURT OF AUDITORS AT 30 NOVEMBER 1981*167*

ANNEX II - INFORMATION AND STATISTICS RELATING TO THE GENERAL BUDGET OF THE EUROPEAN COMMUNITIES AND TO THE EUROPEAN DEVELOPMENT FUNDS*169*

ANNEX III - REPLIES OF THE EUROPEAN PARLIAMENT*205*

ANNEX IV - REPLIES OF THE COUNCIL*207*

ANNEX V - REPLIES OF THE COMMISSION : **

PART I**

CHAPTER 1 - GENERAL COMMENTS*209*

CHAPTER 2 - ACCOUNTING MATTERS*212*

CHAPTER 3 - REVENUE*219*

CHAPTER 4 - THE EAGGF GUARANTEE SECTION*221*

CHAPTER 5 - THE EAGGF GUIDANCE SECTION*226*

CHAPTER 6 - THE SOCIAL SECTOR*229*

CHAPTER 7 - THE EUROPEAN REGIONAL DEVELOPMENT FUND*230*

CHAPTER 8 - RESEARCH , ENERGY , INDUSTRY , ETC.*233*

CHAPTER 9 - COOPERATION WITH DEVELOPING COUNTRIES AND NON-MEMBER STATES*236*

CHAPTER 10 - STAFF EXPENDITURE*241*

CHAPTER 11 - OPERATIONAL EXPENDITURE*243*

CHAPTER 12 - EXTERNAL BODIES AND SUBVENTIONS*245*

CHAPTER 13 - LOANS AND BORROWINGS*245*

PART II - THE EUROPEAN DEVELOPMENT FUNDS*246*

ANNEX VI - REPLIES OF THE COURT OF JUSTICE*257*

ANNEX VII - REPLIES OF THE ECONOMIC AND SOCIAL COMMITTEE*258*

INTRODUCTION

ANNUAL REPORT ON THE 1980 ACCOUNTS

1 . THIS IS THE FOURTH ANNUAL REPORT OF THE EUROPEAN COURT OF AUDITORS , PRODUCED IN ACCORDANCE WITH THE TREATIES ( 1 ) AND THE FINANCIAL REGULATION ( 2 ) , AND COVERING THE ACCOUNTS OF THE FINANCIAL YEAR 1980 . THE COMMISSION IS REQUIRED , BY THE TREATIES ( 3 ) AND THE FINANCIAL REGULATION ( 4 ) , TO DRAW UP A REVENUE AND EXPENDITURE ACCOUNT FOR THE COMMUNITIES FOR EACH FINANCIAL YEAR AND A BALANCE-SHEET AS AT THE END OF THAT YEAR , AND TO FORWARD THEM TO THE PARLIAMENT , THE COUNCIL AND THE COURT OF AUDITORS BY 1 JUNE OF THE FOLLOWING YEAR . THESE FINANCIAL STATEMENTS ARE USED BY THE COURT IN DRAWING UP ITS ANNUAL REPORT . THE ACCOUNTS TOGETHER WITH THE ANNUAL REPORT OF THE COURT AND THE REPLIES OF THE INSTITUTIONS TO THE COURT'S OBSERVATIONS , ARE TO BE EXAMINED BY THE PARLIAMENT AND THE COUNCIL IN CONNECTION WITH THE DISCHARGE TO BE GIVEN BY THE PARLIAMENT TO THE COMMISSION IN ACCORDANCE WITH THE TREATIES ( 5 ) .

2 . THE REPORT IS PRESENTED IN TWO PARTS . PART I RELATES TO THE GENERAL BUDGET OF THE COMMUNITIES , INCLUDING THE BUDGETS OF THE PARLIAMENT , THE COUNCIL , THE COMMISSION , THE COURT OF JUSTICE , THE ECONOMIC AND SOCIAL COMMITTEE , THE OFFICE FOR OFFICIAL PUBLICATIONS AND THE ADMINISTRATIVE BUDGET OF THE EUROPEAN COAL AND STEEL COMMUNITY ( ECSC ) . IT ALSO DEALS WITH LOANS AND BORROWINGS OPERATIONS ( CHAPTER 13 ) .

3 . PART II CONCERNS THE FOUR EUROPEAN DEVELOPMENT FUNDS . THESE FUNDS , WHICH PROVIDE AID TO DEVELOPING COUNTRIES , ARE MANAGED BY THE COMMISSION BUT DO NOT FORM PART OF THE GENERAL BUDGET OF THE COMMUNITIES .

4 . CHAPTER 1 INCLUDES GENERAL COMMENTS ARISING FROM THE COURT'S WORK . AN ANALYSIS OF FINANCIAL INFORMATION RELATING TO THE GENERAL BUDGET OF THE COMMUNITIES AND TO THE EUROPEAN DEVELOPMENT FUNDS IS PRESENTED IN ANNEX II TO THE REPORT .

5 . THE COURT HAS ISSUED SEPARATE REPORTS TO THE RELEVANT DISCHARGE AUTHORITIES ON THE 1980 ACCOUNTS OF JET ( THE JOINT EUROPEAN TORUS ) , THE EUROPEAN CENTRE FOR THE DEVELOPMENT OF VOCATIONAL TRAINING ( BERLIN ) , THE EUROPEAN FOUNDATION FOR THE IMPROVEMENT OF LIVING AND WORKING CONDITIONS ( DUBLIN ) AND THE EURATOM SUPPLY AGENCY AND THE 1979 ACCOUNTS OF THE EUROPEAN SCHOOLS . A SUMMARY OF THE JET REPORT IS INCLUDED IN CHAPTER 8 OF THIS REPORT , AND SUMMARIES OF THE COMMENTS MADE BY THE COURT IN THE REPORTS ON THE OTHER BODIES ARE INCLUDED IN CHAPTER 12 . THE COURT HAS ALSO MADE A SEPARATE REPORT ON THE FUNCTIONAL ACTIVITIES OF THE ECSC ( SEE POINT 1.32 BELOW ) .

PRESENTATION OF COMMUNITY ACCOUNTS AND ANNUAL REPORT OF COURT OF AUDITORS

6 . THE ACCOUNTS FOR THE FINANCIAL YEAR 1980 WERE RENDERED BY THE COMMISSION ON 1 JUNE 1981 . BUT THE COURT NOTES THAT , IN THE COMMISSION'S PROPOSALS FOR SUPPLEMENTARY AND AMENDING BUDGET NO 2 FOR 1981 , THE BALANCE FOR THE YEAR 1980 IS REGARDED AS HAVING BEEN AMENDED RETROSPECTIVELY BY TRANSACTIONS WHICH OCCURRED IN 1981 ( SEE ALSO POINTS 1.7 AND 3.6 OF THIS REPORT ) .

7 . IN CONFORMITY WITH THE FINANCIAL REGULATION , THE COURT'S COMMENTS WERE SENT TO THE INSTITUTIONS ON 15 JULY 1981 . ALL THE COMMENTS CONTAINED IN PARTS I AND II WERE SENT TO THE COMMISSION . THOSE IN CHAPTERS 1 , 10 AND 11 OF PART I WERE ALSO SENT TO THE PARLIAMENT , THE COUNCIL , THE COURT OF JUSTICE AND THE ECONOMIC AND SOCIAL COMMITTEE .

8 . THE FINANCIAL REGULATION PROVIDES FOR EACH INSTITUTIONS TO ADDRESS ITS REPLY TO THE COURT BY 31 OCTOBER . DURING 1979 IT WAS AGREED BETWEEN THE PRESIDENTS OF THE COMMISSION AND THE COURT THAT THERE SHOULD BE CONSULTATION BETWEEN THE TWO BODIES WHEN THE REPORT WAS BEING FINALIZED IN THE EARLY AUTUMN . THE AGREEMENT WAS IMPLEMENTED THAT YEAR AND AGAIN IN 1980 IN RESPECT OF THE REPORTS ON THE 1978 AND 1979 ACCOUNTS . THE CONSULTATIONS TOOK PLACE ON THE BASIS OF THE DRAFT REPLIES OF THE COMMISSION AND ENABLED CHANGES TO BE MADE , WHERE NECESSARY , IN BOTH THE COMMENTS AND REPLIES IN ORDER TO CLARIFY THE TEXTS AND THEREBY PROVIDE A MORE USEFUL DOCUMENT FOR THE READER . A SIMILAR PRACTICE WAS ADOPTED WITH THE OTHER INSTITUTIONS .

9 . THIS YEAR THE COMMISSION CHANGED THE ARRANGEMENTS - BUT WITHOUT HAVING INFORMED THE COURT OF AN INTENTION TO DO SO . DRAFT COMMISSION REPLIES WERE NOT MADE AVAILABLE FOR SEVERAL CHAPTERS AND FOR OTHERS WERE NOT PROVIDED IN TIME TO BE TAKEN INTO ACCOUNT IN THE CONSULTATIONS . THIS SERIOUSLY LIMITED THE VALUE OF THE CONSULTATIONS .

THE COURT REGRETS THIS DEVELOPMENT ; ITS OVERRIDING PURPOSE IN DRAWING UP THE ANNUAL REPORT IS TO PROVIDE A DOCUMENT WHICH WILL BE OF VALUE TO THE USERS - IN PARTICULAR PARLIAMENT AND COUNCIL IN EXERCISING THEIR POWERS OF CONTROL OVER THE IMPLEMENTATION OF THE BUDGET ( 6 ) . TO ACHIEVE THIS AIM IT NEEDS MAXIMUM COOPERATION FROM THE INSTITUTIONS . THE COURT HOPES THAT DISCUSSIONS NOW BEING HELD WITH THE COMMISSION WILL OVERCOME THE PROBLEMS ENCOUNTERED IN DEALING WITH THIS YEAR'S REPORT AND LEAD TO SATISFACTORY ARRANGEMENTS IN FUTURE .

10 . THE COURT HAS ESTABLISHED THE REPORT AFTER STUDYING THE REPLIES SENT BY THE INSTITUTIONS ON 31 OCTOBER , WHICH ARE CONTAINED IN ANNEXES III TO VII TO THE REPORT . WHERE , IN THE LIGHT OF THE REPLIES , THE COURT HAS FELT THE NEED FOR SOME CLARIFICATION TO GIVE THE READER A BETTER UNDERSTANDING OF THE ISSUES , THIS HAS BEEN PROVIDED IN THE RELEVANT PARAGRAPH OF THE REPORT . THE ABSENCE OF A COMMENT BY THE COURT ON THE INSTITUTIONS' REPLIES DOES NOT , HOWEVER , IMPLY THAT THE COURT AGREES WITH THE REPLY .

11 . THE FINAL TEXT OF THE REPORT WAS ADOPTED BY THE COURT ON 26 NOVEMBER 1981 AND SENT TO THE INSTITUTIONS IN ACCORDANCE WITH ARTICLE 84 OF THE FINANCIAL REGULATION ON 30 NOVEMBER 1981 .

MEMBERSHIP AND ORGANIZATION OF THE COURT

12 . IN OCTOBER 1981 MR PIERRE LELONG WAS ELECTED PRESIDENT IN SUCCESSION TO MR MICHAEL MURPHY . MR MURPHY HAD BEEN RE-ELECTED IN NOVEMBER 1980 , ON COMPLETION OF HIS FIRST THREE-YEAR TERM , BUT HAD THEN INDICATED THAT HE WISHED TO SERVE IN THAT OFFICE ONLY FOR A FURTHER YEAR . FOLLOWING THE ACCESSION OF GREECE TO THE COMMUNITIES , THE GREEK MEMBER , MR GEORGE VITALIS , WAS APPOINTED ON 1 JANUARY 1981 TO THE COURT . THE FOUR MEMBERS WHO WERE INITIALLY APPOINTED FOR 4-YEAR TERMS , MR ALDO ANGIOI , MR PAUL GAUDY , MR ARNE JOHANSEN AND MR MICHAEL MURPHY WERE ALL RE-APPOINTED FOR A FURTHER SIX YEARS FROM 18 OCTOBER 1981 .

13 . IN THE LIGHT OF EXPERIENCE GAINED IN THE FIRST THREE YEARS OF OPERATION AND THE APPOINTMENT OF A TENTH MEMBER , THE COURT REORGANIZED THE ALLOCATION OF RESPONSIBILITIES AMONGST THE MEMBERS WITH EFFECT FROM 1 JANUARY 1981 . THE ALLOCATIONS AS AT 30 NOVEMBER 1981 , AFTER THE CHANGE OF PRESIDENCY , ARE SHOWN IN ANNEX I TO THIS REPORT .

COURT BUDGET AND STAFF

14 . THE COURT'S EXPENDITURE IN 1979 , INCLUDING CARRY-OVERS TO 1980 , AMOUNTED TO SOME 10,0 MEUA , AND IN 1980 , INCLUDING CARRY-OVERS TO 1981 , AMOUNTED TO SOME 10,9 MEUA . THE MAIN ELEMENT IN THESE AMOUNTS IS FOR SALARIES AND ALLOWANCES OF MEMBERS AND STAFF , NAMELY 8 MEUA IN 1979 AND 8,8 MEUA IN 1980 .

15 . THE BUDGETS FOR 1979 AND 1980 PROVIDED FOR THE FOLLOWING NUMBERS OF POSTS :

*1979*1980*

A CATEGORY STAFF*79*96*

LA CATEGORY STAFF*19*22*

B CATEGORY STAFF*44*60*

C CATEGORY STAFF*52*60*

D CATEGORY STAFF*20*21*

TOTAL*214*259*

REPORTS AND OPINIONS

16 . THE COURT IS EMPOWERED BY THE TREATIES ( ARTICLE 78 F ( 4 ) AND 78 H ECSC , ARTICLES 206 A ( 4 ) AND 209 EEC AND ARTICLES 180 A ( 4 ) AND 183 EAEC ) TO SUBMIT OBSERVATIONS ON SPECIFIC QUESTIONS AND TO DELIVER OPINIONS AT THE REQUEST OF ONE OF THE INSTITUTIONS . THE COURT HAS DECIDED TO USE THE FORMER OF THESE POWERS TO PRESENT THE RESULTS OF CERTAIN EXAMINATIONS SEPARATELY FROM THE ANNUAL REPORT .

17 . THE COURT CONSIDERS THAT , IN GENERAL , THE ANNUAL REPORT WILL BE OF MORE VALUE TO THE DISCHARGE AUTHORITY AND OTHER USERS IF IT CONCENTRATES ON MATTERS DIRECTLY RELATED TO THE ACCOUNTS FOR THE FINANCIAL YEAR IN QUESTION . THIS WILL ALSO ENABLE THE ANNUAL REPORT TO BE KEPT TO A REASONABLE LENGTH . OTHER SUBJECTS , WHICH REQUIRE MORE EXTENSIVE TREATMENT AND/OR RELATE TO OPERATIONS COVERING SEVERAL FINANCIAL YEARS , CAN MORE CONVENIENTLY BE PRESENTED , IF APPROPRIATE , SEPARATELY AT ANY CONVENIENT TIME .

18 . THE COURT HAS PUBLISHED THE FOLLOWING REPORTS AND OPINIONS DURING THE YEAR 1 DECEMBER 1980 TO 30 NOVEMBER 1981 :

( A ) SPECIAL REPORT ON ACQUISITION AND CONTROL OVER OFFICE SUPPLIES AND EQUIPMENT , ETC . AS APPLIED BY THE INSTITUTIONS OF THE EUROPEAN COMMUNITIES ( OJ NO C 326 OF 15 . 12 . 1980 )

( B ) OPINION ON THE PROPOSAL FOR A COUNCIL REGULATION LAYING DOWN GENERAL RULES FOR THE SUPPLY AS FOOD AID OF PRODUCTS OTHER THAN CEREALS , SKIMMED-MILK POWDER OR BUTTEROIL TO CERTAIN DEVELOPING COUNTRIES AND SPECIALIZED BODIES ( OJ NO C 326 OF 15 . 12 . 1980 )

( C ) ANNUAL REPORT CONCERNING THE FINANCIAL YEAR 1979 ACCOMPANIED BY THE REPLIES OF THE INSTITUTIONS ( OJ NO C 342 OF 31 . 12 . 1980 )

( D ) SPECIAL REPORT ON THE APPLICATION OF COUNCIL DIRECTIVE 75/268/EEC ON MOUNTAIN AND HILL FARMING IN CERTAIN LESS-FAVOURED AREAS ( OJ NO C 358 OF 31 . 12 . 1980 )

( E ) OPINION ON THE PROPOSAL FOR A COUNCIL REGULATION INTRODUCING A TAX ON CATCHES OF SALMON IN THE BALTIC SEA BY COMMUNITY VESSELS ( OJ NO C 358 OF 31 . 12 . 1980 )

( F ) OPINION ON THE PROPOSAL FOR A COUNCIL REGULATION COMPENSATING GREECE FOR ITS CONTRIBUTION TO THE COST OF THE FINANCIAL MECHANISM AND THE SUPPLEMENTARY MEASURES FOR THE UNITED KINGDOM ( OJ NO C 30 OF 11 . 2 . 1981 )

( G ) OPINION ON THE DRAFT FINANCIAL REGULATION APPLICABLE TO THE FIFTH EUROPEAN DEVELOPMENT FUND ( OJ NO C 45 OF 4 . 3 . 1981 )

( H ) SPECIAL REPORT CONCERNING PUBLISHING , PRINTING AND REPRODUCTION PRACTICES OF THE INSTITUTIONS OF THE EUROPEAN COMMUNITIES ( OJ NO C 150 OF 19 . 6 . 1981 )

( I ) OPINION ON THE PROPOSAL FOR A FINANCIAL REGULATION ON THE APPLICATION OF THE AGREEMENT IN THE FORM OF AN EXCHANGE OF LETTERS BETWEEN THE EUROPEAN ECONOMIC COMMUNITY AND THE PORTUGUESE REPUBLIC CONCERNING THE IMPLEMENTATION OF PRE-ACCESSION AID FOR PORTUGAL ( OJ NO C 156 OF 25 . 6 . 1981 )

( J ) OPINION ON THE COMMISSION'S PROPOSAL FOR A COUNCIL REGULATION AMENDING THE FINANCIAL REGULATION OF 21 DECEMBER 1977 APPLICABLE TO THE GENERAL BUDGET OF THE EUROPEAN COMMUNITIES ( OJ NO C 232 OF 11 . 9 . 1981 )

( K ) SPECIAL REPORT ON THE SECURITIES , DEPOSITS AND GUARANTEES FURNISHED IN RESPECT OF OPERATIONS THAT GIVE RISE TO EXPENDITURE FROM THE EAGGF , GUARANTEE SECTION ( OJ NO C 249 OF 29 . 9 . 1981 )

( L ) OPINION ON THE PROPOSAL FOR A COUNCIL REGULATION COMPENSATING GREECE FOR ITS CONTRIBUTION TO THE COST OF THE FINANCIAL MECHANISM AND THE SUPPLEMENTARY MEASURES FOR THE UNITED KINGDOM ( OJ NO C 282 OF 5 . 11 . 1981 ) .

19 . THE COURT HAS ADOPTED THE FOLLOWING REPORTS WHICH ARE REQUIRED BY THE GOVERNING REGULATIONS :

( A ) OPINION ON A DRAFT COMMISSION REGULATION LAYING DOWN DETAILED RULES FOR THE IMPLEMENTATION OF CERTAIN PROVISIONS OF THE FINANCIAL REGULATION OF 21 DECEMBER 1977

( B ) REPORT ON THE ACCOUNTS OF THE EUROPEAN SCHOOLS FOR 1979

( C ) REPORT ON THE 1980 JET FINANCIAL STATEMENTS

( D ) REPORT ON THE 1980 ACCOUNTS OF THE EURATOM SUPPLY AGENCY

( E ) REPORT ON THE 1980 ACCOUNTS OF THE EUROPEAN FOUNDATION FOR THE IMPROVEMENT OF LIVING AND WORKING CONDITIONS ( DUBLIN )

( F ) REPORT ON THE 1980 ACCOUNTS OF THE EUROPEAN CENTRE FOR THE DEVELOPMENT OF VOCATIONAL TRAINING ( BERLIN )

( G ) REPORT ON THE FINANCIAL STATEMENTS OF THE EUROPEAN COAL AND STEEL COMMUNITY FOR THE FINANCIAL YEAR 1980 .

20 . THE COURT ALSO ADOPTED THE FOLLOWING REPORTS :

( A ) CAHIER D'OBSERVATIONS RELATIF A L'EXERCICE FINANCIER 1978 DE LA CECA

( B ) OBSERVATIONS ON THE PROPOSAL FOR A COUNCIL REGULATION RELATING TO THE FINANCING BY THE EAGGF GUARANTEE SECTION OF CERTAIN INTERVENTION MEASURES , PARTICULARLY THOSE INVOLVING THE BUYING-IN , STORAGE AND SALE OF AGRICULTURAL PRODUCTS BY INTERVENTION AGENCIES

( C ) STUDY ON THE DEVELOPMENT OF THE EUROPEAN FOUNDATION FOR THE IMPROVEMENT OF LIVING AND WORKING CONDITIONS ( DUBLIN )

( D ) STUDY ON THE EUROPEAN CENTRE FOR THE DEVELOPMENT OF VOCATIONAL TRAINING ( BERLIN )

( E ) OBSERVATIONS ON THE FARM ACCOUNTANCY DATA NETWORK ( FADN )

( F ) OBSERVATIONS SUR LA GESTION DE LA CECA POUR 1979

( G ) STUDY OF THE FINANCIAL SYSTEMS OF THE EUROPEAN COMMUNITIES ( 7 ) .

THE COURT'S AUDIT

21 . IN ITS REPLIES ( 8 ) TO THE COMMENTS OF THE COURT CONCERNING THE FINANCIAL YEAR 1979 , THE COMMISSION EXPRESSED REGRET THAT " THE COURT DID NOT PAY MORE ATTENTION TO THE COMMISSION'S EFFORTS TO IMPROVE IMPLEMENTATION OF THE BUDGET AND TOO OFTEN RESTRICTED ITSELF TO CRITICISM ... THE COURT EVALUATES THE COMMISSION'S ACTIVITIES FROM A NEGATIVE POINT OF VIEW RATHER THAN FROM A POSITIVE ONE , AND IN CONSEQUENCE FINISHES UP WITH AN ASSESSMENT WHICH DOES A DISSERVICE TO COMMUNITY INTEGRATION " . THE COMMISSION SUBSEQUENTLY REPLIED IN A SIMILAR VEIN TO A QUESTION ( 9 ) BY A MEMBER OF PARLIAMENT . IN VIEW OF THIS IT SEEMS NECESSARY TO EXPLAIN THE COURT'S APPROACH TO ITS ROLE .

22 . SHORTLY AFTER IT WAS ESTABLISHED , THE COURT CONSIDERED HOW IT SHOULD APPROACH THE RESPONSIBILITIES PLACED UPON IT BY THE TREATIES ( 10 ) , NAMELY THAT IT IS TO EXAMINE

- THE ACCOUNTS OF ALL COMMUNITY REVENUE AND EXPENDITURE ,

- THE LEGALITY AND REGULARITY OF REVENUE AND EXPENDITURE ,

- THE SOUNDNESS OF THE FINANCIAL MANAGEMENT .

THE COURT DECIDED TO ADOPT A SYSTEMS-BASED AUDIT FOR THE EXAMINATION OF THE ACCOUNTS , LEGALITY AND REGULARITY . FOR THE THIRD TASK - THE AUDIT OF FINANCIAL MANAGEMENT - A STUDY WAS CARRIED OUT WHICH INCLUDED A REVIEW OF THE PRACTICES OF OTHER AUDIT BODIES WITHIN AND OUTSIDE THE MEMBER STATES . THE COURT CONCLUDED THAT A SYSTEMS-BASED APPROACH WAS APPROPRIATE FOR THAT TASK AS WELL .

23 . THE SYSTEM-BASED APPROACH MEANS THAT THE AUDITOR SEEKS TO RELY , AS FAR AS POSSIBLE , ON THE WAY IN WHICH THE INFORMATION HE IS TO AUDIT IS PRODUCED . IT IS BASED ON THE IDEA THAT THE INTERNAL ADMINISTRATION , BY ITS ORGANIZATION AND MODE OF OPERATION , SHOULD BE SELF-CONTROLLING ; THIS CONSTITUTES THE CONCEPT OF INTERNAL CONTROL . IN APPLYING THIS APPROACH THE COURT EXAMINES AND EVALUATES ALL THE ELEMENTS OF THE INSTITUTION'S INTERNAL MANAGEMENT WHICH MAKE UP THE PROCESSES OF AUTHORIZING , RECORDING AND VERIFYING FINANCIAL TRANSACTIONS , E.G . THE ORGANIZATION PLAN AND THE ALLOCATION OF RESPONSIBILITIES FOR ACTIONS AND DECISIONS HAVING FINANCIAL AND ACCOUNTING IMPLICATIONS . IF THE SYSTEMS AND PROCEDURES APPEAR TO BE SOUND , THE COURT CARRIES OUT TESTS OF CASES AND TRANSACTIONS AND SUCH OTHER ANALYTICAL CHECKS AS IT DEEMS NECESSARY TO CONFIRM THAT THE SYSTEMS ARE OPERATING AS DESCRIBED AND PRODUCING SATISFACTORY RESULTS . IF SYSTEMS WEAKNESSES ARE IDENTIFIED , CASES AND TRANSACTIONS ARE EXAMINED TO ESTABLISH THE PRACTICAL CONSEQUENCES OF WEAKNESSES . THE APPROACH IS THUS CONCERNED WITH HOW THE EXECUTIVE PERFORMS ITS FUNCTIONS , SO THAT THE COURT DOES NOT SEEK TO SUBSTITUTE ITS OWN JUDGMENTS AND DECISIONS FOR THOSE OF THE MANAGEMENT .

24 . IN DRAWING ATTENTION TO WEAKNESSES , IN ITS OBSERVATIONS , THE COURT'S PURPOSE IS NOT CRITICISM FOR ITS OWN SAKE BUT RATHER TO SECURE IMPROVEMENTS IN AND STRENGTHENING OF SYSTEMS AND PROCEDURES , AND THEREBY PREVENT ERRORS OR WASTE OF RESOURCES . IT IS IN THE INTERESTS OF THE COMMUNITIES IN GENERAL THAT ANY DEFICIENCIES IN MANAGEMENT PROCEDURES SHOULD BE IDENTIFIED AND REMEDIED .

25 . IF REMEDIAL ACTION IS TAKEN IN RESPONSE TO OBSERVATIONS , THE COURT WOULD NOT NORMALLY CONSIDER IT APPROPRIATE TO REFER TO THE CASE IN A PUBLISHED REPORT . ISOLATED HUMAN ERRORS WOULD ALSO NOT NORMALLY BE INCLUDED IN SUCH REPORTS , ALTHOUGH THEY WOULD BE DRAWN TO THE ATTENTION OF THE RESPONSIBLE ADMINISTRATION . ITEMS SELECTED FOR PUBLICATION ARE , IN GENERAL , THOSE ON WHICH THE COURT DECIDES THAT FURTHER CONSIDERATION IS REQUIRED , FOR EXAMPLE BY THE BUDGET OR DISCHARGE AUTHORITIES . THERE MAY , EXCEPTIONALLY , BE CASES WHICH HAVE BEEN REMEDIED BUT WHICH ARE POLITICALLY OR OTHERWISE OF SUFFICIENT INTEREST TO JUSTIFY INCLUSION IN A PUBLISHED REPORT . THE SCALE AND COMPLEXITY OF COMMUNITY OPERATIONS IS SUCH THAT IT WILL TAKE SEVERAL YEARS FOR THE COURT TO EXAMINE ALL THE UNDERLYING SYSTEMS AND PROCEDURES . THE COURT CAN ONLY COMMENT ON THOSE WHICH IT HAS EXAMINED .

( 1 ) ART . 78 F ( 4 ) ECSC , ART . 206 A ( 4 ) EEC AND ART . 180 A ( 4 ) EAEC .

( 2 ) OJ NO L 356 , 31 . 12 . 1977 ; ART . 83 .

( 3 ) ART . 78 D ECSC , ART . 205 A EEC AND ART . 179 A EAEC .

( 4 ) ARTS 73 TO 77 .

( 5 ) ART . 78 G ECSC , ART . 206 B EEC AND ART . 180 B EAEC .

( 6 ) SEE TREATIES ( ART . 78 F 4 ( 4 ) ECSC , ART . 206 A 4 ( 4 ) EEC , ART . 180 A 4 ( 4 ) EAEC ) .

( 7 ) OJ NO C 342 , 31 . 12 . 1981 .

( 8 ) OJ NO C 342 , 31 . 12 . 1980 , P . 249 .

( 9 ) WRITTEN QUESTION NO 2208/80 ; BUT SEE ALSO THE FINAL STATEMENT IN THE DISCHARGE DEBATE BY VICE-PRESIDENT TUGENDHAT TO PARLIAMENT ON 18 JUNE 1981 .

( 10 ) ART . 78 F ECSC , ART . 206 A EEC , ART . 180 A EAEC .

PART I

CHAPTER 1

GENERAL COMMENTS

TABLE OF CONTENTS*POINT*

SUMMARY OF PRINCIPAL COMMENTS*1.0*

ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 1980*1.1 TO 1.22*

UTILIZATION OF APPROPRIATIONS*1.2 TO 1.5*

YEAR OF ACCOUNT AND BALANCE-SHEET QUESTIONS*1.6 TO 1.11*

TRANSFER OF APPROPRIATIONS*1.12 TO 1.14*

PROVISIONAL-TWELFTHS SYSTEM*1.15 TO 1.18*

VERIFICATION OF COMMUNITY ASSETS HELD BY THIRD PARTIES*1.19 AND 1.20*

CONVERSION TO EUA FOR ACCOUNTING PURPOSES*1.21*

REFUSAL OF APPROVAL BY FINANCIAL CONTROLLERS*1.22*

OUTCOME OF PREVIOUS YEARS' OBSERVATIONS*1.23 TO 1.26*

EXAMINATION OF COMMUNITY SYSTEMS OF ACCOUNTING AND INTERNAL CONTROL*1.27 TO 1.29*

THE AUDIT OF THE EUROPEAN COAL AND STEEL COMMUNITY*1.30 TO 1.32*

ACCOUNTING REGULATIONS*1.33 TO 1.36*

SUMMARY OF PRINCIPAL COMMENTS**

1.0 . THE PRINCIPAL COMMENTS IN THIS CHAPTER ARE : **

( A ) THE SYSTEM OF CARRYING FORWARD UNUSED DIFFERENTIATED PAYMENT APPROPRIATIONS MEANS THAT LARGE AMOUNTS OF REVENUE CONTINUE TO BE RAISED DURING A FINANCIAL YEAR BUT NOT USED UNTIL THE FOLLOWING YEAR*1.5*

( B ) QUESTIONS WHICH AFFECT THE AMOUNTS SHOWN IN THE FINAL ACCOUNTS HAVE ARISEN IN A NUMBER OF CASES*1.6 TO 1.11*

( C ) THE PROCEDURES USED FOR CERTAIN TRANSFERS OF APPROPRIATIONS WERE NOT PROVIDED FOR IN THE REGULATIONS*1.12 TO 1.14*

( D ) THE OPERATION OF THE SYSTEM OF " PROVISIONAL TWELFTHS " HAS GIVEN RISE TO QUESTIONS ABOUT THE INTERPRETATION OF THE REGULATIONS*1.15 TO 1.18*

( E ) THE COURT OF AUDITORS HAS ENCOUNTERED DIFFICULTIES IN OBTAINING DIRECT CONFIRMATION OF ASSETS HELD BY THIRD PARTIES*1.19 AND 1.20*

( F ) IN CERTAIN CASES REFUSAL BY THE FINANCIAL CONTROLLERS TO APPROVE TRANSACTIONS HAVE BEEN OVERRULED*1.22*

( G ) MORE THAN HALF THE COURT'S OBSERVATIONS IN PREVIOUS YEARS' REPORTS HAVE NOT SO FAR LED TO CHANGES IN THE SYSTEMS AND PROCEDURES CONCERNED*1.23 TO 1.26*

( H ) THE COURT CARRIED OUT A COMPREHENSIVE EXAMINATION OF THE SYSTEMS OF ACCOUNTING AND OF FINANCIAL CONTROLS*1.27 TO 1.29*

( I ) THE COURT HAS GIVEN OPINIONS ON PROPOSALS FOR**

( I ) NEW IMPLEMENTING MEASURES FOR THE FINANCIAL REGULATION OF 21 . 12 . 1977 , **

( II ) AMENDMENTS TO THE FINANCIAL REGULATION ITSELF . *1.33 TO 1.36 . *

ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 1980

1.1 . THE ACCOUNTS OF THE GENERAL BUDGET OF THE EUROPEAN COMMUNITIES ARE CONTAINED IN A FIVE-VOLUME DOCUMENT ( COM(81 ) 222 TO 224 ) PRODUCED BY THE COMMISSION ON 1 JUNE 1981 . VOLUME V ( COM(81 ) 224 ) OF THE DOCUMENT INCLUDES THE CONSOLIDATED REVENUE AND EXPENDITURE ACCOUNT AND BALANCE-SHEET WHICH , IN GENERAL , FOLLOW THE PATTERN SUGGESTED IN CHAPTER 2 ( TABLES 2 AND 3 ) OF THE COURT'S REPORT FOR THE FINANCIAL YEAR 1979 ( 1 ) . VOLUME V ALSO PROVIDES CERTAIN OTHER GENERAL SUMMARIES SHOWING THE OUTTURN FOR EACH OF THE INSTITUTIONS , TOGETHER WITH THE PRINCIPLES APPLIED IN DRAWING UP THE ACCOUNTS . THE COURT WELCOMES THESE STATEMENTS AS USEFUL DEVELOPMENTS IN THE PRESENTATION OF THE COMMUNITIES' FINANCIAL INFORMATION , AND HOPES THAT THIS INFORMATION WILL BE PUBLISHED . IN THE EXPECTATION THAT IT WILL BE , THE COURT FINDS IT UNNECESSARY TO CONTINUE THE PRACTICE OF PREVIOUS YEARS IN PRESENTING SUCH INFORMATION ITSELF IN THIS REPORT . IN ADDITION TO THE SUMMARIZED INFORMATION IN VOLUME V , MORE DETAILED INFORMATION IS CONTAINED IN THE FIRST FOUR VOLUMES ( COM(81 ) 222 AND 223 ) .

UTILIZATION OF APPROPRIATIONS

1.2 . THE TOTAL APPROPRIATIONS AUTHORIZED TO BE CHARGED TO THE ACCOUNTS IN 1980 AMOUNTED TO 15 182,5 ( 2 ) MEUA , MADE UP AS FOLLOWS :

ORIGINAL BUDGET*15 683,1*

SUPPLEMENTARY BUDGET NO 1*133,0*

SUPPLEMENTARY BUDGET NO 2*366,4*

*16 182,5 ( 2 ) . *

1.3 . THE UTILIZATION OF APPROPRIATIONS BY THE INSTITUTIONS IS SHOWN IN TABLE 1.1 .

TABLE 1.1 - UTILIZATION OF APPROPRIATIONS FOR PAYMENT OF THE 1980 BUDGET AND AMOUNTS CHARGED TO THE CONSOLIDATED REVENUE AND EXPENDITURE ACCOUNT 1980

( MEUA )

APPROPRIATIONS AND UTILIZATION*FINAL APPROPRIATIONS FOR PAYMENT OF THE 1980 BUDGET*PAYMENTS MADE IN 1980 AGAINST APPROPRIATIONS OF THE 1980 BUDGET*CARRY-OVERS TO 1981*AMOUNTS CHARGED TO THE CONSOLIDATED REVENUE AND EXPENDITURE ACCOUNT 1980*

INSTITUTION**AMOUNT*AS % OF FINAL APPROPRIATIONS**AMOUNT*AS % OF FINAL APPROPRIATIONS*

* COMMISSION : *******

NON-DIFFERENTIATED APPROPRIATIONS*13 921,4*13 244,4*95,1 % *474,3*13 718,7*98,5 % *

PAYMENT APPROPRIATIONS ( DIFFERENTIATED ) *1 991,2*1 384,4*69,5 % *606,3*1 990,7*99,9 % *

TOTAL COMMISSION*15 912,6*14 628,8*91,9 % *1 080,6*15 709,4*98,7 % *

* OTHER INSTITUTIONS ( NON-DIFFERENTIATED APPROPRIATIONS ) : *******

PARLIAMENT*177,4*121,8*68,7 % *16,0*137,8*77,7 % *

COUNCIL ( INCLUDING THE ECONOMIC AND SOCIAL COMMITTEE ) *108,6*87,7*80,8 % *9,8*97,5*89,8 % *

COURT OF JUSTICE*21,7*18,1*83,4 % *1,4*19,5*89,9 % *

COURT OF AUDITORS*13,0*10,3*79,2 % *0,6*10,9*83,8 % *

TOTAL*16 233,3 ( 1)*14 866,7*91,6 % *1 108,4*15 975,1*98,4 % *

( 1 ) SEE FOOTNOTE 2 TO POINT 1.2 .

1.4 . DIFFERENTIATED APPROPRIATIONS ARE USED FOR THE IMPLEMENTATION OF MULTIANNUAL ACTIVITIES AND CONSIST OF COMMITMENT APPROPRIATIONS AND PAYMENT APPROPRIATIONS . COMMITMENT APPROPRIATIONS COVER , FOR THE CURRENT FINANCIAL YEAR , THE TOTAL COST OF THE LEGAL OBLIGATIONS ENTERED INTO FOR ACTIVITIES WHOSE IMPLEMENTATION EXTENDS OVER MORE THAN ONE FINANCIAL YEAR . PAYMENT APPROPRIATIONS COVER , UP TO THE LIMIT OF THE AMOUNT ENTERED IN THE BUDGET , EXPENDITURE ARISING FROM COMMITMENTS ENTERED INTO IN THE CURRENT FINANCIAL YEAR AND/OR PRECEDING FINANCIAL YEARS ( 3 ) . THE SUM OF THE AMOUNT PAID IN THE YEAR , AND THE AMOUNT CARRIED OVER TO THE NEXT FINANCIAL YEAR IS CHARGED TO THE CONSOLIDATED REVENUE AND EXPENDITURE ACCOUNT FOR THE YEAR .

1.5 . THE AMOUNT CHARGED TO THE ACCOUNTS FOR THE YEAR 1980 INCLUDED , IN THE CASE OF DIFFERENTIATED PAYMENT APPROPRIATIONS , SOME 600 MEUA CARRIED OVER TO 1981 , I.E . SOME 30 % OF SUCH APPROPRIATIONS AUTHORIZED FOR 1980 . THIS IS AN IMPROVEMENT ON THE SITUATION AT THE END OF 1979 WHEN OVER 1 000 MEUA ( 60 % OF SUCH APPROPRIATIONS ) WERE CARRIED OVER TO 1980 . NEVERTHELESS , LARGE AMOUNTS OF REVENUE CONTINUE TO BE RAISED AND HELD AVAILABLE DURING THE COURSE OF A YEAR , ALTHOUGH THEY ARE NOT REQUIRED TO COVER PAYMENTS UNTIL THE FOLLOWING YEAR . FURTHERMORE , THE REDUCTION IN THE AMOUNT CARRIED OVER AT THE END OF 1980 , AS COMPARED WITH 1979 , IS PARTLY DUE TO AN ACCELERATION OF PAYMENT BY THE COMMISSION OF GRANTS TOWARDS THE COST OF PROJECTS IN THE MEMBER STATES . BUT THIS DOES NOT NECESSARILY REFLECT MORE RAPID PROGRESS IN THE PROJECTS THEMSELVES ; THE SYSTEM OF COMMUNITY FINANCING HAS BEEN CHANGED TO PERMIT PAYMENT IN SUCH CASES BEFORE WORK HAS BEEN CARRIED OUT . THE COMMISSION IS INVITED TO QUANTIFY THE EFFECT OF THIS DEVELOPMENT .

YEAR OF ACCOUNT AND BALANCE-SHEET QUESTIONS

1.6 . A SUPPLEMENTARY BUDGET WAS ADOPTED ON 23 DECEMBER 1980 WHICH INCREASED APPROPRIATIONS FOR THE YEAR BY 366,4 MEUA AND CREATED A PROBLEM SIMILAR TO THAT EXPERIENCED AT THE END OF 1979 . THE ADOPTION OF THE BUDGET CAME TOO LATE FOR THE AMOUNTS INVOLVED TO BE PAID OVER BY THE MEMBER STATES TO THE COMMISSION BEFORE THE END OF DECEMBER . A STRICT APPLICATION OF ARTICLE 5 OF THE FINANCIAL REGULATION WOULD HAVE RESULTED IN THE SUMS IN QUESTION BEING BROUGHT TO ACCOUNT IN 1981 . AS IN THE PREVIOUS YEAR , HOWEVER , THIS WOULD HAVE DEFEATED THE CLEAR INTENTION OF THE BUDGETARY AUTHORITIES , AND THE COMMISSION BROUGHT TO ACCOUNT IN 1980 FUNDS ACTUALLY RECEIVED IN 1981 . THE COMMISSION'S PROPOSALS TO AMEND THE FINANCIAL REGULATION ( SEE POINT 1.36 BELOW ) CONTAIN A REVISION TO ARTICLE 5 TO DEAL WITH A SITUATION OF THIS KIND .

1.7 . THERE WAS , HOWEVER , AN ADDED PROBLEM WITH THIS SUPPLEMENTARY BUDGET . ITS VALIDITY WAS QUESTIONED BY CERTAIN MEMBER STATES WHO HELD BACK SUMS TOTALLING 165,0 MEUA OUT OF THE OWN RESOURCES . CONSEQUENTLY , OF THE TOTAL OF 366,4 MEUA MENTIONED IN THE PREVIOUS POINT 201,4 MEUA WAS BROUGHT TO ACCOUNT IN THE REVENUE AND EXPENDITURE ACCOUNT FOR 1980 PRESENTED BY THE COMMISSION ON 1 JUNE 1981 . ( SEE POINT 3.6 BELOW FOR DETAILS . )

1.8 . AS REPORTED IN POINTS 1,28 AND 1.29 OF THE COURT'S REPORT FOR THE FINANCIAL YEAR 1979 ( 4 ) , THE SUM OF 203,5 MEUA INCURRED IN 1979 HAS BEEN CHARGED AGAINST THE APPROPRIATIONS FOR 1980 AND IS INCLUDED IN THE TOTAL EXPENDITURE OF 2 587,8 MEUA FOR ITEM 6200 FOR THE LATTER YEAR . IT SHOULD BE NOTED , HOWEVER , THAT IN 1980 THE DETAILED COMMITMENT AND CHARGING AS PAYMENT OF THE 203,5 MEUA WAS EFFECTED WITHOUT THE NORMAL PROCEDURE OF GLOBAL COMMITMENT , AS REQUIRED BY ARTICLES 96 AND 97 OF THE FINANCIAL REGULATION , HAVING BEEN RESPECTED .

1.9 . THE DELAYS IN THE CLEARANCE OF ACCOUNTS MENTIONED , IN THE COURT'S REPORT FOR THE FINANCIAL YEAR 1979 ( 5 ) HAVE PERSISTED . THE LATEST ACCOUNTS CLEARED AS AT 1 JUNE 1981 ARE :

EAGGF GUARANTEE : 1973

SOCIAL FUND : 1974

FOOD AID : 1974

PAST EXPERIENCE SUGGESTS THAT THE CLEARANCE OF ACCOUNTS FOR THESE ACTIVITIES WILL GIVE RISE TO ADJUSTMENTS WHICH WILL BE ENTERED IN THE ACCOUNTS OF THE GENERAL BUDGET IN FUTURE YEARS .

1.10 . VARIOUS OTHER QUESTIONS HAVE ARISEN WHICH AFFECT THE AMOUNTS CHARGED AS EXPENDITURE IN THE ACCOUNTS . THESE ARE DESCRIBED IN DETAIL IN THIS AND SUBSEQUENT CHAPTERS AND MAY RESULT IN THE NEED TO ADJUST THE AMOUNTS FOR WHICH THE APPROPRIATE AUTHORITIES ARE INVITED TO GIVE DISCHARGE AS WELL AS THE BALANCE FOR THE YEAR . THE CASES CONCERNED AND THE AMOUNTS INVOLVED ARE AS FOLLOWS :

POINT*AMOUNT ( MEUA ) *

1.13*18,7*

1.14*20,1*

2.10*1,7*

2.13*1,3 ( 6 )*

2.17 ( C ) *0,8*

2.23 ( B ) *0,1*

2.24*1,1*

4.11*2,8*

4.20*203,5 ( 6 )*

4.26*4,0*

4.33*65,7*

5.4*2,3*

6.8*5,8*

FURTHERMORE , THE COURT HAS ALSO NOTED CASES WHERE REVENUE , TO WHICH THE COMMISSION APPEARS TO HAVE BEEN ENTITLED , WAS NOT COLLECTED AND/OR BROUGHT TO ACCOUNT DURING THE FINANCIAL YEAR ( SEE POINTS 2.22 , 3.6 , 3.16 , 3.33 AND 3.37 TO 3.43 ) .

1.11 . TITLE V OF THE FINANCIAL REGULATION SETS OUT THE CIRCUMSTANCES IN WHICH OFFICIALS MAY RENDER THEMSELVES PERSONALLY LIABLE TO DISCIPLINARY ACTION AND PAYMENT OF COMPENSATION . THE APPLICATION OF THESE PROVISIONS SHOULD BE CONSIDERED IN CASES WHERE TRANSACTIONS ARE IN CONFLICT WITH SPECIFIC PROVISIONS OF THE REGULATION .

TRANSFER OF APPROPRIATIONS

1.12 . THE COURT OF AUDITORS HAS NOTED TWO TYPES OF IRREGULAR TRANSFER OPERATIONS DURING THE FINANCIAL YEAR 1980 .

OPEN TRANSFER

1.13 . TRANSFER NO 21/80 WAS PROPOSED BY THE COMMISSION TO COVER ADDITIONAL APPROPRIATIONS NEEDED IN CHAPTER 58 . THE PROPOSAL SPECIFIED THE TOTAL SUM REQUIRED AND THE BUDGETARY ITEMS WHICH WOULD PROVIDE THE SAVINGS BUT NOT THE AMOUNT TO COME FROM EACH . THIS WAS BECAUSE , AT THE TIME , IT WAS NOT POSSIBLE TO DETERMINE FROM THE ACCOUNTS HOW MUCH WOULD BE AVAILABLE IN EACH ITEM .

SUCH PROCEDURE IS NOT PROVIDED FOR IN ARTICLE 21 OF THE FINANCIAL REGULATION , AND IT CONTRAVENES THE PRINCIPLE OF SPECIFICITY OF APPROPRIATIONS . IN THE EVENT , IN ORDER TO MAKE UP THE AMOUNT REQUIRED FOR CHAPTER 58 , THE COMMISSION WAS OBLIGED TO INCLUDE IN THE TRANSFER 18,7 MEUA WHICH HAD BEEN CARRIED OVER FROM 1979 .

THE COURT CANNOT ACCEPT AS JUSTIFICATION ( COMMISSION REPLY ANNEX V , POINT 1.13 ) THAT SIMILAR PRACTICES FOR THE PERIOD 1973-76 APPARENTLY PASSED WITHOUT AUDIT COMMENT . THE COURT HAS PROPOSED ( 7 ) AMENDMENTS TO THE FINANCIAL REGULATION WHICH WOULD MAKE IT CLEAR THAT SUCH OPERATIONS ARE NOT ADMISSIBLE .

TRANSFER IN 1980 OF 1979 APPROPRIATIONS CARRIED OVER

1.14 . IN ITS REPORT FOR THE FINANCIAL YEAR 1979 ( 8 ) , THE COURT CRITICIZED THE TRANSFER OF FUNDS WHICH HAD ALREADY BEEN CARRIED OVER FROM THE PREVIOUS YEAR , A PROCEDURE WHICH IS NOT PROVIDED FOR IN THE FINANCIAL REGULATION , AND IS CONTRARY TO THE PRINCIPLE OF ANNUALITY .

DURING THE FINANCIAL YEAR 1980 THE COMMISSION HAS AGAIN USED THIS PROCEDURE FOR SUMS TOTALLING 38,8 MEUA . INCLUDING THE CASE MENTIONED IN POINT 1.13 ABOVE , THERE WERE THREE SUCH TRANSFERS :

TRANSFER FROM ITEM*TRANSFER TO ITEM*AMOUNT IN MEUA*

375*379*0,089*

32 , 33 , 37 , 87*58*18,697*

93*95*20,000*

TOTAL**38,786*

THE COURT OF AUDITORS REITERATES ITS VIEW THAT SUCH OPERATIONS ARE NOT COVERED BY THE REGULATIONS AND MUST THEREFORE BE REGARDED AS IRREGULAR . CONSEQUENTLY , THE PAYMENTS MADE AGAINST THE APPROPRIATIONS CONCERNED MUST ALSO BE REGARDED AS IRREGULAR , CONTRARY TO THE VIEWS OF THE COMMISSION ( ANNEX V , POINT 1.14 ) . IN ORDER TO PUT THE MATTER BEYOND DOUBT THE COURT HAS PROPOSED , IN ITS OPINION ( 9 ) ON THE COMMISSION'S PROPOSALS TO AMEND THE FINANCIAL REGULATION , AMENDMENTS WHICH WOULD EXCLUDE TRANSACTIONS OF THIS NATURE .

PROVISIONAL-TWELFTHS SYSTEM

1.15 . THE BUDGET FOR 1980 HAD NOT BEEN ADOPTED ON 1 JANUARY 1980 AND , IN ACCORDANCE WITH THE TREATIES AND THE FINANCIAL REGULATION , THE SYSTEM OF PROVISIONAL APPROPRIATIONS WAS BROUGHT INTO OPERATION TO ENABLE THE INSTITUTIONS TO CONTINUE TO FUNCTION . THIS PROCEDURE ALLOWS , FOR EACH CHAPTER OF THE BUDGET , COMMITMENTS TO BE ENTERED INTO DURING THE FIRST MONTH UP TO ONE-QUARTER OF TOTAL APPROPRIATIONS IN THE RELEVANT CHAPTER IN THE PRECEDING FINANCIAL YEAR , WITH THE LIMIT INCREASED BY ONE-TWELFTH IN EACH SUCCEEDING MONTH , SUBJECT TO AN OVERALL LIMIT OF THE AMOUNT INCLUDED IN THE DRAFT BUDGET FOR THE NEW YEAR . PAYMENTS MAY BE MADE EACH MONTH NOT EXCEEDING ONE-TWELFTH OF THE APPROPRIATIONS IN THE RELEVANT CHAPTER OF THE PRECEDING FINANCIAL YEAR OR OF THE DRAFT BUDGET FOR THE NEW YEAR , WHICHEVER IS LESS .

1.16 . AT THE REQUEST OF THE COMMISSION , THE COUNCIL MAY , AFTER CONSULTING THE PARLIAMENT , AUTHORIZE THE SIMULTANEOUS EXPENDITURE OF TWO OR MORE PROVISIONAL TWELFTHS .

1.17 . THE OPERATION OF THIS PROCEDURE IN 1980 SHOWED THAT IN CERTAIN RESPECTS THE REGULATIONS LACKED PRECISION , FOR EXAMPLE :

( A ) WHETHER THE LIMITS DERIVED FROM THE PREVIOUS YEAR SHOULD TAKE ACCOUNT OF ALL TRANSFERS ,

( B ) WHAT CUMULATIVE LIMIT SHOULD BE APPLIED AFTER THE PRESENTATION OF A NEW DRAFT BUDGET .

IN ITS OPINION ON THE COMMISSION'S PROPOSALS TO AMEND THE FINANCIAL REGULATION ( SEE POINT 1.36 BELOW ) , THE COURT HAS SUGGESTED THAT SUCH UNCERTAINTIES SHOULD BE CLARIFIED .

1.18 . IN THE CASE OF THE GUARANTEE SECTION OF THE EAGGF THE LIMITS APPLIED BY THE COMMISSION APPEARED TO THE COURT TO BE IN EXCESS OF THOSE PERMITTED BY THE FINANCIAL REGULATION BY AMOUNTS VARYING BETWEEN 428,6 MEUA AND 1 183,9 MEUA DURING THE FIRST HALF OF THE FINANCIAL YEAR . DETAILS ARE GIVEN IN POINTS 4.14 TO 4.19 OF CHAPTER 4 .

VERIFICATION OF COMMUNITY ASSETS HELD BY THIRD PARTIES

1.19 . THE COURT OF AUDITORS DECIDED TO SEEK INDEPENDENT CONFIRMATION OF COMMUNITY ASSETS HELD BY THIRD PARTIES - MAINLY BALANCES OF BANK ACCOUNTS . INSTITUTIONS AND OTHER BODIES WERE ACCORDINGLY ASKED TO AUTHORIZE THE THIRD PARTIES CONCERNED TO PROVIDE THE APPROPRIATE CERTIFICATES OF BALANCES AND OTHER COMMUNITY ASSETS , AND TO SEND SUCH INFORMATION DIRECT TO THE COURT . THE COMMISSION REFUSED TO INSTITUTE SUCH A PROCEDURE , ON THE GROUNDS THAT THE COURT WAS NOT ENTITLED UNDER THE TREATIES TO BE IN DIRECT CONTACT WITH THE THIRD PARTIES CONCERNED .

1.20 . ALTHOUGH THE COURT EXPLAINED THAT THE PROCEDURE PROPOSED IS WIDELY RECOGNIZED AS AN ESSENTIAL ELEMENT IN THE CHECKS CARRIED OUT BY EXTERNAL AUDITORS AND IS COMMONLY PRACTISED IN COMPARABLE CIRCUMSTANCES IN BOTH THE PUBLIC AND PRIVATE SECTORS IN THE MEMBER STATES , THE COMMISSION HAS SO FAR PERSISTED IN ITS REFUSAL ( SEE POINTS 2.8 AND 2.9 OF CHAPTER 2 ) . THE EURATOM SUPPLY AGENCY , ALTHOUGH ITSELF WILLING TO ACCEDE TO THE COURT'S REQUEST , HAS FELT OBLIGED TO ABIDE BY INSTRUCTIONS GIVEN BY THE COMMISSION TO REFUSE SUCH ARRANGEMENTS ( SEE POINT 12.6 OF CHAPTER 12 ) . THE PARLIAMENT AND THE EUROPEAN SCHOOLS HAVE EACH AUTHORIZED BANKERS TO PROVIDE THE INFORMATION REQUESTED DIRECTLY TO THE COURT AND THE PROCEDURE HAS OPERATED WITHOUT PROBLEMS .

CONVERSION TO EUA FOR ACCOUNTING PURPOSES

1.21 . OWN RESOURCES AND FINANCIAL CONTRIBUTIONS HAVE BEEN CONVERTED TO EUA AT THE RATE OF EXCHANGE RULING ON THE DUE DATE FOR PAYMENT . OTHER ITEMS OF INCOME AND EXPENDITURE HAVE BEEN CONVERTED AT A STANDARD RATE OF EXCHANGE FOR THE MONTH IN WHICH THEY WERE RECEIVED OR PAID . GAINS AND LOSSES ON EXCHANGE HAVE BEEN INCLUDED IN ACCOUNT 951 " GAIN ON DIFFERENCES IN EXCHANGE RATES " ( 10 ) . THE MONETARY ITEMS IN THE BALANCE-SHEET HAVE BEEN CONVERTED AT THE MONTHLY RATES FOR DECEMBER WHICH WERE DERIVED FROM ACTUAL RATES AT THE END OF NOVEMBER . THE COURT OF AUDITORS HAS CRITICIZED THIS SITUATION IN THE PAST AND , IN ITS OPINION ON THE FINANCIAL REGULATION ( SEE POINT 1.36 BELOW ) , HAS PROPOSED AMENDMENTS WHICH WOULD CHANGE THE PROCEDURE .

REFUSAL OF APPROVAL BY FINANCIAL CONTROLLERS

1.22 . UNDER THE PROVISIONS OF THE FINANCIAL REGULATION , PROPOSALS FOR THE COMMITMENT OF EXPENDITURE AND PAYMENT ORDERS ARE SUBJECT TO THE PRIOR APPROVAL OF THE FINANCIAL CONTROLLER . SUCH PRIOR APPROVAL IS ALSO REQUIRED FOR CONTRACTS WITH THIRD PARTIES FOR SUPPLIES AND SERVICES . A REFUSAL OF APPROVAL CAN BE OVERRULED ( EXCEPT WHERE THE AVAILABILITY OF APPROPRIATIONS IS IN DOUBT ) BY A REASONED DECISION OF THE SUPERIOR AUTHORITY OF THE COMPETENT INSTITUTION . THE FINANCIAL REGULATION PROVIDES FOR SUCH CASES TO BE NOTIFIED TO THE COURT OF AUDITORS EVERY THREE MONTHS . THE COURT HAS BEEN INFORMED THAT DURING 1980 REFUSALS OF APPROVAL BY FINANCIAL CONTROLLERS WERE OVERRULED ON SIX OCCASIONS BY THE COMMISSION , ONCE IN PARLIAMENT AND TWICE IN THE ECONOMIC AND SOCIAL COMMITTEE . THE MOST SIGNIFICANT CASE CONCERNED THE COMMISSION AND RELATED TO RENTAL PAYMENTS TOTALLING SOME 9 MEUA ; FOR SOME OF THESE THE AVAILABILITY OF APPROPRIATIONS UNDER THE PROVISIONAL-TWELFTHS PROCEDURE WAS IN QUESTION ( SEE POINTS 11.4 TO 11.6 ) .

OUTCOME OF PREVIOUS YEARS' OBSERVATIONS

1.23 . AS A PART OF THE COURT'S FOLLOW-UP AND EVALUATION OF ITS WORK , AN ANALYSIS HAS BEEN CARRIED OUT OF THE OUTCOME OF THE MAIN OBSERVATIONS IN ANNUAL REPORTS ISSUED BY THE COURT SINCE IT WAS SET UP .

1.24 . LESS THAN HALF OF THE OBSERVATIONS MADE IN THE FIRST THREE ANNUAL REPORTS OF THE COURT HAVE BEEN FOLLOWED UP AND RESOLVED , EITHER COMPLETELY OR PARTIALLY , BY THE RESPONSIBLE INSTITUTION .

1.25 . THE ANALYSIS HAS , HOWEVER , ALSO DISCLOSED THAT MORE THAN HALF OF THE OBSERVATIONS HAVE NOT SO FAR LED TO A CHANGE IN THE SYSTEMS AND PROCEDURES CONCERNED , NOR IN SOME CASES TO ANY POSITIVE RESPONSE TO THE OBSERVATION . SOMETIMES THE COURT'S OBSERVATIONS HAVE BEEN FOLLOWED UP AND SUPPORTED IN THE PARLIAMENT AND/OR THE COUNCIL , BUT IN OTHER CASES THERE HAS BEEN NO REACTION AT ALL . THE COURT OF AUDITORS MUST PLACE ON RECORD ITS DISAPPOINTMENT THAT IN SO MANY CASES ITS OBSERVATIONS HAVE NOT BEEN ACTED UPON .

1.26 . OBSERVATIONS FROM PREVIOUS YEARS ON WHICH REMEDIAL ACTION HAD NOT BEEN TAKEN DURING THE FINANCIAL YEAR 1980 INCLUDE THE FOLLOWING .

ACCOUNTING MATTERS

( A ) THERE IS NO PROPER DOCUMENTATION RECORDING EITHER THE ACCOUNTING SYSTEMS AND PROCEDURES OR THE OVERALL SYSTEM OF CONTROL FOR THE GENERAL ACCOUNTS . ( AR 1977 ( 1 ) , 11.3 ) . THE ABSENCE OF DOCUMENTATION TO WHICH THE COURT IS REFERRING ( COMMISSION REPLY - ANNEX V , POINT 1.26 ( A ) ) , RELATES TO THE MANAGEMENT I.E . MANUALS OF PROCEDURE , JOB DESCRIPTIONS ETC . WHICH ARE ESSENTIAL FOR SOUND ORGANIZATION OF WORK AND OF INTERNAL CONTROL .

( B ) AUTHORIZATION AND CONTROL PROCEDURES FOR MAKING CORRECTING ENTRIES ARE WEAK . ( AR 1977 ( 11 ) , 11.3 ) .

( C ) THERE ARE LONG DELAYS IN RECEIVING THE INFORMATION FROM AUTHORIZING OFFICERS WHICH WOULD ENABLE ITEMS TO BE CLEARED FROM SUSPENSE ACCOUNTS . ( AR 1978 ( 12 ) , 11.4 AND 11.5 . )

OWN RESOURCES

( D ) CONTINUATION BY THE COMMISSION OF THE PRACTICE OF SUSPENDING RECOVERY PROCEDURE IN RESPECT OF FINES WHICH ARE THE SUBJECT OF APPEAL TO THE COURT OF JUSTICE . ( AR 1978 ( 12 ) , 12.42 AND THIS REPORT 3.38 . )

EUROPEAN AGRICULTURAL GUIDANCE AND GUARANTEE FUND ( GUARANTEE SECTION )

( E ) THE FINANCIAL CONTROLLER APPROVES SOME PAYMENT ORDERS BEFORE APPROVING THE CORRESPONDING PROPOSAL FOR COMMITMENT . IN OTHER CASES HE GIVES A " QUALIFIED " APPROVAL . ( AR 1979 ( 13 ) , 4.15 AND 4.35 . )

( F ) THE PROCEDURE FOR GRANTING ADVANCES CARRIES IN ITSELF THE RISK OF CONFUSION BETWEEN FINANCIAL YEARS AND THEREFORE OF EXCEEDING THE AUTHORIZED APPROPRIATIONS . ( AR 1979 ( 13 ) 4.26 TO 4.30 . )

( G ) THE REVENUE FROM THE INTRA-COMMUNITY MONETARY COMPENSATORY AMOUNTS AND FROM THE CO-RESPONSIBILITY LEVY IS ENTERED IN THE BUDGET AS NEGATIVE APPROPRIATIONS WITHOUT ANY LEGAL BASIS . ( AR 1978 ( 14 ) , 2.11 ET SEQ . ; AR 1979 ( 13 ) , 4.36 AND 4.37 . )

( H ) THE FACILITY PROVIDED BY THE REGULATIONS FOR ANTICIPATED DEPRECIATION OF PUBLIC STOCKS WAS USED WITHOUT REFERENCE TO ANY OBJECTIVE CRITERIA AND METHOD , RESULTING IN AN INFRINGEMENT OF THE RULE OF ANNUALITY . ( AR 1978 ( 14 ) , 2.21 TO 2.23 . )

( I ) CLEARANCE OF THE ACCOUNTS TAKES PLACE FAR BEYOND THE TIME-LIMIT LAID DOWN IN REGULATION NO 729/70 OF 21 APRIL 1970 . ( AR 1977 ( 15 ) , 2.2 ; AR 1978 ( 4 ) , 2.28 ; AR 1979 ( 13 ) , 4.47 . )

( J ) THE SYSTEM OF INSPECTION OF COMMERCIAL DOCUMENTS LAID DOWN BY DIRECTIVE NO 77/435 OF 27 JUNE 1977 WAS PUT INTO OPERATION BEHIND SCHEDULE . ( AR 1979 ( 13 ) , 4.63 . )

THE EUROPEAN REGIONAL DEVELOPMENT FUND

( K ) THE COMMISSION IS NOT ABLE TO PROVIDE ESSENTIAL ACCOUNTING INFORMATION SUCH AS A LIST OF ACCELERATED PAYMENTS OR THE ACCOUNTING SITUATION OF INDIVIDUAL PROJECTS . ( AR 1979 ( 13 ) , 7.9 , 7.12 AND 7.13 . )

( L ) THE COMMISSION HAS NOT ADOPTED A SYSTEM OF SELECTION OF AIDS AND SUBSEQUENT VERIFICATION OF THEIR EFFECTS IN APPLICATION OF ARTICLES 5 , 6 AND 7 OF THE FUND REGULATION . ( AR 1979 ( 13 ) , 7.19 . )

COOPERATION WITH DEVELOPING COUNTRIES AND NON-MEMBER STATES

( M ) THERE ARE CONSIDERABLE DELAYS IN CLEARING THE ACCOUNTS OF THE NATIONAL INTERVENTION AGENCIES . ( AR 1978 ( 16 ) , 7.15 . )

( N ) THERE ARE DELAYS IN PLANNING AND IMPLEMENTING THE AID PROGRAMMES . ( AR 1978 ( 16 ) , 7.20 . )

( O ) WITHIN THE FRAMEWORK OF COOPERATION WITH THIRD COUNTRIES , THE FINANCING AGREEMENTS CONCLUDED BETWEEN THE COMMISSION AND THE RECIPIENT COUNTRIES SHOULD MAKE SPECIFIC MENTION OF THE POWERS OF AUDIT OF THE COURT OF AUDITORS . ( AR 1979 ( 17 ) , 9.47 . )

OPERATIONAL EXPENDITURE

( P ) THE COURT OF JUSTICE HAS NOT APPOINTED A FINANCIAL CONTROLLER AS REQUIRED BY ARTICLE 19 OF THE FINANCIAL REGULATION OF 21 DECEMBER 1977 . ( AR 1978 ( 16 ) , 9.3 . )

THE EUROPEAN DEVELOPMENT FUNDS

( Q ) THE ACCOUNTS OF THE FUNDS HAVE NOT BEEN CLOSED AND THE COURT RECOMMENDS THAT THEY BE SO . ( AR 1978 ( 16 ) , 1.1 . )

( R ) THE DIVISION OF POWERS BETWEEN THE COMMISSION AND THE EIB ( SPECIAL LOANS AND RISK CAPITAL ) RAISES PROBLEMS OF COORDINATION AND AUDIT . ( AR 1978 ( 16 ) , 3.14 . )

EXAMINATION OF COMMUNITY SYSTEMS OF ACCOUNTING AND INTERNAL CONTROL

1.27 . DURING 1980 THE COURT OF AUDITORS CARRIED OUT A COMPREHENSIVE EXAMINATION OF THE SYSTEMS OF ACCOUNTING AND FINANCIAL CONTROLS OF THE INSTITUTIONS OF THE COMMUNITIES . THE EXAMINATION WAS ON TWO LEVELS :

( A ) A GENERAL STUDY OF THE FINANCIAL SYSTEMS OF THE EUROPEAN COMMUNITIES FROM THE PROCEDURES RELATING TO THE PREPARATION OF THE BUDGET UP TO THE DISCHARGE BY THE PARLIAMENT IN RESPECT OF THE IMPLEMENTATION OF THE BUDGET ,

( B ) A DETAILED EXAMINATION OF THE OPERATIONAL SYSTEMS OF ACCOUNTING AND FINANCIAL INFORMATION .

1.28 . THE REPORT OF THE GENERAL STUDY AT ( A ) ABOVE WAS SENT TO THE COMMISSION IN DECEMBER 1980 . THE COMMISSION'S COMMENTS WERE RECEIVED BY THE COURT ON 16 JUNE 1981 .

1.29 . MATTERS OF A MORE GENERAL NATURE ARISING OUT OF BOTH PARTS OF THE EXAMINATION HAVE BEEN TAKEN INTO ACCOUNT IN THE COURT'S OPINIONS ON THE COMMISSION'S PROPOSALS TO AMEND THE FINANCIAL REGULATION AND IMPLEMENTING MEASURES ( SEE POINTS 1.34 TO 1.36 BELOW ) .

THE AUDIT OF THE EUROPEAN COAL AND STEEL COMMUNITY

1.30 . THE TREATY PROVISIONS GOVERNING THE AUDIT OF THE ECSC ARE SOMEWHAT DIFFERENT FROM THOSE RELATING TO THE OTHER TWO COMMUNITIES . A DISTINCTION IS DRAWN BETWEEN ADMINISTRATIVE REVENUE AND EXPENDITURE AND OTHER REVENUE AND EXPENDITURE , I.E . THAT RELATING TO THE FUNCTIONAL ACTIVITIES OF THE COMMUNITY , INCLUDING LOANS AND BORROWINGS . THE COURT OF AUDITORS IS REQUIRED TO REPORT SEPARATELY ON THESE TWO ASPECTS .

1.31 . THE ADMINISTRATIVE EXPENDITURE IS DEBITED TO THE ACCOUNTS OF THE COMMISSION AND A LUMP SUM CONTRIBUTION ( AMOUNTING TO 5 MEUA P.A . SINCE 1978 ) IS MADE TO THE COMMISSION'S ACCOUNTS OUT OF THE ECSC REVENUE AND EXPENDITURE ACCOUNT . ALL THESE TRANSACTIONS ARE COVERED BY THE AUDIT EXAMINATION WHICH LEADS UP TO THE COURT'S ANNUAL REPORT UNDER ARTICLE 78 F ( 4 ) OF THE ECSC TREATY .

1.32 . THE COURT'S REPORTS ON THE FUNCTIONAL ACTIVITIES OF THE ECSC ( UNDER ARTICLE 78 F ( 5 ) OF THE TREATY ) ARE SUBMITTED TO THE HIGH AUTHORITY ( I.E . THE COMMISSION ) AND THE COUNCIL . THE COURT'S EXAMINATION OF THE SYSTEMS OF ACCOUNTING AND FINANCIAL CONTROLS OF THE ECSC RESULTED IN A NUMBER OF OBSERVATIONS ABOUT WEAKNESSES IN PROCEDURES . THESE WERE GENERALLY ACCEPTED BY THE COMMISSION AND REMEDIAL ACTION HAS BEEN PROMISED . THE PRINCIPAL POINTS ARISING HAVE BEEN INCLUDED IN A REPORT SUBMITTED TO THE HIGH AUTHORITY AND THE COUNCIL ON 9 JANUARY 1981 .

ACCOUNTING REGULATIONS

1.33 . THE TREATIES ( 18 ) PROVIDE THAT THE COUNCIL SHALL MAKE FINANCIAL REGULATIONS SPECIFYING IN PARTICULAR THE PROCEDURE TO BE ADOPTED FOR ESTABLISHING AND IMPLEMENTING THE BUDGET AND FOR PRESENTING AND AUDITING ACCOUNTS . THE FINANCIAL REGULATION MADE UNDER THESE POWERS IS THUS INTENDED TO PROVIDE THE BASIC FRAMEWORK FOR THE IMPLEMENTATION OF THE GENERAL BUDGET AND IS THEREFORE ONE OF THE MAIN INSTRUMENTS FOR THE MANAGEMENT OF THE COMMUNITIES' FINANCIAL AFFAIRS . IT IS ALSO OF GREAT IMPORTANCE TO THE COURT OF AUDITORS IN CARRYING OUT ITS FUNCTIONS . THE REGULATION CURRENTLY IN FORCE WAS MADE BY THE COUNCIL ON 21 DECEMBER 1977 AND ARTICLE 107 PROVIDED FOR IT TO BE REVIEWED AT THREE-YEARLY INTERVALS .

1.34 . IN PARAGRAPHS 1.37 TO 1.40 OF ITS REPORT FOR THE FINANCIAL YEAR 1979 , THE COURT POINTED OUT THAT THE IMPLEMENTING MEASURES ENVISAGED UNDER ARTICLE 106 OF THE FINANCIAL REGULATION HAD NOT BEEN MADE AND THAT THE REGULATION OF 29 JUNE 1975 IMPLEMENTING THE FORMER ( REPEALED ) FINANCIAL REGULATION OF 25 APRIL 1973 HAD CONTINUED TO BE APPLIED . THE REPORT NOTED THAT , ON 5 AUGUST 1980 , THE COMMISSION HAD TRANSMITTED TO ALL THE INSTITUTIONS , FOR CONSULTATION , PROPOSALS FOR NEW IMPLEMENTING MEASURES .

1.35 . ON 6 FEBRUARY 1981 THE COURT SUBMITTED ITS OPINION ON THE PROPOSAL TO THE PARLIAMENT , THE COUNCIL AND THE COMMISSION . ON THAT OCCASION THE COURT CONFINED ITS REMARKS TO THE DETAILED CONTENT OF THE PROPOSAL AND RESERVED COMMENTS OF A MORE GENERAL NATURE FOR ITS OPINION ON THE COMMISSIONHS PROPOSALS TO AMEND THE FINANCIAL REGULATION . NEVERTHELESS , THE COURT SUGGESTED A CONSIDERABLE NUMBER OF AMENDMENTS , AIMED AT CLARIFYING OR TIGHTENING THE FINANCIAL PROCEDURES , WHICH THE EXPERIENCE OF ITS FIRST THREE YEARS OF OPERATIONS HAD SHOWN TO BE DESIRABLE .

1.36 . ON 13 JANUARY 1981 THE COUNCIL CONSULTED THE COURT ON A PROPOSAL FROM THE COMMISSION FOR A COUNCIL REGULATION AMENDING THE FINANCIAL REGULATION OF 21 DECEMBER 1977 . THE COURT CONCLUDED THAT THE AMENDMENT SHOULD HAVE REGARD TO CERTAIN PRESSING CONSIDERATIONS OF A FUNDAMENTAL NATURE RELATING TO THE FINANCIAL MANAGEMENT WHICH WERE NOT COVERED IN THE DRAFT . ACCORDINGLY , ON 27 MAY 1981 , THE COURT PRESENTED ITS OPINION IN TWO PARTS , THE FIRST CONTAINING THE OBSERVATIONS OF A GENERAL NATURE AND THE SECOND THE COURT'S PROPOSALS ON INDIVIDUAL ARTICLES . THIS OPINION WAS PUBLISHED IN THE OFFICIAL JOURNAL OF THE EUROPEAN COMMUNITIES ( 19 ) ON 11 SEPTEMBER 1981 .

( 1 ) OJ NO C 342 , 31 . 12 . 1980 , PP . 29 AND 30 .

( 2 ) THE DIFFERENCE BETWEEN THIS TOTAL AND THE TOTAL FINAL APPROPRIATIONS IN TABLE 1.1 IS ATTRIBUTABLE TO PAYMENT BY THIRD PARTIES FOR WORK BY THE JRC ( 12,0 MEUA ) AND TRANSFERS IN 1980 OF FUNDS CARRIED OVER FROM 1979 ( 38,8 MEUA ) . SEE COM(81 ) 224 , P . 14 , POINT 2.2 .

( 3 ) ART . 1 OF FINANCIAL REGULATION , OJ NO L 356 , 31 . 12 . 1977 , P . 2 .

( 4 ) OJ NO C 342 , 31 . 12 . 1980 , P . 16 .

( 5 ) OJ NO C 342 , 31 . 12 . 1980 , POINT 1.36 , P . 18 ( SEE ALSO POINT 1.26 OF THIS REPORT ) .

( 6 ) THESE CASES HAVE ALREADY BEEN THE SUBJECT OF COMMENT BY PARLIAMENT IN THE CONTEXT OF THE 1979 DISCHARGE .

( 7 ) OPINION DATED 27 MAY 1981 , OJ NO C 232 , 11 . 9 . 1981 .

( 8 ) OJ NO C 342 , 31 . 12 . 1980 , PP . 9-10 .

( 9 ) OJ NO C 232 , 11 . 9 . 1981 .

( 10 ) SPECIAL PROVISIONS APPLY TO EAGGF GUARANTEE SECTION .

( 11 ) OJ NO C 313 , 31 . 12 . 1978 .

( 12 ) OJ NO C 326 , 31 . 12 . 1979 .

( 13 ) OJ NO C 342 , 31 . 12 . 1980 .

( 14 ) OJ NO C 326 , 31 . 12 . 1979 .

( 15 ) OJ NO C 313 , 31 . 12 . 1978 .

( 16 ) OJ NO C 326 , 31 . 12 . 1979 .

( 17 ) OJ NO C 342 , 31 . 12 . 1980 .

( 18 ) ART . 78 ( H ) ECSC , ART . 209 EEC , ART . 183 EAEC .

( 19 ) OJ NO C 232 , 11 . 9 . 1981 .

CHAPTER 2

ACCOUNTING MATTERS

TABLE OF CONTENTS*POINT*

SUMMARY OF PRINCIPAL COMMENTS*2.0*

INTRODUCTION*2.1*

THE COMMISSION'S SYSTEM OF CASH ACCOUNTING*2.2 TO 2.11*

EVALUATION OF INTERNAL CONTROL*2.3 TO 2.7*

YEAR-END CHECK OF CASH BALANCES*2.8 TO 2.11*

ACCOUNTING PRINCIPLES AND PRESENTATION OF FINANCIAL STATEMENTS*2.12 TO 2.15*

PREVIOUS YEAR'S SURPLUS*2.12 TO 2.14*

APPROPRIATIONS CARRIED OVER*2.15*

THE ASSETS AND LIABILITIES OF THE INSTITUTIONS*2.16 TO 2.25*

ADJUSTMENT OF THE CONTRA ACCOUNTS OF COMMUNITY BODIES*2.17 AND 2.18*

RECONCILIATION OF CENTRAL AND SUPPLEMENTARY ACCOUNTS*2.19 AND 2.20*

INACCURACIES IN THE VALUATION OF ASSETS AND LIABILITIES*2.21 TO 2.25*

CONCLUSIONS*2.26 TO 2.28*

SUMMARY OF PRINCIPAL COMMENTS**

2.0 . THE PRINCIPAL COMMENTS INCLUDED IN THIS CHAPTER ARE : **

( A ) THERE ARE SERIOUS SHORTCOMINGS IN THE INTERNAL CONTROL OF THE CASH DEPARTMENT OF THE COMMISSION*2.3 TO 2.11*

( B ) ALL EXPENDITURE , EVEN IF ILLEGAL OR IRREGULAR , SHOULD APPEAR NOT IN THE BALANCE-SHEET BUT IN THE REVENUE AND EXPENDITURE ACCOUNT . ONCE THE LATTER HAS BEEN DRAWN UP ON 1 JUNE , NO FURTHER AMENDMENT MAY BE MADE EXCEPT AS PART OF THE PROCESS OF DISCHARGE*2.12 TO 2.14*

( C ) COMPARISON OF THE ACCOUNTS OF THE VARIOUS COMMUNITY BODIES REVEALS DISCREPANCIES THAT WERE LEFT UNCORRECTED BY THE ACCOUNTS DEPARTMENTS AT THE END OF THE FINANCIAL YEAR*2.17 AND 2.18*

( D ) THE END-OF-YEAR PRESENTATION OF ASSETS AND LIABILITIES IS NOT COMPREHENSIVE AND DOES NOT MEET THE STATUTORY REQUIREMENTS*2.19 TO 2.25*

( E ) DESPITE SOME IMPROVEMENT IN THE FORM AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS , THE COURT HAS NOT BEEN ABLE TO SATISFY ITSELF THAT THE BALANCE-SHEET OF THE COMMUNITIES AS AT 31 DECEMBER 1980 ADEQUATELY REFLECTS THE COMMUNITIES' ASSETS AND LIABILITIES AT THAT DATE*2.26 TO 2.28*

GENERAL INTRODUCTION

2.1 . THIS CHAPTER IS CONCERNED WITH THE FAIRNESS OF THE PRESENTATION OF FINANCIAL INFORMATION AND OF THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 1980 . IT ALSO DEALS WITH ACCOUNTING OPERATIONS THAT ARE NOT DIRECTLY CONNECTED WITH A SPECIFIC BUDGET SECTOR .

THE COMMISSION'S SYSTEM OF CASH ACCOUNTING

2.2 . IN THE EUROPEAN COMMUNITIES , THE MAJORITY OF FINANCIAL TRANSACTIONS WITH THIRD PARTIES PASS THROUGH THE CASH ACCOUNTS . THEY ARE THE CHANNEL FOR SUCH TRANSACTIONS IN THE ACCOUNTS , WHETHER OF ASSETS , LIABILITIES , REVENUE OR EXPENDITURE , AND THE CREDIBILITY OF THE SYSTEM OF INTERNAL CONTROL ( 1 ) AS A WHOLE CAN THEREFORE ONLY BE ENHANCED BY A STUDY OF THESE ACCOUNTS .

DURING 1980 THE COURT OF AUDITORS CARRIED OUT A DETAILED EXAMINATION OF CASH ACCOUNTING PROCEDURES . THE PRINCIPAL CONCLUSIONS ARE SUMMARIZED IN THE FOLLOWING PARAGRAPHS . WEAKNESSES WERE FOUND IN THE SYSTEM OF INTERNAL CONTROL WHICH LED THE COURT TO ATTACH PARTICULAR IMPORTANCE TO THE VERIFICATION OF THE CASH ACCOUNTS AT THE END OF THE FINANCIAL YEAR 1980 . ( SEE POINT 2.10 BELOW . )

EVALUATION OF INTERNAL CONTROL

2.3 . THE CENTRAL ACCOUNTS OF THE COMMISSION DO NOT INCLUDE ALL THE BANK ACCOUNTS USED FOR TRANSACTIONS WHOSE RESULTS APPEAR IN THE FINANCIAL STATEMENTS . THUS THE ACCOUNTS DEPARTMENT IS UNAWARE OF THE BANK ACCOUNTS RESERVED FOR BORROWINGS AND LOANS . THE SAME IS TRUE OF THE ACCOUNTS USED BY THE EXTERNAL COMMISSION DELEGATIONS IN MEDITERRANEAN AND ACP COUNTRIES ( 2 ) AND OF CERTAIN ACCOUNTS INTO WHICH ARE PAID RECEIPTS FROM THE SALE OF PUBLICATIONS BY THE INFORMATION OFFICES IN THE MEMBER STATES .

IN SHORT , ABOUT A HUNDRED BANK ACCOUNTS APPEAR TO ESCAPE THE CONTROL OF THE COMMISSION'S ACCOUNTING OFFICER .

IT WOULD BE PREFERABLE IF ALL BANK ACCOUNTS OPENED IN THE COMMISSION'S NAME FOR THE PURPOSES OF IMPLEMENTING THE GENERAL BUDGET AND ITS ANNEXES WERE KNOWN TO THE CASH DEPARTMENT , REGISTERED BY THE ACCOUNTING SYSTEM AND UNDER THE STRICT SUPERVISION OF ITS ACCOUNTING OFFICER . IT WOULD ENABLE THE ACCOUNTING OFFICER TO SAFEGUARD COMMUNITY ASSETS ( 3 ) , RESTORE TO THE ACCOUNTING SYSTEM ITS ROLE AS AN INSTRUMENT OF MANAGEMENT , AND MAKE THE ENTRIES ON WHICH THE FINANCIAL STATEMENTS ARE BASED MORE RELIABLE .

THE VIEW OF THE COMMISSION ( ANNEX V , POINT 2.3 ) CALLS FOR THE FOLLOWING REMARKS FROM THE COURT :

( A ) THE IDEA THAT STRICT SUPERVISION CAN BE EXERCISED BY THE ACCOUNTING OFFICER OVER ACCOUNTS WHICH DO NOT APPEAR IN THE GENERAL BALANCE SEEMS A CONTRADICTION IN TERMS , TO SAY THE LEAST ;

( B ) A SYSTEM OF ACCOUNTS IS NOT A FAITHFUL REFLECTION OF REALITY UNLESS IT IS COMPLETE , AND THE OMISSION OF BANK ACCOUNTS FROM THE CENTRAL ACCOUNTS CAN IN NO CIRCUMSTANCES BE JUSTIFIED ;

( C ) THE SEPARATION - DESIRED BY THE TREATIES - OF THE FUNCTIONS OF ADMINISTRATOR AND ACCOUNTING OFFICER - THE LATTER ALONE BEING RESPONSIBLE FOR SAFEGUARDING THE FUNDS - DISAPPEARS ONCE THE ACCOUNTING OFFICER IS RELIEVED OF RESPONSIBILITY FOR CERTAIN BANK ACCOUNTS HELD BY THE ADMINISTRATIVE DEPARTMENTS .

2.4 . A BASIC MEANS OF CONTROL IS THE REGULAR RECONCILIATION OF THE BANK BALANCES IN THE GENERAL ACCOUNTS WITH THE BANK STATEMENTS . THIS SERVES TO REVEAL ANY TRANSACTIONS RECORDED IN THE ACCOUNTS BUT NOT CONFIRMED BY THE BANK , AND VICE VERSA . THESE INCOMPLETE TRANSACTIONS CAN REVEAL ERRORS OR INCONSISTENCIES REQUIRING CORRECTIVE ACTION . THE ANALYSIS OF ACCOUNTING SYSTEM SHOWED THAT THE IMPORTANCE OF BANK RECONCILIATIONS WAS WELL RECOGNIZED BY THE COMMISSION IN PRINCIPLE , BUT THAT ITS APPLICATION LEFT MUCH TO BE DESIRED . FOR THE BANK ACCOUNTS HELD IN NATIONAL CURRENCY , RECONCILIATIONS ARE MADE ONLY AT IRREGULAR INTERVALS .

FOR EXAMPLE , AT 30 APRIL 1981 , THE RECONCILIATIONS OF 31 DECEMBER 1980 WERE STILL NOT FINALIZED IN THE CASE OF SEVEN BANK ACCOUNTS , TWO OF WHICH SHOWED BALANCES OF 30,7 AND 8,7 MEUA RESPECTIVELY . IN THE CASE OF ACCOUNTS HELD IN EUA , NO RECONCILIATIONS HAVE BEEN MADE AT ALL .

TO AVOID ALL RISK OF ERROR OR FRAUD IT WOULD BE PREFERABLE IF THE INTERNAL ACCOUNTING RULES PROVIDED FOR BANK RECONCILIATIONS TO BE MADE ON A SYSTEMATIC BASIS AT REGULAR FOR ALL BANK ACCOUNTS AND APPROVED BY A SENIOR MEMBER OF THE ACCOUNTS DEPARTMENT .

2.5 . THE CASH DEPARTMENT HAS A STAFF OF 14 , OF WHOM THREE ARE IN LUXEMBOURG . APART FROM AN ORGANIZATION CHART COMMUNICATED ORALLY , THIS DEPARTMENT HAS NEITHER FORMAL DESCRIPTIONS OF THE SYSTEMS AND PROCEDURES EMPLOYED , NOR JOB DESCRIPTIONS . THERE IS SOME CONFUSION AS A RESULT IN THE ALLOCATION OF DUTIES , ESPECIALLY IN RESPECT OF CONTROL , SUPERVISION AND CORRECTION OF CURRENT TRANSACTIONS . THE PRESENT DELAYS IN COMPLETING RECONCILIATIONS AND CLEARING CREDIT ENTRIES FOR PAYMENTS CANCELLED COULD BE OVERCOME BY BETTER SUPERVISION IN THE DEPARTMENT AND STRICTER DEFINITION OF RESPONSIBILITIES .

2.6 . THE CASH ACCOUNT IS KEPT ON AN OFFICE COMPUTER WHICH IS PROGRAMMED BY A COMMERCIAL COMPANY . FROM CORRESPONDENCE AT THE TIME OF ACQUISITION IT IS CLEAR THAT PROGRAMMES PREPARED FOR PARLIAMENT WERE TAKEN OVER WITHOUT ANY ATTEMPT AT ADAPTATION TO THE SPECIAL REQUIREMENTS OF THE COMMISSION . THE GENERAL AND CASH ACCOUNTS ARE KEPT ON THE SAME COMPUTER . IT OPERATES VERY SLOWLY , CAUSING CONSTANT BOTTLENECKS IN DATA ACQUISITION AND CONSEQUENT DELAYS IN OBTAINING THE INFORMATION NECESSARY FOR DAY-TO-DAY MANAGEMENT . CERTAIN DATA ARE PERIODICALLY PROCESSED SOME 250 KILOMETRES AWAY BY THE COMPANY RESPONSIBLE FOR PROGRAMMING , WHICH INVOLVES FURTHER DELAYS . THUS THE CASH DEPARTMENT HAS TO KEEP A SET OF PARALLEL MANUAL ACCOUNTS IN ORDER TO FOLLOW THE ACCOUNTING SITUATION FROM DAY TO DAY AND MANAGE THE CASH FUNDS ON A DAILY BASIS .

2.7 . ACCOUNTING STATEMENTS COULD BE OBTAINED QUICKLY ENOUGH TO MEET THE NEEDS OF MANAGEMENT IF THE DATA-PROCESSING SYSTEM WERE ADAPTED TO THE ACTUAL REQUIREMENTS OF THE CASH DEPARTMENT AND MADE COMPATIBLE WITH THE GENERAL AND BUDGETARY ACCOUNTING SYSTEMS . THIS WOULD END THE NEED FOR PARALLEL MANUAL ACCOUNTS AND MAKE ENOUGH TIME AVAILABLE TO CARRY OUT BASIC CONTROLS WITHOUT HAVING TO INCREASE STAFF .

YEAR-END CHECK OF CASH BALANCES

2.8 . IN ORDER TO REVIEW ALL THE CASH ACCOUNTS INDEPENDENTLY , OBTAIN A DESCRIPTION OF THE FUNCTIONING OF THE ACCOUNTS OPENED WITH VARIOUS FINANCIAL INSTITUTIONS , AND CROSS-CHECK THE END-OF-YEAR BALANCES , THE COURT OF AUDITORS DECIDED TO MAKE USE OF OUTSIDE CONFIRMATION . THIS PROCEDURE , WIDELY USED IN MODERN AUDITING PRACTICE , CONSISTS IN HAVING THE ACCOUNT HOLDER ASK THE BANKER TO SEND DIRECT TO THE AUDITOR CERTAIN INFORMATION ON THE OPERATION AND BALANCES OF ACCOUNTS OPENED WITH THE BANK .

WHILE THE DEPARTMENTS AT THE EUROPEAN PARLIAMENT ACCEPTED THIS PROCEDURE IMMEDIATELY , THE COMMISSION FOUND IT UNACCEPTABLE THAT FINANCIAL INFORMATION COULD BE SENT TO THE COURT OF AUDITORS " WITHOUT THE KNOWLEDGE OF THE ACCOUNTING OFFICER " . IT THEREFORE DECIDED TO SEEK CONFIRMATION FROM SOME OF ITS BANKERS OF INFORMATION REQUESTED BY THE COURT AND TO FORWARD TO THE COURT THEIR REPLIES .

2.9 . THE METHOD ADOPTED BY THE COMMISSION CALLS FOR THE FOLLOWING COMMENTS :

( A ) WHEREAS THE COURT INTENDED TO EMPLOY A MODERN , EFFECTIVE METHOD OF AUDIT , WIDELY USED IN BOTH THE PUBLIC AND PRIVATE SECTOR , THE COMMISSION OPTED FOR AN INDIRECT METHOD ;

( B ) THE BANKS WERE NOT ASKED FOR ALL OF THE INFORMATION THAT THE COURT HAD REQUESTED ;

( C ) CERTAIN CASH ACCOUNTS ESCAPED THIS PROCEDURE :

- THE BANK ACCOUNTS OF THE EXTERNAL DELEGATIONS ( 11)*9*

- THE BANK ACCOUNTS OF THE INFORMATION OFFICES ( 11)*13*

- THE BANK ACCOUNTS RESERVED FOR BORROWINGS AND LOANS*45*

- THE TREASURY ACCOUNTS OF THE MEMBER STATES*8*

THUS THE COURT WAS UNABLE TO FULFIL ITS AUDIT OBJECTIVES IN RELATION TO THE CASH ACCOUNTS AT 31 DECEMBER 1980 .

THE COURT OF AUDITORS FINDS IT HARD TO UNDERSTAND THE POSITION OF THE COMMISSION ( ANNEX V , POINTS 2.8 AND 2.9 ) :

( A ) THE COURT HAS EXPLAINED ON SEVERAL OCCASIONS , BOTH ORALLY AND IN WRITING , THAT THIS PROCEDURE DOES NOT INVOLVE DIRECT ACCESS TO THE BANKS ; THE SIGNATORIES OF THE INSTITUTION MERELY GIVE INSTRUCTIONS TO THE BANKS CONCERNED TO SEND THE NECESSARY INFORMATION ( AGREED WITH THE INSTITUTION ) DIRECTLY TO THE COURT OF AUDITORS , I.E . WITHOUT IT PASSING THROUGH THE INSTITUTION .

IT IS THEREFORE NOT A QUESTION OF DIRECT ACCESS BUT RATHER OF DIRECT RECEIPT OF A REPLY ( A COPY OF WHICH CAN BE GIVEN TO THE INSTITUTION , EITHER BY THE BANK OR BY THE COURT ) .

( B ) THE COURT OF AUDITORS USED THIS PROCEDURE IN EXAMINING THE 1980 ACCOUNTS OF THE EUROPEAN PARLIAMENT , JET AND THE EUROPEAN SCHOOLS , WITHOUT CAUSING THE SLIGHTEST DIFFICULTY .

ONLY THE COMMISSION AND THE EURATOM SUPPLY AGENCY ( AT THE COMMISSION'S INTERVENTION ) REFUSED TO COMPLY WITH THIS PROCEDURE .

( C ) THIS PROCEDURE IN NO WAY CONFLICTS WITH THE PRINCIPLE OF BANK SECRECY . INDEED , IT IS SUCH COMMON PRACTICE AMONG BANKS THAT FIVE BANKS REPLIED NOT ON THE FORMS PROVIDED BUT ON THEIR OWN FORMS , SPECIALLY PRINTED FOR REPLY TO REQUESTS BY THE AUDITORS OF THEIR CLIENTS .

( D ) THIS PROCEDURE IS A GENERAL PRACTICE USED BY AUDITORS WITHOUT AFFECTING IN THE LEAST THE MUTUAL TRUST BETWEEN THE AUDITOR AND THE BODY AUDITED . THE COURT OF AUDITORS SEES NO REASON WHY THE EFFECT SHOULD BE ANY DIFFERENT IN THE CASE OF THE COMMISSION'S ACCOUNTS .

AT ALL EVENTS , ON 13 NOVEMBER 1981 , THE COMMISSION PROPOSED A PRACTICAL SOLUTION FOR THIS PARTICULAR PROBLEM WHICH IS ACCEPTABLE TO THE COURT .

2.10 . VERIFICATION BY THE COURT OF AUDITORS OF THE BANK BALANCES AT 31 DECEMBER 1980 CONFIRMED THE WEAKNESSES IN INTERNAL CONTROL THAT WERE NOTED DURING THE EXAMINATION OF ACCOUNTING SYSTEMS AND PROCEDURES ( SEE POINT 2.4 ABOVE ) .

OF 51 CURRENT ACCOUNTS IN NATIONAL CURRENCIES SEVEN , REPRESENTING 42,2 MEUA ( I.E . 35 % OF THIS CATEGORY ) , HAD NOT BEEN THE SUBJECT OF AN END-OF-YEAR RECONCILIATION .

NONE OF THE NINE ACCOUNTS IN EUA ( TOTAL : 56,7 MEUA ) HAD BEEN RECONCILED WITH THE BANK STATEMENTS . TWO OF THESE ACCOUNTS HAD BALANCES AT BANK RESPECTIVELY 1,27 AND 0,7 MEUA LOWER THAN THE BALANCE IN THE ACCOUNT , WITHOUT THE CASH DEPARTMENT BEING ABLE TO EXPLAIN THE DIFFERENCE .

A FURTHER THREE OF THESE ACCOUNTS CONTAINED BANK INTEREST OF 1,73 MEUA PAID IN 1980 AND CREDITED TO THE FINANCIAL YEAR 1981 . THIS IS NOT IN CONFORMITY WITH THE FINANCIAL REGULATION AND CAUSES A REDUCTION BY THE SAME AMOUNT IN THE 1980 BALANCE .

CONTRARY TO WHAT IS SUGGESTED BY THE COMMISSION IN ITS REPLY ( ANNEX V , POINT 2.10 ) , REVENUE MUST BE CONSIDERED AS COLLECTED THE MOMENT IT IS ENTERED IN THE ACCOUNTS BY THE BANK . SINCE THE DATE OF COLLECTION OF THE BANK INTEREST IN QUESTION WAS 1980 , IT SHOULD HAVE APPEARED IN THE REVENUE OF THE FINANCIAL YEAR 1980 , AND THUS NECESSARILY HAVE INFLUENCED THE BALANCE OF THE FINANCIAL YEAR . EXAMINATION OF THE FILE DOES NOT CONFIRM THAT THE BANK STATEMENTS HAD BEEN RECEIVED TOO LATE FOR INCLUSION OF THIS INTEREST IN THE REVENUE OF 1980 , AS SHOULD HAVE BEEN THE CASE .

2.11 . IN CONCLUSION , THE COURT WOULD STRESS THE NEED FOR IMPROVEMENT OF THE ORGANIZATION AND ADMINISTRATIVE PROCEDURES OF THE CASH DEPARTMENT , WITHOUT WHICH THE ACCOUNTING OFFICER OF THE COMMISSION WILL NOT BE ABLE TO SAFEGUARD ASSETS AND FUNDS . THE COURT FINDS IT UNACCEPTABLE THAT A KEY POINT IN THE SYSTEM OF INTERNAL CONTROL SHOULD IN PRACTICE PROVE TO BE AN AREA OF SERIOUS SHORTCOMINGS IN WHICH BASIC CONTROLS CANNOT FUNCTION NORMALLY .

THE COURT OF AUDITORS IS NOT SATISFIED THAT THE SUMS APPEARING UNDER THE HEADING " CASH ACCOUNTS " AS AT 31 DECEMBER 1980 REPRESENT THE WHOLE OF THE COMMISSION'S LIQUID ASSETS .

ACCOUNTING PRINCIPLES AND PRESENTATION OF FINANCIAL STATEMENTS

PREVIOUS YEAR'S SURPLUS

2.12 . THE BALANCE OF A GIVEN FINANCIAL YEAR ( 4 ) IS PUBLISHED IN THE REVENUE AND EXPENDITURE ACCOUNT FOR THAT YEAR . THE BALANCE OF EACH FINANCIAL YEAR IS PROVISIONALLY ENTERED AS REVENUE IN THE CASE OF A SURPLUS OR EXPENDITURE IN THE CASE OF A DEFICIT IN THE BUDGET OF THE FOLLOWING FINANCIAL YEAR ( 5 ) UPON ADOPTION OF THE AMENDING BUDGET TO CORRECT THE OWN RESOURCES OF THE YEAR ENDED , WHICH IS DONE AFTER 1 JULY OF THE FOLLOWING YEAR ( 6 ) . THE 1980 BUDGET HAVING BEEN ADOPTED ONLY ON 9 JULY 1980 , THE 1979 BALANCE WAS , EXCEPTIONALLY , ENTERED IN THE INITIAL BUDGET .

2.13 . THE SURPLUS OF THE FINANCIAL YEAR 1979 PUBLISHED IN THE REVENUE AND EXPENDITURE ACCOUNT ON 1 JUNE 1980 WAS 453,4 MEUA , AFTER DEDUCTION OF THE FOLLOWING NON-AUTOMATIC CARRY-OVERS OF APPROPRIATIONS :

( A ) COMMISSION*2,5 MEUA*

( B ) PARLIAMENT*2,7 MEUA*

WHEN THE 1980 BUDGET WAS ADOPTED ON 9 JULY 1980 , IT CONTAINED AN ESTIMATED PROVISIONAL SURPLUS OF 458,6 MEUA FOR 1979 ( 7 ) . IN OCTOBER 1980 , AFTER THE COUNCIL HAD FINALLY REJECTED THE COMMISSION'S APPLICATION FOR A CARRY-OVER , THE LATTER PUBLISHED AN AMENDMENT TO THE REVENUE AND EXPENDITURE ACCOUNT ( 8 ) , RAISING THE 1979 SURPLUS TO 455,9 MEUA . IN SPITE OF THE PROVISIONS OF ARTICLE 27 OF THE FINANCIAL REGULATION , NEITHER SUPPLEMENTARY AND AMENDING BUDGET NO 1-1980 OF 2 NOVEMBER 1980 ( 9 ) NOR NO 2-1980 OF 23 DECEMBER 1980 ( 10 ) ALTERED THE PROVISIONAL BALANCE OF 9 JULY 1980 TO MAKE IT CORRESPOND TO THE BALANCE IN THE AMENDED REVENUE AND EXPENDITURE ACCOUNT . THE RESULTING SITUATION WAS CONFUSED , SINCE THE REVENUE AND EXPENDITURE ACCOUNT GAVE THE IMPRESSION THAT THE PARLIAMENT'S NON-AUTOMATIC CARRY-OVERS WERE ACCEPTABLE BECAUSE

IN THIS CONFUSED SITUATION , WHICH CONTINUED UNTIL THE DISCHARGE DECISION OF 18 JUNE 1981 , THE PARLIAMENT EFFECTED EXPENDITURE OF 1,3 MEUA IN 1980 AGAINST THESE NON-AUTOMATIC CARRY-OVERS , WHICH IT CONSIDERED AS ACCEPTED . THE COMMISSION ADMINISTRATION FOR ITS PART SENT A LETTER TO THE SECRETARY-GENERAL OF THE PARLIAMENT IN MID-SEPTEMBER 1980 , REMINDING HIM OF THE UNCERTAINTY SURROUNDING THE 2,7 MEUA IN NON-AUTOMATIC CARRY-OVERS .

WHEN THE PARLIAMENT , IN ACCORDANCE WITH ARTICLE 74 OF THE FINANCIAL REGULATION , FORWARDED TO THE COMMISSION THE INFORMATION REQUIRED FOR DRAWING UP THE 1980 REVENUE AND EXPENDITURE ACCOUNT , THE COMMISSION CONSIDERED THAT THE NON-AUTOMATIC CARRY-OVERS FROM 1979 TO 1980 HAD NOT BEEN AUTHORIZED AND REFUSED TO TAKE INTO ACCOUNT EXPENDITURE CHARGED AGAINST THESE APPROPRIATIONS IN 1980 . IT ENTERED THEM ON THE ASSETS SIDE OF ITS BALANCE-SHEET UNDER THE HEADING " EXPENDITURE NOT YET BROUGHT TO ACCOUNT " .

2.14 . THE EVENTS CALL FOR TWO REMARKS :

( A ) THE REQUIREMENT IN ARTICLE 77 OF THE FINANCIAL REGULATION THAT THE COMMISSION FORWARD THE REVENUE AND EXPENDITURE ACCOUNT TO THE EUROPEAN PARLIAMENT AND THE COUNCIL BY 1 JUNE AT THE LATEST IS A STRICT ONE . ACCORDINGLY , NO CHANGES MAY BE MADE TO THE REVENUE AND EXPENDITURE ACCOUNT AFTER THIS DATE EXCEPT UNDER THE DISCHARGE PROCEDURE .

WITH REGARD TO THE VIEWS OF THE COMMISSION ( ANNEX V , POINT 2.14 ( A ) ) , THE COURT OF AUDITORS WOULD FIRST OF ALL POINT OUT THAT THE COMMISSION IS NOT SO MUCH A PARTICIPANT IN DISCHARGE AS SUBJECT TO DISCHARGE . THIS SHOULD THEREFORE PREVENT THE COMMISSION FROM UNILATERALLY AMENDING THE REVENUE AND EXPENDITURE ACCOUNT AFTER 1 JUNE , FOR WHATEVER REASONS .

CONTRARY TO WHAT IS SUGGESTED BY THE COMMISSION , THE COURT OF AUDITORS DID NOT ASK IT TO AMEND THE 1979 REVENUE AND EXPENDITURE ACCOUNT . THE LETTER OF THE COURT OF AUDITORS TO DG XIX OF 9 JULY 1980 ENDED THUS : " SHOULD THE COMMISSION DRAW UP A CORRECTED BALANCE-SHEET , AS ANNOUNCED ON P . 2 OF THE LETTER OF MR TUGENDHAT TO THE PRESIDENT OF THE COURT OF AUDITORS OF 30 MAY 1980 , PLEASE ENSURE THAT THE ABOVE-MENTIONED SUM IS RECORDED IN IT . "

( B ) THE CONSOLIDATED FINANCIAL STATEMENTS WOULD MORE FAIRLY REFLECT THE TRUE POSITION IF , INSTEAD OF THE IRREGULAR EXPENDITURE BEING AMONG THE ASSETS OF THE BALANCE-SHEET , IT WAS SET APART IN THE REVENUE AND EXPENDITURE ACCOUNT AND CLEARLY SHOWN TO HAVE BEEN EFFECTED WITHOUT THE APPROPRIATIONS BEING AVAILABLE , AND THUS ON THE RESPONSIBILITY OF THE AUTHORIZING OFFICER AND THE FINANCIAL CONTROLLER OF THE INSTITUTION CONCERNED .

APPROPRIATIONS CARRIED OVER

2.15 . IN ITS ANNUAL REPORT ON THE 1979 ACCOUNTS ( 12 ) THE COURT OF AUDITORS CONSIDERED THAT THE ITEM " APPROPRIATIONS CARRIED OVER " DID NOT AUTOMATICALLY CONSTITUTE A LIABILITY AND SHOULD BE ANALYSED INTO ITS COMPONENT PARTS . THIS ANALYSIS WAS NOT MADE IN THE CONSOLIDATED BALANCE-SHEET OF THE FINANCIAL YEAR 1980 . HOWEVER , TWO EXPLANATORY NOTES DO PROVIDE SOME FURTHER INFORMATION OF AN ESSENTIALLY BUDGETARY NATURE , DISTINGUISHING BETWEEN APPROPRIATIONS CARRIED OVER COVERING COMMITMENTS ENTERED INTO AND OTHER CARRY-OVERS WHERE THE APPROPRIATIONS DO NOT REPRESENT COMMITMENTS . THE INFORMATION WOULD BE MORE IN KEEPING WITH THE IDEA OF MARSHALLING THE LIABILITIES IF EXISTING LIABILITIES WERE SPLIT INTO CREDITORS AND SIMPLE COMMITMENTS .

THE REPLY OF THE COMMISSION ( ANNEX V , POINT 2.15 ) DOES NOT INDICATE ANY INTENTION TO ALLEVIATE , EVEN IN THE MEDIUM TERM , THE SHORTCOMING NOTED BY THE COURT . BUT KNOWLEDGE OF CREDITORS' BALANCES IS NOT SIMPLY A REQUIREMENT OF BUDGETA * MANAGEMENT , IT IS A NECESSITY FOR MANAGING CASH FUNDS , MAINTAINING GOOD RELATIONS WITH SUPPLIERS AND OBTAINING THE BEST TERMS FOR PAYMENT . FROM AN ADMINISTRATIVE POINT OF VIEW , THE ACCOUNTING OFFICER'S HAVING SUPERVISION OF THE CREDITORS' ACCOUNTS HELPS TO PLACE CASH BUDGETS ON A REALISTIC BASIS AND ENCOURAGES MORE EFFICIENCY IN THE AUTHORIZING OFFICER'S DEPARTMENT .

ASSETS AND LIABILITIES OF THE INSTITUTIONS

2.16 . VARIOUS OBSERVATIONS ARISE FROM EXAMINATION OF THE GENERAL ACCOUNTS OF THE INSTITUTIONS IN RESPECT OF THE MECHANISMS FOR ASCERTAINING ASSETS AND LIABILITIES AT THE CLOSE OF THE FINANCIAL YEAR .

ADJUSTMENT OF THE CONTRA ACCOUNTS OF COMMUNITY BODIES

2.17 . IN THE COURSE OF DAY-TO-DAY MANAGEMENT , THERE ARE NUMEROUS TRANSACTIONS BETWEEN COMMUNITY BODIES ( 13 ) . THESE TRANSACTIONS ARE USUALLY BOOKED TO CURRENT ACCOUNTS . IT IS POSSIBLE THAT AT THE END OF THE YEAR CERTAIN TRANSACTIONS WILL STRADDLE TWO FINANCIAL YEARS IN SOME OF THE ACCOUNTS IN QUESTION . FOR THIS REASON SUCH CONTRA ACCOUNTS SHOULD BE RECONCILED AND WHERE NECESSARY CORRECTED . BY THE END OF 1980 THE COMMISSION HAD NO SYSTEMATIC PROCEDURE FOR RECONCILIATION AND CORRECTION OF CONTRA ACCOUNTS , THE RESULT BEING OFTEN MAJOR DISCREPANCIES BETWEEN THE ACCOUNTS OF THE VARIOUS COMMUNITY BODIES . IN OTHER INSTANCES , IT IS NOT POSSIBLE TO VERIFY THAT ALL THE TRANSACTIONS RECORDED BY ONE BODY HAVE BEEN TAKEN INTO ACCOUNT BY THE OTHER ON THE SAME BASIS . THE FOLLOWING EXAMPLES ARE ILLUSTRATIONS :

( A ) THE ACCOUNTS OF THE COMMISSION INCLUDE A SUM OF 6,7 MEUA DUE FROM THE ECSC , WHILE THE ACCOUNTS OF THE ECSC SHOW A BALANCE OF 10,9 MEUA IN FAVOUR OF THE COMMISSION . THE ACCOUNTS DEPARTMENTS CONCERNED WERE UNABLE TO EXPLAIN THE DIFFERENCE OF 4,2 MEUA . THERE HAD BEEN NO RECONCILIATION OF THE ACCOUNTS IN RECENT YEARS .

( B ) THE COMMISSION'S BALANCE-SHEET SHOWS A SUM OF 0,2 MEUA DUE TO THE COURT OF JUSTICE . THE BALANCE-SHEET OF THE COURT OF JUSTICE AT 31 DECEMBER 1980 MAKES NO MENTION OF THIS AMOUNT . THE PAYMENT MADE TO THE COMMISSION BY THE COURT OF JUSTICE WAS CONSIDERED BY THE LATTER AS AN ITEM OF EXPENDITURE FOR 1980 . AT THE END OF THE YEAR THE ACCOUNTS DEPARTMENTS OF THE TWO INSTITUTIONS DID NOT CORRECT THEIR ACCOUNTS .

( C ) THE OFFICE FOR OFFICIAL PUBLICATIONS HAS RECEIVED IN STAGES SINCE 1978 ADVANCES FROM THE INSTITUTIONS WHICH CONSTITUTED A FUND OF 2,9 MEUA AT 31 DECEMBER 1980 . THE ACCOUNTS OF THE OFFICE RECORD AS ADVANCES RECEIVED ONLY 1,9 MEUA .

THE ACCOUNTS OF THE OTHER INSTITUTIONS HAVE AS ADVANCES PAID TO THE OFFICE ONLY 1,1 MEUA . AT THE END OF THE FINANCIAL YEAR NO CORRECTION WAS MADE TO HARMONIZE THE ACCOUNTS OF THE DIFFERENT INSTITUTIONS .

( D ) THE COMMISSION IS REGULARLY ENGAGED IN TRANSACTIONS WITH THE EUROPEAN DEVELOPMENT FUND ( EDF ) , THE EUROPEAN ASSOCIATION FOR COOPERATION ( EAC ) AND THE EUROPEAN INVESTMENT BANK ( EIB ) , BUT NO RECONCILIATION OF THE COMMISSION'S ACCOUNTS WITH THE ACCOUNTS OF THESE BODIES WAS MADE BY THE ACCOUNTS DEPARTMENTS AT THE END OF THE FINANCIAL YEAR 1980 .

( E ) WHILE A RECONCILIATION OF THE CONTRA ACCOUNTS OF THE COMMISSION AND THE MEDICAL INSURANCE SCHEME SHOWED THAT TWO ENTRIES IN THE COMMISSION'S LEDGERS WERE INCORRECT ( ONE OF LIT 200 000 000 AND THE OTHER OF BFRS 5 000 000 ) , THE CORRECTIONS WERE MADE IN THE 1981 ACCOUNTS AND NOT IN THE 1980 ACCOUNTS .

( F ) WHILE THE BALANCE-SHEET OF THE JOINT EUROPEAN TORUS ( JET ) JOINT UNDERTAKING AS AT 31 DECEMBER 1980 SHOWED AN AMOUNT OF 21,7 MEUA DUE FROM THE COMMISSION , THE COMMISSION'S ACCOUNTS DID NOT SHOW THE SUMS OWED TO THE JET SEPARATELY , I.E . 21,7 MEUA AMONG PAYMENTS PENDING AND 3,9 MEUA AMONG APPROPRIATIONS CARRIED OVER .

THE COMMISSION HAS GIVEN LONG EXPLANATIONS FOR THESE EXAMPLES ( ANNEX V , POINT 2.17 ) , ALTHOUGH THE COURT POINTED OUT SEVERAL TIMES THAT THEY WERE ONLY INTENDED AS ILLUSTRATIONS OF A GENERAL REMARK ON THE IMPORTANCES OF RECONCILING AND CORRECTING CONTRA ACCOUNTS . THERE WAS NO QUESTION OF DECIDING WHICH INSTITUTION WAS RESPONSIBLE IN ANY PARTICULAR CASE , HOWEVER SERIOUS THE FAULT , BUT RATHER OF SHOWING THE EXISTENCE OF DIFFERENCES WHICH SHOULD HAVE BEEN THE SUBJECT OF FURTHER INVESTIGATION OR CORRECTION . AS REGARDS THE CONSOLIDATED ACCOUNTS , THE COURT'S CONCERN IS TO STRESS THE COORDINATING ROLE THAT THE COMMISSION SHOULD HAVE PLAYED IN THE PROCESS OF CONSOLIDATION .

2.18 . IN THE COURT'S OPINION , THE RECONCILIATION OF CONTRA ACCOUNTS IS OF CONSIDERABLE IMPORTANCE FOR ENSURING THAT THE FINANCIAL STATEMENTS PRESENT A TRUE AND FAIR VIEW OF THE FINANCIAL POSITION :

( A ) IT REVEALS ANOMALIES IN TIME FOR THE NECESSARY CORRECTIONS TO BE MADE ;

( B ) IT CONSTITUTES A NECESSARY STAGE IN THE PROCESS OF CONSOLIDATION , WITHOUT WHICH ONLY A SIMPLE ADDITION OF ACCOUNTS , WITH VERY LIMITED SIGNIFICANCE , IS POSSIBLE .

RECONCILIATION OF CENTRAL AND SUPPLEMENTARY ACCOUNTS

2.19 . FOR CERTAIN COMMISSION ACTIVITIES THE RESPONSIBLE AUTHORIZING OFFICERS MAINTAIN SUPPLEMENTARY ACCOUNTING RECORDS . EXAMPLES ARE :

( A ) ADVANCES ON MISSION EXPENSES .

( B ) STOCKS AND INVENTORIES ,

( C ) BORROWINGS AND LOANS ,

( D ) EAGGF AND FOOD AID ADVANCES .

THESE SUPPLEMENTARY ACCOUNTS HAVE AT PRESENT NO VERY STRONG CONNECTION WITH THE CENTRAL ACCOUNTS , ALTHOUGH THE LATTER ARE THE BASIS FOR THE END-OF-YEAR BALANCE-SHEET .

THUS THE AUTHORIZING OFFICER INFORMED THE ACCOUNTING OFFICER OF THE VALUE OF FIXED ASSETS AT 31 DECEMBER 1980 , BUT THE LATTER WAS UNABLE TO VERIFY THE FIGURES SENT TO HIM , AS THE CENTRAL ACCOUNTS DO NOT RECORD CHANGES IN THE VALUE OF FIXED ASSETS . THE SAME APPLIES TO ALL BORROWING AND LOAN OPERATIONS , WHICH ARE NOT RECORDED IN THE CENTRAL ACCOUNTS .

FOR THE EAGGF ADVANCES FOR 1980 , THE MAIN DISCREPANCIES BETWEEN THE CENTRAL ACCOUNTS AND THOSE OF THE AUTHORIZING OFFICER WERE AS FOLLOWS :

TABLE 2.1 - EAGGF ADVANCES - DIFFERENCES BETWEEN THE CENTRAL ACCOUNTS AND THE ACCOUNTS OF THE AUTHORIZING OFFICER

* ( MEUA ) *

MEMBER STATE*CENTRAL ACCOUNTS*AUTHORIZING OFFICER'S ACCOUNTS*DIFFERENCE*

FR OF GERMANY*208,7*207,8* + 0,9*

DENMARK*52,8*53,2* - 0,4*

FRANCE*325,4*324,4* + 1,0*

IRELAND*46,0*46,4* - 0,4*

ITALY*240,0*240,5* - 0,5*

NETHERLANDS*140,6*140,9* - 0,3*

UNITED KINGDOM*122,9*123,1* - 0,2*

THE AUTHORIZING OFFICER DID NOT SUPPLY THE ACCOUNTS DEPARTMENT WITH THE EXPLANATION FOR THESE DIFFERENCES BEFORE PUBLICATION OF THE REVENUE AND EXPENDITURE ACCOUNT .

2.20 . THE COURT OF AUDITORS CONSIDERS THAT HERE IS AN IMPORTANT WEAKNESS IN THE SYSTEM OF INTERNAL CONTROL . IN THE ABSENCE OF A COMPREHENSIVE CENTRAL SYSTEM OF ACCOUNTS AS PROVIDED FOR IN ARTICLE 76 ( 3 ) OF THE IMPLEMENTING MEASURES OF THE FINANCIAL REGULATION ( 14 ) OR OF A SYSTEM OF RECONCILIATION AND CHECKING OF THE SUPPLEMENTARY ACCOUNTS AND CENTRAL ACCOUNTS THROUGH CONTROL ACCOUNTS , IT IS IMPOSSIBLE FOR THE ACCOUNTING OFFICER TO FULFIL HIS ROLE AS GUARDIAN OF THE ASSETS OR TO PREPARE THE END-OF-YEAR FINANCIAL STATEMENTS WITH A REASONABLE DEGREE OF CERTAINTY .

NOTWITHSTANDING THE REPLY OF THE COMMISSION ( ANNEX V , POINTS 2.19 AND 2.20 ) , SINCE ACCOUNTS ARE BY THEIR VERY NATURE AN INSTRUMENT OF MANAGEMENT , THE COURT OF AUDITORS MAINTAINS THAT , WHERE RECORDS KEPT BY THE AUTHORIZING OFFICERS ARE USED FOR THE PURPOSES OF MANAGEMENT , THEY SHOULD BE LINKED TO THE ACCOUNTING SYSTEM . THE ABSENCE OF CONTROL ACCOUNTS IN THE CENTRAL ACCOUNTS DEPRIVES THE SUPPLEMENTARY ACCOUNTS OF THE PRESUMPTION OF ACCURACY THAT THE DOUBLE-ENTRY METHOD CONFERS UPON AN ACCOUNTING SYSTEM . UNDER THESE CIRCUMSTANCES , THE ACCOUNTING OFFICER CANNOT REALLY VERIFY THE FIGURES THAT HE RECEIVES FROM THE SUPPLEMENTARY ACCOUNTS , SHORT OF UNDERTAKING A LONG AND COMPLICATED PROCESS OF CHECKING .

IT WOULD THEREFORE APPEAR NECESSARY FOR THE ACCOUNTING SYSTEMS TO BE ALTERED SO AS TO CREATE A CONNECTION BETWEEN CENTRAL RECORDS AND SUPPLEMENTARY RECORDS .

INACCURACIES IN THE VALUATION OF ASSETS AND LIABILITIES

2.21 . IN ADDITION TO THE MATTERS NOTED ABOVE , THE BALANCE-SHEET OF THE COMMISSION AS AT 31 DECEMBER 1980 DISCLOSES VARIOUS ERRORS AND OMMISSIONS .

2.22 . CERTAIN ASSETS ARE UNDER-VALUED :

( A ) AT 31 DECEMBER 1980 A SUM OF APPROXIMATELY 17 MEUA WAS DUE TO THE COMMISSION IN CONNECTION WITH ENERGY POLICY , BUT THIS SUM DOES NOT APPEAR IN ITS BALANCE-SHEET . FURTHERMORE , SOME 9,3 MEUA IN REVENUE ACCRUED IN CONNECTION WITH OTHER SECTORS AND AWAITING COLLECTION WERE OMITTED FROM THE COMMISSION'S ASSETS .

( B ) AS A RESULT OF NETTING-OFF , THE ACCOUNTS OF EAGGF ADVANCES APPEARING AMONG THE ASSETS IN THE BALANCE-SHEET ARE UNDER-VALUED BY 3,7 MEUA , REPRESENTING EXPENDITURE IN ERROR FOR 1976 , WHICH SHOULD BE CORRECTED BY THE COMMISSION .

2.23 . VARIOUS ASSETS ARE DOUBTFUL :

( A ) AMONG LOANS GRANTED IS A SUM OF 14,5 MEUA LABELLED " DIFFERENCE TO BE ADJUSTED " ( 15 ) . THIS RELATED TO THE EXCESS OF SUMS BORROWED OVER SUMS LENT BY THE COMMISSION TO THIRD PARTIES . THE DIFFERENCE REPRESENTS EITHER COSTS INCURRED BUT NOT RECORDED AS SUCH OR UNUSED SUMS WHICH HAVE BEEN LEFT IN BANK ACCOUNTS . THE ACCOUNTS DEPARTMENTS WERE UNABLE TO OBTAIN FROM THE AUTHORIZING OFFICERS CONCERNED EXACT INFORMATION ON THESE SUMS AND THEREFORE ENTERED THEM UNDER " DISBURSED LOANS " , FOR WANT OF A BETTER SOLUTION .

( B ) APART FROM EXPENDITURE BY THE EUROPEAN PARLIAMENT AGAINST NON-AUTOMATIC CARRY-OVERS FROM 1979 , THE ASSETS IN THE COMMUNITIES' BALANCE-SHEET INCLUDE A NUMBER OF OTHER ITEMS OF EXPENDITURE BY THE COMMISSION EITHER WITHOUT THE APPROPRIATIONS BEING AVAILABLE OR IN EXCESS OF THE INITIAL COMMITMENT .

TABLE 2.2 - EXPENDITURE IRREGULARLY BROUGHT TO ACCOUNT

** ( EUA ) *

BUDGET ITEM*HEADING*APPROPRIATIONS NOT AVAILABLE*EXCESS OVER INITIAL COMMITMENT*

1173*TRAVEL EXPENSES OF NATIONAL EXPERTS*19 947* - *

2310*POSTAL AND DELIVERY CHARGES*73 798* - *

3702*OPERATIONS FOR THE DEVELOPMENT OF DATA PROCESSING* - *15 444*

*TOTAL*93 745*15 444*

THE COURT RECOGNIZES THAT THE SUMS INVOLVED ARE SMALL , BUT WOULD NONETHELESS EMPHASIZE THAT EXPENDITURE WITHOUT APPROPRIATIONS IS NOT PERMISSIBLE , AS THE COMMISSION ADMITS ( ANNEX V , POINT 2.23 ) . IT IS SUFFICIENT IN THIS REGARD TO RECALL THAT THE ONLY CASE IN WHICH IT IS FORBIDDEN TO OVERRULE THE FINANCIAL CONTROLLER'S REFUSAL OF APPROVAL IS WHERE " THE AVAILABILITY OF APPROPRIATIONS IS IN DOUBT " ( 16 ) . THE GENERAL ACCOUNTS CANNOT BE USED AS A MEANS OF AVOIDING THE BUDGETARY RULES .

THE VIEWS EXPRESSED BY THE COMMISSION ( ANNEX V , POINT 2.23 ) GIVES RISE TO THREE COMMENTS :

( A ) THE COMMISSION IS RESPONSIBLE FOR THE ACCOUNTING METHODS ADOPTED BY IT AND ITS SOLE GUIDE IN THIS SHOULD BE THE NEED FOR THE FINANCIAL STATEMENTS TO PRESENT A TRUE AND FAIR VIEW ;

( B ) IN APPLYING DIFFERENT ACCOUNTING METHODS TO IDENTICAL TRANSACTIONS THE COMMISSION IS INFRINGING THE BASIC ACCOUNTING PRINCIPLE THAT ACCOUNTS MUST BE HELD ON A CONSISTENT BASIS . EVERY CHANGE IN METHOD MUST BE APPLIED TO EARLIER TRANSACTIONS AS WELL AS TO THE NEW ONES SO AS TO MAINTAIN CONSISTENCY ;

( C ) IN THE SAME WAY AS IN POINT 2.3 ABOVE , THE FACT THAT THE ISSUING COSTS AND PREMIUMS ARE NO LONGER BROUGHT TO ACCOUNT UPON INVESTMENT OF THE BORROWINGS DETRACTS FROM THE VALUE OF THE STATEMENTS AS A TRUE AND FAIR VIEW OF THE FINANCIAL SITUATION .

2.24 . THE SURPLUS OF THE FINANCIAL YEAR WAS OBTAINED AFTER DEDUCTION OF NON-EXISTENT LIABILITIES .

THE SUSPENSE ACCOUNTS INCLUDE ON THE LIABILITIES SIDE OF THE BALANCE-SHEET A SUM OF 1,1 MEUA RELATING TO A REPAYMENT BY THE EUROPEAN INVESTMENT BANK TO THE COMMISSION , WHICH HAD PAID INTEREST-RATE SUBSIDIES IN ADVANCE FOR A PROJECT FOR WHICH IN THE END NO CONTRACT WAS CONCLUDED . ALTHOUGH ESTABLISHED IN ERROR , IT REMAINS RECORDED AS EXPENDITURE FOR 1980 .

THE VIEW EXPRESSED BY THE COMMISSION ( ANNEX V , POINT 2.24 ) GIVE RISE TO TWO COMMENTS :

( A ) SINCE THE LOAN CONTRACT WAS NEVER CONCLUDED , THE IRREGULARITY LIES IN THE INITIAL PAYMENT BEING CHARGED TO A BUDGET ITEM IN THE ABSENCE OF A SUPPORTING DOCUMENT . AS AN " ANTICIPATORY PAYMENT " ( IN OTHER WORDS , AN ADVANCE ) WAS INVOLVED , IT SHOULD HAVE BEEN ENTERED IN A THIRD-PARTY ACCOUNT IN THE GENERAL ACCOUNTS . ONLY THE COMMITMENT SHOULD HAVE APPEARED IN THE BUDGET ACCOUNTS .

( B ) WHEN IT BECAME CLEAR THAT THE BORROWER HAD WITHDRAWN FROM THE CONTRACT , IT WAS NECESSARY NOT ONLY TO OBTAIN REIMBURSEMENT OF THE PAYMENT BUT ALSO TO CANCEL THE BUDGETARY COMMITMENT UPON WHICH IT WAS BASED . IN OMITTING TO CANCEL THIS COMMITMENT AND TREATING THE REPAYMENT AS A RE-USE OF FUNDS , THE COMMISSION COMMITTED AN ABUSE OF THE PROCEDURE FOR THE CARRY-OVER OF APPROPRIATIONS . THE CARRY-OVER OF NON-DIFFERENTIATED APPROPRIATIONS TO THE FOLLOWING YEAR IN THE ABSENCE OF AN ACTUAL COMMITMENT SHOULD HAVE BEEN SUBMITTED TO THE BUDGETARY AUTHORITY FOR APPROVAL .

2.25 . THESE ERRORS IN THE ACCOUNTS , AND IN PARTICULAR THE OMISSIONS FOUND IN THE VALUATION OF REVENUE AND ASSETS , WHICH ARE PRINCIPALLY DUE TO LACK OF INFORMATION FROM THE AUTHORIZING OFFICERS TO THE ACCOUNTS DEPARTMENTS , LEAD THE COURT TO THINK THAT AS LONG AS THERE IS NO ORGANIZED PROCEDURE FOR PRESENTATION OF THE ASSETS AND LIABILITIES AT THE END OF THE YEAR AND NO INTEGRATION OF THE AUTHORIZING OFFICERS' SUPPLEMENTARY ACCOUNTS WITH THE CENTRAL ACCOUNTING SYSTEM , THE COMMISSION WILL CONTINUE TO HAVE DIFFICULTY IN MEETING THE REQUIREMENTS OF THE LEGISLATION AND SENDING TO THE COUNCIL AND PARLIAMENT " A FINANCIAL STATEMENT OF THE ASSETS AND LIABILITIES OF THE COMMUNITIES . " ( 17 )

CONCLUSION

2.26 . THE COURT OF AUDITORS NOTES WITH SATISFACTION THE EFFORTS MADE BY THE COMMISSION TO IMPROVE THE PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS . THE COURT WELCOMES IN PARTICULAR THE PUBLICATION OF A NEW VOLUME OF THE REVENUE AND EXPENDITURE ACCOUNT WHICH COMBINES THE MAIN FINANCIAL INFORMATION OF THE YEAR IN A CONCISE AND INTELLIGIBLE FORM . IT FINDS OF SPECIAL VALUE THE EXPLANATORY NOTES PROVIDED TO THE TABLES OF FIGURES . NONETHELESS , THE COURT WOULD STRESS THAT THERE REMAINS MUCH TO BE DONE IN THE FIELD OF ORGANIZATION AND ACCOUNTING MANAGEMENT BEFORE RELIABLE FINANCIAL INFORMATION IS AVAILABLE .

2.27 . THE AUDIT OF THE END-OF-YEAR ACCOUNTS CONFIRMED THE EXISTENCE OF WEAKNESSES IN INTERNAL CONTROL THAT WERE IDENTIFIED DURING THE EXAMINATION OF ADMINISTRATIVE AND ACCOUNTING SYSTEMS .

THE RESULTS OF THESE WEAKNESSES IS THAT THE SYSTEMS ARE NOT CAPABLE OF BRINGING IRREGULARITIES TO THE ATTENTION OF THE DISCHARGE AUTHORITY OR PREVENTING ANY NETTING-OFF THAT COULD CONCEAL MAJOR TRANSACTIONS . THE COURT OF AUDITORS FINDS IT DISQUIETING THAT PRACTICES WHICH ARE ILLEGAL OR IRREGULAR UNDER THE TERMS OF THE TREATIES ARE NOT IMMEDIATELY BROUGHT TO THE KNOWLEDGE OF CERTAIN OFFICIALS IN THE COMMISSION .

CONTRARY TO WHAT IS SUGGESTED BY THE COMMISSION IN ITS REPLY ( ANNEX V , POINT 2.27 ) , THE COURT OF AUDITORS HAS SHOWN THAT THERE EXIST IN THE ACCOUNTS UNEXPLAINED DIFFERENCES AND IRREGULARITIES RESULTING FOR THE MOST PART FROM WEAKNESSES IN INTERNAL CONTROL AND NOT FROM OPTIONS OR TECHNIQUES OF PRESENTATION IMPOSED BY THE REGULATIONS . AS REGARDS THE PROBLEM OF NETTING-OFF ( OF WHICH THE COMMISSION MENTIONS ONLY ONE EXAMPLE : ANNEX V , POINT 2.27 ) , THE COURT OF AUDITORS WOULD STRESS THAT THE " DIFFERENCES TO BE ADJUSTED " MENTIONED IN POINT 2.23 ( A ) ARE THEMSELVES THE RESULT OF SEVERAL NETTING-OFF OPERATIONS .

FINALLY , IT SHOULD BE NOTED THAT A NUMBER OF DISCREPANCIES IN THE CASH BALANCES WHICH ARE STILL UNEXPLAINED WOULD ALREADY HAVE BEEN CLARIFIED IF THEY HAD BEEN BROUGHT TO THE KNOWLEDGE OF SENIOR OFFICIALS IN THE COMMISSION IN TIME . ( SEE ABOVE POINT 2.10 , SUBPARAGRAPH 3 . )

2.28 . THE CONTINUING WEAKNESSES IN THE ACCOUNTING SYSTEMS , ALREADY EMPHASIZED IN PREVIOUS YEARS , AND ITS FINDINGS FOR THE FINANCIAL YEAR 1980 , TOGETHER WITH THE OBSTACLE MET BY THE COURT IN ITS AUDIT OF THE CASH ACCOUNTS , MEAN THAT AGAIN THE COURT OF AUDITORS HAS NOT BEEN ABLE TO SATISFY ITSELF THAT THE CONSOLIDATED BALANCE-SHEET AS AT 31 DECEMBER 1980 ADEQUATELY REFLECTS THE COMMUNITIES' ASSETS AND LIABILITIES AT THAT DATE .

( 1 ) BY INTERNAL CONTROL IS MEANT THE ORGANIZATION PLAN AND ALL OTHER FINANCIAL CONTROLS DESIGNED TO SAFEGUARD THE ASSETS OF AN ENTITY , TO ENSURE THE VERACITY OF THE ENTRIES IN THE ACCOUNTS AND TO FACILITATE MANAGEMENT DECISIONS .

( 2 ) THESE DELEGATIONS COME UNDER THE RESPONSIBILITY OF DG VIII OF THE COMMISSION AND ARE FINANCED BY THE GENERAL BUDGET .

( 3 ) ARTICLE 20 OF THE FINANCIAL REGULATION OF 21 DECEMBER 1977 , OJ NO L 357 , 31 . 12 . 1977 .

( 4 ) COUNCIL REGULATION ( EEC , EURATOM , ECSC ) NO 2891/77 , ARTICLE 15 , OJ NO L 336 , 27 . 12 . 1977 .

( 5 ) FINANCIAL REGULATION OF 21 DECEMBER 1977 , ARTICLE 27 , OJ NO L 356 , 31 . 12 . 1977 .

( 6 ) COUNCIL REGULATIONS ( EEC , EURATOM , ECSC ) NO 2891/77 , ARTICLE 16 ( 2 ) AND NO 2892/77 , ARTICLE 10 ( 1 ) , OJ NO L 336 , 21 . 12 . 1977 .

( 7 ) APPLICATIONS FOR NON-AUTOMATIC CARRY-OVERS THAT WERE CONSIDERED PROVISIONAL HAD NOT BEEN INCLUDED IN THE 1979 EXPENDITURE ( 453,4 + 2,5 + 2,7 ) = 458,6 MEUA .

( 8 ) COM(80 ) 565 FR P . 276 .

( 9 ) OJ NO L 364 , 31 . 12 . 1980 .

( 10 ) OJ NO L 373 , 31 . 12 . 1980 .

( 11 ) SOME DELEGATIONS AND INFORMATION OFFICES HAVE SEVERAL BANK ACCOUNTS .

( 12 ) OJ NO C 342 , 31 . 12 . 1980 .

( 13 ) BY COMMUNITY BODY IS MEANT HERE EVERY ADMINISTRATION FOR WHICH SEPARATE ACCOUNTS ARE KEPT AND WHICH IS AN INTEGRAL PART OF THE EUROPEAN COMMUNITIES .

( 14 ) COMMISSION REGULATION OF 30 JUNE 1975 ON MEASURES OF IMPLEMENTATION OF CERTAIN PROVISIONS OF THE FINANCIAL REGULATION OF 25 APRIL 1973 , OJ NO L 170 , 1 . 7 . 1975 .

( 15 ) NEW COMMUNITY INSTRUMENT ( NCI ) = 8,3 MEUA : EURATOM BORROWINGS = 6,2 MEUA .

( 16 ) FINANCIAL REGULATION OF 21 DECEMBER 1977 , ARTICLE 35 , OJ NO L 356 , 31 . 12 . 1977 .

( 17 ) ART . 205 A EEC , ART . 78 D ECSC , ART . 179 A EAEC .

CHAPTER 3

REVENUE

TABLE OF CONTENTS*POINT*

SUMMARY OF PRINCIPAL COMMENTS*3.0*

GENERAL INTRODUCTION*3.1*

SUMMARY OF FINANCIAL INFORMATION*3.2 AND 3.3*

VALUE-ADDED TAX*3.4 TO 3.17*

VAT PAYMENTS IN 1980*3.4*

REJECTION OF DRAFT BUDGET 1980*3.5*

SUPPLEMENTARY BUDGET NO 2*3.6*

ADJUSTMENT OF VAT PAYMENTS AND FINANCIAL CONTRIBUTIONS 1979*3.7 AND 3.8*

METHODS " A " AND " B " FOR DERIVING THE VAT BASIS*3.9 TO 3.15*

UNAUTHORIZED DEDUCTION FROM VAT RESOURCES*3.16*

CORRECTIONS TO VAT SUMMARY ACCOUNTS*3.17*

AGRICULTURAL LEVIES*3.18 TO 3.34*

TRIANGULAR TRAFFIC IN RICE*3.18 TO 3.22*

ADVANCE FIXING OF AGRICULTURAL LEVIES*3.23 TO 3.27*

ERRORS IN CALCULATION OF LEVIES*3.28 TO 3.34*

MISCELLANEOUS REVENUE , ETC . , OUTSTANDING*3.35 TO 3.43*

FINANCIAL CONTROLLER'S REPORT*3.36 TO 3.43*

RECEIVABLE ORDERS ESTABLISHED BUT SUMS UNCOLLECTED*3.37 TO 3.39*

RECEIVABLE ORDERS NOT ESTABLISHED*3.40*

SUMS RECEIVED BUT NO RECEIVABLE ORDER ESTABLISHED*3.41 TO 3.43*

SUMMARY OF PRINCIPAL COMMENTS

3.0 . THE PRINCIPAL COMMENTS IN THIS CHAPTER ARE : **

( A ) THREE MEMBER STATES DISPUTED THE VALIDITY OF SUPPLEMENTARY BUDGET NO * *3.6*

( B ) ERRORS IN VAT SUMMARY ACCOUNTS SUBMITTED BY MEMBER STATES REMAIN TO BE ADJUSTED*3.17*

( C ) TRIANGULAR TRAFFIC IN RICE HAS RE-EMERGED*3.18 TO 3.22*

( D ) THERE WERE ERRORS IN THE ASSESSMENT OF AGRICULTURAL LEVIES BY CERTAIN MEMBER STATES*3.28 TO 3.34*

( E ) WEAKNESSES WERE FOUND IN THE COMMISSION'S INTERNAL ARRANGEMENTS FOR RECOVERY OF MISCELLANEOUS RECEIPTS*3.37 TO 3.43*

GENERAL INTRODUCTION

3.1 . 1980 WAS THE FIRST YEAR IN WHICH THE OWN RESOURCES SYSTEM OF THE COMMUNITIES OPERATED WITHOUT RESTRICTION OR RESERVE . ALL MEMBER STATES ASSIGNED CUSTOMS DUTIES , AGRICULTURAL LEVIES AND VALUE-ADDED TAX ( VAT ) RESOURCES IN ACCORDANCE WITH THE COUNCIL DECISION OF 21 APRIL 1970 .

SUMMARY OF FINANCIAL INFORMATION

3.2 . DURING THE YEAR UNDER REVIEW , THE ORIGINAL BUDGET ESTIMATE OF REVENUE ( 15 683,1 MEUA ) WAS REVISED BY SUPPLEMENTARY BUDGETS NOS 1 AND 2 TO A FINAL TOTAL OF 16 182,5 MEUA . ACTUAL RECEIPTS WERE 15 903,4 MEUA . THE FOLLOWING TABLE COMPARES THE REVENUE FOR 1979 AND 1980 AS SHOWN IN THE ACCOUNTS .

TABLE 3.1 - TOTAL REVENUE , 1979 AND 1980

( MEUA )

TYPE OF REVENUE*1979 ACTUAL REVENUE*1980*

**ORIGINAL BUDGET*FINAL BUDGET*ACTUAL REVENUE*VARIATION ( 4 ) - ( 2 ) *

* ( 1 ) * ( 2 ) * ( 3 ) * ( 4 ) * ( 5 ) *

CUSTOMS DUTIES*5 189,1*5 667,8*6 000,0*5 905,7* + 237,9 ( + 4,2 % ) *

AGRICULTURAL LEVIES*1 678,6*1 719,2*1 520,0*1 535,4* - 183,8 ( - 10,7 % ) *

SUGAR AND ISOGLUCOSE LEVIES*464,9*504,5*504,5*466,9* - 37,6 ( - 7,5 % ) *

VALUE-ADDED TAX RESOURCES*4 737,7*7 151,0*7 256,4*7 093,5* - 57,5 ( - 0,8 % ) *

FINANCIAL CONTRIBUTIONS ( GNP ) *2 302,1* - * - * - * - *

ADJUSTMENT OF 1979 VAT RESOURCES* - * - *176,2*176,2* + 176,2*

ADJUSTMENT OF 1979 FINANCIAL CONTRIBUTIONS* - * - *84,9*84,9* + 84,9*

MISCELLANEOUS REVENUE ( INCLUDING ECSC AND EURATOM CONTRIBUTIONS ) *188,7*182,0*182,0*182,2* + 0,2 ( + 0,1 % ) *

BALANCE FROM PREVIOUS YEAR*41,6*458,6*458,6*458,6**

TOTAL*14 602,7*15 683,1*16 182,5*15 903,4* + 220,3 ( + 1,4 % ) *

3.3 . THERE WAS A SHORTFALL OF 279,1 MEUA ( 1,7 % ) IN REVENUE COMPARED WITH THE FINAL ESTIMATE INCLUDED IN SUPPLEMENTARY BUDGET NO 2 , ADOPTED ON 23 DECEMBER 1980 . IF THE FINAL OUT-TURN ( TABLE 3.1 , COLUMN 4 ) IS COMPARED WITH THE ORIGINAL BUDGET ESTIMATES ADOPTED ON 9 JULY 1980 ( COLUMN 2 ) THE FOLLOWING PICTURE EMERGES :

( A ) CUSTOMS DUTIES WERE UP BY 4,2 % . THERE WAS A STRONG UPWARD TREND IN THE EARLY PART OF THE YEAR IN IMPORTATIONS OF MACHINERY AND CERTAIN OTHER GOODS SUBJECT TO HIGH RATES OF DUTY WHICH LED TO A REVISION OF THE ESTIMATE DURING THE YEAR . HOWEVER , THE FINAL ESTIMATE WAS NOT FULLY REALIZED DUE TO THE EFFECTS OF THE RECESSION WHICH BEGAN TO BE REFLECTED IN REDUCED IMPORTS FROM AUGUST ONWARDS .

( B ) AGRICULTURAL LEVIES WERE DOWN BY 10,7 % . A FALL IN THE VOLUME OF IMPORTS IN THE EARLY PART OF THE YEAR ( THOUGH PARTLY COMPENSATED BY A REVERSED TREND IN THE LATER PART ) WAS REINFORCED BY THE FIRM TREND OF WORLD CEREAL PRICES WHICH BROUGHT DOWN THE LEVELS OF LEVIES .

( C ) SUGAR LEVIES ( PRODUCTION AND STORAGE ) AND ISOGLUCOSE LEVIES ( PRODUCTION ) TAKEN TOGETHER WERE DOWN BY 7,5 % , DUE MAINLY TO DOWNWARD TRENDS IN THE QUANTITIES OF SUGAR LIABLE TO THE LEVIES AND TO THE FOLLOWING FACTORS AFFECTING THE ISOGLUCOSE PRODUCTION LEVY :

- ACTING ON A RULING OF THE COURT OF JUSTICE OF 25 OCTOBER 1978 , DECLARING COUNCIL REGULATION ( EEC ) NO 1111/77 ( 1 ) INVALID , THE COMMISSION IN 1980 COMPLETED REFUNDS OF LEVIES PAID IN RESPECT OF THE 1977/78 MARKETING YEAR ;

- IN ITS JUDGMENT OF 29 OCTOBER 1980 THE COURT OF JUSTICE DECLARED VOID COUNCIL REGULATION ( EEC ) NO 1293/79 ( 2 ) , WHICH AMENDED REGULATION NO 1111/77 IN THE LIGHT OF THE PREVIOUS JUDGMENT , ON THE GROUNDS THAT THE OPINION OF THE PARLIAMENT HAD NOT BEEN DELIVERED . FOLLOWING THE LATEST JUDGMENT , THE COMMISSION SUSPENDED FURTHER COLLECTIONS PENDING THE RE-ENACTMENT ( 3 ) , IN DUE FORM AND WITH RETROSPECTIVE EFFECT , OF THE VOIDED REGULATION .

AS A RESULT OF THE ABOVE FACTORS , FOR ISOGLUCOSE LEVIES , TAKEN IN ISOLATION , THERE WAS A NET REFUND OF 2,7 MEUA .

( D ) VALUE-ADDED TAX RESOURCES WERE DOWN BY 57,5 MEUA ( 0,8 % ) EXPLAINED BY THE FOLLOWING FACTORS :

- THE REDUCTION , BY THE AMENDING AND SUPPLEMENTARY BUDGET NO 1 , OF THE COMMUNITY VAT RATE FROM 0,7216 % TO 0,6953 % , EXACTLY CORRESPONDING TO THE BALANCES OF THE PREVIOUS YEAR'S VAT AND FINANCIAL CONTRIBUTIONS ( 261 MEUA ) PAID BY MEMBER STATES IN 1980 ( SEE POINTS 3.7 AND 3.8 BELOW ) ;

- THE INCREASE IN THAT RATE FROM 0,6953 % TO 0,7322 % TO MEET THE INCREASED EXPENDITURE ( 366,4 MEUA ) AUTHORIZED BY SUPPLEMENTARY BUDGET NO 2 ;

- THE AFOREMENTIONED INCREASE WAS NOT FULLY REALIZED DUE TO THE FACT THAT THREE MEMBER STATES HELD BACK A TOTAL OF 165 MEUA ( SEE POINT 3.6 BELOW ) .

VALUE-ADDED TAX

VAT PAYMENTS IN 1980

3.4 . FOR THE FIRST TIME SINCE THE INTRODUCTION ( 4 ) OF THE OWN RESOURCES SYSTEM ALL MEMBER STATES PAID VALUE-ADDED TAX ( VAT ) RESOURCES IN 1980 .

REJECTION OF DRAFT BUDGET 1980

3.5 . THE REJECTION OF THE DRAFT 1980 BUDGET BY THE PARLIAMENT RAISED THE QUESTION OF THE BASIS ON WHICH VAT TWELFTHS SHOULD BE PAID IN THE INTERVAL BEFORE THE ADOPTION BY THE COUNCIL OF THE NEW DRAFT BUDGET , WHICH TOOK PLACE IN JUNE 1980 . ARTICLE 10 ( 3 ) OF COUNCIL REGULATION ( EEC , EURATOM , ECSC ) 2891/77 ( 5 ) PROVIDED THAT MONTHLY VAT INSTALMENTS SHOULD , IN SUCH CIRCUMSTANCES , BE CALCULATED FROM THE AMOUNTS ENTERED IN THE DRAFT BUDGET . MAINTAINING THAT THE REJECTION BY PARLIAMENT HAD THE EFFECT OF RESCINDING THE DRAFT BUDGET , ALL MEMBER STATES BASED THEIR CONTRIBUTIONS FOR THE EARLY MONTHS OF 1980 ON THE SUMS INCLUDED IN THE DEFINITIVE 1979 BUDGET . THESE CONTRIBUTIONS WERE REGULARIZED ON THE ADOPTION OF THE NEW DRAFT BUDGET . THE COMMISSION , WHICH TOOK THE VIEW THAT THE ORIGINAL DRAFT BUDGET REMAINED OPERATIVE FOR THIS PURPOSE UNTIL THE NEW ONE TOOK EFFECT , DECIDED , NEVERTHELESS , NOT TO DEMAND INTEREST ( ESTIMATED BY THE COMMISSION TO BE OF THE ORDER OF 16 MEUA ) UNDER ARTICLE 11 OF THE SAID REGULATION . THE COURT OF AUDITORS WOULD LIKE TO KNOW THE COMMISSION'S REASON FOR THIS DECISION .

SUPPLEMENTARY BUDGET NO 2

3.6 . SUPPLEMENTARY BUDGET NO 2 ( FOR 366,4 MEUA ) WAS FINALLY ADOPTED ON 23 DECEMBER 1980 . DURING ITS CONSIDERATION BY PARLIAMENT , ADDITIONAL APPROPRIATIONS AMOUNTING TO 266,4 MEUA IN RESPECT OF SOCIAL FUND EXPENDITURE WERE ADDED . FRANCE , THE FEDERAL REPUBLIC OF GERMANY AND BELGIUM CONTESTED THE LEGALITY OF THESE APPROPRIATIONS , INTER ALIA , ON THE GROUNDS THAT THEY MADE AVAILABLE IN 1980 PAYMENT APPROPRIATIONS WHICH ACCORDING TO THE WRITTEN INTENTION OF PARLIAMENT WERE ONLY TO BE EFFECTED IN 1981 . AS A CONSEQUENCE , THESE MEMBER STATES RESTRICTED THEIR VAT PAYMENTS TO COVER ONLY THE UNCONTESTED APPROPRIATIONS . FOLLOWING THE COMMISSION'S REQUEST FOR FULL PAYMENT , THE FEDERAL REPUBLIC OF GERMANY REFERRED THE MATTER TO THE COURT OF JUSTICE , BUT HAS SINCE SUSPENDED THE PROCEEDINGS PENDING THE OUTCOME OF NEGOTIATIONS WITH THE COMMISSION .

SINCE DRAFTING THE ABOVE PARAGRAPH THE COURT OF AUDITORS LEARNED ( ANNEX V , PARAGRAPH 1.7 ) THAT THE ARREARS ( 165 MEUA ) WERE EVENTUALLY MADE AVAILABLE ON 1 OCTOBER 1981 . HOWEVER , IN THE DRAFT SUPPLEMENTARY AND AMENDING BUDGET NO 2 OF 1981 , DRAWN UP ON 19 OCTOBER 1981 , THESE SUMS HAVE BEEN SHOWN AS HAVING AMENDED RETROSPECTIVELY THE BALANCE FOR 1980 AND HAVE THEREFORE BEEN TREATED AS IF THEY HAD BEEN RECEIVED IN 1980 ( 6 ) .

THE COURT IS CONSTRAINED TO MAKE THE FOLLOWING ADDITIONAL OBSERVATION . THE TREATMENT ACCORDED TO THESE ARREARS CLEARLY CONFLICTS WITH THE PROVISION OF THE FINANCIAL REGULATION ( 7 ) WHICH PRESCRIBED , IN ARTICLE 5 , THAT APART FROM CERTAIN SPECIFIED EXCEPTIONS , " THE REVENUE OF A FINANCIAL YEAR SHALL BE ENTERED IN THE ACCOUNTS OF THE FINANCIAL YEAR ON THE BASIS OF THE AMOUNTS COLLECTED DURING THE FINANCIAL YEAR " . SINCE THE SUMS WERE RECEIVED IN 1981 , THEY FALL TO BE SHOWN AS CURRENT REVENUE OF THAT YEAR .

ADJUSTMENT OF VAT PAYMENTS AND FINANCIAL CONTRIBUTIONS 1979

3.7 . ARTICLE 10 ( 1 ) OF COUNCIL REGULATION ( EEC , EURATOM , ECSC ) NO 2892/77 ( 8 ) REQUIRES MEMBER STATES TO SUBMIT TO THE COMMISSION , BEFORE 1 JULY , A SUMMARY ACCOUNT INDICATING THE TOTAL FINAL AMOUNT OF THE VAT BASIS OF ASSESSMENT FOR THE PREVIOUS CALENDAR YEAR ( " THE REFERENCE YEAR " ) . THE COMMUNITY VAT RATE ADOPTED FOR THAT YEAR IS THEN APPLIED , AND , AFTER TAKING INTO ACCOUNT THE PROVISIONAL MONTHLY INSTALMENTS ALREADY MADE , THE ADJUSTMENTS FOR EACH MEMBER STATE ARE WORKED OUT AND ARE TO BE EFFECTED ON THE FIRST WORKING DAY OF AUGUST . THOSE MEMBER STATES PAYING FINANCIAL CONTRIBUTIONS MUST ALSO ADJUST THESE CONTRIBUTIONS SO AS TO RESTORE THE ORIGINAL RELATIONSHIP BETWEEN THEM AND THE VAT RESOURCES FOR THE REFERENCE YEAR .

3.8 . THOSE MEMBER STATES WHICH HAD OPERATED VAT RESOURCES FOR 1979 ( THAT IS , ALL EXCEPT THE FEDERAL REPUBLIC OF GERMANY , IRELAND AND LUXEMBOURG ) SUBMITTED THE REQUISITE SUMMARY ACCOUNTS . THEY SHOWED THAT THE MEMBER STATES' MONTHLY INSTALMENTS IN 1979 FELL SHORT OF THE FINAL TOTAL BY 176,2 MEUA OR 3,6 % . DETAILS ARE SHOWN IN TABLE 3.2 .

TABLE 3.2 - VAT FOR 1979

( MEUA )

MEMBER STATE*TOTAL MONTHLY INSTALMENTS , 1979*LIABILITY AS PER MEMBER STATES' SUMMARY ACCOUNTS*DIFFERENCE ( 2 ) - ( 1 ) *

* ( 1 ) * ( 2 ) * ( 3 ) *

BELGIUM*329,6*338,3*8,7 ( 2,6 % ) *

DENMARK*183,9*183,5* - 0,4 ( - 0,2 % ) *

FRANCE*1 720,4*1 774,0*53,6 ( 3,0 % ) *

ITALY*747,7*817,3*69,6 ( 8,5 % ) *

NETHERLANDS*453,6*476,6*23,0 ( 4,8 % ) *

UNITED KINGDOM*1 302,5*1 324,2*21,7 ( 1,6 % ) *

TOTAL*4 737,7*4 913,9*176,2 ( 3,6 % ) *

THE BALANCES SHOWN IN COLUMN 3 WERE INCORPORATED IN AMENDING AND SUPPLEMENTARY BUDGET NO 1 ADOPTED ON 20 NOVEMBER 1980 .

METHODS " A " AND " B " FOR DERIVING THE VAT BASIS

3.9 . REGULATION 2892/77 ALLOWS MEMBER STATES TO CALCULATE THE FINAL VAT BASIS OF ASSESSMENT EITHER DIRECTLY FROM VAT RETURNS BY TAXPAYERS ( " METHOD A " ) , OR INDIRECTLY FROM STATISTICAL DATA ( " METHOD B " ) .

3.10 . IN METHOD A , ADOPTED BY DENMARK ONLY , THE BASIS IS DERIVED BY SUBTRACTING FROM THE TOTAL OF TAXABLE SALES THE TOTAL OF TAXABLE PURCHASES WHICH GIVE RISE TO A DEDUCTION OR REFUND OF INPUT TAX . VAT RETURNS IN DENMARK DO NOT CONTAIN DATA RELATING TO PURCHASES AND SALES , BUT SINCE ONLY ONE RATE OF TAX APPLIES THERE , IT IS AN EASY MATTER TO RECONSTITUTE THESE DATA FROM THE TAX FIGURES ON THE RETURNS . ( SEE , HOWEVER , POINT 3.16 . )

3.11 . UNDER METHOD B , ADOPTED BY BELGIUM , FRANCE , ITALY , THE NETHERLANDS AND THE UNITED KINGDOM , THE VAT BASIS IS CALCULATED BY DIVIDING THE NET VAT REVENUE ACTUALLY COLLECTED IN THE REFERENCE YEAR BY A WEIGHTED AVERAGE OF THE VAT RATES IN OPERATION IN THE MEMBER STATE DURING THAT YEAR . THE WEIGHTINGS FOR EACH RATE ARE DERIVED FROM AN ANALYSIS OF THE NATIONAL ACCOUNTS STATISTICS FOR THE SECOND YEAR BEFORE THE REFERENCE YEAR BY SPLITTING UP THE VARIOUS EXPENDITURE AGGREGATES SUBJECT TO VAT ACCORDING TO THE RATES APPLICABLE . THIS LATTER YEAR WAS CHOSEN AS BEING THE LATEST YEAR FOR WHICH DETAILED STATISTICS ARE NORMALLY AVAILABLE .

3.12 . ONCE CALCULATED , UNDER EITHER METHOD , THE VAT BASIS MUST THEN BE ADJUSTED TO COMPENSATE FOR THE MANY DEROGATIONS WHICH MEMBER STATES CONTINUE TO OPERATE UNDER THE TRANSITIONAL PROVISIONS OF THE VAT DIRECTIVE . FOR EXAMPLE , SOME MEMBER STATES CONTINUE TO EXEMPT PASSENGER TRANSPORT THOUGH IT IS TAXED UNDER THE FINAL UNIFORM SYSTEM . OTHERS DO NOT GRANT TAXPAYERS A DEDUCTION , ALLOWED UNDER THE UNIFORM SYSTEM , FOR INPUT TAX ON PETROL AND MOTOR CARS USED FOR BUSINESS PURPOSES . IN MANY CASES , THE DATA REQUIRED FOR THESE ADJUSTMENTS ARE NOT AVAILABLE FROM VAT RETURNS , AND A VARIETY OF OTHER STATISTICAL OR TAX SOURCES MUST BE RELIED UPON . THE ADJUSTMENTS , THOUGH LARGE IN NUMBER , RESULTED IN A NET NEGATIVE ADJUSTMENT , OF THE ORDER OF 2 % FOR 1979 .

3.13 . THE ACCURACY OF METHOD B RELIES UPON TWO BASIC ASSUMPTIONS IMPLICIT IN THE SYSTEM . THE FIRST IS THAT THE NATIONAL ACCOUNTS STATISTICS CAN BE SPLIT UP BETWEEN THE VARIOUS RATE CATEGORIES WITH SUFFICIENT DETAIL AND ACCURACY . THE SECOND IS THAT THE PATTERN OF EXPENDITURE ON THE VARIOUS RATE CATEGORIES HAS NOT CHANGED SIGNIFICANTLY BETWEEN THE YEAR FOR WHICH THE WEIGHTINGS ARE CALCULATED AND THE REFERENCE YEAR . THE IMPORTANCE OF THESE ASSUMPTIONS IS ILLUSTRATED BY THE FACT THAT AN OVERESTIMATE OF THE WEIGHTED AVERAGE RATE BY ONLY ONE-TENTH OF A PERCENTAGE POINT ( FOR EXAMPLE , 13,1 % INSTEAD OF 13,0 % ) WOULD RESULT , FOR ALL THE MEMBER STATES USING METHOD B , IN UNDERPAYMENTS OF VAT RESOURCES OF THE ORDER OF 40 MEUA ; AN UNDERESTIMATE WOULD , OF COURSE , HAVE THE OPPOSITE EFFECT .

3.14 . METHOD B IS ESSENTIALLY A STATISTICAL EXERCISE . SO WAS THE FORMER SYSTEM OF FINANCIAL CONTRIBUTIONS BASED ON AGGREGATE GROSS NATIONAL PRODUCT . HOWEVER , IN GENERAL , NATIONAL ACCOUNTS STATISTICS ARE NOT A FULLY SATISFACTORY MEDIUM FOR THE KIND OF DETAILED FISCAL ANALYSIS REQUIRED FOR METHOD B . IN ORDER TO ACHIEVE THE NECESSARY ADAPTATIONS TO THE OFFICIAL STATISTICAL DATA , MEMBER STATES HAD TO HAVE RECOURSE TO A GREAT NUMBER OF EXPEDIENTS , SOME OF WHICH WERE OF DOUBTFUL VALIDITY FROM A STATISTICAL POINT OF VIEW . HOWEVER , IT HAS NOT BEEN POSSIBLE TO GAUGE THE EFFECTS , WHETHER POSITIVE OR NEGATIVE , ON THE OWN RESOURCES .

3.15 . THE AUDIT CARRIED OUT BY THE COURT OF AUDITORS HAS ENABLED IT TO GATHER USEFUL INFORMATION ON THE TWO METHODS EMPLOYED . WHILE CERTAIN TENTATIVE CONCLUSIONS ARE POSSIBLE , AT THIS STAGE , REGARDING THE PROBLEMS POSED BY THE USE OF TWO METHODS SIMULTANEOUSLY , IT WOULD BE PREMATURE , AFTER ONLY ONE YEAR'S EXPERIENCE AND AT A TIME WHEN THREE MEMBER STATES WERE NOT YET IN THE SYSTEM , TO COME TO A FIRM JUDGMENT . THE COURT WILL CONTINUE ITS EXAMINATION OF THE APPLICATION OF THE TWO METHODS .

UNAUTHORIZED DEDUCTION FROM VAT RESOURCES

3.16 . IT WAS NOTED THAT DENMARK HAD DEDUCTED ABOUT 1,5 MEUA FROM ITS VAT PAYMENT TO THE COMMISSION . FOR REASONS OF NATIONAL POLICY , DENMARK TAXED CERTAIN SERVICES WHICH ARE NOT LIABLE IN THE REST OF THE COMMUNITY . IT IS PERMITTED TO DO THIS UNDER A SPECIAL PROVISION GRANTED BY THE COUNCIL AT ITS REQUEST , BUT FEELS THAT IT SHOULD NOT BE REQUIRED TO PAY VAT RESOURCES THEREON . THE COURT OF AUDITORS IS NOT AWARE OF ANY LEGAL BASIS FOR THIS RETENTION .

CORRECTIONS TO VAT SUMMARY ACCOUNTS

3.17 . EXAMINATION OF THE 1979 SUMMARY ACCOUNTS BY THE COMMISSION AND THE COURT OF AUDITORS DISCLOSED A NUMBER OF ERRORS AND OMISSIO