Amended proposal for a COUNCIL REGULATION amending the Financial Regulation and separating the internal audit function from the ex ante financial control function (Article 24, paragraph 5, of the Financial Regulation)

(presented by the Commission pursuant to Article 250 (2) of the EC Treaty)

EXPLANATORY MEMORANDUM

1. On 30 May last the Commission adopted a proposal for a Regulation (COM (2000) 341 final amending the Financial Regulation of 21 December 1977 and separating the internal audit function from the ex ante financial control function (Article 24, paragraph 5 of the Financial Regulation). This specific proposal in no way affects the proposal for the recasting of the Financial Regulation adopted by the Commission on 26 July 2000 (COM (2000) 461 final), which thoroughly overhauls the traditional centralised ex ante system for the control of financial transactions.

The European Parliament and the Court of Auditors both gave broadly favourable opinions on this proposal on 5 October 2000, i.e. very quickly, so that this essential change to the Financial Regulation can be adopted as soon as possible.

The European Parliament and the Court of Auditors both agree with the Commission about the need to separate as quickly as possible the functions of ex ante control and internal audit, both of which are currently assigned to the financial controller by the second sentence of the fifth paragraph of Article 24 of the Financial Regulation. This separation is essential to stop any potential conflict of interests and to establish a better balance and enhanced effectiveness of the two functions.

2. The European Parliament's opinion amends the Commission's proposal on four points:

* Addition of an article on the production by the financial controller of an annual report for the budgetary authority (amending the second paragraph of Article 24 Fin Reg).

* Redrafting of the new Article 24a of the Financial Regulation on the internal auditor to

- develop the missions of the internal auditor and specify that they are incompatible with those of authorising officer or accounting officer,

- introduce flexibility for the institutions other than the Commission, the European Parliament and the Council,

- require the publication of an annual internal audit report and exchanges of good practices between institutions.

* Addition of a recital and an Article 2a to the proposed Regulation to restate that ex ante controls are retained with the necessary resources and independence for these controls to be performed.

3. The Court of Auditors suggested the following amendments:

* Statement in the Financial Regulation of the principle of an independent audit function, leaving the institutions the choice of how it should be organised (designation, detailed objectives of the mission, extent of the work), in compliance with the relevant international standards (amendment of the proposed Article 24a).

* Stipulation of the separation of the functions of internal auditor, financial controller, authorising officer and accounting officer (amendment of fourth paragraph of Article 21).

* Stress on the independence of the internal auditor, who is accountable only to the institution which appointed him (amendment of the proposed Article 24a).

* Identification of the provisions on the internal auditor in a separate title.

4. Broadly speaking the Commission can accept these amendments.

It would seem reasonable to make this separation compulsory only for the European Parliament, the Council and the Commission. These are the three biggest institutions in terms of total appropriations, number of transactions and of staff involved in the management and control of budget implementation.

Two important points must then be made in the Financial Regulation concerning the independence of the internal auditor: first, like the financial controller today, he will report directly only to the institution which appointed him, and second, this function must be incompatible with that of authorising officer or accounting officer.

For the sake of transparency, the Commission also proposes following Parliament's opinion on the transmission to the other institutions each year of a report on ex ante control and internal audit. This will facilitate the exchange of good practices between the institutions.

It is also necessary to clarify the timetable for the current reforms by stipulating that this proposal in no way alters the ex ante control powers of the financial controller. He will continue to perform his control duties in accordance with Article 24 of the Financial Regulation without prejudice to the position taken by the Commission in the White Paper, in particular as concerns the abolition of centralised ex ante controls, which is dealt with in the proposal for recasting the Financial Regulation.

For that purpose the financial controller must be given the necessary resources and independence to perform his duties. These guarantees are already provided for in Articles 37 and 39 of the Implementing Rules, but they should also be specified in the Financial Regulation itself.

5. The Commission has not, on the other hand, incorporated the following three amendments in its amended proposal:

* First, if the internal audit function is separate from the ex ante control, an official or other servant must be appointed to take charge of it in each institution. To ensure that auditors have access to all staff, files and places of employment of the institutions, the idea of externalising the internal audit to private auditors, as suggested by the Court of Auditors, does not seem practicable. This is without prejudice to the possibility for the institutions to make use of external audit firms to perform specific audit tasks in the full respect of the principle of confidentiality.

* Second the fast-track procedure for a specific amendment to the Financial Regulation is not the appropriate method for expanding the internal audit missions as proposed by the European Parliament. The Implementing Rules will supplement the Financial Regulation on this point pending the development of this new function in the proposed recasting (COM(2000) 461 final of 26/7/2000).

* There is no doubt that the internal auditor is not a financial actor within the meaning of the Financial Regulation. The proposed recasting does in fact have a separate chapter for the provisions concerning the internal auditor, as suggested by the Court of Auditors, but changing the structure of the Financial Regulation is not feasible as part of this specific proposal.

6. The Commission has accordingly produced the amended proposal which it is sending to the Council for adoption as soon as possible in accordance with Article 250 of the Treaty.

2000/0135 (CNS)

Amended proposal for a COUNCIL REGULATION amending the Financial Regulation and separating the internal audit function from the ex ante financial control function (Article 24, paragraph 5, of the Financial Regulation)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 279 thereof,

Having regard to the Treaty establishing the European Coal and Steel Community, and in particular Article 78h thereof,

Having regard to the Treaty establishing the European Atomic Energy Community, and in particular Article 183 thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the European Parliament,

Having regard to the opinion of the Court of Auditors 4 3 2 1,]]]] [5]

[1]

[2]

[3]

[4]

[5] OJ C, p.

Whereas:

(1) The accumulation of the internal audit function and the control ex-ante by the financial controller under Article 24, paragraph 5, second sentence of the Financial Regulation may give rise to a dispersal of the two functions without necessarily ensuring the right balance between the two.

(2) Pending the adoption of the Financial Regulation, the internal audit function should be separated from the financial controller's other functions as soon as possible. The result of this would be that the financial controller will continue to fulfil his present functions, including ex ante control, but not that of internal audit, which will be performed by an internal auditor independent of the financial controller.

(3) Given, however, the volume of budget appropriations, the staff responsible for management and control and the limited number of transactions of certain European institutions (within the meaning of the Financial Regulation), which are therefore subject to fewer management risks, this separation should be compulsory only for the European Parliament, the Council and the Commission.

(4) The internal auditor will enjoy the same benefits and prerogatives as those granted to the financial controller in Article 24 of the Financial Regulation and will report, as does the financial controller, to his institution, and to it alone.

(5) In order to enhance the transparency of budget implementation and to facilitate the exchange of good practices between institutions, each institution will send to the other institutions the annual report drawn up by the financial controller and the annual internal audit report illustrating the main lessons to be learned from ex ante control and internal audit in the previous year.

(6) All the institutions in respect of their own sections of the budget, shall ensure that the financial controller has the resources and independence required to perform his ex ante control functions in accordance with Article 24 of the Financial Regulation.

HAS ADOPTED THIS REGULATION:

Article 1

Article 24 of the Financial Regulation is amended as follows:

1. The second paragraph is replaced by the following:

"He shall carry out his duties in accordance with the principles laid down in Article 2 and the provisions of Article 22(3). He shall report to his institution on any problem he uncovers regarding the management of Community finances. He shall produce an annual report on his work which his institution shall transmit to the other institutions.";

2. The fifth paragraph is replaced by the following:

"Monitoring shall be carried out by that official by means of inspection of the files relating to expenditure and revenue and, if necessary, on the spot."

Article 2

An Article 24a is added:

"Article 24a

1. The European Parliament, the Council and the Commission shall each appoint an internal auditor who is independent of the financial controller. He shall be appointed in each institution in the same way as the financial controller and, in order to be able to exercise his duties, shall have access to the same information as the financial controller as set out in the second sentence of the fourth paragraph and the fifth and sixth paragraphs of Article 24. In the performance of his duties the internal auditor shall be accountable only to the institution which appointed him; he shall report directly to that institution and shall enjoy the same guarantees as are granted to the financial controller in accordance with the second, eighth and ninth paragraphs of Article 24.

The internal audit shall include an evaluation of the effectiveness of the management and control systems designed to ensure the regularity of operations. These duties shall be exercised in accordance with the implementing rules provided for in Article 139.

The internal auditor may be neither authorising officer nor accounting officer.

2. The Court of Justice, the Court of Auditors, the Economic and Social Committee, the Committee of the Regions and the Ombudsman may each appoint an internal auditor in accordance with paragraph 1.

If no internal auditor is appointed, the financial controller shall perform the institution's internal audit in accordance with the implementing rules provided for in Article 139.

3. Each institution shall send to the other institutions its annual internal audit report showing the number and nature of the audits performed, the main recommendations to which they have given rise and the action taken on these recommendations.

4. Each institution shall consider whether the recommendations made in the internal audit reports of the other institutions can apply to its own management and control systems."

Article 3

This Regulation shall enter into force on the seventh day following its publication in the Official Journal of the European Communities.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, [...]

For the Council

The President