Communication from the Commission

Answers of the Member States to the Court of Auditors' 1999 Annual Report

(2001/C 316/02)

I. INTRODUCTION

In accordance with Article 276(3) of the Treaty and Article 89(8) of the Financial Regulation, the purpose of the Commission's follow-up report is to set out the measures it has taken in response to the observations accompanying the decisions giving discharge and other observations by Parliament concerning the implementation of expenditure, and to the comments accompanying the recommendations on discharge adopted by the Council.

Since the 1996 Dublin European Council, the Commission has been requesting Member States, in accordance with the SEM 2000 objectives of sound and efficient financial management, to provide information on the measures taken in response to the Court of Auditors' observations in its annual report and special reports. These measures are complementary to those taken by the Commission.

This report presents the Member States' replies to the observations in the Court of Auditors' Annual Report for 1999 and it contains details of the action taken by the Member States in response to the Court of Auditors' observations. This year Member States were asked to put the emphasis on measures which will provide lasting remedies for the shortcomings identified and mentioned in the Court's report and in its statement of assurance. The final purpose of this report is to contribute to improving the financial management of Community funds.

The Court of Auditors points out in its 1999 Annual Report that Member States are responsible for the day-to-day management of the bulk of the funds from the Community budget. It adds that the annual report and the special reports draw attention to serious and persistent weaknesses in Member States' management and control systems. The Court accordingly requires the Member States to complete implementation of the new management and control systems for Community funds.

In its recommendation on the discharge for 1999, the Council has invited the Commission to intensify and consolidate administrative cooperation with the Member States. It also stressed that it is essential that the Commission establish efficient management and monitoring systems for the purpose of prevention and for taking corrective measures, if necessary in association with national administrations. Parliament has also strongly emphasised the role played by the Member States in the proper administration of Community resources.

The Commission's request to the Member States was in three parts. The first one contained the Court's observations which identified the Member State concerned, the second part set out the Court's general observations where no Member State was identified, and the last part presented the errors recorded by the Court in the Statement of Assurance for which the Member States are responsible.

The scope and quality of the Member States' replies vary widely from country to country. Only the responses of Sweden, the United Kingdom, France and the Netherlands can be considered complete and of high quality. For the first part of the request, almost all the countries identified in the annual report responded to the Court's remarks, but some did not answer them all (see points II, III and IV below). Seven countries provided no answers at all to the second part, general observations of the Court where no Member State is identified, and the replies of the other countries, with some exceptions, were incomplete. Finally, most of the countries answered the third part, the errors listed by the Court in the Statement of Assurance, but in some cases not all the errors were commented on.

Member States' replies to the Court's general observations where no Member State is identified were, with some exceptions, inadequate. Most of the Member States failed to propose structural corrective measures. Descriptions of remedial action already taken, in progress or still to be adopted for individual error cases were generally detailed and the responses constructive.

Some Member States emphasise the importance for Member States of respecting their obligations to manage EU funds properly. Other countries are concerned about the high error rate as regards payments.

Certain countries express support for the basic ideas underlying the Commission's proposal for overhauling the Financial Regulation or highlight that the recasting of this regulation must be completed rapidly with the involvement of the Court of Auditors.

Some Member States ask the Court of Auditors to name the Member States in its annual report. Others criticise the Court's refusal to give specific figures for the error rate.

This report presents a broad analysis of the Statement of Assurance errors (part II), a selection of the responses sent by the Member States to the 1999 Court of Auditors' Annual Report concerning own resources, the common agricultural policy and structural actions (parts III, IV and V) and some conclusions (part VI). The subjects selected have been chosen in relation to the importance of the Court's observation and to the general interest. The Member States more frequently mentioned in this paper are not those Member States with a highest level of error but those who have participated more intensively in the responses to the Court's Annual Report. The reference to the paragraph of 1999 Annual Report is given in brackets.

II. ANALYSIS OF THE STATEMENT OF ASSURANCE ERRORS

(a) Commission's analysis of the errors

In its Statement of Assurance, the Court gave a negative opinion on payments in contrast to the positive opinions (with certain reservations) in respect of commitments, revenue and the reliability of the accounts. The following analysis concerns only the errors in payments and is based on data produced by the Court of Auditors.

Overall, the Court found 85 extrapolable substantial errors in payments. These errors related mainly to the Structural Funds and the EAGGF Guarantee Section, which is managed on the Commission's behalf by the Member States. The Court considered that Member States were responsible for 78 of these errors or 84 % of the extrapolated value, and the Commission for the remainder. Twenty-two of the errors, or 30 % of the value, were challenged by the Commission and/or the Member States.

While this would point to the need to improve the management and control systems in the Member States, it is also important to note that, as stated by the Court of Auditors, where errors are found at final beneficiary level, these do not in practice affect the amount actually paid from Community funds to the Member States in the Structural Funds.

The Court noted 40 errors spread across 11 Member States in respect of the EAGGF Guarantee Section, amounting to some 28 % of the total absolute value. Some 27 of these errors, or 59 % of the absolute value, were at the level of the final beneficiary, with 11 or 28 % of the value at the level of the Member State authorities. Two of the errors were negative in value, i.e. related to under-payments. Many of the errors involved relatively minor over-declarations of land area or animals eligible for support. One error, amounting to 11 % of the total value of EAGGF Guarantee errors, related to the non-application of a supplementary levy due because milk quotas were exceeded. The Commission was responsible for two errors amounting in value to some 14 % of the total.

The Structural Funds accounted for 30 errors in nine Member States amounting to some 62 % of the total value, half of these due to ineligible expenditure being included in claims. Almost half of the errors, accounting for some 52 % of the value, occurred at the level of the final beneficiary. Two errors amounting to some 16 % of the total value were attributed by the Court to the Commission, with the remaining errors (14, or 32 % of the total value) occurring within Member State administrations. Overall, just under two thirds of the errors in value terms concerned the European Regional Development and Cohesion Funds, while most of the remainder related to the European Social Fund.

The sampling approach used by the Court in the Statement of Assurance is designed to enable it to reach an opinion across the budget. This means that individual Member States may be under or over-represented in the sample in comparison with the total number and value of transactions relating to them. The DAS results cannot therefore be taken as representative of the quality of individual programmes or activities nor of individual Member States' management and control systems.

(b) Member States' responses to the errors

Most of the Member States accept, in their responses to the Commission's request, the errors attributed to them in the Statement of Assurance and they explain the measures taken. But there are also a considerable number of responses that refute the Court's arguments. The most frequent situations are as follows:

- the Member State disagrees with the Court's interpretation of the rule,

- in some cases the Member State agrees with the nature of the error but disagrees with its quantification by the Court; some even disagree with the nature of the error itself,

- the Member State does not interpret the facts in the same way as the Court,

- the Member States disputes the methodology used by the Court.

In some cases the Member States did not provide any response to the errors noted by the Court in the Statement of Assurance.

III. OWN RESOURCES (Chapter 1 of the 1999 Annual Report)

- The Court criticises the use by the Member States of two different national accounts systems, ESA 79 and ESA 95, for calculating the GNP resource. The Court had observed in previous reports that ESA 79 did not provide as accurate a reflection as ESA 95 of the Member States' real capacity to contribute to the budget (paragraphs 1.33-1.35).

France replies that the own resources Decision adopted by the Council on 29 September 2000 requires that ESA 95 be used to calculate the GNP resource, and is thus in line with the Court's requests. However, it will not enter into force until it has been ratified by all the Member States.

The United Kingdom agrees with the Court and points out that it has argued for a swift move to ESA 95 for GNP calculation purposes, which would reduce the risks associated with ESA 79 highlighted by the Court of Auditors.

The Swedish authorities think that the use of two different national accounts systems is a natural consequence of the need to ensure that the introduction of ESA 95 will not unintentionally lead to more resources being made available to the Community budget. The new own resources Decision confirms that the GNP amounts must not alter the balance of resources. When the new own resources Decision has been ratified by all the Member States, ESA 79 will give way to ESA 95.

- The Court criticises both the reliability and the nature of the separate account (the B account). Member States must enter in the B accounts established entitlements which have not yet been recovered and for which no security has been provided. They must also enter in the B accounts established entitlements for which security has been provided but which have been challenged and might, upon settlement of the disputes which have arisen, be subject to change. The Court points out failure by the Member States to comply with the requirements for making entries in the B accounts (paragraphs 1.12-1.15). The Council, in its recommendations on the 1999 discharge, invited the Commission, in close cooperation with the Member States, to continue its efforts to improve the reliability of the B accounts.

France replies that it intends to change its accounting procedure in accordance with the wishes of the Community authorities and has already taken a number of steps. The Commission has been informed of the changes made.

Italy considers that in most cases these anomalies occur because the separate account is kept manually, which means that the potential for error is greater than in the case of a computerised separate account. It announces that computerisation of the quarterly accounts for own resources in Italy is now nearing completion and should become operational in the first quarter of the current year.

The Irish authorities reply that they are ever conscious of the need to maintain the separate account in the correct manner and continuously strive to do so.

- The Court also asks the Commission to require the Member States to provide more detailed analysis of the balances on the B accounts. This analysis would serve as a basis for showing in the financial statements the estimated amounts to be recovered, and to improve management of the debt. Such treatment would be preferable to the procedure followed in 1999 by the Commission of making 100 % provision (paragraph 1.16).

Sweden replies that the generally accepted accounting method used in the valuation of debts is to enter doubtful debts as the amounts not expected to be collected. In this sense, making a 100 % provision is not therefore necessarily incorrect, if there is reason to believe that the sum that can be collected is zero, but this method is not sound if what the Commission means is that there is a lack of information about the content of the B account, which forms the basis for the assessment. If this is the case, the Court of Auditors' recommendation that a more detailed analysis be made of the balances on the B accounts is probably well-founded. Sweden feels that the best solution is to use a combination of individual assessment and recovery figures. It should be possible, when calculating the provision, to make individual assessments of separate items in the B account which give a very large total. For example, the debts of just five operators represent 70 % of Sweden's total balance in the account. For the remaining 30 %, which is spread over hundreds of operators, it would be very complicated and time-consuming to make individual assessments.

- The Court found that the late transmission in 1999 by several Member States of valid assessment bases for the GNP resource reduced the time available for the checks performed by the Commission (paragraph 1.21).

France endeavours to respect the deadlines for transmitting data for 2000 and earlier years.

In Swedish authorities' view, it is important that the Member States send in their annual GNP data in good time so as to allow the Commission more time for checking and hence greater comparability between Member States.

- The Court considers that the application of the methodology for comparing intermediate consumption currently used by two Member States for the VAT resource should be applied by all the other countries, provided the necessary amendments and improvements are made. The aim of the method mentioned in the Court's Report is, by comparing information from VAT statements with data from other statistical sources, to identify the sectors within the economy where large-scale VAT fraud can be expected. This method, in the Court's opinion, proved convincing at the practical level even where amendments proved necessary because of the special features of the data available (paragraphs 1.65-1.72). In this connection the Council, in its recommendation on the 1999 discharge, expressed its concern about combating VAT fraud and welcomed any initiative that will provide effective ways of doing so. It added that an examination of methodology, which would make for more refined risk-analysis in the area of VAT as referred to by the Court in its annual report, could be carried out by the Advisory Committee on Own Resources (ACOR).

France replies that this subject must be discussed in the Advisory Committee on Own Resources (ACOR), but it adds that the proposed new procedure must not increase the workload for the national authorities responsible for calculating the VAT base. In the French authorities' view, a heavier workload might further increase the delays in the transmission of data to the Commission also mentioned by the Court. The comparison of statistical and tax data is a method that France has been using since 1993 to combat intra-Community VAT fraud.

Austria is critical of the proposed method. It argues that the quality of the data required for this method varies, and it would be inappropriate to draw any firm conclusions regarding VAT or input tax fraud in individual sectors of activity based on a comparison of figures from statistical sources (the national accounts) and tax sources.

The Dutch authorities adopt a cautious approach. They think that the results of the ongoing experiments in this area should be examined before a decision is taken.

Sweden feels that the method referred to by the Court of Auditors should be considered. But it thinks that if the methodology is to be applied successfully, a number of questions must be resolved relating to the structure of the statistical system.

IV. COMMON AGRICULTURAL POLICY (Chapter 2 of the 1999 Annual Report)

- The Court notes that, at Member State level, the main formal errors found were caused by shortcomings in performing the regulation checks. For instance, the Court criticises the fact that, in France and Finland, the minimum percentage of area aid applications to be covered by on-the-spot checks was not always increased when the number of errors revealed by the initial examination of the files was too high, and it says that this is contrary to the provisions of Commission Regulation (EEC) No 3887/92 (paragraph 2.34).

France replies that where a significant number of anomalies are identified during on-the-spot checks, this does not necessarily imply bad management or fraud, but illustrates the reliability and appropriateness of the risk analysis system and the selection criteria used at department level. The French authorities point out that the rates for checks per department for 1999 were set in accordance with the Commission working paper, which formalises the dual approach based on two criteria: proportion of anomalies and surface area affected by the anomalies. In accordance with this memo, the situation in the departments audited as part of the statement of assurance for 1999 did not call for an increase in the rate.

In the view of the Finnish authorities, no formal error occurred as referred to in the annual report. They feel that the rates for checks were set as prescribed by the Commission in its working paper.

- The Court states that there are too many transfers between appropriations in EAGGF, and it adds that the number of transfers is influenced by the variable quality of the Member States' estimates. The Court takes the view that these estimates could be improved by imposing stricter deadlines on the Member States for submission of the estimates and by setting up a more rigorous system to monitor them. It considers that the Commission and the Member States should improve the quality of estimates in terms both of revenue and expenditure (paragraph 2.20). The Council, in its recommendation on the 1999 discharge, called on the Member States to shorten the procedural deadlines and the deadlines for transmission of the necessary information.

Sweden sees no need for further measures to improve the budget forecasts for agricultural measures beyond the improvements already made.

The Dutch authorities agree with the conclusions of a study carried out by the Commission into the reliability of the Member States' forecasts. This study showed how difficult it would be to improve forecasts, except in the case of supporting measures and rural development.

- The Court of Auditors refers to problems detected in Special Report 4/98 concerning butter imports from New Zealand. This butter can, subject to certain conditions, be imported at a preferential rate. A number of problems have arisen in the past in the European Union because the butter did not appear to meet the relevant conditions. The Court of Auditors considers that no appropriate measures have been taken in some countries (paragraphs 2.113- 2.129).

The Netherlands states that the Dutch customs authorities discovered that the fat content did not meet the legal requirements, and made a further claim on that basis. They add that the legal proceedings are still pending.

The United Kingdom accepts that appropriate physical controls could have identified irregularities at an earlier stage, but the key point in its view is that there was no loss of income to the Community budget, and no significant cost to Community funds. The UK considers that British Customs acted quickly to establish the amount of arrears due (GBP 250 million) and take the necessary action to collect the appropriate amounts from the companies involved.

- Some Member States are criticised by the Court for continuing to have many small over-declarations of agricultural areas eligible for aid and of the number of head of livestock for animal premium (paragraph 2.26).

The Danish authorities reject that criticism and point out that the Danish parcel register system and the related arrangements for administering area aid cases are generally recognised to function smoothly. They argue that this system has in fact been adopted by other countries, and by the Commission, as a model.

The United Kingdom accepts the Court's comments and explains that it has now made significant improvements in the scheme administration, which it believes will lead to a reduction in errors found.

- The Court contests the financial correction percentage (2 %) applied to France for expenditure on area aid in the marketing year 1994; in its view, the Commission should have applied 5 % (paragraphs 2.50-51).

The French authorities contest even the 2 % flat-rate correction imposed by the Commission. They have brought an action for annulment before the Court of Justice of the European Communities on the ground that the correction is disproportionate to the irregularity, which did not undermine the objectives of Community legislation.

- The Court also contests the financial correction percentage (2 %) applied to Greece. It notes that, in the arable crops sector, the required cross-checks were not carried out in this country until after the payment was made; this should have been treated as a weakness affecting the key controls and led to a 5 % correction (paragraph 2.52).

The Greek authorities dispute the Court's criticism and reply that the required cross-checks were carried out at the required time with the required frequency, as acknowledged by both the Commission and the national departments, and that efforts are continually being made to improve them.

- The Court criticises the fact that according to an audit of a regional agency in Sweden the method used to apportion the general costs led to the allocation of a higher share of the general costs to the projects co-financed by the Union than to the projects financed by Sweden alone (paragraph 2.38).

Sweden disputes the criticism and replies that the operations financed by the EU in the agency in question are governed by a relatively detailed set of rules compared with many other areas of the agency's activity. The greater financial burden was the result of a request from the management for more time for the EU project. This explains the allocation of costs noted by the Court of Auditors.

- The Court notes that in Greece, unions of cooperatives made unauthorised deductions from the amount of aid to be paid for olive oil, tobacco and cotton production (paragraphs 2.27 and 2.29).

The Greek authorities recognise the facts but argue that at the time of the payments, the Community regulations did not explicitly require that beneficiaries be paid the full amount. Later, the adoption of Regulation (EC) No 1259/99, which came into force on 1 January 2000, removed any doubts regarding the ban on making deductions from Community subsidies. In consequence the Ministry of Agriculture has announced arrangements whereby the payments will be made direct to the beneficiaries.

V. STRUCTURAL ACTIONS (Chapter 3 of the 1999 Annual Report)

- The Court notes that as regards Objective 2 for the period 1994-1996, there are considerable delays in closing programmes (paragraphs 3.30-32). In its recommendation on the 1999 discharge, the Council points out that particular attention needs to be paid to the supervision and control of the closure of programmes.

France replies that the new Structural Funds regulation sets deadlines by which sums committed for measures which have not yet been the subject of a final payment application by Member States are decommitted. The deadlines are 31 March 2001 for programmes prior to 1994, and 31 March 2003 for programmes between 1994 and 1999.

The United Kingdom agrees on the importance of closing old programmes quickly. However in some cases it has taken longer than expected to resolve outstanding financial issues with the applicants.

- The Court considers that the number of anomalies occurring in the declarations of expenditure co-financed by the Community is still high. It points out that almost all the substantive errors in payments directly affecting the legality and regularity of the underlying transactions occurred in the Member States, at the level of the final beneficiaries (paragraphs 3.42 and 3.43). In its recommendation on the 1999 discharge, the Council recognises the importance of efficient implementation of the provisions laid down in Regulation (EC) No 2064/97 for the purpose of strengthening the provisions on financial controls carried out by the Member States and the Protocols concluded between national audit services and the Commission. Moreover, given the volume of structural measures in the Community budget, the Council stresses the importance of the steps taken by the Member States and the Commission to improve management, follow-up and control in this area.

In order to reduce errors at the level of final beneficiaries, the United Kingdom has revised and clarified the application form and grant offer letter for the 2000-06 programmes in order to explain applicants' responsibilities in more detail.

France considers that with the introduction of Regulation (EC) No 2064/97 on the control of the Structural Funds, the Commission launched a process of tightening up financial control of the Structural Funds. This process has continued in 2000 with the adoption of two new regulations on the management and control of the Funds and the financial corrections required in cases of non-compliance with the rules. But the French authorities point out that the time required to introduce these various regulations in the Member States is relatively long. France welcomes the regulatory efforts the Commission has made since 1997 to tighten up financial control of the Structural Funds. It fully endorses the Court's recommendation that the Commission pay closer attention to implementation in the Member States of these successive regulations. In the French authorities' view, it is essential that the Commission take this action once the above regulations have been promulgated so that implementation is fast, effective and uniform within the Union.

With a view to avoiding errors, the authorities responsible for payments in Sweden have arranged training and information meetings for administrators at all levels in the implementing organisation. Checklists have also been compiled and information has been circulated on auditing visits in order to minimise the number of errors. The fact that Sweden normally does not pay out aid to the project sponsors in advance but only when the costs have been accounted for neutralises, in our opinion, the risk of substantive errors.

Partly in response to the irregularities detected in the European Social Fund in 1999, the Dutch Government decided to investigate on a nation-wide basis whether improvements were also needed with regard to the management, inspection and monitoring of other Structural Funds. The Ministries of Foreign Affairs, Economic Affairs, Agriculture, Nature Management and Fisheries and Social Affairs and Employment have examined whether improvements to those aspects of the Structural Funds of relevance to them are necessary and desirable. Appropriate measures have been taken by the various ministries.

To ensure active involvement in that part of EU structural policy which is implemented on a regional basis, it is necessary for ministers to have adequate powers. In that connection, the bill on the monitoring of European grants is extremely important. The bills were submitted to the Dutch Second Chamber on 2 January 2001.

- The Court states that its audit revealed a number of cases where decommitments should have been made before the end of the budgetary year 1999 (so-called "sleeping projects"). The Court considers that the Commission should take steps to decommit these amounts (paragraph 3.53).

Regarding sleeping commitments, Sweden takes the view that the Community Regulation should state that if inadequate requests for payment are received a project should be closed down and no payments made.

- Eligibility datasheet No 5 in the Commission Decision of 23 April 1997 stipulates that overheads should be charged in a fair and reasonable way. The Court reported wide variations in the way overhead charges are taken into account. The Court considers that models for calculating indirect overheads should be introduced before the 2000-2006 programming period (paragraphs 3.64-67). With regard to the use of overhead charges and lump-sum payments, the Council, in its recommendation on the 1999 discharge, points to the need to comply with the rules in force.

During the 1995-1999 programming period Sweden developed models for calculating indirect overheads. Sweden maintains a strict position on the approval of indirect overheads. Sweden is in favour of the new Regulation (EC) No 1685/2000 on eligible expenditure. However, it does not consider it appropriate to introduce percentages for calculating indirect overheads, as projects differ from one Member State to another.

- The Court criticises some aspects of the implementation of Regulation (EC) No 2064/97. This regulation is intended to strengthen the financial controls that the Member States are required to exercise over operations co-financed by the Structural Funds (paragraphs 3.69-3.74).

Ireland explains that, in order to help the relevant ERDF spending bodies to comply with the regulation, the Irish Department of Finance issued a circular in 1998 providing guidance for its implementation.

- The Court thinks that the Commission should review the rules on eligible expenditure in order to better target the use of Community funding (paragraph 3.80).

The United Kingdom replies that the Commission has already acted on this and the new datasheets have been endorsed by the Member States.

Sweden points out that the Commission, in collaboration with the Member States, has produced a new Regulation (EC) No 1685/2000 on eligible expenditure, which Sweden considers to be a positive step. It considers that there will always be problems of interpretation, however, and the Swedish authorities would like to see closer cooperation with the Commission to resolve any questions which might arise.

Ireland replies that the rules on eligible expenditure are always open to interpretation. It is impossible to forecast all the possible situations.

- The Court considers that the procedure to take corrective actions on accepted irregularities should be improved (paragraph 3.85)

The United Kingdom monitoring authorities will encourage regional administrators to resolve detected irregularities within six months. Moreover, guidance on the reporting and prevention of irregularities by the United Kingdom departments is to be improved.

- The Court criticises the fact that, in the case of the Cohesion Fund, the Commission does not always have access to all the essential information required by the Regulation (paragraph 3.114).

Ireland refutes this criticism and replies that in Ireland the Commission has unrestricted access to all the essential information it requires in respect of projects put forward for Cohesion Fund assistance.

VI. CONCLUSIONS

Even if the Member States, in their responses to the Commission request, accept many errors noted by the Court of Auditors, there are also a considerable number of errors for which the Member States refuse the Court's arguments.

In general the Member States have presented remedial actions for the errors noted by the Court in the Statement of Assurance for which the individual Member States are responsible. On the contrary, for the general observations of the Court with no Member State identified, the Member States have provided very few examples of remedial action taken, which is problematic considering that 80 % of expenditure are delegated to Member States. Moreover, the Council, in its decision on the 1999 Discharge, has recommended intensifying administrative cooperation between the Commission and the Member States.

To substantially reduce the Statement of Assurance error rate, the management by the Member States of the Community funds must be improved. This is to a large extent a responsibility of the Member States but also a responsibility of the Commission, which can propose appropriate changes in the European Union regulations.

In the future the aim will be to publish the answers of the Member States to the Court of Auditors' Annual Report earlier in the discharge procedure. The report from the Commission should be ready at the moment the Council debates its recommendation for the discharge.

For this purpose, as early as possible in November 2001, and in view of the preparation of the report relating to budget year 2000, the Commission will establish, in agreement with the Member States which general and specific issues they are invited to address in their contributions. Their responses will be requested for 20 December 2001. The Commission will prepare a summary report for the Discharge Authority summarising these contributions around the end of February 2002.