Communication from the Commission - Synthesis of Annual Activity Reports 2003 of DGs and Services { SEC(2004) 732 }

TABLE OF CONTENTS

Communication from the Commission

Synthesis of Annual Activity Reports 2003 of DGs and Services

1. Introduction

2. Internal control framework issues

2.1. General state of play

2.2. Specific issues

2.2.1. Delegations

2.2.2. Representation offices of the Commission in the Member States

2.2.3. Commission offices and executive agencies

2.3. Conclusions

3. Activity Based Management/ Strategic Planning and programming

4. Human resources

5. Financial management and reporting

5.1. Shared management

5.2. Direct and indirect centralised management

5.3. Ex ante and ex post control

5.4. Implementing the financial regulation

5.5. Accounting/financial reporting

5.6. Conclusions

6. Governance issues

7. Conclusions

1. Introduction

The Commission's Directorates General (DGs) and services reviewed the main policy achievements against the objectives set in the 2003 Annual Policy Strategy In their annual activity reports, and took stock of the management in that year.

The present Synthesis focuses only on the management of DGs and services in 2003. It does not pay full tribute to the emphasis the Commission's administrative reform has put on the fact that management is oriented towards the delivery of the Union policy objectives. This is the rationale behind the annual strategic cycle starting with the Annual Policy Strategy which informs the services work programmes to which the DGs' annual activity reports refer.

The annual activity reports of the Commission DGs and services provide more detail of the actions the Commission conducted and its policy work.

2003 was a year of substantial progress in the implementation of the Commission's administrative reform, with virtually all actions laid down in the White Paper being implemented [1]. Likewise, most of the actions plans undertaken to address cross-cutting issues identified in the previous Syntheses are completed or well advanced.

[1] See for further details the Progress Report of Reform (COM(2004) 93 of 10.2.2004).

Taking note of these achievements, this Synthesis deals with a number of cross-cutting management issues raised in annual activity reports. For this Synthesis, the Commission has decided to focus on the management and organisation issues resulting from the work of its DGs and services which are particularly relevant to the functioning of the enlarged Union.

It also takes stock of the issues identified and the recommendations contained in the annual report of the internal auditor pursuant to Article 86(3) of the Financial Regulation, the overview of the state of the internal control systems [2] and the annual report of the Audit Progress Committee [3]. On these recommendations, this Synthesis draws the appropriate conclusions.

[2] Overview on the state of internal control in the Commission DGs and Services in 2003.

[3] Third Annual Report of the Audit Progress Committee - Period from May 2003 to April 2004. The audit Progress Committee is responsible for monitoring the quality of internal audit work and the implementation by Commission DGs and services of audit recommendations.

2. Internal control framework issues

2.1. General state of play

The 2002 European Court of Auditors' Report underlined the necessity to ensure the effective and complete application of the internal control standards, as they, together with the principle of responsibility of Directors General, represent the cornerstone for much of the Reform in the Commission. At the end of 2003 the Commission achieved compliance with the baseline requirements, according to the commitments made by the Commission in its 2002 Synthesis. The next steps will concentrate on further improving the effectiveness of internal control systems.

2.2. Specific issues

The Synthesis highlights specific points concerning cases where management responsibility has been either de-concentrated to Commission administrative structures outside headquarters or to external bodies.

One issue has required urgent action: the implementation of internal control in delegations, representations and external bodies reporting to the Commission, should be finalised and implemented as a matter of priority, to avoid that a lower standard of internal control risks to apply beyond the Commission's headquarters. In the above cases, the accountability, control and reporting requirements applicable to all Commission DGs and services should be applied and attention should be paid to implementing appropriate internal controls.

2.2.1. Delegations

The Commission has embarked on a substantial de-concentration process concerning the management of external aid, which has given Commission delegations in third countries responsibility for the management and control of operational expenditure. This process, which was extended to more delegations in 2003 is in general considered to be successful by the relevant DGs. Some deficiencies concerning implementation of internal control standards in delegations, such as separation of duties are being addressed, in particular by tackling the underlying problems regarding human resources organisation.

2.2.2. Representation offices of the Commission in the Member States

The 2002 reservation on the functioning of the representation offices in the Member States has given rise to corrective measures, which have been adopted and have started to bear fruit. Nevertheless, for 2003, the reservation in the relevant annual activity report and declaration had to be repeated in the meantime.

2.2.3. Commission offices and executive agencies

The new financial regulation has made it possible for the Commission to set up administrative offices and executive agencies in charge of management tasks. Action to create such bodies has been undertaken. The first offices started to operate in 2003. The first executive agency will start to operate in the second half of 2004. It is important to ensure that their own internal control framework is subject to the same standard as any Commission services.

2.3. Conclusions

In certain circumstances, the Commission either de-concentrated to DGs' departments outside headquarters or delegated management tasks to external bodies, considering that they can be more effectively performed in this way. This de-concentration and delegation must ensure the same level of accountability as provided by the DGs, in particular regarding their internal control systems.

The respective DGs are responsible for ensuring that adequate internal control arrangements in representations and delegations are in place and fully operational and that they provide the relevant authorising officer by delegation with the necessary assurance needed to support his/her annual declaration attached to the annual activity reports.

Executive agencies should manage funds delegated to them with the same level of assurance as that of the Commission DGs and services. Thus the internal control framework set up by the executive agencies will be included in the overview performed twice a year by the DG Budget.

Implementation of internal control should continue to concentrate on effectiveness, to ensure that internal control systems adequately support the assurance to be given yearly by the authorising officers by delegation.

3. Activity Based Management/ Strategic Planning and programming

The strategic planning and programming cycle was fully operational in all its stages in 2003. The process of establishing the annual activity reports has improved, which is also acknowledged by the Court of Auditors and actions plans have readily been incorporated in the DGs' annual management plans.

A consolidated strategic planning and programming framework is now in place. Further attention will continue to be devoted to this issue, in particular by exploring the possible development of a more multi-annual approach to strategic programming and making programming an explicit central part of the relationship between DGs and services and their Commissioners.

The Commission's DGs and services experienced a certain difficulty in developing performance indicators, including assessing progress in implementing policy objectives. The Court of Auditors underlines the need to improve the definition of indicators. The following issues require consideration:

- The activity based management logic requires that objectives are set, implemented and reported upon at all levels within the Commission's DGs and services, with an appropriate level of coherence and comparability.

- More meaningful performance indicators need to be developed to improve management's capacity to monitor the achievement of objectives, as reported by the Court of Auditors. Stepping up the involvement of Commissioners and top managers in the exercise is one of the issues to address.

Conclusions

The annual process of defining objectives for each policy area and department needs consideration on how it could be made more meaningful in practice. Objective setting needs integration into the policy development, to ensure a sense of ownership by the top management. Although the overall framework is now in place, there may be a need to consider ways of simplifying, and thereby improving, the definition of objectives and indicators. To build better support for the institution, verifiable annual output objectives will also need to combine with a clear vision of the policy impact to be achieved over a longer period.

4. Human resources

Negotiations on the new Staff Regulations were completed in 2003, as one of the several positive developments. The Council adopted the relevant texts on 22 March 2004, and they entered into force on 1 May 2004. A new exercise, consisting of identifying "sensitive" posts in financial or administrative matters and moving jobholders occupying these posts for more than 7 years, has been launched in each Commission department.

The first appraisal and promotion exercise based on a new system, reinforcing the link between merit and career development, was completed within the set deadlines. The emphasis on training constituted an important element of personnel policy across the board. The majority of DGs achieved or surpassed the Commission's target for average number of training days per individual staff member.

Against this background, and as in previous years, the annual activity reports of a number of DGs and services highlight staff shortages and difficulties in recruiting qualified personnel in specific areas of activity. The Commission's internal auditor, for his part, observes a "chronic human resources deficit" affecting the Commission's tasks, in particular the control of spending programmes.

Conclusions

The Commission notes that the human resource issue is linked to the examination of the delivery mechanisms used for each policy. The latter are currently under review to ensure that they are the most appropriate. Governance options, such as shared management or outsourcing, are being examined case by case. Finally, alignment between human resources and priorities is an issue for the Annual Policy Strategy, where needs and risks at Commission level need careful examination. Risk analysis should help in orienting resource allocation, alongside other elements such as policy priorities. Such an examination should include arbitration as to the activities that can no longer be done and have to be abandoned, so that resources can be freed and redeployed to activities that need to be strengthened.

5. Financial management and reporting

2003 was the first year of implementation of the new Financial Regulation: thanks to a thorough preparation, the introduction of the new financial rules was generally successful. For the first time, DGs' activity statements have been used in the budgetary procedure. Several financial management issues have emerged from the annual activity reports and declarations for 2003, which are not new; all of them are subject to on-going corrective actions at various stages of implementation.

5.1. Shared management

Notwithstanding the progress made in 2003 through considerable advances on the closure of programmes relating to 1994-1999 and increased controls on the beneficiary countries' management and control systems, what emerges from the annual activity reports and declarations of all DGs involved in shared management of Structural Funds is that in 2003 it was not yet possible to give an unqualified assurance for such expenditure.

Several measures are envisaged, such as obtaining reasonable assurance regarding management and control systems in the Member States, both by the audit strategy established by each DG and by assurance declarations to be obtained from the bodies charged by Member States with the management, payment and control of Community Funds. This is also a line advocated by the internal auditor.

5.2. Direct and indirect centralised management

The annual activity reports and declarations of the relevant DGs demonstrate a satisfactory level of assurance as expressed by the Commission DGs and services in the field of centralised management. A difficulty persists in relation to grants based on the partial reimbursement of actual costs declared by the beneficiaries. This question has once again given rise to reservations concerning the frequency of errors affecting the declaration of most DGs dealing with this kind of programme. The need for controls to avoid conflict of interest in the selection process is put forward. The development of an effective strategy of controls and recovery actions to counter the risk of payment of non-eligible costs and consideration of alternative funding criteria are also suggested. A weakness has also been disclosed in the area of management and control with regard to information relays and networks, which has given rise to the adoption of corrective measures.

5.3. Ex ante and ex post control

The new financial regulation introduces precise requirements for ex ante and ex post controls to be carried out. At the end of 2003 the Commission achieved compliance with the baseline requirements on the internal control standards, according to the commitments made by the Commission in its 2002 Synthesis. Implementation of such controls will be further improved through more extensive exchanges of best practices.

5.4. Implementing the financial regulation

The recast financial regulation, which entered into force on 1 January 2003, introduced a robust legal framework which served as the foundation for more effective and accountable financial management and better protection of the Community's financial interests. Although considerable progress was made, certain annual activity reports disclose residual difficulties in implementing some provisions of the new Financial Regulation. This issue is being examined as regards the implementing rules, for which a limited review is foreseen in the near future.

5.5. Accounting/financial reporting

The project to reform the accounting system moved ahead in 2003 in accordance with the multi-annual plan aimed at putting in place accrual accounting by 2005.

5.6. Conclusions

The Commission is responsible under Article 274 EC for implementation of the budget, while the apportionment of responsibilities between the Commission and the Member States under shared management is in process of being further clarified. Notwithstanding the progress made in 2003, the Commission is not yet in a position to supervise everyone of the Member State's management and control system in the area of the Structural Funds. It should seek to obtain this overall assurance by its own control efforts and by obtaining from the bodies entrusted by the Member States with the management, payment and control of Community funds assurance on the effectiveness of their systems. This goal will be pursued by strengthening the controls carried out by the Commission services and by the application of financial corrections wherever it is necessary. In particular, for the Structural Funds, for the current programming period, there will be increased cooperation with national authorities concerning system audits and ex post controls and, for the period 2007-2013, the introduction of an appropriate instrument in the legislative acts. Such instruments could include, as already indicated, declarations of assurance by the bodies charged by the Member States with the management, payment and control of Community funds. Initiatives in this area will take account of the recommendations of the Court of Auditors in its Opinion on the Single Audit Model.

Direct management is demanding for the Commission's resources. This issue will be addressed, in particular through further consideration of the different management implementation methods and simplification of the Commission's management of programmes with significant budgetary volumes, as recently requested by the European Council, including the consideration of possible externalisation of management tasks (as proposed by the Commission in its Communication on the multi-annual financial framework 2007-2013), review of control tasks (audit certificates certifying the eligibility and reality of the costs claimed, outsourcing of controls to independent auditors) and the related supervisory arrangements at Commission level.

Ex ante and ex post controls are key elements in ensuring proper use of Community funds. At the end of 2003 the Commission achieved compliance with the baseline requirements on the internal control standards according to the commitments made in its 2002 Synthesis. An increase in volumes and skills of resources allocated to these tasks is bearing fruit, but is still developing across the Commission's DGs and services. Further support and training on these issues (including the use of sampling tools for additional ex ante controls, checklists and risk-based strategies for on-the-spot controls) will be provided by the central services, and exchanges of practice organised, including within the ex post control network under creation. The introduction of the Commission-wide contract database in the accounting system coupled with ex ante and ex post controls, combined with a review of management and control systems, will also help to reduce the risk of double funding.

The project of modernising the Commission's accounting system will continue according to the timetable set, and the Commission's DGs and services should deploy the needed effort to adapt to the new framework in compliance with the financial regulation.

A review of the Implementing rules of the Financial Regulation will be launched in the coming months [4].

[4] This fast-track review will be limited to title V of the implementing rules in order to integrate the new requirements of the newly adopted Directive on Public Procurement and some ceilings related to low value procurement procedures as well as articles 180 to 183 dealing with flat-rate grants and article 166 which deals with the deadline for the adoption and publication for the annual work program for grants.

6. Governance issues

As a follow-up to the problems encountered at Eurostat and to the 2002 annual activity reports and Synthesis, several governance measures have been taken in 2003 to ensure stronger links and more effective communication between the DGs and services and the Commissioners and between the horizontal services and the operational DGs. A new version of the code of conduct governing relations between Commissioners and DGs and services further specifies information to be received by Commissioners on internal control and audit matters. Regular reporting on these questions, as well as on issues reported to OLAF, is in place, as the annual activity reports show.

The transmission of information and coordination within the Commission's internal audit community was also improved.

The reservations expressed in the 2003 annual activity reports and declarations show that in some cases their impact on reasonable assurance is not adequately assessed. The scope of the declaration should be free of ambiguity, as the Court of Auditors also points out. It was noted that the peer review exercise of draft reservations was positive in terms of introducing a more consistent approach, but it is also necessary to address the need for the DGs to draw up their declaration in such a way as to reflect the exact state of internal control without emptying the assurance given of its substance. Furthermore, additional reflection will be given to developing best practice on internal assurance mechanisms for supporting the declarations of Directors General, including monitoring and reporting mechanisms at the different levels of the hierarchy.

Conclusions

The annual activity report process has been progressively refined. Information, in particular from resource directors, is available for the authorising officer by delegation to express his/her declaration of assurance, and the communication flow between DGs and services and Commissioners has become more regular and explicit.

One key issue to be addressed is for annual declarations by authorising officers by delegation to accurately reflect the actual functioning of their internal control systems and action will be pursued in this field. Guidelines and assistance from central services and sharing of best practices across Commission DGs and services will help to strengthen further the process.

Also with a view to obtaining unqualified declaration of assurance by the Court of Auditors, the Commission's DGs and services should ensure that the assurance expressed in the declaration is both consistent with regard to the reservations expressed and firmly established on effective risk management and accurately reflect the operation of their control systems.

Commission DGs and services should prioritise audit and internal control recommendations in terms of risk and potential impact and reinforce their follow-up.

7. Conclusions

The points raised by DGs and services by the Internal/External auditor, and in the overview are already identified and subject to previous action plans undertaken in prior synthesis. Since 2003 was the year of major implementation of the Commission Reform actions, the Synthesis does not suggest new actions, but consolidation of horizontal action plans. DGs have drawn up specific action plans, which will need implementation, as a result of the annual activity reports. The Commission notes that most actions included in the 2001 and 2002 action plans show good progress, although it may vary on a case-by-case basis as explained below:

* Some actions completed under the terms of the previous Syntheses require further follow-up to fully bear fruit.

*

* It is the case, amongst others, of the assessment to be carried out by the Heads of delegation following the conclusions drawn on the state of internal controls in Delegations; the implementation of the measures agreed concerning the DG Press' relays and network and Representations; the results of the different actions in the field of shared management (clarification of responsibilities between the Commission and the Member States, measures envisaged in the audit field), which need being put into practice where possible during the current programming period and reflected in the legal framework of the next period; further reflection on the question of the introduction of broader flat-rate elements into subsidies.

* Actions laid down in the previous Syntheses still ongoing are:

*

* The need for enhanced attention by DGs and services on the effectiveness of their internal control systems, also to ensure that they adequately support the assurance to be given yearly by them as authorising officers by delegation; the proper communication at all levels within the DGs of the management and control framework; the re-examination of the scope for synergies between the services involved in external relations announced in the 2001 Synthesis; the adoption of the Communication to address the issue of scarce skills in certain areas; the development of a database of legal entities and of a database of contracts; the finalisation of the work on interoperability of management information systems, launched by the 2001 Synthesis.

The Reform, one of the main priorities of this Commission is largely in place. The instruments of the Reform, which are designed to make the Commission's management better performing, more accountable and transparent, have now become part of the day-to-day functioning of the Commission DGs and services [5], thus contributing to a more efficient and effective Commission able to rise up to the challenges of the enlarged Union.

[5] For further details concerning the state of play of the Commission's administrative reform, reference is made to the Communication on the Progress report for 2003 (COM(2004) 93 of 10.2.2004.), which also contains a comprehensive section on the measures adopted in the wake of the Eurostat crisis.

A reflection on the most appropriate management models to deliver better policy results and to provide better value for money at European level is currently ongoing in the context of the proposals for the financial framework 2007-2013:

* In case of shared management, the Commission should continue to work to increase the responsibility of the bodies entrusted by the Member States with the management, payment and control of Community funds, and the Commission's powers to correct irregularities need to be strengthened. Concerning centralised management, simplification of the instruments is needed, so that the rules can be better understood by the beneficiaries and management and controls can be made more cost-effective. The Commission can also build upon existing work in the respective management domains and review the scope for increased externalisation of functions.

* Whatever methods are used and whatever assurance mechanisms are pursued, there will always be an obligation on the Commission to ensure that control mechanisms are adequate to discharge its overall responsibility for the implementation of the budget.

* Properly qualified resources should be devoted to audit and controls, particularly in the areas of greater risk. Synergies with bodies performing audits and controls at national and European level should be developed. Cooperation between auditors and auditees should be increased, so to ensure mutual understanding and smooth implementation of agreed recommendations. Proper attention should continue to be paid to the quality of internal audit work.