FOLLOW-UP REPORT on the 1998 financial year

(presented by the Commission)

TABLE OF CONTENTS

Follow-up report on the 1998 financial year

1. INTRODUCTION

2. MeAsures taken by the Commission

2.1. Own resources

2.2. Common agricultural and fisheries policies

2.3. Structural measures

2.4. Internal policies

2.5. External aid

2.6. Administrative expenditure

2.7. Financial instruments and banking activities

2.8. Statement of assurance

3. RepLIES FROM THE Member States

3.1. General introduction

3.2. Own resources (Chapter 1 of the Annual Report)

3.3. Common agricultural policy (Chapter 2 of the Annual Report)

3.4. Structural Funds (Chapter 3 of the Annual Report)

3.5. DAS - Statement of assurance (Chapter 8 of the Annual Report)

ANNEX 1 Measures taken by the Commission in response to the comments accompanying the Council Recommendation

ANNEX 2 Member States' replies to the observations in the Court of Auditors' annual report

Memorandum

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.

Part One of this report is addressed to the Council, following its recommendation with a view to Parliament's vote on discharge. It is a response to the Council's wish, expressed in Article 1 of its Recommendation of 13 March 2000, to follow more closely the work undertaken, to take a full and active part in the reform process and to review regularly progress on the reform.

Part Two presents the comments by the Member States - and the measures they have adopted - in response to the Court of Auditors' observations in its annual report and related special reports. The Member States' replies to the Court of Auditors in the first half of the year were presented in full (and in three language versions) to the Group of Personal Representatives of the Finance Ministers at its meeting in April 2000.

1. 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.

The follow-up report comprises three annexes. At this stage only the first two annexes have been produced, Parliament having postponed its vote on discharge for the 1998 budget.

The first annex, addressed to the Council, is a response to its Recommendation with a view to Parliament's vote on discharge. It has been drafted against the general background of the implementation of Agenda 2000 and the reforms at the Commission and therefore places special emphasis on measures already taken and projects under consideration. It is worth noting that, for the first time, the first annex includes a Commission Action Plan, which has been welcomed by the Council.

The second annex sets out the Member States' replies to the observations in the Court of Auditors' annual report for 1998, in accordance with Article 274 of the Treaty, as amended by the Amsterdam Treaty. The quality of these replies varies. One factor detracting from their quality is that they generally relate to specific points and do not cover all of the Court's observations. Thus, certain Member States have failed to reply to observations on structural measures or fraud prevention. In some cases, the Member States contest the Court's remarks.

A third annex, in response to Parliament's discharge vote, will be presented later.

This document summarises the most important and most general aspects of Annexes I and II.

2. MeAsures taken by the Commission

The Council would like the recasting of the Financial Regulation to play a key role in improving financial management. In the Commission's view, the recasting exercise has several objectives, one of which is to improve financial management. In pursuit of this objective, it is incorporating into the Regulation the guidelines it adopted in its White Paper. More specifically, it is redefining the role of the financial players in order to confer greater responsibility on authorising officers and establishing an internal audit service.

The Council asks the Commission to monitor rigorously the measures taken to resolve problems encountered in budget implementation in order to avoid any recurrence. The Commission shares the Council's view and to this end will be presenting an annual action plan, which will serve as a regular monitoring tool. The plan will be sent to the budgetary authority at the very beginning of the year and updated after six months so that its implementation can be reviewed.

2.1. Own resources

The Council asks the Commission to monitor national VAT revenue, particularly in relation to intra-Community trade. The Commission has established an operational procedure for the automatic transmission of information on VAT revenue. On the basis of the information received from the Member States, it will present a first analysis of trends in VAT revenue at the meeting of Deputy Directors-General for Indirect Taxation on 12 September 2000.

To avoid overstating amounts receivable, the Commission has, for the first time, entered a 100% adjustment for doubtful debts on the assets side of the balance sheet of the 1999 revenue and expenditure account, reducing the value of the entry for amounts owed by the Member States.

2.2. Common agricultural and fisheries policies

The Council feels that, despite the improvements made, the rate of error affecting the legality and regularity of underlying transactions is still too high. Nevertheless, the Council acknowledges that audits carried out in the course of clearing the accounts have cushioned the impact of the situation indicated by extrapolation of the Court of Auditors' findings. The Commission points out that the clearance-of-accounts audits have led to an overall annual adjustment of EUR900 million, or 2.2% of the budget, which is very close to the extrapolation of the error rate in the Court of Auditors' statement of assurance.

The Council asks the Commission, in collaboration with the Member States, to improve the operation of the paying agencies, particularly as regards declarations, in order inter alia to increase the reliability of budget forecasts. As regards agricultural spending as a whole, the Commission carried out a feasibility study in 1999 with a view to setting up a detailed database providing financial information on every transaction. As the findings of the study were positive, a tendering procedure for setting up the base has been set in motion. On the specific question of accompanying measures to resolve the problem of unreliable forecasts, the Commission has introduced a system of penalties where there are substantial divergences between forecasts and actual expenditure in the rural development field under Regulation (EC) No 1750/1999.

2.3. Structural measures

The Council would like to see better evaluation of the results obtained in the light of the objectives set, together with improvements in reliability and the coordination of evaluation methods. At the same time, it wants to see closer partnership with the Member States. The Commission considers that the new regulations have clarified the definition of evaluation responsibilities. The Commission has also provided Member States with a document on the appraisal of the quality of evaluations, as practised within the Commission itself. At the beginning of the new programming period (2000-2006), the Member States were asked to quantify the expected impact of structural measures. As a result, indicators were established for assessing results obtained in relation to the objectives being pursued. While the new legislation provides for greater decentralisation of powers to the Member States in other fields, evaluation is still based on a balanced partnership, cf. Articles 40(3), 42(2) and 43(2) of Regulation 1260/99.

In the payments field, the Council would like to see a distinction between advances and final payments. The Commission replies that the recasting of the Financial Regulation provides an opportunity for a complete overhaul of the different types of payments. It proposes that a distinction be made between prefinancing, interim payments (repayments) and the payment of balances, as in the Structural Funds Regulations. The distinction between advances and payments on account, which has been criticised by the Court of Auditors, is to be dropped.

The Council wants to see tighter controls at the closure of Community operations, particularly on programmes for the period 1994-99. The Commission replies that account has been taken of the Council's request in the inspection programme for 2000, and to a greater extent in the forecasts for 2001. However, the biggest effort here has to be made by the national authorities. They must comply with Article 8 of Regulation 2064/97, which states that the Member States must, no later than at the time of the request for the final payment, present a statement summarising the conclusions of the inspections made in previous years and provide an overall conclusion as to the validity of the request for the payment of the balance and the final declaration of expenditure. The statement must be drawn up by a person or organisation functionally independent of the implementing service and the inspections carried out must cover at least 5% of total eligible expenditure and a representative sample.

The Council asks for consistency between structural measures and other Community policies, particularly as regards environmental protection and compliance with the competition rules in the award of contracts. The Commission replies that a specific Article has been included in the new Council Regulation No 1260/99 of 21 June 1999 laying down general provisions on the Structural Funds. Article 12 of the Regulation provides that, "Operations financed by the Funds or receiving assistance from the EIB or from another financial instrument shall be in conformity with the provisions of the Treaty, with instruments adopted under it and with Community policies and actions, including the rules on competition, on the award of public contracts, on environmental protection and improvement and on the elimination of inequalities and the promotion of equality between men and women".

The Council believes that the Agenda 2000 reforms should solve a number of problems identified by the Court and simplify management. The Commission replies that simplified management, better programming, better coordination and evaluation of operations and more effective partnership were the main points of its Agenda 2000 proposal and have been incorporated in the new Regulations. For example, the number of Structural Fund objectives has been cut from seven to three and the number of Community Initiatives from fourteen to four, thereby significantly reducing the number of individual programmes which must be implemented by the Member States and the Commission.

The Commission adds that several other provisions written into the Structural Funds legislation should also serve to improve their programming and budget management. For example, the Commission Regulation laying down detailed rules for the application of Council Regulation (EC) No 1260/1999 regarding the procedure for making financial corrections to assistance under the Structural Funds sets out the Member States' responsibilities for correcting irregularities and recovering amounts and the procedures for dialogue before corrections are made by the Commission.

2.4. Internal policies

The Council asks the Commission to step up on-the-spot audits. The Commission replies that, since 1996, it has substantially stepped up its on-the-spot financial audits in this sector.

The Council wants recovery orders to be executed quickly. The Commission replies that it is in the process of developing the SINCOM 2 computer tool, which will improve the management of recovery orders for both authorising DGs and DG BUDG. A reporting tool will be developed at the same time. DG BUDG has also decided to devote more resources to the recovery of amounts owing in order to deal more effectively with the existing and growing workload.

The Council asks that dormant commitments be cancelled. The monitoring of dormant commitments is a priority for the Commission. DG RTD has established a system for following up dormant commitments on a two-monthly basis: the amounts are decommitted immediately or else the relevant recovery orders are issued. DG TREN has created a special team which expects to close or process some 500 dormant contracts by the end of 2000.

The Council asks for a simplification of clauses on eligible overhead costs in research contracts. The Commission replies that additional simplification measures have been introduced under the 5th Framework Plan, including a clearer definition of eligible costs and an option allowing for reimbursement of overheads at a flat rate equal to 80% of personnel costs. Flat-rate contracts can also be concluded for the grant of exploratory awards specific to SMEs and for projects worth up to EUR100 000. DG RTD is considering the possibility of concluding targeted agreements on costs with participants applying the total costs scheme with a view to defining with them their average personnel costs and overheads.

2.5. External aid

The Council wants to see tighter Commission control over the powers conferred on technical assistance offices (TAOs). The Commission reports that, at the instigation of the SCR, the external relations (RELEX) services have taken part in a comprehensive survey aimed at clarifying and identifying existing TAO contracts in their field of activity. The services have drawn up proposals on dismantling the TAOs. Plans have been laid for replacing TAO staff with resources at headquarters or in delegations, with a timetable for transition to ensure the continuity of projects and programmes.

The Council asks the Commission to update accounting information before the end of the first half of each financial year, particularly with regard to outstanding amounts, in order to present a more faithful picture of the situation. The Commission replies that information on amounts decommitted during the year in respect of outstanding commitments is included (in a table showing the impact of previous commitments, "the weight of the past") in the reports on budget implementation which are published monthly (aggregate figures for each title) or three times a year (figures for each budget item).

The Council asks the Commission to tighten its checks on tendering procedures to avoid excessive or unjustified expenditure. The Commission points out that procedures have been considerably simplified as a result of the instruction manual it adopted on 10 November 1999, which has applied to centralised contracts since 1 June 2000 and will gradually be introduced for decentralised contracts.

The Council asks the Commission to carry out methodical checks on NGO accounts in terms of supporting documents for expenditure. The Commission replies that the introduction of a new standard grant contract for external aid since 1 January 2000 has helped resolve the problem of verifying expenditure. The new contract provides for systematic audits in certain cases and stipulates that under no circumstances may the final payment be made until after the expenditure has been substantiated on the basis of the final report on implementation.

2.6. Administrative expenditure

The Council asks the Commission to manage more rigorously the administrative expenditure of its delegations. The Commission points out that it has launched a number of measures, including the updating of the balance sheet at 31 December 1999 with regard to land, buildings and fixed assets under construction in non-member countries (already completed), the development of new software for the decentralised management of inventories in external delegations (operational on 1 January 2001), improvements to the method of salary adjustment for local staff serving in the external delegations and a review of the supplementary sickness insurance scheme for local staff.

2.7. Financial instruments and banking activities

The Council asks for a solution to be found and implemented to enable the Court of Auditors to carry out a satisfactory audit of the European Investment Fund. The Commission responds that the EIF is in the process of being restructured insofar as the EIB will become the majority shareholder. With respect to the audit rights of the Court of Auditors, the Commission is continuing its efforts to find a pragmatic solution along the lines of its proposals of last year.

2.8. Statement of assurance

The Council considers it unacceptable that, despite the efforts made, the incidence of error has not fallen since the previous financial year. The Commission replies that the Court of Auditors has already given a positive statement of assurance (DAS) for own resources and commitments. In the case of payments, however, the incidence of errors still needs to be significantly reduced. With respect to the reliability of the accounts, the errors pointed out by the Court do not, in most cases, constitute non-observance of the Financial Regulation but reflect the inadequacy of this Regulation in relation to the Court's criteria. An ambitious reform of the Financial Regulation is being proposed by the Commission and important measures have been taken. For agriculture, the amount recovered for the Community budget via the clearance mechanism and the system of inspection and penalties is very close to the most probable loss that can be extrapolated from the Court's DAS sample. In other areas, such as the Structural Funds, important improvements have been made, in particular the eligibility datasheets, Regulation 2064/97 and the Agenda 2000 measures.

3. RepLIES FROM THE Member States

3.1. - General introduction

* The Court considers that the Member States must adopt the same measures to counter fraud affecting the finances of the Union as they do at national level.

Few Member States have replied to the Court's observation. Nevertheless, the replies are unanimous in pointing out that there can be no distinction between the resources employed to defend financial interests at national level and at Community level. All the replies stress that the measures taken by Member States to combat fraud which might harm the Community's financial interests are similar to those taken to combat fraud harming their own financial interests.

One Member State refers to the Report by the Independent Experts and its 91 recommendations on management, financial control and fraud prevention. It proposes that a new legal framework be established with the appointment of a European Public Prosecutor responsible for judicial action following administrative investigations by OLAF, the creation of a public prosecution department in each Member State with responsibility for prosecuting Community infringements and the establishment of a European Prosecution Service, with delegated prosecutors in the Member States given the task of prosecuting all offences affecting the Community's financial interests.

3.2. - Own resources (Chapter 1 of the Annual Report)

* The Court finds delays in making customs duties available.

The Member States that have replied announce either that they will try to reduce this type of incident as much as possible or that work is in progress on improving the system for managing payment of customs debts. Nevertheless, they point out that the risk cannot be eliminated entirely, given the complexity of customs rules and procedures, the proliferation of services involved and the number of customs declarations.

* The Court finds significant errors in the separate accounts kept by the Member States for traditional own resources.

Two Member States support the Commission's proposal to amend Regulation No 1552/89 to increase the effectiveness of the procedure for allowing write-offs.

Some Member States announce that computer systems are being introduced to eliminate the numerous errors that were inevitable under the old system of manual accounting or that instructions are being issued to rectify the errors that were found. One Member State contests the Court's statement.

3.3. - Common agricultural policy (Chapter 2 of the Annual Report)

* The Court notes a lack of transparency in the monthly declarations with regard to corrections to previous declarations.

Two Member States share the Commission's view that the Court's suggestion for achieving the desired transparency would at least double the number of budget lines in order to highlight amounts recovered on previous payments. Moreover, given the provisional nature of the corrections and the need to enter them in the accounts, this additional information in monthly declarations would increase the administrative workload.

One country asks for a degree of flexibility in this matter to prevent Community legislation becoming too complex.

* The Court criticises the failure to identify negative expenditure.

The Member States that have replied consider that the accounts are generally reliable and that the situation regarding amounts owed is known. One Member State argues that prudence should be the overriding factor in identifying items of expenditure on the assets side in order to avoid the duplication of accounting entries.

One Member State refers to the Commission proposal laid before the EAGGF Committee on 16 December 1999, under which the Member States would be invited to assess the recoverability of amounts owed for the 2000 financial year.

* The Court criticises instances of over-declaration by final beneficiaries.

Two Member States reply that they have tried to continue improving procedures for scrutinising CAP expenditure.

One Member State calls for Community agricultural legislation to be simplified, arguing that the more ambiguous and complex the rules, the more complicated the task of management and scrutiny and the higher the risk of fraud.

* The Court notes that in two Member States the compulsory registers do not exist or are not up to standard.

The two Member States accept the Court's criticism and report that the compulsory registers have been introduced and brought into line with Community legislation.

* The Court criticises the existence of non-compliant export documents relating to refunds.

The Member State in question replies that, to avoid such cases recurring, it has clarified the instructions given to its Customs Directorate and stepped up the training of customs officials by the Agriculture Directorate.

* The Court finds shortcomings in the keeping of livestock records at the final beneficiary stage, particularly relating to beef and veal.

The Member States that have replied announce that they have taken the necessary steps to resolve the problem raised by the Court. They have set up a service for identifying herds, improved the training of stockbreeders and established a standard herd register for all livestock producers.

3.4. - Structural Funds (Chapter 3 of the Annual Report)

* The Court points out errors in expenditure declarations when measures are closed.

Two Member States have replied that the initiatives taken by the Commission in the context of SEM 2000 and Agenda 2000 should help to improve the control.

* The Court notes the failure to check systematically the closure of Cohesion Fund projects.

One Member State replies that an ERDF and Cohesion Fund Financial Control Unit has been established with responsibility for random audit checks of ERDF and Cohesion Fund expenditure. This unit reports its findings to the Commission and the Department of Finance.

* The Court points out some cases where the eligibility criteria were not respected.

Some countries say that measures such as Regulation 2064/97 and the datasheets for eligible costs will improve the situation.

* The Court observes that most of the substantive errors directly concerning the legality and regularity of the underlying transactions occurred at final beneficiary level.

The four Member States that answer the Court's observation describe the measures taken with a view to avoiding errors at final beneficiary level. One country says that all suspected/ reported cases of fraud and irregularity are investigated and appropriate action taken. These cases and follow-up action are reported to the Commission. Another country reports the organisation of training and information meetings for administrators at all levels in the implementing organisation. In one Member State, checklists have also been compiled and information circulated in order to minimise the number of errors.

* The Court considers that the Commission and the Member States carry out insufficient checks.

Some Member States consider that the rules on financial control, and hence the protection of the Community's resources, have been tightened up by Regulation (EC) No 2064/97, which strengthens the rules on controls and provides for independent certificates. One country emphasises the importance of quality rather than quantity of controls.

One Member State highlights the limitation of resources within national and regional government departments.

* The Court points out that it is necessary to improve financial management and control.

Some Member States report increased training effort to detect and eliminate errors and the introduction of new computerised information systems.

* The Court considers that at present it is difficult to obtain complete information on individual types of project, on their sustainability and viability, on the positive or negative impacts that they have on each other or on their overall effects. Data systems of this kind should be set up in partnership, since they are as necessary for the Community as for the Member States and, in the absence of any progress in compiling them, it will be difficult to improve and make more workable the evaluations prescribed by the provisions in force.

One Member State announces the development of an IT system to gather reliable financial and statistical information with a view to ensuring the adequacy of accounting systems and the correctness of operations and for ensuring compliance with Community rules. Another country supports the idea of developing data systems in order to improve the evaluation procedures.

* The Court criticises the quality and scope of the recommendations and results of the ongoing assessments.

Some countries reply that progress has been made with evaluation systems and consider that the ongoing assessments have achieved the intended objectives.

One Member State has carried out a survey of the ongoing assessments made there in order to pinpoint shortcomings and develop methods for the next programming period.

In another Member State an independent unit was established in 1996 in partnership between the Department of Finance and the European Commission, in order to advise and assist the national authorities and the Commission in the evaluation of Structural Fund programmes.

* Follow-up of the Court's audits in the EAGGF-Guidance field: The promotion of organic farming and of non-polluting forms of agriculture is among the main elements of the reform of the CAP and is mentioned in the 5th Action Programme and in Council Regulation No 2085/93. However, in a random selection of farmers across all Member States visited, only one had received start-up aid to create an organic farm.

Some countries believe that adequate opportunities for promoting organic farming have been created at Community level and that investment aid is granted even today to environment-oriented measures.

One Member State, however, disagrees with the Court's observation and points out that its policy is to treat all farmers equally for the purposes of structural measures; organic farming does not, therefore, receive preferential treatment in the area of investment aid.

* Follow-up to the Court's audits in the EAGGF-Guidance field: insufficient checks.

One Member State considers that increased levels of checking may be seen as running contrary to a desire to ease the stress and burdens on the farming community.

Another country points out that quality checks must be increased but primarily through programme monitoring rather than on-the-spot checks.

* The Court considers that the progress in application of basic principles and implementation is slow.

Some Member States support the Commission's reply that the Commission has taken a number of measures, such as producing datasheets on the eligibility of expenditure, adopting a Regulation implementing Article 24 of the Coordination Regulation (implementation of financial coordination) and signing agreements with the national authorities on tightening up checks. These instruments should, in the context of the new Regulation, which contains some new elements, help in the long term to resolve the problems mentioned by the Court of Auditors.

3.5. - DAS - Statement of assurance (Chapter 8 of the Annual Report)

Few Member States have attempted to reply to the general statements in this Chapter (as distinct from the specific errors detected).

* The Court points out an unacceptable number of substantive errors.

One Member State considers that the high level of errors is worrying and that the Commission must address the problem within the context of the future reform package.

Another country considers that clarification of the regulations will help reduce the error rate in this field.

* The Court recommends taking steps to prevent, detect and correct errors.

One Member State highlights the importance of working on the simplification and clarification of regulations, and ensuring that new regulations are fraud-proofed.

Some countries consider that the Member States have a clear responsibility for tackling errors discovered in their own departments and controls.

ANNEX 1 Measures taken by the Commission in response to the comments accompanying the Council Recommendation

- The measures taken by the Commission are shown in tables following each of the Council's recommendations. Where appropriate, the Commission has also updated its February 2000 Action Plan with new measures proposed or adopted by its departments.

Contents

Introduction

1 - Own resources

2 - Common agricultural and fisheries policy

3 - Structural measures

4 - Internal policies

5 - External aid

6 - Administrative expenditure

7 - Financial instruments

8 - Statement of assurance

9 - Special Report No 1/99 concerning the aid for the use of skimmed milk and skimmed milk powder as animal feed

10 - Special Report No 2/99 on the effects of the CAP reform in the cereals sector

11 - Special Report No 3/99 on the management and control of interest rate subsidies by the Commission

Main points of the Council's comments

on the discharge for 1998 [1]

[1] a) Recommendation of 13 March 2000 on the discharge in respect of the general budget.

Introduction

a) The Council asks that the efforts already undertaken under SEM 2000 to strengthen financial management in cooperation with the Member States be consolidated, as the Member States implement a major part of the budget.

Reply:

The Commission welcomes the Council's support for reinforcing the cooperation on financial management with the Member States. It has already confirmed its intention of maintaining the Personal Representatives Group on Sound Financial Management (PRG), which was established for this purpose in the context of the SEM2000 initiative.

b) The Council would like the recasting of the Financial Regulation to play a key role in improving financial management.

Reply:

The recasting exercise has several objectives, one of which is to improve financial management. In pursuit of this objective, the guidelines adopted by the Commission in its White Paper are being incorporated into the Regulation. More specifically, this involves redefining the role of the financial players in order to confer greater responsibility on authorising officers and establishing an internal audit service. The new Financial Regulation also reaffirms the principles of budgetary law, which already include sound financial management.

c) The Council considers that the maximum utilisation of the appropriations entered in the annual budget is not in itself an indicator of sound financial management.

Reply:

The Commission shares this view, which, moreover, is in keeping with the definition of the principle of sound financial management laid down in Article 2 of the Financial Regulation. The reform proposal seeks to bolster this idea by referring to the principles of economy, efficiency and effectiveness

d) The Council asks the Commission to monitor rigorously the measures taken to resolve problems encountered in budget implementation in order to avoid any recurrence.

Reply:

The Commission shares the Council's view and to this end will be presenting an annual action plan

e) The Council notes that the Court has not yet been able to issue a positive statement of assurance as a result of an unacceptably high incidence of error in the underlying transactions.

Reply:

Each year the Court of Auditors issues a qualitative Statement of Assurance (DAS). It does not publish error rates. In some sectors, such as agriculture, the clearance system and the inspection and sanctions systems recovered for the Community budget an amount very close to the most probable loss incurred by the budget. In other areas, such as the Structural Funds, improvements have been made but the results will take some time to show through (see action plan). Important measures include Regulation 2064/97 and Agenda 2000.

f) The Council welcomes the action plan and will examine its implementation attentively.

Reply:

The Commission agrees with the Council that the action plan will serve as a regular monitoring tool. The plan will be sent to the budgetary authority at the very beginning of the year and updated after six months so that its implementation can be reviewed.

1. Own resources

1.1. Council Recommendation

a) The Council asks for improvements in accounting procedures and the procedures for making available to the Commission certain entitlements which have been established but not yet recovered.

Reply:

The Commission shares the Council's concerns regarding the need to improve the procedures applied in the Member States for booking entitlements that have been established but not yet recovered. That is why, for a number of years, it has carried out an annual programme of on-the-spot audits under Regulation No 1150/2000 (formerly Regulation No 1552/89) in order to highlight and correct improper practices. In two cases where it has been faced with a refusal by a Member State to bring its accounting practices into line, the Commission has commenced infringement proceedings under Article 226 of the Treaty.

b) The Council asks the Commission to monitor national VAT revenue, particularly in relation to intra-Community trade.

Reply:

The Commission has established an operational procedure for the automatic transmission of information on VAT revenue. On the basis of the information received from the Member States, it will present a first analysis of trends in VAT revenue at the meeting of Deputy Directors-General for Indirect Taxation on 12 September 2000

1.2. Action plan

>TABLE POSITION>

Comment on the action plan (measure iv):

To avoid overestimating amounts owed, the Commission has, for the first time, entered a 100% adjustment for doubtful debts on the assets side of the balance sheet of the 1999 revenue and expenditure account, reducing the value of the entry for amounts owed by the Member States.

2. Common agricultural and fisheries policy

2.1. Council Recommendation

a) The Council asks the Commission to put forward, in its recasting of the Financial Regulation, a precise definition of the concept of negative expenditure and its entry in the accounts within the subceilings of the financial perspective.

Reply:

The recasting of the Financial Regulation provides an opportunity to reaffirm that neither negative revenue nor negative expenditure can exist. Negative expenditure is replaced by revenue earmarked for specific purposes, an exhaustive list of which is laid down in Article 17 of the recasting proposal.

The Regulations providing for a deduction from expenditure to be declared will be adapted accordingly.

b) The Council asks the Commission, in collaboration with the Member States, to improve the operation of the paying agencies, particularly as regards declarations, in order inter alia to increase the reliability of budget forecasts.

Reply:

- As regards agricultural spending as a whole, the Commission carried out a feasibility study in 1999 with a view to setting up a detailed database to provide financial information on every transaction. As the findings of the study were positive, a tendering procedure for setting up the base has been set in motion.

- On the specific question of accompanying measures to resolve the problem of unreliable forecasts, the Commission has introduced a system penalising substantial divergences between forecasts and actual expenditure in the rural development field under Regulation (EC) No 1750/1999.

c) Despite the improvements made, the rate of error affecting the legality and regularity of underlying transactions is still too high. Nevertheless, the Council acknowledges that audits carried out in the course of clearing the accounts have cushioned the impact of the situation indicated by extrapolation of the Court of Auditors' findings.

Reply:

The clearance-of-accounts audits have led to an overall annual adjustment of EUR900, or 2.2% of the budget, which is very close to the extrapolation of the error rate in Court of Auditors' statement of assurance.

2.2. Action plan

>TABLE POSITION>

Comments on the action plan:

The introduction of and follow-up to all these measures aimed at increasing compliance with Community legislation receives special attention during programming exercises and clearance-of-accounts audits in the Member States. In most cases the findings give rise to recommendations or even proposals for financial corrections for failure to comply with the rules in force.

3. Structural measures

3.1. Council Recommendation

a) The Council would like to see better evaluation of the results obtained in the light of the objectives set, together with improvements in reliability and the coordination of evaluation methods. At the same time, it wants to see closer partnership with the Member States.

Reply:

The new regulations have clarified the definition of evaluation responsibilities. This makes it easier for the party concerned to take initiatives, although partnership is the prevailing principle in the overall exercise.

The Commission has also provided Member States with a document on the appraisal of the quality of evaluations, as practised within the Commission itself. The quality of mid-term evaluations is one of the criteria for sound management laid down in connection with the performance reserve.

The Member States have made major efforts to develop monitoring systems, which make it easier to assess the short and long-term impact of structural measures.

At the beginning of the new programming period (2000-2006), the Member States were asked to quantify the expected impact of structural measures. As a result, indicators were established for assessing results obtained in relation to the objectives being pursued.

While the new legislation provides for greater decentralisation of powers to the Member States in other fields, evaluation is still based on a balanced partnership, cf. Articles 40(3), 42(2) and 43(2) of Regulation 1260/99.

To enhance the coordination of evaluation methods for the ESF for the 2000-2006 programming period, DG EMPL has drawn up "Guidelines for systems of monitoring and evaluation". Aimed at national managers, the guidelines present, among other things, a standard evaluation mandate designed to ensure greater consistency in the selection of national evaluators. They also give examples of monitoring and evaluation indicators and set out the structure and role of the steering group which provides a framework for partnership between the Member States and the Commission on evaluation issues.

The Commission has produced two methodological guides on rural development measures for the period 2000-2006 which are designed to provide a frame of reference for evaluation and ensure consistency of evaluation methods in the different regions of the Union. The guides include a number of common questions relating to evaluation which must be answered using common criteria and indicators. The Commission has laid down rules that evaluation studies will be co-financed on condition that answers are given to the common questions and reports are drawn up in line with certain qualitative criteria, as defined in the guidelines. In the implementing Regulation the Commission took pains to foster closer partnership with the Member States on the question of evaluations.

Methodological guides have been produced for the ex post evaluation of Objective 5a and 5b measures for the period 1994-1999, adopting the same approach.

b) The Council asks for clarification of the accounting system providing for decommitments so that the situation regarding structural measures can be monitored more easily.

Reply:

For the new period (2000-2006), decommitments will be accounted for using the Commission's computerised accounting system (SINCOM II), which allows deadlines to be introduced and applied for the validity of all commitments. The commitment of tranches will be limited in accordance with Article 31(2) of the general Structural Funds Regulation (1260/99).

For programmes running over from previous periods, the managing DGs keep an overall record of programmes in the process of closure, the status of the closure procedure and related incidents. As soon as the closure procedure is completed, outstanding commitments are decommitted immediately. At the beginning of each year, the managing DGs review the list of outstanding commitments carried over from the previous year to determine whether they are necessary. If not, they are decommitted.

c) The Council would like to see a distinction between advances and final payments.

Reply:

As regards the different types of payment, the Commission has launched a study with a view to redefining the information to be published in the consolidated financial statements and analysing the scope for effective implementation. This approach incorporates the clarification of concepts relating to types of payment as part of the recasting of the Financial Regulation and takes account of the new legislative framework for the 2000-2006 Structural Funds programming period, which provides for a more transparent management structure.

The recasting of the Financial Regulation provides an opportunity for a complete overhaul of the different types of payments. The Commission proposes that a distinction be drawn between prefinancing, interim payments (repayments) and the payment of balances, as in the Structural Funds Regulations. The distinction between advances and payments on account, which has been criticised by the Court of Auditors, will be dropped.

d) The Council wants to see tighter controls at the closure of Community operations, particularly on programmes for the period 1994-99.

Reply:

The Council's request has been taken into account in the inspection programme for 2000, and to a greater extent in the forecasts for 2001.

The Commission's inspections in 2001 and to some extent in 2002 will concentrate on the closure of forms of assistance relating to the 1994-99 programming period. However, the biggest effort here has to be made by the national authorities. They must comply with Article 8 of Regulation 2064/97, which states that the Member States must, no later than at the time of the request for the final payment, present a statement summarising the conclusions of the inspections made in previous years and provide an overall conclusion as to the validity of the request for payment of the balance and the final declaration of expenditure. The statement must be drawn up by a person or organisation functionally independent of the implementing service and the inspections carried out must cover at least 5% of total eligible expenditure and a representative sample.

e) The Council asks for consistency between structural measures and other Community policies, notably as regards environmental protection.

Reply:

A specific Article has been included in the new Council Regulation No 1260/99 of 21 June 1999 laying down general provisions on the Structural Funds. Article 12 of the Regulation provides that, "Operations financed by the Funds or receiving assistance from the EIB or from another financial instrument shall be in conformity with the provisions of the Treaty, with instruments adopted under it and with Community policies and actions, including the rules on competition, on the award of public contracts, on environmental protection and improvement and on the elimination of inequalities and the promotion of equality between men and women."

Moreover, Council Regulation No 1257/1999 on support for rural development for the period 2000-2006 pays special attention to consistency with other Community policies. The entire Regulation is inspired by the need for environmental protection, which is the actual objective of one category of measures (agri-environmental measures) and a condition of eligibility for several others. Furthermore, agri-environmental measures are the only category which must be included in Member States' rural development programmes. Articles 37 to 39 of the Regulation ensure compliance and consistency with other Community policies, in particular the common agricultural policy.

f) The Council asks for compliance with the competition rules in the award of contracts.

Reply:

A specific Article has been included in the new Council Regulation No 1260/99 of 21 June 1999 laying down general provisions on the Structural Funds. Article 12 of the Regulation provides that, "Operations financed by the Funds or receiving assistance from the EIB or from another financial instrument shall be in conformity with the provisions of the Treaty, with instruments adopted under it and with Community policies and actions, including the rules on competition, on the award of public contracts, on environmental protection and improvement and on the elimination of inequalities and the promotion of equality between men and women."

In the course of its on-the-spot inspections, the Commission checks that the authorities responsible for managing Community programmes comply with Community competition rules in areas open to competition (e.g. technical assistance contracts).

g) The Council repeats its request to receive a report from the Commission on the implementation of checks under Regulation (EC) No 2988/95 on the protection of the European Communities' financial interests and Regulation (EC) No 2185/96 concerning on-the-spot checks against fraud and irregularities.

Reply:

The Commission has already laid before the Council a staff working paper, 'Report on the application of Council Regulation (EURATOM, EC) No 2185/96 concerning on-the-spot checks and inspections carried out by the Commission in order to protect the European Communities' financial interests against fraud and other irregularities' (SEC(2000)844, 16 May 2000). The Council's request has therefore been satisfied.

h) The reform undertaken in the context of Agenda 2000, and the other reforms under way should solve a number of the problems detected by the Court and, in particular, simplify management and improve the programming of structural measures, as well as their coordination and evaluation, and enhance partnership between the Commission and the Member States.

Reply:

Simplified management, better programming, better coordination and evaluation of operations and more effective partnership were the main points of the Commission's Agenda 2000 proposal and have been incorporated in the new Regulations. The number of Structural Fund objectives has been cut from seven to three and the number of Community Initiatives from fourteen to four, thereby significantly reducing the number of individual programmes which must be implemented by the Member States and the Commission. The new general Regulation has improved and expanded the concept of partnership, which now covers the Commission, the Member State, regional and local authorities (including environmental authorities), economic and social partners and other relevant bodies (including those working in the environmental and equal opportunities fields).

Several other provisions written into the Structural Funds legislation should also serve to improve their programming and budget management, in line with the amounts laid down in the financial perspective, in particular the setting of a flat-rate deflator for converting to each year's current prices the amounts laid down at basic 1999 prices, automatic commitment in annual tranches with decommitment of the unused portion after a certain deadline, and the system of advances and repayments.

3.2. Action plan

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4. Internal policies

4.1. Council Recommendation

a) The Council asks the Commission to step up on-the-spot audits.

Reply:

Since 1996 DG RTD has substantially stepped up its on-the-spot financial audits. Only 42 such audits were carried out in 1996 and barely 55 contracts were audited. By contrast, at 19 June 2000, the number of audits already carried out during the current year stood at 87 and a total of 127 contracts had been examined.

DG RTD has undertaken to inspect up to 10% of auditable contractors, a substantial increase in inspection activities which is a result of:

- the launch of a call for tenders by DG RTD, in collaboration with DG INFSO and DG FISH, and the subsequent conclusion of a general contract with external auditors to carry out on-the-spot checks;

- an increase in and the stabilisation of the audit team within DG RTD responsible for monitoring and checking the audits carried out by the external firm.

DG TREN plans a total of nearly 60 on-the-spot inspections in 2000, compared with 52 in 1999.

This increase has been made possible by a general contract, under which external auditors carry out on-the-spot inspections of bodies receiving Community contributions under the framework programme for research.

b) The Council asks for dormant commitments to be cancelled and recovery orders to be executed swiftly.

Reply:

To improve the monitoring of dormant commitments and the execution of recovery orders, DG RTD has introduced into its administrative procedures:

- a two-monthly system for following up dormant commitments: amounts are decommitted immediately or else the relevant recovery orders are issued.

- comprehensive follow-up of the 225 recovery orders pre-dating 1999 which have not yet been honoured by contractors.

A total of 310 recovery orders were issued in the first five months of 2000 - the tangible result of these follow-up operations. Mention should also be made of the positive effect of the increase in the number of completed audits, which has also speeded up the establishment of amounts owed and hence the issue of the relevant recovery orders.

Following its merger, DG TREN made reducing dormant contracts a priority. It set up a special team to deal with the backlog and by the end of the year 2000 expects to have closed or processed around 500 dormant contracts, as understood by the Court of Auditors (i.e. where there has been no transaction in the last two accounting years).

As regards the speed of execution of recovery orders, DG BUDG is developing the SINCOM 2 computer tool, which will improve the management of recovery orders for both authorising DGs and DG BUDG. A reporting tool will be developed at the same time. DG BUDG has also decided to devote more resources to the recovery of amounts owing in order to deal more effectively with the existing and growing workload.

c) The Council would like the final implementation rates for programmes to be taken into account in the financial statements accompanying the proposals for programme renewal, excluding cancelled commitments.

Reply:

Full information on budget execution is already provided in the context of the annual budgetary procedure, notably in the working documents.

d) The Council asks for a simplification of clauses on eligible overhead costs in research contracts.

Reply:

Under the 4th framework programme, participants in Community RTD projects could fix their indirect costs at 20% of total costs only if they applied the additional cost model of funding.

Additional simplification measures have been introduced under the 5th framework programme, including a clearer definition of eligible costs and an option allowing for reimbursement of overheads at a flat rate equal to 80% of personnel costs. Flat-rate contracts can also be concluded for the grant of exploratory awards specific to SMEs and for projects worth up to EUR100 000.

To pursue simplification further, and in particular to facilitate the administrative and financial management of projects while tightening up protection of the Commission's financial interests and all parties' certainty as to the law, DG RTD is considering the possibility of concluding targeted costs agreements with participants applying the total costs scheme with a view to defining with them their average personnel costs and overheads. This will require amendments to Commission Regulation (EC) No 996/1999 of 11 May 1999 laying down provisions for the implementation of Council Decision No 1999/65/EC. [2] The corresponding proposal is at present the subject of interdepartmental consultations.

[2] Decision concerning the rules for the participation of undertakings, research centres and universities and for the dissemination of research results for the implementation of the fifth framework programme of the European Community (1998-2002).

On this basis, a move towards a universal system of flat-rate overheads could be considered for the 6th framework programme.

e) The Council repeats its request to the Commission to lay before it a proposal for a Regulation creating a legal basis for general information policy (B3-300).

Reply:

The Commission implements the budget line in question in accordance with Article 21 of the Financial Regulation and the section of the Institutional Agreement of 6 May 1999 relating to legal bases.

4.2. Action plan

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Comments on the action plan:

* Measures i, ii, iii, iv, vi:

As indicated in the first version of the action plan, the impact of measure i will not be felt until the projects under the 4th framework programme come to an end in 2002 .

On 8 April 1999, the Commission signed General Contract No 1213/99 with Blumer Accountants en Adviseurs in order to obtain certain services in the audit sector (measure ii). The first lot under this contract was awarded on 18 June 1999. It covers 20 audits (54 projects) to be conducted over nine months. In March 2000, DG INFSO launched a second lot for 20 new audits (42 projects).

Prior checks on the financial reliability of potential contractors have been stepped up (measure iii). If, following inspection of the contractor's balance sheets, it is found that the smooth development of the project and the protection of the Community's financial interests may be at risk, preventive action is taken, e.g. a bank guarantee is requested, the advance payment is reduced or the contractor's participation is scaled down.

An interdepartmental working party has reviewed the management rules for the 5th framework programme (measure iv). Work is now under way on introducing simplifications such as an increase in the ceiling for granting flat-rate contracts, the standardisation of eligible costs with a single funding model based on flat-rate overheads, and finally administrative penalties to prevent the participation of contractors who have committed serious financial irregularities.

A new accounting system reconciling financial, legal and accounting requirements has been drawn up and is being examined as part of the recasting of the Financial Regulation (measure vi). This provision cushions the negative effects on the inspection of files caused by the pressure resulting from the annual closure of previous years.

* Measure v:

Great progress has been made in the review of accounting codes. DG Budget has drawn up a proposal designed to define the concepts involved, while meeting financial, legal and accounting requirements, as part of the recasting of the Financial Regulation. It will be implemented as soon as possible after the reforms have been adopted.

5. External aid

5.1. Council Recommendation

a) The Council asks for administrative practices to be adapted in order to improve the situation regarding the implementation of budget appropriations (both commitments and payments), which is heavily concentrated towards the end of the financial year.

Reply:

Faced with a concentration of commitment appropriations implemented at the end of the year, DG DEV has undertaken to make systematic use of calls for proposals for most of the budget lines under its responsibility. The calls for proposals launched in 2000 will yield results towards the end of the year. On the basis of this experience, new calls for proposals could be launched in 2001 at an earlier stage in order to avoid the concentration problem. However, DG DEV points out that implementation is particularly complex because of the need to ensure consistency with measures financed by the EDF.

If the accounting system is operational at the beginning of the year, the utilisation of payment appropriations is not concentrated at the end of the year. Indeed the opposite is true. The Commission will see to it that any increases requested do not occur at the end of the year, leading to a concentration effect.

b) The Council insists on the need to continue re-deploying staff to priority areas.

Reply:

The 'Peer Group' set up by the Commission has carried out a study of the match between the institution's tasks and its human resources. The Commission will draw conclusions from the study in September. The budgetary authority will be informed of the results of this exercise, which forms part of the reforms undertaken by the new Commission.

c) The Council asks for tighter Commission control over the powers conferred on technical assistance offices (TAOs).

Reply:

At the instigation of the SCR, the external relations (RELEX) services have taken part in a comprehensive survey aimed at clarifying and identifying existing TAO contracts in their field of activity. As a result a document has been published on the SCR's website on EUROPA, which is accessible to all.

For all new initiatives, Commission services have ensured compliance with the vade-mecum and model contracts for TAOs. Furthermore, in accordance with the guidelines adopted by the Commission, the services have drawn up proposals for dismantling the TAOs. Plans have been laid for replacing TAO staff with resources at headquarters or in delegations, with a timetable for transition to ensure the continuity of projects and programmes.

d) The Council asks the Commission to update accounting information before the end of the first half of each financial year, particularly with regard to outstanding amounts, in order to present a more faithful picture of the situation.

Reply:

Information on amounts decommitted during the year in respect of outstanding commitments is included (in a table showing the impact of previous commitments, "the weight of the past") in the reports on budget implementation. These reports are published:

- monthly (aggregate figures for each title);

- three times a year (figures for each budget item) after closure of the accounts on 31 May, 31 August and 31 December.

e) The Council asks for greater priority to be given to recovering unspent advances.

Reply:

The Council's concerns are shared by the SCR, which adopted this approach in 1999 and will continue to do so in examining old case files in 2000.

DG BUDG plans to develop a function in SINCOM enabling it to keep better track of recoveries. As the backlog from the past is cleared and financial controls become ever more rigorous, the number of recovery orders increases. Following up these recovery orders will require the mobilisation of human resources which are cruelly lacking.

f) The Council wants to see a better balance in the distribution of appropriations to avoid a situation where there is an abundance of unused appropriations on the one hand, while at the same time payments are delayed or even stopped because of a shortage of appropriations.

Reply:

The Commission shares the Council's concerns. While the budgetary authority sometimes diverges from its forecasts, the Commission strives to improve this balance by means of transfers, as it did many times in 1999.

In the last three years the utilisation rate for commitment appropriations for ECHO has been 100%.

Payment appropriations were also nearly used up in full (97% in 1997 and 1998), except in 1999 when the utilisation rate was low (81%) as a result of exceptional increases in commitment appropriations, in particular for Kosovo, in the second half of the year. Moreover, the balance of payment appropriations was carried over to 2000.

Only in a few exceptional cases and for very short periods did payments have to be stopped for lack of appropriations. Moreover, this is one of the reasons why ECHO asked for and obtained:

- the transfer of a substantial part of the humanitarian aid reserve to B7-21;

- the consolidation of five different budget lines into just two.

This has enabled ECHO to respond more easily to new humanitarian crises without holding up the implementation of commitment and payment appropriations pending transfers of appropriations from one line to another.

g) The Council asks the Commission to tighten its checks on tendering procedures to avoid excessive or unjustified expenditure.

Reply:

As a result of the instruction manual adopted by the Commission on 10 November 1999, procedures have been considerably simplified - eight thresholds for services, works and supply contracts - so that the management of external aid contracts is more effective. The manual has applied to centralised contracts since 1 June 2000 and will gradually be introduced for decentralised contracts.

h) The Council asks the Commission to try to reduce the number of formal errors in payments.

Reply:

The SCR is fully aware of the undertakings given by the Commission and will try in future to reduce the rate of formal errors, insofar as the methods applicable to this rate are reviewed in agreement with the Court of Auditors, as recommended by Parliament in its deliberations on the 1998 discharge.

The revision of the Financial Regulation should also be used as an opportunity to lay down definitions of errors of substance and form in the implementing rules.

i) The Council asks the Commission to carry out methodical checks on NGO accounts in terms of supporting documents for expenditure.

Reply:

The introduction of a new standard grant contract for external aid since 1 January 2000 has helped resolve the problem of verifying expenditure. The new contract provides for systematic audits in certain cases and stipulates that under no circumstances may the final payment be made until after the expenditure has been substantiated on the basis of the final report on implementation. The Commission has already been implementing the Council's recommendation in 1999 on the basis of the rules in force. Both Parliament and the Court have observed that the revision of the Financial Regulation should be used as an opportunity to concentrate in future on an approach that is based on scrutiny of results rather than of resources.

Since the end of 1995, ECHO's finance department has systematically carried out audits on the humanitarian organisations funded by ECHO. More than 100 financial audits have been conducted in the last five years. The organisations audited account for more than 80% of the volume of aid granted by ECHO. One of the aims of these audits is to assess the NGOs' financial management and internal control systems and to check that the original supporting documents match the declarations of expenditure submitted to ECHO.

ECHO certainly intends to continue and even step up these methodical checks. The way they are organised in future will depend on the current administrative reforms, particularly in the audit field, and on the minimum audit standards to be drawn up by the Commission.

j) The Council hopes that the new Financial Regulation will come up with effective solutions to most of the problems it found relating to external aid.

Reply:

The recasting exercise allows for a thorough overhaul of the provisions in Title IX of the present Regulation with a view to harmonising procedures for the award of external aid contracts and laying the foundations for the decentralised management of aid.

k) The Council feels that an over-broad definition of partnership might fail to clarify procedures.

Reply:

The Commission adopted a reviewed Framework Partnership Agreement in March 1998. The new FPA was the result of in-depth consultation with ECHO partners and Member States in the Humanitarian Aid Committee. The new FPA came into effect on 1 January 1999.

As stated by the Court of Auditors in its 1999 annual report, the procedures introduced by the new FPA are clearer and simpler than they were in the previous one and are in line with the Court's recommendations in Special Report No 2/97.

It should also be noted that the International Committee of the Red Cross and the International Federation of the Red Cross signed an amended FPA, in order to reflect the specificity of the mandate of both international organisations.

UN agencies have not subscribed to the new FPA. The General Agreement concluded between the Commission and a number of UN agencies on August 1999, together with the general conditions of the FPA, provide the terms of reference for all operational contracts concluded by ECHO with UN agencies. Once the ongoing discussions on the simplification of reporting have been concluded, a specific FPA could be drafted, incorporating the relevant aspects of the General Agreement.

While ensuring non-discriminatory treatment of its partners, the Commission has shown the necessary flexibility to take into account the nature of their mandate.

5.2. Action plan

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Comments on the action plan:

i) All the delays in external aid payments were made good in the course of 1999.

ii) Manual of harmonised procedures for external aid contracts: date of likely first impact on DAS - 2001.

iii) Standard contract for subsidies, including auditing of all payments over EUR100 000: 2001.

The amount of subsidies granted by ECHO is relatively small (1% of its budget). Since 1999 use has been made of the standard contract laid down in the vade-mecum. From this year, all subsidies exceeding EUR100 000 will be audited, in accordance with the Commission communication of 13 January (COM(2000) 11/2).

vi) Standardised independent monitoring of aid programmes

A monitoring system of active projects in the ACP, ALA & MED regions is being designed and tested, and will be gradually extended during 2001 and 2002 to cover almost all projects. There will be some exceptions, such as certain contributions to sectoral or other multi-donor programmes or structural adjustment programmes requiring different (macroeconomic) supervision; and although the system is initially being based on external monitors, if the resources problem in Delegations can be resolved, it may be possible to develop a more comprehensive and effective system that is better integrated in the Commission's delivery mechanisms. For now and in 2001, work continues on design and first implementation.

vii) Revision of procurement procedures in the Financial Regulation: depends on date of adoption of the new Financial Regulation.

6. Administrative expenditure

6.1. Council Recommendation

a) The Council wants interinstitutional cooperation to be stepped up so that the presentation of the consolidated balance sheet and the off-balance sheet commitments is improved and harmonised.

Reply:

Interinstitutional cooperation between accounting officers of the institutions has been stepped up with a view to harmonising accounting procedures and the presentation of financial statements. To this end, work is under way on finalising a manual on accounting and consolidation and a Regulation on the accounting management of the institutions' assets, two organisational measures which will contribute to a harmonised presentation of the accounts.

The Commission has also undertaken to review the entire accounting framework as part of the recasting of the Financial Regulation. All the Community satellite bodies will be called on to apply the new framework.

b) The Council asks the Commission to manage more rigorously the administrative expenditure of its delegations.

Reply:

Updating of the balance sheet at 31 December 1999 with regard to land, buildings and fixed assets under construction in non-member countries - already completed.

Development of new software for the decentralised management of inventories in external delegations - operational on 1 January 2001.

Improvements to the method of salary adjustment for local staff serving in the external delegations - a more precise methodology has been drawn up, the most important points of which have been put into effect immediately. The fine details will be finalised soon, following discussions with staff representatives.

Review of the supplementary sickness insurance scheme for local staff:

- to take account of the diversity of circumstances, ceilings for reimbursement have been drawn up for specific expenses (e.g. spectacle frames) or for all expenses in certain countries (e.g. Kenya, Russia, South Africa);

- other measures, such as encouraging staff to use generic pharmaceutical products or the conclusion of agreements with medical practitioners, have been introduced where appropriate;

- the treatments for which prior authorisation is required are laid down specifically in the rules governing the scheme, as are the treatments excluded from reimbursement, such as prostheses and massages;

- it is worth pointing out that this is a supplementary sickness insurance scheme which applies in countries where national social security arrangements are non-existent or inadequate. The scheme is funded jointly by local staff and by the Commission.

Reimbursement of private telephone calls. When telephone exchanges are renewed in delegations, the new exchanges are equipped with software which can identify automatically the numbers dialled, where technically feasible. In other cases calls are logged manually. The question of reimbursing private telephone calls is being examined systematically as part of a detailed analysis of the imprest accounts.

Scrutiny of mission expenses statements. These statements are systematically examined as part of the detailed analysis of the imprest accounts. 97 detailed analyses have so far been carried out. Adjustments to mission expenses statements are made where necessary.

Security guard contracts. In line with the Court's recommendations, new instructions have been drawn up to open this field up to competition on a wide scale.

c) The Council wants a mechanism requiring a formal annual declaration by any official applying for certain entitlements and allowances.

Reply:

From 2001, a system of formal annual declarations will be in operation for the following allowances:

- education allowance;

- household allowance.

For all other allowances, the conditions of award are monitored and verified by the Commission on the basis of the administrative status of each member of staff concerned.

d) The Council wants to see Community satellite bodies step up their cooperation with the Commission in the award of contracts and establishment of cost accounting.

Reply:

The Commission will examine how to improve cooperation on contracts, taking into account the constraints imposed by the satellite bodies' separate legal status. The development of cost accounting should lead first of all to better cooperation between the bodies, in which the Commission will be willing to participate.

6.2. Action plan

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Comments on the action plan (measure i):

The clause on additional fittings in new leasehold contracts has been adapted.

The new wording, reproduced in the Annex, has already been incorporated into the leases for B100, J-70, SC11, VM18 and L-41, concluded in 1999, and in the lease for the J-30 building concluded in 2000.

In response to the Court of Auditors' remarks, this new wording indicates unambiguously that the building owner has a contractual responsibility to carry out additional fitting work requested by the Commission.

However, the Commission's central contracts unit doubts whether harmonised contracts can be drawn up for all leases. They must be examined on a case-by-base basis.

7. Financial instruments and banking activities

7.1. Council Recommendation

a) The Council wants the Commission to evaluate the objectives of the "Growth and Environment" programme and step up controls in order to guarantee the regularity and sound management of the funds in question.

Reply:

The Commission will launch an evaluation of the Growth and Environment Scheme. The final report of the evaluation will be presented next year.

DG ECFIN's internal audit unit carried out an audit of the Scheme's legality and regularity and issued two reports, one in January and a second in April 2000. Following this audit, the Commission services are establishing annual procedures concerning further regular controls and are in the process of reviewing contractual arrangements with the European Investment Fund (EIF).

b) The Council asks for a solution to be found and implemented to enable the Court of Auditors to carry out a satisfactory audit of the European Investment Fund.

Reply:

The EIF is in the process of being restructured insofar as the EIB will become the majority shareholder. With respect to the audit rights of the Court of Auditors, the Commission is continuing its efforts to find a pragmatic solution along the lines of its proposals of last year.

The Commission will remain an important and active partner in the EIF.

7.2. Action plan

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8. Statement of assurance and supporting information

8.1. Council Recommendation

a) The Council considers it unacceptable that, despite the efforts made, the incidence of error has not fallen since the previous financial year.

Reply:

The Court of Auditors has already given a positive statement of assurance (DAS) for own resources and commitments. In the case of payments, however, the incidence of errors still needs to be significantly reduced.

With respect to the reliability of the accounts, the errors pointed out by the Court do not, in most cases, constitute non-observance of the Financial Regulation, but reflect the inadequacy of this Regulation in relation to the Court's criteria. An ambitious reform of the Financial Regulation is being proposed by the Commission and important measures have been taken.

For agriculture, the amount recovered for the Community budget via the clearance mechanism and the system of inspection and penalties is very close to the most probable loss that can be extrapolated from the Court's DAS sample. In other areas, such as the Structural Funds, important improvements have been made, in particular the eligibility datasheets, Regulation No 2064/97 and the Agenda 2000 measures.

b) The Council is in favour of technical contacts between the Court and the Commission to define all the factors necessary for the process of reducing the incidence of error for the DAS.

Reply:

Such contacts already take place.

c) The Council wants the accounting framework to be improved in order to harmonise the informative value of the financial statements.

Reply:

The accounting framework will be reviewed as part of the recasting of the Financial Regulation so that accounting principles generally accepted by the public sector are adopted. This will increase the informative value of the financial statements.

d) The Council asks for certain procedures to be reviewed in order to rectify errors in the presentation of fixed assets and commitment for future expenditure in the consolidated revenue and expenditure account and balance sheet.

Reply:

With regard to the presentation of fixed assets in the balance sheets, the rules on valuation and accounting will be clearly laid down in the Regulation on the accounting management of the Community's assets to be adopted by the end of October 2000. The Regulation will apply to all the institutions.

e) To avoid the understatement of debtors found in the consolidated balance sheet, the Council asks the Commission to tighten controls on the use of advances in the field of external action and make the relevant recoveries.

Reply:

The Commission plans to resolve this matter by reviewing the types of payments in its recasting of the Financial Regulation. In the meantime, DG BUDG will try to improve the presentation of the financial statements.

f) The Council asks the Commission to cancel without delay commitments which no longer match the Commission's obligations and to take account of this factor in its financial programming.

Reply:

The Commission plans to resolve this matter once and for all by reviewing the types of payments in its recasting of the Financial Regulation. In the meantime, DG BUDG will try to improve the presentation of the financial statements. Authorising departments have been asked to evaluate outstanding commitments and either change the deadline for implementation or decommit the amounts in question if the outstanding commitments no longer correspond to a contractual obligation.

In SINCOM2 no payment can be authorised if the deadline for implementation has expired.

g) The Council considers that the Commission should establish a management system capable of ensuring the implementation of preventive, or even corrective, measures in collaboration with the implementing bodies in the Member States.

Reply:

The Council Regulation on the 2000-06 period spells out more clearly that financial corrections may be applied in order to recover sums where there is a significant risk of irregularities because of systematic errors. However, potential irregularities will of course be detected, and recovery carried out, in a financial year other than the one in which they occurred.

As regards the CAP, the measures introduced by the Community Regulations (IACS, GIS, vineyard and oil registers, quotas) are all preventive or even corrective measures which serve to reduce budget expenditure by around EUR300 million per year.

h) The Council wants the reform of Financial Regulation and the simplification of certain Regulations to contribute to improving financial management and the monitoring of the implementation of the various payments.

Reply:

The recasting of the Financial Regulation has several objectives, one of which is to improve financial management. In pursuit of this objective, the Commission is incorporating into the Regulation the guidelines it adopted in its White Paper. More specifically, it is redefining the role of the financial players in order to confer greater responsibility on authorising officers and establishing an internal audit service. The new Financial Regulation also reaffirms the principles of budgetary law, which already include sound financial management.

The recasting of the Financial Regulation provides an opportunity for a complete overhaul of the different types of payments. The Commission proposes that a distinction be made between prefinancing, interim payments (repayments) and the payment of balances, as in the Structural Funds Regulations. The distinction between advances and payments on account, which has been criticised by the Court of Auditors, will be dropped.

i) In the field of agricultural expenditure, the Council supports the Commission's initiatives aimed at enhancing the reliability of the accounting data from paying agencies.

Reply:

DG AGRI attaches great importance to internal controls in paying agencies and independent certification of the accounting data supplied by paying agencies in order to increase the reliability of the agencies' accounts.

j) The Council hopes that the measures taken by the Commission in 1997 and those following on from the Agenda 2000 reforms will make it possible to reduce the number of errors in the Structural Funds field.

Reply:

The Court of Auditors has already given a positive statement of assurance (DAS) for own resources and commitments. In the case of payments, however, the incidence of errors still needs to be significantly reduced. The Commission promises to do its utmost to reduce significantly the rate of errors as quickly as possible, beginning in 2001, when a number of legislative and administrative provisions which it has already adopted - or plans to adopt - will take full effect.

8.2. Action plan

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Comments on the action plan (measure iii):

DG AGRI monitors unrecovered debts closely. In 1999 it launched a special survey of all the Member States. It set up an expert working party in June 2000 and is following up decisions on annual declarations of expenditure for 2000.

9. Special report No 1/99 concerning the aid for the use of skimmed milk and skimmed milk powder as animal feed

Conclusions on Special Report No 1/99

At the end of its proceedings the Council made the following recommendations:

- In view of the financial guidelines laid down by the European Council in Berlin in the context of Agenda 2000 for the pattern of agricultural expenditure over the period 2000 to 2006 - in particular the need for further savings in order to ensure stabilisation of expenditure in real terms - all internal disposal measures provided for in the framework of the Common Market Organisations should be subjected to critical review, with the emphasis on consumption rather than interventions liable to lead to an increase in stocks.

- In the specific case of aid for the use of skimmed milk as animal feed, account should be taken of the finding by the Court of Auditors that only 35% of skimmed milk powder production can be sold at market prices and the cost to the EU budget of subsidies for its use as feed amounted to around EUR386 million in 1997.

- The Commission should examine the various suggestions made by the Court of Auditors for eliminating the weaknesses observed (including, as regards calculation of the quantity qualifying for aid, quality standards and reliability of control systems) and bring them into its consideration of improvements in aid management.

- The points made by the Court of Auditors concerning adequate control in the case of skimmed milk powder used in the manufacture of animal feed in another Member State should, in particular, be taken up. Consideration should also be given here to the possibility already envisaged by the Commission of abolishing the special arrangements introduced by Regulation No 1624/76 for payment of aid in respect of skimmed milk powder.

Reply:

- In its approach to the common organisation of markets, the Commission's aim is to reduce or even eliminate the role of public intervention buying, in favour of market disposal. This approach has been endorsed by the Council in the Agenda 2000 decisions and in previous decisions, particularly those on olive oil in 1998.

In the milk sector in particular, the Commission's aim is to eliminate the structural market surplus using minimum budget resources. To this end it pursues the following approach:

* It supports efforts to promote the consumption of milk and milk products in general in order to maintain and increase total consumption.

* It considers disposal on the internal market as the main instrument for eliminating the market surplus. In managing these measures, the Commission aims to avoid expensive purchases of public stocks, while restricting to a minimum the amounts of aid granted by keeping these amounts under regular review. Likewise, regular checks are made on the need to maintain or discontinue disposal measures. In 1999, for example, certain measures deemed less effective were abolished (in particular aid for skimmed milk powder for use as animal feed, and social butter).

- The Court of Auditors' finding is related to the structural surplus on the milk market, which is a result of political decisions by the Council. Milk surpluses that can no longer be converted into other value-added milk products are used to manufacture butter and skimmed milk powder, the two products which form the basis of the market-support mechanism in the milk sector.

- In 1999 the Commission reviewed the arrangements for aid for skimmed milk and skimmed milk powder for use as animal feed, taking into account inter alia the Court's suggestions. The following points in particular are worth mentioning here:

* the amount of aid is now linked to the protein content of the skimmed milk powder;

* the inspection provisions have been spelled out in greater detail, particularly with regard to the detection of whey,

* the aid scheme for liquid skimmed milk [Regulation (EEC) No 1105/68] was abolished from 1 January 2000.

- As part of the above review, it was decided that the special provisions laid down by Regulation (EEC) No 1624/76 would be abolished with effect from 1 July 2000.

10. Special Report no 2/99 on the effects of the CAP reform in the cereals sector

Conclusions on Special Report No 2/99

1. The Council appreciated the quality of the report, but regretted that it had not been prepared earlier, since then it could have been used as background for the new reform. There were, however, differing views on some of the Court's conclusions, particularly on over-compensation, the impact of set-aside and the difference in treatment between farms and agricultural sectors. Lastly, the Council and the Commission stated that the most important thing was to avoid undermining the Berlin European Council's conclusions on Agenda 2000 by re-opening discussion on ways of stabilising the sector.

2. At the close of its proceedings, the Council drew the following conclusions:

- The MacSharry reform was a step in the right direction. Subsequent action was required and was taken under the CAP reform approved in the context of Agenda 2000.

- As was to be expected, the switch from price support to a system of direct aid brought a marked increase in budgetary expenditure. However, the increase turned out to be larger than foreseen. The decrease in expenditure forecast for 1997 did not take place: on the contrary, cereals expenditure has continued to rise year by year.

- Under the reform, farmers in some Member States were over-compensated for their actual lost earnings because of the trend in market prices over the five-year period from 1993 to 1997. However, such over-compensation varied widely from one Member State to another and from one farmer to another.

- Consumer interests were in practice neglected under the reform. Taxpayers are having to bear a heavier financial burden without benefiting from any perceptible reduction in final consumer prices.

- Agenda 2000 took account of some of the points raised in the Court of Auditors' Special Report. Given the Berlin European Council's request that the Commission should submit a report to it in 2002 on the development of agricultural expenditure, accompanied, if necessary, by appropriate proposals (Conclusions, point 22, fifth indent), the Commission could make a detailed analysis of the problems highlighted in Special Report No 2/99.

Reply:

The Commission reserves the right to decide whether it is appropriate to present the report suggested by the Council, in the context of the ongoing evaluation of the CAP. The effectiveness of the various CAP reform measures in the cereals sector will be examined, taking into account the interests of consumers.

11. Special Report No 3/99 on the management and control of interest rate subsidies by the Commission

Council Conclusions on Special report No 3/99

The Council examined with interest the above report and takes note of the findings and the criticisms formulated by the Court of Auditors concerning the management and control by the Commission of the above interest rate subsidies.

The Council took note of the explanation of the Commission, according to which the economic efficiency of interest rate subsidies remained hard to prove and their conformity with the applicable lending conditions was also difficult to verify.

The Council is concerned with the efficiency of interest rate subsidies and shared worries about the risks of their improper utilisation.

The Council broadly endorses the recommendations made by the Court of Auditors in their report in order to improve on the situation. Therefore, the Commission should in particular:

- ensure that mechanisms are in place so that the beneficiaries receive full financial benefit of the interest rate subsidies paid by the Community budget, with deduction only of the stipulated margins, and this also in cases where the EIB acts as an intermediary;

- evaluate the efficiency of the interest rate subsidies and quantify, wherever possible, the rate of achievement of the objectives set by the Council.

The Council agreed with the Commission that controls, in order to be efficient, should not be duplicated between the Community institutions, given the high administrative costs of such controls.

Furthermore, the Council welcomes the commitment of the Commission to examine how to improve its accounting and financial reporting concerning interest rate subsidies and how to improve their management and control by possible harmonisation and centralisation.

Finally the Council welcomes the commitment of the Commission to present, as soon as possible, ideally before the end of July 2000, a comprehensive study on the general usefulness of interest rate subsidies in terms of cost and economic efficiency, in the light of all relevant factors.

Reply:

The Commission has examined the general usefulness of interest rate subsidies. In so doing, it:

- consulted the departments which manage appropriations earmarked for interest rate subsidies;

- consulted the various EIB departments concerned;

- carried out interviews with a sample of government departments in certain Member States in order to draw on their experience in this field.

On this basis, a first draft report has been produced. It sets out a list of the relevant Community activities, analyses the theoretical effectiveness of the instrument, and then tries to verify the conclusions for each Community programme by empirical methods.

The conclusions and proposals arising from this study must now be sent to the relevant Commission departments for consultation, then laid before the Collège for approval. This means that the report will probably be ready for transmission to the Council some time in October.

ANNEX 2 Member States' replies to the observations in the Court of Auditors' annual report

Contents

GENERAL Introduction

1 - OWN RESOURCES

2 - COMMON AGRICULTURAL AND FISHERIES POLICY

3 - STRUCTURAL MEASURES

4 - STATEMENT OF assurance

GENERAL Introduction

The Member States must adopt the same measures to counter fraud affecting the finances of the Union as they do at national level (point 0.5 of the Annual Report).

Only a few Member States have replied to the Court's observation on countering fraud (IRL, P, SV, FIN, NL).

Nevertheless, the replies are unanimous in pointing out that there can be no distinction between the resources employed to defend financial interests at national level and at Community level. All the replies stress that the measures taken by Member States to combat fraud which might harm the Community's financial interests are similar to those taken to combat fraud harming their own financial interests.

Ireland points out that the rules on combating fraud are constantly being updated and improved in order to achieve better financial management.

Portugal shares this view and reports that, whenever financial interests are at stake, whether they be national or Community interests, the Directorate-General for Customs and Excise (DGAIEC) applies the same criteria and takes the same steps to combat fraud. Portugal adds that three legal instruments have recently come into force (in 1998) which define and govern the action taken in this field in a uniform manner.

Finland considers that it is important for the Member States to continue to improve the quality and performance of EU financial management. It is in favour of the Commission taking prompt action to tackle the most serious individual problem areas. At national level Finland has been endeavouring to ensure that financial management is efficient and cost-effective and produces tangible results and that Community rules are properly adhered to in the national administration of Community resources.

Sweden also stresses the importance of meeting the obligations imposed on the Member States in this field and is anxious that good cooperation should be established between Swedish control authorities and the Commission to ensure good financial management. Since Sweden became a member of the EU, Community resources have been protected there in the same way as national resources in that all the rules for the financial management, control and auditing of resources in the Swedish budget also apply to the Community resources which are administered and checked by Swedish authorities. Moreover, Community resources are covered by the same criminal-law protection as national budget resources. Sweden is one of the countries which has ratified the Fraud Convention and the accompanying protocol.

The Netherlands refers to the Report by the Independent Experts and its 91 recommendations on management, financial control and fraud prevention. The Dutch authorities are in favour of developing a new legal framework in three stages:

- In Stage One a European Public Prosecutor would be appointed with responsibility for pursuing judicial action following OLAF's administrative investigations. This Public Prosecutor would also play a part in coordinating the investigation and prosecution of cross-border fraud cases affecting Community funds.

- In Stage Two a special public prosecution department would be set up in each Member State, with responsibility for prosecuting Community offences (i.e. fraud, corruption and all the offences referred to in Article 29 of the Treaty on European Union).

- In Stage Three a European Prosecution Service would be established, with delegated prosecutors in the Member States given the task of prosecuting all offences affecting the Community's financial interests.

The Dutch authorities consider that such mechanisms would help improve coordination between the Member States - and between the Member States and OLAF - in investigations into fraud affecting the Community's financial interests.

1. Own resources (Chapter 1 of the Annual Report)

1.1. Traditional own resources:

- Delays in making customs duties available (point 1.9 of the Annual Report)

The Member States that have replied (D, F, I, IRL) announce either that they will try to reduce this type of incident as much as possible or that work is in progress on improving the system for managing payment of customs debts. Nevertheless, they point out that the risk cannot be eliminated entirely, given the complexity of customs rules and procedures, the proliferation of services involved and the number of customs declarations.

- Significant errors in the separate accounts kept by Member States (points 1.10 and 1.12 of the Annual Report)

Certain Member States (D) contest the Court's assertion that some established entitlements are wrongly kept in the B account instead of being entered in the A account and made available to the Community budget. The Member States point to considerable differences between the Court and the Commission on the one hand and the Member States on the other regarding the interpretation of the rules on the entry of entitlements in the separate account laid down in Article 6 of Regulation (EEC, Euratom) No 1552/89. Some Member States argue that this difference of interpretation explains many of the debts which the Court regards as doubtful.

Others (F, IRL) support the Commission's proposal to amend Article 17(2) of Regulation No 1552/89 to increase the effectiveness of the procedure for allowing write-offs. The Commission proposes that the threshold for notifying the Community authorities of write-offs be raised from EUR10 000 to EUR50 000 so that Member States can concentrate their efforts on recovering the largest debts. It also suggests that a cut-off date be introduced for examining debts - five years after the date of establishment or, in the event of an administrative or judicial appeal, five years after the date on which the debtor is notified of the decision.

Some Member States (D) announce that computer systems are being introduced to eliminate the numerous errors that were inevitable under the old system of manual accounting or that instructions are being issued to rectify the errors that were found (I).

1.2. VAT and GNP own resources

- Position of assets not made known with immediate effect (point 1.15 of the Annual Report)

Some Member States (E, NL) replied that their statements and notices were sent by mail or fax in good time.

1.3. Verification of compliance of national legislation with Community law

- Failure to comply with the obligation to transpose legislation (point 1.34 of the Annual Report)

The Member States comment very little on this point. Spain even states the opposite view to the Court. Nevertheless, many Member States point out that no infringement proceedings have been commenced for failure to transpose the VAT Directive. Some of them (NL, D) endorse the Commission's view that it is not in a position to carry out systematic appraisal of compliance.

2. Common agricultural policy (Chapter 2 of the Annual Report)

2.1. Budget implementation/ failure to observe budgetary rules

- Lack of transparency in the monthly declarations with regard to corrections to previous declarations (point 2.12 of the Annual Report)

Some Member States (E, L) share the Commission's view that the Court's suggestion for achieving the desired transparency wou