REPORT on the financial statements of the European Environment Agency (EEA-Copenhagen), together with the Agency's replies (97/C 81/06)

(For the period from 1 September 1994 to 31 December 1995)

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

1.2. The Court of Auditors has examined the financial statements of the European Environment Agency for the financial years 1994 and 1995. The budget was implemented under the responsibility of the Executive Director in accordance with the requirements of Article 13 (1) of Council Regulation (EEC) No 1210/90. His responsibilities include the preparation and presentation of the accounts (2) in accordance with the internal financial provisions set out in Article 14 of Council Regulation (EEC) No 1210/90. Article 188c of the Treaty establishing the European Community requires the Court of Auditors to audit these accounts. This report constitutes the first audit of the Agency.

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

1.4. The financial statements for the financial years 1994 and 1995 are reliable and the underlying operations were carried out, on the whole, in accordance with the rules concerning legality and regularity.

Main observations concerning the implementation of the budget of the European Environment Agency for the financial years 1994 and 1995

The Commission subsidy

1.5. During the financial year 1995 the Agency used only part of the Commission subsidy provided for in the general budget (ECU 12 million, of which ECU 6,2 million was drawn down). It is the Court's opinion that the Agency should have issued a recovery order during the financial year 1995 for the balance remaining due (ECU 5,8 million) in order to meet the commitments that were carried over to the financial year 1996 (totalling ECU 7 million).

Spending in excess of available appropriations

1.6. Several cases of expenditure in excess of available appropriations, amounting to approximately ECU 0,4 million altogether, were found under titles I (staff expenditure) and II (administrative expenditure) of the budget. This amount, which could not be charged to the budget for 1995, was entered on the assets side of the balance sheet in a suspense account, and had to be charged to the budget for the financial year 1996 (contravention of Articles 5, 27, 29c and 43 of the Agency's Financial Regulation).

Imprest account

1.7. Almost all payments charged to the budget under titles I and II were made via an imprest account. The utilization of this account was not in accordance with Article 43 of the Agency's Financial Regulation, since the administrator of the imprest accounts was, at the time, both the Accounting and the Authorizing Officer for certain budget headings. Furthermore, the deadlines for the submission of supporting documents were not met and the availability of appropriations committed was not verified before payments were made. This situation seems to be the principal cause of the cases of spending in excess of available appropriations pointed out above.

Appropriations carried forward

1.8. At the end of the financial year 1995, as was already the case at the end of the financial year 1994, the percentage of appropriations carried forward was very high in relation to the appropriations available (ECU 7 million - 57,2 % of the total budget). The majority of these carryovers concern title III (operational expenditure) (ECU 6,4 million, representing 90,3 % of the appropriations under this title). A large share (ECU 1,8 million) of the appropriations carried over from 1994 to 1995, totalling ECU 8,5 million, had to be cancelled (21 % of the appropriations carried over).

A posteriori referral to the Financial Controller

1.9. Several proposals for the commitment of funds totalling ECU 0,5 million were submitted, a posteriori, to the Financial Controller for his approval. In these cases, the Financial Controller withheld his approval, but this refusal was overruled by the Management Board. The Court wishes to emphasize the obligation to respect the Financial Regulation and to submit proposals for commitments in due form prior to 'any measure of a kind which might lead to expenditure from the budget` (Article 27 of the Agency's Financial Regulation).

Separation of duties

1.10. The separation of duties within the administration of the Agency has not been observed. Due to a shortage of staff in the financial accounting department, the same person was, at one and the same time, Accounting Officer, administrator of the imprest accounts and Authorizing Officer for certain budget headings.

Accounting systems

1.11. The budgetary accounting and general accounting are carried out on two independent and unconnected computer systems. The budgetary accounting system is, moreover, not programmed to refuse entries in the event of appropriations available, or appropriations committed, being exceeded.

The Financial Controller

1.12. The Management Board appointed the Commission's Financial Controller as their own Financial Controller. The Court considers it would be advisable, in respect of the Agency's present mode of operation, to appoint a full-time Financial Controller for the Agency.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 28 October 1996.

For the Court of Auditors

Bernhard FRIEDMANN

President

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(1) OJ No L 120, 11. 5. 1990, p. 4.

(2) Contrary to the requirements of Article 13 (3) of Council Regulation (EEC) No 1210/90, the accounts for all revenue and expenditure of the Agency in respect of the financial year 1995 were not prepared until 20 June 1996, the date on which the accounts were signed by the Executive Director of the Agency and sent to the Commission, to the Board of Management and to the Court of Auditors. These accounts were received by the Court on 28 June 1996. The abridged version of these financial statements is presented in the tables annexed to this report.

THE AGENCY'S REPLIES

The European Environment Agency was established in Copenhagen in mid-1994. A first budget of ECU 10,2 million was adopted already on 31 October 1994. Since the decision on where to locate the Agency had been delayed a fast start was needed. Through a significant effort, projects could be identified and the budget committed before the end of the year, but for obvious reasons the execution of the commitments could barely start before the end of 1994.

Thus, in 1995 the Agency faced the daunting task of executing, not only the budget from 1994 but also a new budget for 1995 of ECU 10,5 million, and this before the regular staff of the Agency had taken up duty. The vacant posts in the Agency were published in November 1994 and the selected candidates started coming on board in summer 1995 after a long selection procedure involving more than 7 000 applications.

In short, the Agency had an ambitious work programme and virtually two budgets to execute, but very limited staff for the task. Despite this, work went ahead and in 1995 the Agency finalized major projects, like the Dobris assessment, the review of the fifth environmental action plan. Five European topic centres were established and the build-up of the EIONET advanced. The build-up of the Agency progressed with regular staff increasing from 1 on 1 January 1995 (supported by 10 temporary staff, for example national experts and auxiliary staff) to 22 on 31 December 1995, still supported by 10 temporary staff.

The Agency's administration has progressively developed since the same open procedure to recruitment was applied. Nevertheless, it was clearly too understaffed in 1995 to handle the procedural and financial aspects of the work. On the finance side only one person was available to handle the financial, budgetary and contractual aspects of the work programme during the first half of the year. In June 1995 the Head of Administration took up duty, and only in the beginning of 1996 did the rest of the finance and contract staff come on board.

The Agency rose to the challenge, but some mistakes of a procedural nature were made in the areas of finance and budget.

Overspending

There was overspending on some budget lines. The reason was, on the one hand, that the Agency's budgetary monitoring system did not function in a satisfactory way and on the other hand some executed payments were not introduced due to the fact that the Agency was seriously understaffed in the finance department. As a consequence, when the accounts were closed, the discrepancy between the accounts and the payments actually made, showed up as overspending on some budget lines. Since no adjustment between budget lines can be made after 1 January, this has to be booked on the 1996 accounts, i. e. be financed from the 1996 budget.

In 1996 the expenditures and the availability of appropriations in titles I and II, which was where the problems occurred in 1995, were carefully monitored in order to avoid overspending.

Procedures overlooked (Saisine a posteriori)

During the build-up of the Agency, a work programme was established and started being executed before administrative procedures had been well established and an administration in place to monitor that procedures were followed. In some cases this led to work being ordered and carried out without all the procedures being observed. In particular, work was contracted without the Financial Controller in Brussels having given his visa which is a prerequisite for this kind of operational expenditure. It was not a question of finances being wasted or that the finances were not there. The mistake was procedural and reflected that work had to be done and the procedures to assure that this was done according to Community rules were not yet in place.

Procedures are now in place to avoid similar problems. A clear delegation of authorizing powers have been established and staff informed of the rules.

Separation of functions

In the financial framework of the Agency, as is the case in all public institutions, certain functions should be kept separate. A basic principle is that the same person should not commit money and order payment. However, during the period of establishment of the Agency in Copenhagen the number of staff in the Agency was so small that it was not possible to observe this principle. This is rightly criticized by the Court of Auditors. However, once the staffing of the Agency started to increase this was corrected and these functions have been rigorously separated in the Agency since autumn 1995.

Extensive use of imprest accounts

The normal procedure for committing and ordering payments in the EU-system is to have prior approval by the Financial Controller in practically all cases. In the case of the Agency, the Agency Financial Controller is the same as the Commission's and located in Brussels. To send all financial transactions to Brussels for approval before they could actually be executed would be an excessively tiresome procedure. It would seriously obstruct the working of the Agency.

The way out of this dilemma is the imprest account. It works in principle as a petty-cash reserve although the amounts involved are important. Instead of seeking prior approval from Financial Control, the Agency executes the payment and once a month the imprest account is sent to the Financial Controller to have the ex post approval of the payments which have been made. On the one hand this facilitates the functioning of the Agency, but, on the other hand, it is a double-edged sword since the Agency's internal controls and the financial department must have the capacity to handle this additional responsibility.

Thus, the criticism by the Court of Auditors is understandable, but as long as the Financial Controller is located in Brussels there is, in the Agency's view no alternative to an extensive use of the imprest account.

It is therefore with great interest that the Agency has noted the recommendation by the Court of Auditors that the Financial Controller of the Commission should place a Financial Controller in the Agency. The Agency would welcome this step.

Computerized financial system

The Court of Auditors underlines the need for the Agency to find an up-to-date computerized financial system which can integrate the accounting side with the budget monitoring side. In the complicated financial system of the European Union such a computerized system is crucial to avoid having to tie down a lot of resources in financial and budgetary work.

The Agency supports wholeheartedly the conclusion by the Court of Auditors. Since the beginning of 1995, the Agency has again and again tried to find a solution to this problem. It is a problem which the European Environment Agency shares with the other EU Agencies. In 1996, the Agencies launched a joint call for tenders to find a solution but this call for tenders has not been successful, i.e. no satisfactory system has been found. Thus, the Agency is at present pursuing the possibility of using the new budget monitoring system Sincom 2. The plan is to have it installed and operational in time to execute the 1997 budget on the basis of this system. There will still be one software for the budget monitoring system and another for the general ledger. Nor will the imprest accounts be integrated in the software the Agency will continue to look for an efficient way of solving these problems and will endeavour to coordinate this work with the other Agencies.