Report

on the financial statements of the European Agency for the Evaluation of Medicinal Products concerning the financial year 2001, together with the Agency's replies

(2002/C 326/04)

CONTENTS

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THE COURT'S OPINION

1. This report is addressed to the Management Board of the European Agency for the Evaluation of Medicinal Products in accordance with Article 57(10) of Council Regulation (EEC) No 2309/93(1).

2. The Court has examined the financial statements of the European Agency for the Evaluation of Medicinal Products for the financial year ended 31 December 2001. In accordance with Article 57(7) of Council Regulation (EEC) No 2309/93, the budget was implemented on the responsibility of the Director. This responsibility includes the drawing up and presentation of the financial statements(2) in accordance with the internal financial provisions adopted on the basis of Article 57(11) of Council Regulation (EEC) No 2309/93. The Court of Auditors is required under Article 248 of the Treaty establishing the European Community to examine these accounts.

3. The Court carried out the audit in accordance with its auditing policies and standards, which have been adapted from generally accepted international auditing standards to reflect the specific nature of the Community context. The Court carried out such tests of the accounting records and applied such other procedures as it deemed necessary in the circumstances. Through this audit the Court obtained a reasonable basis for the opinion expressed below.

4. This examination has enabled the Court to obtain reasonable assurance that the annual accounts for the financial year ended 31 December 2001 are reliable and that the underlying transactions, taken as a whole, are legal and regular.

MAIN OBSERVATIONS

Implementation of the budget

5. The implementation of the appropriations for the financial year 2001 and of the appropriations carried over from the previous year is set out in Table 1(3).

6. Since 1998, a significant proportion of the subsidy paid to the Agency by the Commission has been carried over every year: 5,6 million euro at the end of 1998, 8 million euro at the end of 1999 and 7,2 million euro at the end of 2000. In 2001 7,9 million euro of the 14,7 million euro subsidy provided for in the budget was carried over, with just one payment of 6,8 million euro having been made on 17 December 2001. The fact that this situation persists means that the Commission and the Agency should jointly examine the method for determining the amount of this subsidy.

7. The final appropriations for the financial year amounted to 65,9 million euro, of which 58,0 million euro was committed. 24,3 million euro was committed out of the operating appropriations (Title III), which amounted to 28,6 million euro. Payments made against the operating appropriations for the financial year amounted to 17,7 million euro, of which 8,1 million was carried over to the following financial year (an automatic carry-over of 4,3 million and a non-automatic one of 3,8 million) and 2,8 million was cancelled. The cancellation figure is due partly to a decrease in the Agency's activities, following a fall in the demand for its services, which was reflected by a fall in its actual revenue, compared with what had been estimated.

8. The commitment appropriations carried over to 2002 relate mainly to 13,5 million euro of operating appropriations carried over, which constitutes an increase in relation to the previous financial year. This increase in carry-overs demonstrates the need for the Agency to improve the quality and monitoring of the programming of its activities.

9. The appropriations carried over from the financial year 2000 amounted to 11,8 million euro, 10,6 million of which was validated, and the balance was cancelled.

Financial statements

10. Tables 2 and 3 set out in summary form the revenue and expenditure account and balance sheet published by the Agency in its Activity Report for the financial year 2001. Contrary to the current regulations(4), the Agency included in its revenue 10,7 million euro due in respect of the financial year 2001. This problem of presentation does not affect the reliability of the accounts, however.

11. The Agency does not depreciate its fixed assets. It should apply the valuation and depreciation rules adopted by the Commission(5) so that the values entered in the balance sheet provide a faithful picture of the goods comprising its assets.

12. The Agency frequently receives in advance lump sums for examinations which its customers are considering requesting. However, the rules for determining the applicable fees are complex and can give rise to different interpretations. As a result, it is difficult to reconcile the amounts customers have paid and the fees actually due. This situation results in delays in drawing up the corresponding recovery orders. For example, on 31 December 2001 recovery orders in respect of 2,6 million euro had still not been drawn up. The Agency should give its customers the option of opening deposit accounts with the Agency.

Application of financial provisions

13. No reasoned decision was taken by the director concerning a fee reduction of 10000 euro per file in the case of 28 files (i.e. a total of 280000 euro), as is required by Article 9 of Council Regulation (EC) No 2743/98 of 14 December 1998(6).

14. In the case of 25 of the 28 files, the decision concerned fees that had already been received in 2000. It has proved difficult to transpose this at the accounting level, because the SI2 system is not designed to deal with such cases. In order to regularise the situation, a "negative" recovery order for 280000 euro was issued (250000 euro of which was entered in an extra-budgetary account).

15. The Agency handles the annual fees manually. In December 2001, these fees related to 195 products, approximately 80 % of which were for human medicine and 20 % for veterinary. There is a note from the Agency's director requesting that recovery orders be issued on the fifteenth of month "n" for products for which renewal fees were due in month n+2. As has been found during previous audits, this deadline was not respected in the majority of the annual fee files examined.

16. In 2000, the sum of the unpaid invoices relating to inspection work amounted to 330000 euro, i.e. 26 % of forecast revenue. In 2001, the total value of the unpaid invoices (before 1 November 2001) was 270000 euro, or 38 % of forecast revenue. Coordination between the accounting and administrative departments is provided for in the inspections procedure and should be improved.

17. A contract for an amount of 236640 euro was signed between a consultant and the Agency(7) on 31 December 2001. The chronology of the implementation of the procedures that culminated in the signature of this contract clearly demonstrates that the intention was to utilise the 2001 appropriations before they lapsed(8) and to finance work, which patently could not be carried out before 2002, by means of appropriations carried over from 2001 to 2002. This practice is incompatible with the principle concerning the annual nature of the budget.

18. Furthermore, some of the provisions of the contract are unsatisfactory: after describing the technical aspects of programming, the contract should make a link between the payment of invoices and project implementation whereas all that is provided is a schedule of payments to be made.

Purchase of goods and services

System for estimating requirements

19. The Agency's workload is estimated each year at the time the budget and work programme are drawn up, which enables the following to be determined:

- expected revenue;

- requirements concerning staff and premises, as well as current purchases;

- the list of informatics projects to be carried out.

20. The preparation and planning of purchases are left to the initiative of the managers of the Agency's various sectors of activity. The proposed purchasing procedure is examined by the Advisory Committee on Procurements and Contracts (ACPC).

21. However, these forecasts are indicative because, firstly, the Agency's revenue varies and, secondly, insufficient account is taken of the constraints on the purchasing procedures. Owing to uncertainty as to the volume of revenue(9), the managers tend to wait until the end of the year before submitting their purchase requests. For the period to 2000-2001, 65 % of the contracts were signed in the second half of the year and 26 % of those were signed in the last two months. This concentration of contract signature at the end of the financial year cannot be justified on the basis of varying revenue, since a considerable percentage of revenue(10) is made up of a subsidy from the Commission. The Agency should ensure that the system for estimating its requirements is improved.

22. The need to improve the system for estimating requirements can be illustrated by one project, for an amount of USD 236000, to extend a joint informatics development with the World Health Organisation, the first phase of which was launched at the beginning of 2000 and completed in June 2001. The proposal to extend this project, over the period from July 2001 to June 2002, received a positive opinion from the ACPC on 19 July 2001. The commitment proposal(11), which was drawn up on 13 November 2001, after a supplementary budget had been adopted, was finally approved by the Financial Controller on 20 December 2001, after some of his remarks had been taken into consideration. A "Memorandum of Understanding", instead of a contract, was signed on 23 January 2002. In the meantime, the service provider continued to provide its services in the second half of 2001 in the absence of both a valid contract and sufficient appropriations to finance its work.

Programming of purchases

23. Purchases are not programmed. As a result, in 2000 and 2001, 51 % of the administration and informatics sections' contracts were concluded on the basis of private treaty agreement, frequently on the grounds of utmost urgency.

24. If a purchasing schedule were to be drawn up covering the time from when the file is submitted to the ACPC up to the date on which delivery of the goods or services is sought, there would be less recourse to private treaty agreements and purchasing management would improve.

Choice of procedure

25. The choice of purchasing procedure is still unduly influenced by the need for urgency as a result of the lack of programming and it is not guided, as it should be, by a concern to exercise an optimal purchasing policy in terms of sound management.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 25 and 26 September 2002.

For the Court of Auditors

Juan Manuel Fabra Vallés

President

(1) OJ L 214, 24.8.1993, p. 18.

(2) As required under Article 57 (9) of Council Regulation (EEC) No 2309/93, the accounts for all the Agency's revenue and expenditure for the financial year 2001 were drawn up on 27 March 2002 and forwarded to the Agency's Management Board, the Commission and the Court of Auditors. The Court received these accounts on 5 April 2002. A summarised version of these financial statements is presented in the tables attached to this report.

(3) All the tables in this report have been drawn up on the basis of the most exact values possible for the data used. For presentation purposes, the figures were rounded up or down, which may produce minor differences in the totals. A dash indicates a non-existent or nil value and 0,0 indicates a value below the rounding threshold.

(4) Article 15 of Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 (OJ L 130, 30.5.2000, p. 8).

(5) Commission Regulation (EC) No 2909/2000 of 29 December 2000 (OJ L 336, 30.12.2000, p. 75).

(6) OJ L 345, 19 december 1998, p. 7.

(7) Reference No C/01/2001.3.

(8) Commitment No SI2.8418, for a sum of 203508 euro, representing 85 % of the contract amount, was signed on 19 December 2001.

(9) The Agency is only able to make reliable revenue estimates in the case of new medicines submitted to it, which account for some 10 % of the applications addressed to it.

(10) 30 % in principle.

(11) Reference No SI2.8217.

Table 1

Implementation of the budget for the financial year 2001NB:

The totals may contain discrepancies due to the effects of rounding.

Source:

The Agency's data. These tables summarise the data provided by the Agency in its own financial statements.

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Table 2

Revenue and expenditure account for the financial years 2001 and 2000

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NB:

The totals may contain discrepancies due to the effects of rounding.

Source:

The Agency's data. These tables summarise the data provided by the Agency in its own financial statements.

Table 3

Balance sheet as at 31 December 2001 and 31 December 2000NB:

The totals may contain discrepancies, due to the effects of rounding.

Source:

The Agency's data. These tables summarise the data provided by the Agency in its own financial statements.

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The Agency's replies

4. The Agency welcomes the Court's concluding statement that the examination of the Agency's accounts for the budget year 2001 confirms that the annual accounts are reliable and that the underlying transactions, taken as a whole, are legal and regular.

The Agency also recognises that the Court has not only evaluated in depth the full range of financial activities of the Agency but also the budgetary and accounting structure and procedures.

6. It has to be noted that the activities of the Agency are financed by fees payable by the applicants for marketing authorisations (approximately 75 % of revenue) and a Community contribution (approximately 25 %).

The majority of the fees are paid in advance of the applications being submitted and this means the Agency always maintains a positive cash flow.

In 2002 the Agency and the Commission discussed this issue and agreement has been reached that the balance of past years shall be transmitted and that from 2002 onwards the annual contribution shall be paid in three instalments (March, July and October). In October of each year, a meeting between the Agency and the Commission will take place in order to establish the real needs of the Agency until the end of the budget year.

7. It has to be taken into account that the Agency cannot forecast with complete accuracy the amounts eventually received for fee income in any one year, in particular since the fee income has to be estimated at the end of year no 2 and revised at the end of year no 1. The estimated fee income for the budget year 2001 was EUR 45,7 million and actual fee revenue was EUR 42,7 million.

8. The amount of carry-forwards is to a considerable extent a result of the fact that the end of the year is often a particularly busy period for the pharmaceutical companies which, as a consequence, leads to a higher number of submissions and fee payments to the Agency. The evaluation activities related to both the applications and the fees are carried out during the course of the following year.

A major part of the carry-forwards provide for the payments due to national competent authorities (NCAs) for the evaluation work done by the rapporteurs and co-rapporteurs (normally 50 % of the application fee). These amounts are paid on completion of the rapporteur/co-rapporteur evaluation work and the receipt of the respective reports between 70 and 90 days after the fee has been received by the Agency.

9. The statement can be confirmed. It should, however, be noted that carry-forwards contain an element of estimation as to the final amounts payable, e.g. fitting out of the premises etc. The Agency will continue its efforts to ensure that accrued liabilities are accurate within acceptable material levels.

10. The issue of accounting for revenue by the Agency will be reviewed in the context of the recasting of the Financial Regulation. However, at present the Agency's management believes the accounting policies used correctly reflect the financial results of the Agency. Supplementary information on cash collected and payments made is given in the statement of revenue and expenditure in accordance with the Financial Regulation.

11. During 2002 a Framework Financial Regulation for all EU Agencies, including the European Agency for the Evaluation of Medicinal Products, will be decided. It is planned to introduce depreciation in 2003 in accordance with the instructions to be issued by the Commission's Accounting Officer.

12. The amount in question of EUR 2,6 million concerns fees received in advance of the official start of the evaluation procedure, which is when the recovery order is prepared. For recurring operations where fees are payable in advance, the Agency will evaluate with the customers the feasibility of opening a deposit account.

13. This issue was a very specific and exceptional situation based on imperative public health grounds. The absence of financial incentives to facilitate implementation of Community measures could have led to a series of products being taken off the market, with unacceptable consequences in terms of public health, in particular treatment disruption for patients.

In the specific case, the Committee responsible has given its support to the approach chosen and the Management Board was informed and did not raise any objections. The Agency will, however, make every effort so that the financial rules and regulations are fully respected in the future.

14. Given the constraints of the budgetary accounting system SI2 it is, as the Court highlights, difficult to introduce the subject type of transaction into the system. The solution the agency has chosen on this issue was dictated by the urgency of the matter. The Agency will however consider more adequate ways of settlement should such a situation occur again.

15. Appropriate steps have been taken to ensure that recovery orders for annual fees are issued on time.

16. The collection of invoices for inspections is in certain cases complex as applicants, even though they are legally obliged to pay within 30 days of the invoice date, often try to delay payment until the inspection has taken place. Improved procedures have been put in place to monitor the collection of inspection fees.

17. The subject contract was essential to the smooth functioning of the EudraVigilance system. It had been expected to have both the contract and major parts of the work completed by a working group separate from EudraVigilance prior to December 2001, but due to unforeseen delays and in order to set the project in train as soon as possible, the signing of the contract and the execution of the works fell into separate budget years. The Agency will seek to avoid such schedules in the future.

18. The work of the contractor is subject to weekly review. The contractor's timesheets, which are signed as evidence not only of attendance at the Agency in accordance with the terms of the contract, but also of satisfactory progress, support the periodic payments made in accordance with the payment schedule.

The Agency will set up a procedure in order to ensure that contracts will not only contain a schedule for payments but also a schedule for the implementation of agreed actions and it will be assured that the last payment will only be made after the final delivery of goods and/or services.

19. The requirements with regard to additional office space, refurbishment, etc. are detailed in an internal budget document which lists each item of expenditure linked, where appropriate, with contract details.

20. A list of proposed tenders is prepared at the beginning of the year within the sector and prior notices are drawn up and published in the Official Journals. All tender notices are submitted to the ACPC for opinion before publication.

21. The reason why many of the contracts are signed later during the year is that a project may take several months to prepare. The subsequent tender procedure can also take several months. So projects commence at the beginning of the year but often contracts cannot be signed until September or October. Given that at least the Community contribution will in future assure a reliable source of income through three instalments agreed with the Commission (see point 6) it should be possible to spread expenditure more evenly over the year.

22. Negotiations between the Agency and the World Health Organisation (WHO) on an extension of the cooperation on Siamed had extended beyond the expiry date of the initial contract. This was mainly due to the fact that the WHO insisted on a different formula regarding the sharing of the cost, i.e., the Agency had to cover about two thirds of the costs.

The procedure surrounding this project has since led to the creation of the position of a contract manager in order to follow up more closely contractual relations with third parties.

23 and 24. The reason that a number of contracts within Administration and IT are concluded by "entente directe" is that certain companies, e.g. the supplier of telecommunications systems, only permit the installation of their particular brand of hardware and software. Failure to comply may render the maintenance contract null and void.

25. It is agreed that the choice of procurement procedures is often determined by urgencies. This situation is partly due to the difficulties the Agency faces with the estimation of demand during a given budget year. The Agency will make an effort to strengthen its procedures of forecasting and budget planning.