Opinion No 2/2001

on a proposal for a Council Regulation on the Financial Regulation applicable to the general budget of the European Communities

(submitted pursuant to Article 279 EC)

(2001/C 162/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular Article 248(4) and Article 279 thereof,

Having regard to the Treaty establishing the European Coal and Steel Community, and in particular Article 45c(4) and Article 78h thereof,

Having regard to the Treaty establishing the European Atomic Energy Community, and in particular Article 160c(4), and Article 183 thereof,

Having regard to the proposal for a Council Regulation on the Financial Regulation applicable to the general budget of the European Communities(1),

Having regard to the request for an opinion on this proposal submitted by the Council to the Court of Auditors on 24 November, and received by the Court on 29 November 2000,

HAS ADOPTED THE FOLLOWING OPINION:

1. In 1998, the Commission embarked on the process of recasting the existing financial legislation by presenting a working document on recasting the Financial Regulation(2). This was the Commission's reply to the response given to the "seventh series" of amendments to the Financial Regulation, including that of Court Opinion No 4/97(3), which sought a fundamental review of all the financial legislation.

2. The Commission did not follow the Court's recommendation to set up a high-level working group including outside experts with a view to thoroughly assessing the situation before making any attempt to draw up a revised draft Financial Regulation(4). In fact, the Commission availed itself of external resources in only two areas: the simplification of the Financial Regulation, and the keeping and the presentation of the accounts. Having examined the study produced by experts consulted in the accounting field, the Court regrets that the timetable drawn up by the Commission has not enabled it to include in the proposal for a Financial Regulation the proposals contained in the study, thereby leaving a significant proportion of the recasting work unfinished (see paragraphs 41 to 43).

3. The Commission proposal provides a basis for recasting the financial regulations, although it does not take into consideration all of the concerns which the Court expressed in Opinion No 4/97 and, generally speaking, is not radical enough. In this opinion, the Court proposes such amendments to the Commission's text as it has deemed necessary, except in areas concerning the basic accounting framework and the objectives of the accounts and of the financial statements, the provisions governing which, in the sections concerned, are inadequate.

4. The general philosophy underlying this Court opinion is the following:

(a) the Community budget system should apply the existing budgetary principles and should tolerate only those exceptions that are indispensable;

(b) the budget system should be as simple as possible;

(c) the budget, in terms of both estimates and implementation, and the financial statements, should reflect the reality of the operations and financial situation of the Communities.

Budgetary principles (Part One, Title I, Articles 1 to 28)

5. The Court devoted several paragraphs of Opinion No 4/97(5) to the question of general budgetary principles. It recommended that budgetary principles should be applied more strictly and exceptions confined to a bare minimum. The Commission's draft recasting groups the principles together under a single title. The Court suggests that certain articles should be amended or added to so as to make the proposed definitions more rigorous and more explicit. It regrets that certain exceptions to the principles are still contained in the draft Financial Regulation.

6. The provision contained in Article 6(2), which allows forbudgetary commitments in annual instalments, divests the notion of differentiated appropriations of all meaning and should therefore be deleted (see paragraphs 30 and 31).

7. The carrying-over of appropriations, which is authorised by Article 8 of the draft, contravenes the very principle of the annuality of the budget. Rules for carrying appropriations over are no longer essential under the system of differentiated appropriations (which the Commission proposes to generalise), in so far as the commitments entered into are, where necessary, covered by payment appropriations which may arise from subsequent financial years. Any shortage of payment appropriations which may arise under certain budget headings could always be offset by the relaxation of the transfer rules proposed by the Commission (see paragraph 10) and, exceptionally, by the possibility of requesting appropriations by means of a supplementary budget. These carry-overs of appropriations are unnecessary and have only a marginal financial impact. On the other hand, they do make management systems (in particular computerised accounting systems) more complex and may even lead to confusion when the financial statements are read. The objectives they are supposed to achieve can be achieved through the normal arrangements for adopting and implementing the budget.

8. The system of provisional twelfthsdescribed in Article 12 could be placed after Article 33 of the draft, as it essentially concerns the procedure for adopting the budget. The current provisions, which are unnecessarily complicated, could be simplified.

9. Other unnecessary exceptions include the provisions laid down by way of derogation from the principle of the universality of the budget with a view to making the system forearmarking certain revenue permanent (Article 17). As the Court points out in Opinion No 1/2001(6): "There may be circumstances in which certain specific receipts, outside the field of the EAGGF-Guarantee, could enable institutions to spend corresponding amounts for related purposes without the need for fresh budgetary authorisation". The Court favours retention of this system but wishes marginal cases to be treated in accordance with the general provisions.

10. The Court considers that the proposed Article 21, which allows the Commission greater room for manoeuvre as regardstransfers of appropriations, is reasonable, in particular with a view to drawing up the budget on the basis of activities. In order to improve the current situation, consideration also needs to be given to the application of the principle of budgetary specification and to the structure of the budget (see paragraph 16 on the structure of the budget).

11. As regards the principles of sound financial management, which are mentioned in Article 25 of the draft, they could usefully be completed by adding a definition of each principle.

12. In addition to the aforementioned exceptions, special provisions apply to certain Community activities (e.g. the EAGGF-Guarantee, the Structural Funds, research, external measures, offices and administrative appropriations) in the second part of the draft Financial Regulation (Articles 134 to 168). A stricter application of the principles would render many exemptions superfluous, whereas the more specific provisions, by their very nature, could be transferred to the rules for implementing the Financial Regulation. Any important remaining exemptions could be included in the first part of the Regulation.

13. As a general rule, the Court considers that, for the sake of consistency and legal certainty, any exceptions to the budgetary principles must always be clearly authorised in the Financial Regulation, and not by sectoral regulations adopted on bases other than Article 279 of the Treaty.

Drafting and structure of the budget (Part One, Title II, Articles 29 to 44)

14. The Commission has retained in Article 41 of the draft the possibility of including in the budget a negative reserve of a maximum of 200 Mio euro. The notion of a negative reserve impedes the clear and accurate presentation of precisely calculated budgetary authorisations and, as such, contravenes the principle of transparency as set out in the Commission's draft.

15. The Court has a number of suggestions for improving or clarifying the texts of Articles 39 and 43 concerning, respectively, the prohibition of negative revenue and expenditure in the budget, and the general presentation of the budget. The Court endorses the proposal in Article 44 to give the institutions a measure of flexibility in the composition and grading of their staff; it is for consideration whether this flexibility should be further extended so as to enable the institutions, within a budgetary allocation for staff costs, to choose the most appropriate mix for them of permanent and temporary staff and staff working under external contracts.

16. In its Opinion No 4/97(7), the Court referred to the cases of loss of control observed in the application of the principle of budgetary specification, as a result of which some budget headings which had been allocated huge amounts of appropriations existed alongside others which had been allocated a few thousand euro. To begin with, the Financial Regulation should contain a provision limiting these disparities. Consideration then needs to be given to the relevance of subdividing budget headings into titles, chapters, articles and items. The budgetary nomenclature could be reviewed and the maximum number of budgetary subdivisions could be limited to a specific level, for example the chapter, or to an amount established by the budgetary authority, so as to guarantee the institutions greater flexibility as regards management.

Implementation of the budget (Part One, Title III, Articles 45 to 54)

17. The Commission has sought to clarify the situation by proposing a specific chapter on methods of implementing the budget (Articles 50 to 54). This clarification had proved necessary in the light of numerous problems arising from the progressive increase in the Commission's workload, the enlargement of the European Union, the role of the Technical Assistance Offices (TAOs) and the size of the budgets to be managed.

18. Over and above the improvements made by the Commission, the wording of certain articles seems to need some refinement so as to differentiate between the powers of the Commission and those of the other parties involved on the basis of the method of implementation envisaged, whilst stressing that the Commission nevertheless remains responsible in the final analysis for the implementation of the budget, pursuant to Article 274 of the Treaty. Whatever the method of implementation envisaged, the Court welcomes the emphasis placed by the Commission on the checks on measures undertaken and proposes that where the Commission implements the budget on a decentralised basis its partners' responsibilities should be specified. The Court welcomes the inclusion of provisions which should permit the Commission to work more rationally and effectively with international organisations.

Financial actors/Liability of financial actors/Internal auditor (Part One, Title III, Articles 55 to 64 and 80 to 82)

19. In Opinion No 4/97, the Court urged the Commission to explore ways of modernising the role of the financial actors(8). In particular, it recommended that a new Financial Regulation should contain the following principles and provisions in respect of exercising the internal control function in the institution:

- 'the status and powers of the Financial Controller should be redefined, on the assumption that he would exercise the functions of internal auditor of the institution,

- a clearer indication should be given of the scope of the authorising officers' powers in respect of financial management and financial control. Since the prior approval procedure is likely to be used significantly less or even, in the end, to disappear completely, additional provisions need to be introduced to ensure the legality, regularity and sound financial management of Community measures and to protect the Communities' financial interests, in particular to prevent officials from having to face any situation where a conflict arises between the interests of the service and the interests of third parties,

- on the same assumption, the powers of the accounting officer need to be strengthened'.

In actual fact, the provisions governing the financial actors and, therefore, the structure of the Community internal control system would represent an important step towards meeting the Court's recommendations, in particular with regard to the proposal that an internal auditor should now oversee the internal control systems.

20. In its Opinion No 1/2000(9) on the Commission's proposal to separate the internal audit function from the financial control function, the Court stressed the independence of the internal auditor. The importance of this principle would require the Financial Regulation to lay down in unambiguous terms that, "in carrying out his duties, the internal auditor is responsible only to the institution that designated him and that he reports direct to that institution"(10) (this addendum is proposed in these terms in Article 80).

21. The Commission's proposal concerning the financial actors is based on a significant change in the structure of the Community system of financial control with which the Court generally agrees and which largely follows the recommendations in Court Opinion No 4/97. However, the proposal makes no reference to the Financial Controller, notwithstanding that Article 279c of the Treaty explicitly refers to the Financial Controller as one of the financial actors for whom the rules concerning responsibilities are to be laid down by the Council.

22. Articles 56 and 57 of the Commission's proposal, which concern the Authorising Officer, should be amended. It is pointless to propose that the Authorising Officer should submit accounts to his institution when it does not appear clear what accounts are concerned. There should also be a clear definition of what professional responsibility he bears for the legality and regularity of transactions or internal control systems. As the Court has pointed out on several occasions, doing away with centralised prior approval would not be acceptable unless it was replaced by other procedures providing guarantees of at least equivalent value involving actors other than the Financial Controller.

23. The role of the Accounting Officer in keeping the accounts and drawing up the financial statements would be strengthened, in particular vis-à-vis the authorising departments. However, Article 58 should also be expanded.

24. The Court draws the Council's attention to the fact that the proposed text (Article 62) on the liability of the Authorising Officer, unlike the provisions concerning the Accounting Officers and Imprest Administrators in Articles 63 and 64, contains no provision as to what could constitute a serious error for which the Authorising Officers could be held legally or financially responsible. The Regulation needs to make clear that authorising officers may be held responsible for losses to the budget or damage to the financial interests of the Community which result from their actions (or failures to act) and which they should have foreseen. The Court further points out again (as it previously indicated in paragraph 5.20 of the Annex to Opinion No 4/97) that it is not sufficient to leave any necessary action to be taken under the relevant provisions of the Staff Regulations; these provisions are not apt for the recovery of money, and have in any case never been applied. The Commission should therefore consider the possibility of creating within the current framework an independent structure for establishing the financial responsibility of its officials and other staff, the legal basis for which would not be the Staff Regulations.

Revenue operations (Part One, Title III, Articles 65 to 69)

25. The abolition of any form of establishment of a claim in respect of own resources, as envisaged in Article 66(1), is unsatisfactory. Even if an estimate of the claim cannot be made for traditional own resources, because the value of this revenue is known only when it is made available to the Commission by the Member States, the Authorising Officer should be required at the very least to draw up an estimated timetable for monitoring the recovery of the miscellaneous own resources that are to be paid over periodically by the Member States.

26. As regards agricultural revenue categorised as miscellaneous revenue, the draft does not specify whether it will be subject to the general arrangements or to arrangements akin to those envisaged for own resources. Given that such agricultural revenue does not constitute own resources, it must fall within the ambit of the general arrangements.

Expenditure operations: commitments (Part One, Title III, Articles 70 to 72)

27. The Court considers that the Commission's proposal concerning the definition of the concept of a commitment does not resolve all the questions raised by a reading of Articles 1(4)(3) and 36(2) of the current Financial Regulation as this area remains a constant source of difficulties for the implementation of the budget and for the accounting system.

28. Accordingly the Court proposes two changes in the arrangements set out in the draft Regulation. First a "budgetary commitment" should be defined as the subject of a specific documented decision by an institution or its delegate to spend a given sum of money for a defined purpose. In accordance with the Commission's proposals the amounts of money concerned by such decisions would count against the budgetary provision for commitment appropriations. Such decisions would need, as the Commission proposes, to be translated into legal obligations to third parties at the latest by the end of the financial year following that in which the decision was taken. The Court suggests that this latter stage in the process should use the term "legal obligation", thereby avoiding the use of the word "commitment" to mean something other than the decision in the budgetary context.

29. Secondly, as stated in paragraph 6, which deals with the budgetary principles, the Court considers that the provision in Article 70(3) whereby commitments may be broken down into instalments (where the basic act so provides) negates the essential purpose of differentiated appropriations and of a commitments budget and should therefore be deleted. The annual commitments budget is intended to authorise and limit the expenditure decisions made by the Communities during the financial year. These expenditure decisions give rise to budgetary commitments which constitute, in turn, the authorisation and limits for recording in the accounts the corresponding legal obligations subsequently entered into with third parties. Another objective is to ensure that the actual extent of the Communities' financial obligations is known. Such a system only makes sense if it is applied in a consistent manner to all expenditure decisions in all sections of the budget. All specific expenditure decisions taken during a given financial year should be exhaustively recorded in that year. The commitments budget should therefore be sufficient to cover the whole of the expenditure decisions made during a given year, including those concerning programmes, projects, etc., requiring payments which are staggered over several years. If the commitment appropriations provided are not sufficient to cover all of the estimated cost of a programme, then the corresponding decision and legal obligation should not be made and entered into.

30. This means that, in fields involving substantial multiannual programmes for which the expenditure decisions are adopted at the beginning of the programming period, the amounts of commitment appropriations may vary significantly from one year to another. This would simply reflect the underlying reality of the transactions concerned and could not be reconciled with the concept of an annual commitments budget which was directly limited, as has so far been the case, by a linear financial perspective. Currently the financial perspective (not mentioned in the Treaty or the Commission's proposal, but referred to in Article 3 of the existing Financial Regulation) sets an own resources ceiling which in turn is applied to annual budgets for both commitments and payments, although it is only the payments that are directly financed by the revenue raised. In order to ensure that this conflict does not arise in the future, the financial perspective ceilings should be applied to the commitments budgets for the whole of the period of a financial perspective, rather than on an annual basis.

31. The Court wishes to emphasise that the criteria provided for in the Financial Regulation for committing expenditure, and for recording commitments in the accounts, should be applied consistently across the whole budget without derogation for particular expenditure areas. If the Commission's proposal is not amended on the basis set out above, it would be better to opt for a payments budget only, without commitment appropriations. In such a case, the institutions would still need to record and to present to the budgetary authority, in support of their requests for budgetary provision for payments, information on expenditure decisions taken and obligations entered into. No specific limits, however, would be set as part of the annual budgetary process on the level of expenditure decisions. The institutions would still be subject to budgetary discipline in that they would have to manage their affairs in such a way that the need to make payments did not result in them exceeding the appropriations made available by the budgetary authority for the financial year.

Expenditure operations: payments (Part One, Title III, Articles 73 to 77)

32. Payments (and not "expenditure", as stated in sections 2 to 5 of Chapter 6) must be carefully monitored at the various stages in the accounting and management systems in order for the latter to indicate the extent to which budget operations have actually been implemented in respect of final beneficiaries. To this end the Commission proposes the separate disclosure of pre-financing payments and refunds of expenditure charged to the annual budget. However, it is also necessary that the degree to which pre-financing payments charged to previous budgets have not yet been absorbed by the financing of expenditure at final beneficiary level, and the degree to which budgetary payments are not yet "cleared", should also be accounted for on a continuous basis and disclosed in summary form in the financial statements.

33. Pre-financing payments charged to the budget, most of which are paid to intermediaries and not to final beneficiaries, should be restricted to amounts demonstrably required to meet the Community's share of the necessary pre-financing of programmes, projects, the activities of technical assistance offices, etc. Where further funds are required they should only be paid to reimburse expenditure actually incurred. Where the initial advances are not adequate to meet ongoing pre-financing needs an additional advance would be paid. As operations approach completion, the advances should be absorbed by setting them off against the last payments due for expenditure reimbursements. Systematic perpetual advance payment mechanisms, which increase the risk of loss of control and provide a misleading image of budgetary execution, should be prohibited.

Procurement (Part One, Title IV, Articles 83 to 100)

34. The Financial Regulation should contain only essential provisions; provisions which, by their very nature, could be susceptible to change should be transferred to the implementing arrangements. This latter category includes specific cases of exclusion and penalties (Articles 88 to 90).

35. The Court considers it important that the rule laid down in Article 84(3) (new Article 96a) of the draft concerning situations of suspected errors, irregularities or fraud, should be strengthened and applied in all cases by the institutions wherever a contractor has committed irregularities or fraud.

36. The Court proposes the inclusion of an additional article (Article 100b, the result of transferring Article 154 of the Commission's proposal) on the designation of persons eligible to participate in tendering procedures in the area of external aid (see paragraph 59).

Subsidies (Part One, Title V, Articles 101 to 114)

37. The provisions included under this title should be limited to provisions of a general nature, to be implemented in accordance with the recent vade mecum on subsidies which, in the Court's view, should enjoy the status of a Commission regulation.

38. Several aspects of the draft Financial Regulation should be amended:

(a) Article 101 should distinguish more clearly between subsidies and payments made in the context of a public works contract;

(b) the same article should also better define the scope of the title in question.

39. Given the various fields of activity in which subsidies are disbursed, for example in the field of humanitarian aid, the provisions of the title should allow for a degree of flexibility:

(a) Article 102 should not insist on either joint financing or the (unverifiable) condition that no profit should be made;

(b) Article 103 should envisage the possibility of disbursing a subsidy outside the context of a programme;

(c) Article 106 should be deleted so as not automatically to limit the rate at which administrative expenditure is financed.

40. Certain provisions should also be deleted, as they are self-evident or unnecessary or because they would be impossible to implement: this is the case, in particular, of the provisions envisaged in paragraphs 2 and 3 of Article 112 concerning the refunding of subsidies, as the amendment of the provisions envisaged in Article 112(1) is adequate.

Keeping and presentation of the accounts (Part One, Title VI, Articles 115 to 122)

41. As paragraph 2 of this opinion states, the provisions submitted take no account of the findings of the study commissioned from a group of experts. This study provides a solid basis for developing the provisions that are missing from the recast proposal (see also paragraph 43 and the introductory comments to Part One, Title VI). The provisions proposed by the Commission should be revised before the Council takes a final decision. The Court would also point out that under the amendment of the Financial Regulation proposed by the "seventh series" and ratified in 1998(11), the Commission included in Article 70 of the current Financial Regulation a provision to distinguish between "budgetary expenditure and revenue" and "non-budgetary expenditure and revenue", as a consequence of which a broader accounting result is calculated. This is equivalent to distinguishing between two levels of results, one concerning the implementation of the budget and another which is obtained by adding to the first of those operations which concern the accounts rather than the budget (depreciation, provisions, etc.). Article 70 also provides for the balance sheet to be drawn up on the basis of accruals accounting. Thus, the provisions orienting the Community accounts framework towards an accruals-based accounting system are found in the current Financial Regulation. To be fully applicable, they should have been made explicit and developed in the draft recasting of the Financial Regulation. Once the Commission has completed this task, it must take the measures required to implement these provisions.

42. The Court stresses the importance of choosing a basic accounting framework as a prerequisite for any decision regarding the keeping and presentation of the accounts. To this end, it would be beneficial to consult the work of international bodies with responsibilities in this area, a step which the Court recommended in Opinion No 4/97(12). In the form in which they are currently presented, the financial statements are of limited value to the user: for example, they do not distinguish between current and capital expenditure, or between intermediate and definitive payments, nor do they account for accrued accounts payable. These deficiencies could be overcome by the adoption of an accruals-based accounting framework, as foreseen by Article 70 of the current Financial Regulation.

43. Implementing an accounting and financial framework which is both consistent and rigorous is, however, a major operation. As well as choosing a basic accounting framework, it is necessary to define the objectives of the accounts and of the financial statements, the principles, rules and accounting methods which determine the rules for keeping the accounts and drawing up the financial statements, and the information contained therein. The timetable for drawing up the financial statements could be brought forward by doing away with additional periods (which are unnecessary once appropriations are no longer carried over and the procedures for transferring payment appropriations are relaxed), and their publication should comply fully with the principle of transparency.

External audit and discharge (Part One, Title VII, Articles 123 to 133)

44. The provisions included under this title essentially concern the Court's role as external auditor of the Community's finances. The Court considers that these provisions are in their rightful place in the Treaty and that they do not need to be repeated and explained in the Financial Regulation. The fact is that the repetition of certain provisions, in particular those dealing with the Court's role and its rights of access to information (in particular Articles 123, 125 (in part), 127 (in part), 129 and 130 (in part)), could be interpreted restrictively by certain bodies which are audited by the Court. The Court should, in all cases, be in a position to carry out its task without hindrance, pursuant to the provisions of the Treaty.

Provisions specific to the EAGGF-Guarantee (Part Two, Title I, Articles 134 to 140)

45. There is no need for a specific section for the EAGGF-Guarantee. Only Article 136(2) needs to be retained and this should be included in Article 70.

46. Most of the exemptions proposed by the Commission are explained by the continuing existence of a system of non-differentiated appropriations and by problems with procedures for charging payments to detailed budget headings. The fact is that EAGGF-Guarantee expenditure takes the form of refunds of expenditure declared by Member States which are initially disbursed outside the budget ("advances" consisting of provisional refunds), followed by budgetary adjustments.

47. These adjustments often require appropriations to be transferred before expenditure can be charged to the appropriate budget items. Furthermore, the level of detail currently utilised when amounts are charged to the budget leads in practice to unacceptable delays in recording the adjustments to budgetary payments.

48. The Commission's amendment to Article 21(1)(c) concerning transfers between chapters of operational expenditure should enable it to make the necessary transfers without having to wait for the budgetary authority's approval of transfer proposals at the end of the year. The requirement to seek approval from the budgetary authority for transfers between budget headings under the EAGGF-Guarantee is meaningless in a context where the expenditure is compulsory and the refunds to the Member States have already been made.

49. As regards the breakdown of declared expenditure, the current system requires the Member States to notify the Commission by the 10th of each month of all expenditure disbursed during the previous month. More detailed information for recording expenditure disbursed during the previous month in the Community budget must be sent to the Commission by the 20th of each month at the latest. For this reason and as the disbursed expenditure is taken into account for the EAGGF budget year, i.e. until 15 October, the Commission is in possession of the data sufficiently early to charge the amounts in question to the budget before the closure of the financial year(13).

50. Furthermore, if the Court's proposal in Article 19 to specify appropriations only by section, subsection, title, chapter and article (and not by item and sub-item) were adopted, the registration of expenditure by Member State, measure and financial year for management purposes would no longer affect the charging to the budget of the monthly advances paid to the Member States.

51. Notifications in respect of certain data may contain inaccuracies. As a result, adjustments may prove necessary, even after the accounts for a financial year have been closed. Nevertheless, such adjustments, provided they do not affect the reliability of the accounts, are recognised by generally accepted accounting principles.

52. As for EAGGF-Guarantee appropriations for rural development and the accompanying measures, these are multiannual measures for which the value of commitments entered into during a financial year is often different from the value of payments made during the same financial year. It is therefore inappropriate to specify in Article 135 that commitment appropriations are equal in value to payment appropriations and Article 170 (appearing in the transitional and final provisions) should be deleted.

Provisions specific to the Structural Funds (Part Two, Title II, Articles 141 to 145)

53. There is no need for a separate Title because the Commission's proposal contains very few derogations from the standard rules.

54. Article 143 concerning the "reconstitution" of commitment appropriations when commitments made in prior years are decommitted is unnecessary.

55. Article 144, giving the Commission the power to make transfers of appropriations between Structural Funds (where related to the same objectives), and Article 141(3) on the decentralised management of pre-accession structural and agricultural measures should be included in the appropriate place in Part One, Titles I and III.

56. The other articles are unnecessary because they either:

(a) state the evident fact that certain aspects of the management of the Funds are subject to the provisions of the "rules" governing the Structural Funds (specifically Regulation (EC) No 1260/1999) when these do not constitute exceptions to general rules (Articles 142(1), first indent, 142(2), 142(4), 145); or

(b) restate provisions in Part One (Article 142(1), second indent); or

(c) appear to be based on a misunderstanding. Article 142(3) says that "The treatment by the Member States of repayments of pre-financing payments and the implications for the amounts of contributions from the Funds shall be governed by the rules referred to in Article 141". The Regulation concerned, Regulation (EC) No 1260/1999, makes no reference to the reconstitution of payment appropriations.

Provisions specific to research (Part Two, Title III, Articles 146 and 147)

57. There is no need to create a specific Title for research. Exemptions from the standard provisions should be included in the relevant parts of the Financial Regulation (Article 146(1)(2) and (3) and Article 147(3); the others should be deleted as standard provisions cover the cases concerned (Article 146(2) and Article 147(1) and(2)).

Provisions specific to external measures (Part Two, Title IV, Articles 148 to 156)

58. There is no need for a separate Title because the Commission's proposal contains almost no derogations from the standard rules. There are some extensions to these rules in Part One which should be included in the appropriate Titles of that part. Article 153(1), providing that the implementing rules contain special provisions relating to the thresholds and arrangements for awarding external contracts, and Article 154, concerning participation in tendering procedures, should be included in Title IV of Part One (see Articles 100a and 100b). Article 150(2), concerning the assumption of full responsibility by beneficiary countries for Community funds paid to them under the decentralised management arrangements, should be inserted in Article 50 in Title III of Part One.

59. Articles 148 and 149 add little of substance to Article 50 and are therefore unnecessary.

60. Article 150(1) contains unrealistic and over-ambitious criteria which the Commission should evaluate before deciding to entrust management of actions under the rules of decentralised management to non-member country governments. Such criteria are not applied to Member State administrations before they are entrusted with shared management responsibilities. It seems inappropriate to lay down such criteria in the Financial Regulation. The provisions of Article 150(2) are adequate (see paragraph 58).

61. Article 151 is unclear and unnecessary. The fact that the Commission retains the responsibility to carry out checks, even where it has granted responsibilities under decentralised management, is already set out in Article 50(3).

62. Article 152 sets out the contractual instruments to be used for the implementation of external actions. This should be in the implementing rules. The fact that financing agreements with beneficiary non-member countries are to be treated as obligations to third parties should be set out in Article 72.

63. Article 152 provides that the individual contracts and grant agreements which implement financing agreements must be concluded by 31 December of year n+ 3(14), where n is the year of the budget commitment. This is based on the rules applied in the Phare programme, but such provisions are unsuited to current implementation practice in development aid because the maximum implementation period seems too short. This is a management issue already addressed in Article 71(3) by the requirement that each commitment should have a final date for implementation.

64. Article 153(2), providing that the procedures for awarding the contracts should be laid down in the financing agreements, contracts or grant agreements, should be transferred to Title IV of Part I.

65. Article 155, permitting the award of 100 % grants is a derogation from the standard rules on grants in Title V of Part One. The Court proposes that Article 102(1), which requires co-financing in the award of grants, and Article 106(1), which provides that a grant may not finance the entire administrative expenditure of the beneficiary organisation, should be omitted, rendering the derogation at Article 155 unnecessary.

66. Article 156 concerning the auditing of the accounts is not justified. To the extent that explicit provision for this should be in the Financial Regulation, it should be placed in Title VII of Part One, between Articles 126 and 127, or between Articles 127 and 128.

Provisions specific to the European Offices and to administrative appropriations (Part Two, Title V, Articles 157 to 168)

67. The Court recommends replacing both Titles (the first of which concerns the Office for Official Publications of the European Communities, the other the European Anti-fraud Office) by a single title for "European Offices". As these Offices are likely to increase in number(15), taking individual account of them in the Financial Regulation would require the Regulation to be revised each time an Office is created. Furthermore, it would be preferable for the Offices to observe similar rules.

68. As regards administrative appropriations, none of the exceptions envisaged is indispensable if differentiated appropriations are used for this type of expenditure. In the first year in which this new system of appropriations is implemented, provision will clearly have to be made for sufficient commitment appropriations to cover all decisions taken and legal obligations entered into by the institutions.

Transitional provisions (Part Three, Title I, Articles 169 and 170)

69. These provisions were examined at the same time as the provisions specific to the EAGGF-Guarantee (paragraphs 46 to 53).

Final provisions (Part Three, Title II, Articles 171 to 176)

70. The overall approach which the Court advocates is that of retaining only the main provisions in the Financial Regulation. Consequently, not only should the Financial Regulation empower the Commission to adopt implementing arrangements for all of these provisions but consultation in respect of these arrangements and the adoption thereof should also take place at the same time as the procedure for adopting revisions of the Financial Regulation. This measure would guarantee the chronological consistency of the applicable legislation in this area (which is all the more essential as the Financial Regulation itself would include only the basic provisions) and would provide the Council with a comprehensive overview of the rules which will ultimately apply.

71. If the Parliament and the Council employ theconsultation procedure when the Financial Regulation is being amended and if, after this procedure, Parliament issues a further opinion, the provision that the Court should be specifically consulted about financial regulations, if it is to be meaningful, requires the Court to be sent a copy of Parliament's opinion so as to enable it to make such additions to its own opinion as it may deem appropriate.

72. Rather than copy the standard general Financial Regulation, which is not necessarily suited to their needs, thefinancial regulations specific to the various Community bodies should be based on a common framework drawn up by the Commission after it has sought the opinion of Parliament, the Council and the Court.

73. The need for legality, consistency and unity in the applicable financial provisions, together with the need for them to be transparent and legible for users and managers, means that the number of exceptions to the rules specified in the Financial Regulation needs to be strictly limited and the sole exceptions allowed must be specified therein. Consequently, the exceptions described in the sectoral regulations should be rescinded.

CONCLUSIONS

74. The general thrust of the Commission's proposals on significant issues (notably methods of implementation, financial actors, internal auditor, procurement and grants) is considered to be satisfactory. However, modifications are required to ensure that the provisions are perfectly clear, precise, rigorous or flexible, as the case may be.

75. There is a need for further simplification by:

(a) further limiting the exceptions to general principles;

(b) confining many detailed provisions to the implementing measures;

(c) eliminating Part Two, which contains separate sections for various areas of expenditure.

76. The Court endorses the measures in the Commission's proposal aimed at rationalising the budget structure (general application of differentiated appropriations; elimination of negative expenditure), reducing certain exceptions to the budgetary principles of annuality and universality (eliminating supplementary periods, except for EAGGF-Guarantee; eliminating the making of appropriations available again, except for Structural Funds; eliminating the re-use of recoveries), and allowing borrowing solely to finance the acquisition of immovable assets. However, in the Court's view the rationalisation should have gone further: in particular the Court considers that the carrying-over of appropriations (paragraph 7), maintaining the supplementary period for EAGGF-Guarantee(paragraph 49), and making appropriations available again for the Structural Funds (paragraphs 54 and 56(c)) are not necessary.

77. In order to reflect therealityof Community transactions and its financial position:

(a) the basis for budgetary commitments needs to be clearly defined. All legal obligations entered into should be subject to the authorisation of the commitments budget. There should beno artificial annual tranches for commitments. It is not logical that the financial perspective should in effect fix a ceiling for annual commitments budgets. If the changes put forward by the Court are not adopted it would be better to opt for a single payments budget without commitment appropriations (paragraphs 6 and 27 to 31);

(b) "advances" paid out of the budget should be limitedto what is necessary for prefinancing. The real nature of budgetary payments, andthe degree to which advances have been used for expenditure at the level of final beneficiaries, should be disclosed in the annual financial statements (paragraphs 32 and 33);

(c) the Commission's proposal for greater autonomy to make transfers between appropriations for payment is reasonable and should be kept.Once legal obligations have been entered into the reality is that the payments budget must be adjusted to meet the legitimate claims of beneficiaries which are often not easily predictable (paragraph 10);

(d) thenegative reserveshould be dropped because it allows the adoption of a budget which exceeds the apparent total amount authorised (paragraph 14).

78. The provisions of the section on theaccounting and the financial statementsare inadequate. This is the one main area where the Court does not suggest a text to be inserted in the regulation, in which there are significant omissions. The provisions proposed by the Commission should be revised before the Council takes a final decision (paragraphs 41 to 43).

79. The provisions on the powers and rights of the external auditor are superfluous as the provisions of the Treaty are adequate in themselves (paragraph 44).

This Opinion was adopted by the European Court of Auditors in Luxembourg at the Court meeting of 8 March 2001.

For the Court of Auditors

Jan O. Karlsson

President

(1) Commission document ref. 2000/203 (CNS) - COM(2000) 461 final.

(2) Commission working document concerning the recasting of the Financial Regulation(SEC(1998) 1228 final, 22.7.1998).

(3) OJ C 57, 23.2.1998, p.1.

(4) Paragraph 17 of Court Opinion No 4/97.

(5) Paragraph 15 (first to fourth indents) of Court Opinion No 4/97 and paragraphs 1.1 to 1.32 of the Annex.

(6) Paragraph 31 of Court Opinion No 1/2001 (OJ C 55, 21.2.2001).

(7) Paragraphs 1.20 and 1.21 of the Annex to the Court's Opinion.

(8) Paragraph 16(c) of Court Opinion No 4/97 and paragraphs 5.1 to 5.17 of the Annex.

(9) Court Opinion No 1/2000 (OJ C 327, 17.11.2000, p.1).

(10) Paragraph 11 of Court Opinion No 1/2000.

(11) Council Regulation (EC, ECSC, Euratom) No 2548/98 (OJ L 320, 28.11.1998, p.1).

(12) Paragraph 15 (sixth and eighth indents) and paragraph 16(b) of Court Opinion No 4/97 and paragraphs 1.33 to 1.48 of the Annex.

(13) As regards public-storage operations, the deadline for making adjustments is 20 December. As the financial year for this category of expenditure closes on 15 September, this deadline for making final adjustments hardly seems justified.

(14) Except for contracts for auditing and evaluation, which may be concluded later.

(15) As shown by the creation of the new Office for the Management of External Aid (EuropeAid) at the beginning of 2001.

Opinion of the court

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