Special report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994 together with the replies of the Commission, the Parliament, the Council, the Court of Justice, the Economic and Social Committee and the Committee of the Regions
Date: 1995-10-26
Institutions: European Court of Auditors
Subjects: activity report, auditing, balance sheet, budgetary control, financial year, general budget (EU)













EUR-Lex - 31995Y1230(08) - EN






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31995Y1230(08)

Special report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994 together with the replies of the Commission, the Parliament, the Council, the Court of Justice, the Economic and Social Committee and the Committee of the Regions  


Official Journal C 352 , 30/12/1995 P. 0011 - 0092 





Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1994 together with the Commission's reply, the Parliament's reply, the Council's reply, the Court of Justice's reply, the Economic and Social Committee's and the Committee of the Regions' replyTABLE OF CONTENTS  Paragraph reference1. The conditions governing the production of the DAS 1.1 - 1.44The Court's mandate 1.3 - 1.4The accounts and operations covered by the DAS 1.5 - 1.8The scope and limits of the DAS 1.9 - 1.26The Court's auditing standards and methodology 1.27 - 1.442. Carrying out the audit 2.1 - 2.22The constraints affecting the auditing work 2.1 - 2.10The audit work carried out 2.11 - 2.223. The audit findings 3.1 - 3.151General conclusion 3.1The reliability of the accounts 3.2 - 3.100The legality/regularity of the underlying transactions 3.101 - 3.1514. Lessons to be drawn from the Statement of Assurance 4.1 - 4.17The DAS audit results concerning the underlying transactions in respect of expenditure 4.1 - 4.4Implications concerning the quality of the Community systems of financial administration 4.5 - 4.8Remedial action required 4.9 - 4.17ANNEXES: PageAnnex I:  Evaluation of the financial impact of the serious formal errors of legality/regularity concerning commitments 49Annex II: Brief description of the serious formal errors of legality/regularity concerning the commitments 50Annex III: Evaluation of the financial impact of the substantial serious errors of legality/regularity concerning the payments 51Annex IV: Brief description of the substantial serious errors of legality/regularity concerning the payments 52Annex V: Evaluation of the financial impact of the serious formal errors of legality/regularity concerning the payments 55Annex VI: Brief description of the serious formal errors of legality/regularity concerning the payments 56Annex A: Charts and diagrams Nos I to VIII 57CHAPTER 1 The conditions governing the production of the DAS1.0. TABLE OF CONTENTS Paragraph referenceIntroduction 1.1 - 1.2The Court's mandate 1.3 - 1.4The legal bases 1.3The Court's general objectives 1.4The accounts and operations covered by the DAS 1.5 - 1.8The scope and limits of the DAS 1.9 - 1.26A global assurance covering all of the accounts and underlying transactions 1.9The DAS and other types of audit 1.10 - 1.16The DAS and the audit of sound financial management (SFM) 1.17 - 1.19The DAS and the exposure of deliberate irregularities 1.20 - 1.23The audit of own resources based on the GNP and VAT 1.24 - 1.26The Court's auditing standards and methodology 1.27 - 1.44An audit covering all of the accounts and operations for the financial year 1.27An experimental method 1.28The assessment of the systems 1.29 - 1.31Direct auditing of the underlying transactions 1.32 - 1.35The statistical sampling method 1.36 - 1.37The criteria selected by the Court 1.38The definition and treatment of errors 1.39 - 1.43Other auditing activities 1.44INTRODUCTION1.1. Following the entry into force of the Treaty on European Union on 1 November 1993, this is the Court's first Statement of Assurance (hereinafter referred to as the 'DAS` ()) concerning the reliability of the accounts and the legality and regularity of the underlying transactions for the financial year 1994. For this reason the Court deemed it expedient to describe, in this introductory part, the approach and methodology used in the audit work underlying the DAS in an adequately detailed manner so that the results of its audits and its conclusions can be understood.1.2. The Court is moreover continuing to produce its Annual Report and other special reports for the consideration of the Council and Parliament in the context of the discharge procedure. The Annual Report on the financial year 1994 was published in Official Journal of the European Communities C 303 of 14 November 1995.THE COURT'S MANDATEThe legal bases1.3. Pursuant to the Treaties (), the Court of Auditors of the European Communities (hereinafter referred to as 'the Court`) has examined the accounts and underlying transactions for the financial year 1994 concerning activities financed from the European Union's general budget so as to submit to the European Parliament and the Council a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of these operations ().The Court's general objectives1.4. The Court's objective was to be in a position to formulate an opinion, on the evidence of the audit work it had done, with regard to the following:- whether the accounts, i.e. the consolidated revenue and expenditure account and balance sheet, are globally reliable, in the sense that they provide an accurate picture of the Community's assets, the financial position and the outcome of operations for the financial year ended 31 December 1994, in accordance with the provisions of the Treaties, the Financial Regulation and the provisions for the implementation thereof, as well as with generally accepted accounting principles where they are applicable to the public sector,- whether the underlying transactions were generally legal and regular with respect to all of the legal provisions applicable.THE ACCOUNTS AND OPERATIONS COVERED BY THE DAS1.5. The accounts audited are those summarized in Volume IV (containing the consolidated revenue and expenditure account and financial balance sheet, as well as the explanatory notes) of the documents submitted by the Commission to the discharge authorities and, on 28 April 1995, to the Court of Auditors ().1.6. The DAS covers the consolidated accounts for all of the activities covered by the European Union's general budget, which encompasses all of its revenue and expenditure. The Commission is required by Articles 78, 80 and 81 of the Financial Regulation governing the general budget of the European Communities () to draw up volume IV of the Communities' accounts, to which the DAS relates (), and Volumes II and III, which contain detailed information. These accounts are not published. Charts and diagrams Nos I to VIII in Annex A () summarize the principal budgetary implementation data recorded in these accounts for the financial year 1994.1.7. The DAS covers all of the accounts and all of the underlying transactions, down to the level of final taxpayers and beneficiaries.1.8. The implication of the DAS is that the Court is to express its opinion on the substance of the accounts, of the revenue and expenditure, and of the specific operations related thereto. Therefore, as regards expenditure, the Court has selected a definition of 'underlying transaction` which leads it to the conclusion that its audit powers extend as far as the level of the final beneficiary of Community funds, and include, where necessary, an audit of the material aspects of the operations financed. As regards revenue, the situation differs in that there are limitations on the audits that may be carried out at the level of the tax-payer. As regards traditional own resources, the audit does not extend to material operations, but only to the supporting documents relating to the establishment of the amounts due by taxpayers ().THE SCOPE AND LIMITS OF THE DASA global assurance covering all of the accounts and underlying transactions1.9. As required by the Treaty, the DAS is global in nature: it is not intended to produce a specific assessment or arrive at a quantified conclusion on any particular operational or geographical area of Community activity.The DAS and other types of audit1.10. The DAS applies to the 1994 accounts as they stand at present. The transactions belonging to the areas audited by the Court during the production of the DAS are likely to be subjected to further verification by other authorities, on the basis of the current regulations, particularly during the clearance of the EAGGF-Guarantee accounts.1.11. The transactions underlying the accounts audited may be checked again at a later date by various Commission departments and, in certain cases, by the Member States, which may lead to a large number of corrections being made in future financial years which will be taken into account at the time they are made. The most significant of these corrections, in volume terms, are those made, sometimes rather late, as a result of the procedure of clearing the EAGGF-Guarantee paying agencies' accounts. Corrections are not confined to this area, however, because they may occur in all areas (Own Resources, Structural Funds, Research, etc.). The present volume of errors concerning the underlying transactions which have been identified within the context of the DAS may give some idea of the scale of the corrections yet to be made. The possibility of future corrections should not cast doubt on the intrinsic value of the assessment task carried out by the Court in connection with the DAS: it is in fact normal and desirable that such corrections should be made and taken into account by the departments and authorities involved during the financial years in which they arise.1.12. Certain results from the work of other auditors have identified cases of irregularity and anomalies which the Court cannot take over as they are, in the context of the statistical method used for the DAS, but which it does take into account in its final assessment, especially as regards the traditional own resources.1.13. Some of this other work leads to the identification of transactions in respect of which the aspects of legality and regularity, or the question of the correct entry in the accounts, pose a problem for one reason or another, but do not result in the necessary amending adjustments being made immediately (accounting adjustments, recoveries, etc.). Examples are cases of fraud and irregularities notified by the administrations in Member States (see the table in paragraph 3.110 for further information), or anomalies detected by the Commission's Financial Controller during his inspections.1.14. These presumed irregular transactions are not always clearly identified or quantified, and frequently relate to previous financial years, which cannot necessarily be clearly distinguished. Nevertheless, for one reason or another, they are likely to affect the legality and regularity of the underlying transactions and the reliability of the 1994 accounts. The Court believes that it is rather to the Community system's credit that they have been identified, but it is concerned about the slowness of the follow-up of these matters (unsatisfactory presentation of the accounts, inefficient recovery procedures, etc.). All the same, this information on possible cases of irregularity also constitutes a significant indicator of the volume of irregularities at the level of the underlying transactions.1.15. The Court has examined the extent to which the proportion of this information that results from the work of other auditors and concerns irregularities detected through audit procedures that comply with generally accepted auditing standards () generally corroborates the findings of its own work, which relates exclusively to the accounts and transactions for the financial year 1994. Nevertheless, the DAS is based solely on the findings of the Court's work. This is carried out in accordance with the Court's evaluation criteria, because the conditions under which it could rely on other auditors' work have not yet been fulfilled. Moreover, the information available concerning this other work, which often relates to previous financial years, often lacks the necessary level of accuracy. Furthermore, the findings of such work cannot be combined with the Court's findings. However, the latter, by virtue of their specific statistical nature, are already representative of all of the transactions for the financial year covered by the Court's audit, and therefore include those identified as being erroneous in audits not carried out by the Court.1.16. For example, an analysis of the audit reports produced by the Commission in the social field highlighted the difficulties experienced by the Court when it attempts to take over such results, as they are, for its own purposes. In fact, these reports frequently draw attention to cases of incorrect or ineligible expenditure but they generally do not quantify clearly enough the financial impact thereof. Moreover, they also note cases which are still awaiting bilateral discussion with the Member States concerned, so no definitive conclusion can be drawn as to their existence. Analysis of these audit reports in the social field alone has resulted in an estimate of about ECU 130 million as the financial impact of possible errors which had not been settled at the end of 1994 and linked, in general, to expenditure under financial years prior to 1994. Identification and clearer quantification of the errors in these reports, as well as a precise indication of the financial years during which the sums in question were expended, would make it easier for the Court to take these results into account when producing the DAS.The DAS and the audit of sound financial management (SFM)1.17. The DAS itself contains no conclusion as to the degree of compliance with the principles of sound financial management. This is something which the Court is continuing to assess separately, as part of its other work, in particular in the context of its annual and other special reports.1.18. The audit of the legality and regularity of the underlying transactions means that the Court must satisfy itself that such transactions comply with Community rules, and in particular the Financial Regulation. This latter provides on several occasions (e.g. as stated in Articles 2, 28 (2) (f), 38 (1) (d), and 47 (b)), that transactions must adhere to the principles of sound financial management, economy and cost-effectiveness. It might therefore be concluded that, in the strict sense, observance of the rules of sound financial management is an aspect of legality and regularity which the Court should incorporate into its verifications in support of the DAS.1.19. The lack of objective evaluation criteria, particularly in the basic regulations, in addition to the number and complexity of the elements to be considered, has led the Court to exclude any general assessment of the financial management from the auditing objectives in respect of the legality and regularity of the underlying transactions examined for the purpose of producing the DAS. This aspect will continue to be examined in the Court's other work.The DAS and the exposure of deliberate irregularities1.20. Certain cases of deliberate irregularity to the detriment of the Community finances cannot, by reason of their very nature, be detected by the usual auditing procedures implemented in accordance with generally accepted auditing standards. The Court is not therefore in a position to give any assurance concerning the non-existence of cases of this type.1.21. Nevertheless, the audit work the Court undertakes in connection with the DAS may lead - and has led in certain cases - to the uncovering of pointers to cases of deliberate irregularity when these are- present in the field of transactions selected in the Court's samples,and- of a sort such that they can be detected through audit procedures carried out in accordance with generally accepted auditing standards.1.22. Cases of deliberate irregularity detected in this manner are treated, at the financial audit level, as 'errors` affecting the legality and regularity of the underlying transactions, and, therefore, the actual content of the DAS. In any event, the Court will still continue to deal with these cases in the appropriate manner, outside the DAS framework.1.23. This is also the context in which the Court follows up other cases of deliberate irregularity, such as, for example, those uncovered in the field of tourism which are at present the subject of judicial enquiries, which the Court envisages examining later, in a future report.The audit of own resources based on the GNP and VAT1.24. Because of the macro-economic nature of the statistical data on which the GNP and VAT own resources - which account for about 80 % of Community revenue - are based, the Court has limited its examination to assessing the suitability of the procedures for drawing up these data and guaranteeing their reliability.1.25. As the Court stated in its Annual Report concerning the financial year 1992 (), the macro-economic aggregate which the GNP represents, and the VAT assessment base, are not the product of traditional accounting, but of a national statistical accounting system using macro-economic data. The Court's audit in this sector was essentially qualitative, its purpose being to evaluate the quality of the systems and procedures set up to determine and collect this type of revenue.1.26. The audit was particularly directed towards assessing the workings of the procedures leading to the drawing up of the GNP figures and the basis for calculating the VAT, and was carried out at the Commission and in the relevant central administrations in the Member States. This audit did not deal with the accuracy of the macro-economic data on which the GNP and VAT own resources were calculated, and the opinion delivered by the Court in the DAS does not cover this particular aspect.THE COURT'S AUDITING STANDARDS AND METHODOLOGYAn audit covering all of the accounts and operations for the financial year1.27. The Court has adopted an auditing method which conforms to the generally accepted standards applicable to public accounts (), including in particular the carrying out of tests intended to ensure that its audit results are statistically representative overall and have a solid factual basis.An experimental method1.28. Never having had any prior experience of having to deliver a global statement covering simultaneously the reliability of the accounts and the legality and regularity of the underlying operations, the Court adopted an exploratory approach, which consisted of implementing new auditing procedures adapted to its work, the purpose of which was:- firstly, to implement auditing procedures experimentally and to evaluate them so as to draw immediate lessons therefrom, and to make any improvements necessary for audits in subsequent financial years,and- secondly, to enable the Court to have valid financial audit results to support the DAS concerning the financial year 1994.The assessment of the systems1.29. At the time of its founding, the Court decided to adopt for its audit work the auditing method of examining internal control systems. The aim of systems analysis is, inter alia, to reduce the volume of substantive tests on the transactions pertaining thereto and thereby make for more efficient and economic use of auditing resources. In the case of the audit underlying the DAS, which covers the whole budget, it is impossible to make an in-depth assessment every year of the multitude of systems and sub-systems involved in the management and control of Community transactions, particularly in the complex areas where the administration is shared with the Member States. Moreover, the Court's evaluations of the systems to date have generally resulted in its observing significant quality differences between the numerous systems used, and therefore, in order to make an assessment of the whole of the population audited, the Court has not been able to base a significant part of its audit confidence on the quality of these systems.1.30. The Court therefore concluded that the most economical approach to the DAS-related audit was for it to limit itself to the minimum analysis needed to understand the systems related to the samples selected (which, in any case, cover the most important fields of activity subject to its audit) and not to try to reduce the volume of tests in the light of the number of systems it has found to be satisfactory.1.31. Of course, the Court will continue to analyse and assess the systems thoroughly within the scope of the specific financial audits it decides to conduct on a cyclical basis in the areas concerned. Once these analyses and assessments, combined with the results of the work carried out in support of the DAS, lead the Court to believe that it is able to base part of the global assurance it is seeking on the control systems it considers valid, it will subsequently be in a position to reduce the size of the samples of transactions to be audited in the areas concerned.Direct auditing of the underlying transactions1.32. The DAS-related work involves, inter alia, a programme for the direct auditing of the underlying transactions, the purpose of which is to seek assurance as to the reality and the legality and regularity of these transactions, as well as the accuracy with which the corresponding accounting transactions are recorded in the accounts at all levels of management of Community funds, i.e. starting with the Commission's central accounts and ending with final beneficiaries and tax-payers.1.33. The Court selected a number of accounting transactions in the central accounts of the Community institutions, and mainly in the Commission's central computerized accounting system (SINCOM), using the statistical sampling method described below. As regards transactions connected with EAGGF-Guarantee expenditure, the selection was made on the basis of the Member States' monthly expenditure statements, on which the data entered in the Community accounts are based.1.34. The connection between the data in the accounts and the underlying transactions is not always immediate because, in the majority of cases, the data entered relate to an aggregate of data entered at lower administrative levels, and therefore correspond to a very detailed set of underlying transactions. The Court's audit was therefore carried out starting at central management level, using a method which allowed it to follow the individual accounting transactions selected in the central Community accounts through to the basic management level and, consequently, to the corresponding underlying transaction at final beneficiary or taxpayer level.1.35. When programmes are co-financed by the Community and the Member States, especially in the field of the Structural Funds, where most of the payments are advances/payments on account, there is often no direct link between payments made by the Commission and payments received by the final beneficiaries for such time as the programme has not been closed. In order to be able to give an opinion as to the legality and regularity of the underlying transactions, the Court, in such cases, carried out a random sampling check of the expenditure declared by the Member States in support of their applications for an advance.The statistical sampling method1.36. The statistical sampling method used by the Court to enable it to draw its audit conclusions with regard to all of the accounts and underlying transactions covered by the DAS was the monetary unit sampling method, (hereinafter referred to as 'MUS`) which, in financial terms, is a type of sampling where the probability of selection is proportional to the size of the operations.1.37. As regards expenditure, discrete samples were drawn, firstly, to cover expenditure committed, including outstanding commitments from preceding financial years, and, secondly, expenditure carried out. In the case of revenue, a similar sample was drawn to cover revenue derived from traditional own resources. As already explained in paragraphs 1.24 to 1.25, owing to the nature of VAT and GNP own resources the audits included an evaluation of procedures and tests of an analytical type.The criteria selected by the Court1.38. The Court has set a minimum initial objective of ensuring, if the results of its work justify this, with a 95 % degree of confidence, that any errors affecting the reliability of the accounts, or the legality and regularity of the underlying transactions, do not exceed overall 1 % of the value of the reference amount selected by the Court - in this case, the initial budget (i.e. approximately ECU 70 000 million). The resulting unacceptable error threshold therefore amounts to ECU 700 million.The definition and treatment of errors1.39. Any operation which has not been entered in the accounts in a satisfactory manner or carried out in accordance with the legal provisions and regulations applicable constitutes an error. Given the difficulty in the Community field of tracing a specific borderline between the concepts of legality and regularity, and the fact that the consequences of non-compliance with these are the same with respect to the DAS, it was decided not to make a distinction between these two concepts, but to organize the work in such a way as to ensure that the operations were at the same time both 'legal and regular`. The concepts of legality and regularity taken into account are those relating to compliance with all the Community provisions and with the provisions applicable elsewhere, notably certain national provisions in the Member States, in order to ensure observance of the Community provisions.1.40. When the Court processed its audit findings, it classified the errors according to the way in which they affected the legality/regularity of the transactions or the reliability of the accounts, or both. Moreover, in each of these categories a sub-classification was made according to the type of error. Furthermore, a distinction was made between those errors that must be considered to be substantial, owing to their direct implications with respect to the reliability of the accounts or the value of the underlying transactions, and those errors which may be described as formal because they do not have a direct and measurable detrimental impact on the Community budget. In both categories, the errors are classified as serious or less serious after an analysis of the principles concerned and the facts observed. Only serious errors were taken into account for the purpose of issuing reservations under the DAS. Errors deemed less serious (not too serious and insignificant) were notified () individually to the administrators concerned, including those at the Commission and in the Member States, so that appropriate measures could be taken. Finally, a distinction was also made according as the errors originated at central management level at the Commission or were made by a third party, particularly a Member State.1.41. Based on the results of the work carried out on the sample findings, global conclusions were drawn, as well as conclusions based on the type, origin and degree of seriousness of the errors, concerning all of the Community accounts and operations relating to the financial year 1994. By applying the statistical extrapolation method selected, the Court assessed the most likely error affecting the accounts and operations for the financial year, and the magnitude of the maximum and minimum errors, according to the degree of confidence selected, was taken into account.1.42. Alongside these extrapolated results, the magnitude of the known errors affecting the financial year 1994 was taken into consideration. These errors were detected in transactions located both within and outside the samples, as well as during other Court audits unconnected with those specifically relating to the DAS. Errors detected by other auditors are not included in the quantified audit findings presented in this report for the reasons stated in paragraphs 1.12 to 1.16 and 2.1 to 2.3.1.43. The Court therefore intends to present the outcome of its work in such a way as to provide a complete, objective and measured picture of the implementation of the budget, in accordance with the request made by the European Parliament in its observations concerning the discharge in respect of the budget for the financial year 1993 ().Other auditing activities1.44. The Court also carried out additional checks of the main horizontal aspects of the execution of the budget (financial balance sheet, computerized accounts, revenue and expenditure account).CHAPTER 2 Carrying out the audit2.0. TABLE OF CONTENTS Paragraph referenceThe constraints affecting the auditing work 2.1 - 2.10The use of other auditors' work 2.1 - 2.3Timetable constraints 2.4 - 2.6The lack of readily accessible data relating to the underlying transactions 2.7 - 2.10The audit work carried out 2.11 - 2.22The audit work concerning revenue 2.11 - 2.12The samples of expenditure operations audited 2.13 - 2.17Other work 2.18 - 2.22Audit of the general accounts and of the consolidated balance sheet as at 31 December 1994 2.18 - 2.19Global consistency checks 2.20The review of the SINCOM computerized accounting system 2.21 - 2.22THE CONSTRAINTS AFFECTING THE AUDITING WORKThe use of other auditors' work2.1. The Court was able to rely on work carried out by other auditors only in a few cases as far as its DAS-related work on the financial year 1994 was concerned, irrespective of whether such work had been carried out in the Community institutions or the Member States.2.2. This is because, in general, the Court does not always have adequate information about such work, i.e. the areas covered, the resulting findings and the measures taken in response. Furthermore, in the rare cases where satisfactory information is available, the conditions concerning the approach and the audit procedures applied in such work are not generally satisfied, so that the Court cannot take over these results as they are within the framework of the statistical evaluation used for the DAS (see in particular paragraphs 1.12 to 1.16).2.3. Regarding the work of the National Audit Institutions (NAIs), it became clear that their audit approach to Community spending differs greatly from one country to another, as regards both objectives, methods, extent and depth, and frequency. As the Court must issue a homogeneous Statement of Assurance in respect of all operations charged to the Community budget, it has not been able to rely on the work of the NAIs in order to provide the 1994 DAS. When the NAIs' audit work proves to be compatible with its own objectives and methodology, the Court will attempt to rely on that work, provided it can obtain satisfactory access to the underlying documentation.Timetable constraints2.4. The timetable applicable to the Court's audit in respect of the DAS is very tight and has to take into account the concentrated implementation of a large number of commitments and payments at the end of the financial year under audit, together with the date for presenting the accounts and the date on which the draft report supporting the DAS is to be submitted to the Commission.2.5. The audit for the DAS consists notably of checking a representative sample of underlying transactions, the definitive identification of which is only possible after the final commitments and payments involved have been implemented at the end of the supplementary periods stipulated in the Financial Regulation (15 January of year n + 1 in principle, but also 31 January, or even the end of February in the case of some transactions). Furthermore, although the work could be started on the basis of the provisional revenue and expenditure accounts and balance sheets, which the Commisssion was able to provide, very usefully, in advance, the Statement of Assurance relates to accounts which are forwarded in their definitive version to the Court by 1 May n + 1 at the latest.2.6. In order for the Court to be able to submit the DAS at the same time as its Annual Report, by 15 November of the year n + 1, at the latest, after a bilateral discussion procedure which allows those auditees that are subject to the discharge decision (the Commission and the other institutions involved) to voice their views on the findings of the work, the DAS audit had to be concentrated into the initial months of the year n + 1.The lack of readily accessible data relating to the underlying transactions2.7. Comprehensive data relating to the underlying transactions at beneficiary (or tax-payer) level are generally either rare or very difficult to gain access to, and even if they are available they are in formats which differ greatly from one area or Member State to another. In the Court's view, the efficiency and effectiveness of the management and control of Community operations, whether carried out by the Commission or national bodies, as well as the efficiency and effectiveness of the Court's audit, are significantly diminished as a result of this situation.2.8. About two-thirds of the expenditure under the general budget of the Communities consists of measures (notably the EAGGF and the Structural Funds) for which management is shared between the Commission and the Member States. About one quarter of the Communities' own resources consists of customs duties and agricultural levies, commonly known as traditional own resources, which are collected by the Member States. The transactions underlying the Community accounts in these fields are widely dispersed throughout the Communities and are managed by a wide variety of bodies, at national, regional and local level, in the Member States.2.9. As a result, the data relating to these transactions are processed by a wide variety of usually complex systems, not all of which are computerized, and they are stored in a wide variety of forms. Even in the areas of the EAGGF-Guarantee and customs duties, which are by definition the sole responsibility of the European Community, the data are collected within systems which are designed for national purposes and which sometimes do not provide a clear link with the declarations made to the Commission to justify Community financing. In the field of the Structural Funds, where operations are co-financed by public bodies in the Member States, comprehensive data in any coherent form often do not exist, or are extremely difficult to obtain. Under such conditions, administrative and accounting tasks are rendered extremely difficult and efficient and effective techniques, such as risk analysis-based procedures, are very difficult to put into effect.2.10. In the Court's view, it ought to be feasible to take steps to rationalize the data recorded in the Member States regarding Community operations and to consolidate such information into readily accessible computer systems which would serve the purposes of national administrative bodies, the Commission and the Court. In the 'information age`, the trend towards increased decentralization and shared management of Community operations in Member States is no barrier to the provision of relatively detailed comprehensive data for the use of the national bodies in charge of the day-to-day management and audit of such operations, and for those holding ultimate responsibility, i.e. the Commission and the Court of Auditors.THE AUDIT WORK CARRIED OUTThe audit work concerning revenue2.11. The own resources are divided into two broad categories:- 'traditional own resources`, which are collected at source and are sub-divided into two main categories: customs duties and agricultural levies, on the one hand, and sugar levies, on the other,- 'VAT and GNP resources`, the amount of which is determined largely by macro-economic statistical data.2.12. With regard to the own resources as a whole, exhaustive checks were carried out in respect of the reliability, legality/regularity and accuracy of the Commission's accounts. In the case of the traditional own resources, the audit of the Commission's accounts was conducted, using the same statistical sampling method as for expenditure, on the basis of a sample of 119 transactions which were audited down to the level of the underlying operations in the Member States. As already explained in paragraphs 1.24 to 1.26, the audits concerning the VAT and GNP resources concentrated on the quality of the procedures used to determine the amounts.The samples of expenditure operations audited2.13. Concerning expenditure, the Court carried out a direct audit of transactions selected at random using its own statistical sampling method, just as it did for the traditional own resources.2.14. In this field, the total number of underlying transactions audited was 1 432, 563 of which related to payments, 632 to commitments made during the financial year and 237 to commitments to be cleared at the beginning of the financial year. The method adopted of selection proportional to size showed that the Court's analyses had produced samples whose structure reflected that of the total population from which the samples were drawn in terms of spread throughout the budget areas or geographical regions.2.15. The audit involved examining the legality/regularity of these transactions, as well as the accuracy of the corresponding accounting entries at all of the levels of administration of the activities under the Community budget, i.e. from central management level at the Commission down to the level of the financial beneficiaries where necessary.2.16. In financial terms, the audit at the level of the Commission's central management covered a significant volume of the transactions for the financial year. For example, the net total value of the payments examined amounted to approximately ECU 21 500 million, i.e. almost 36 % of the total payments for the financial year. As regards the commitments entered into during the financial year, the net total was around ECU 30 000 million, or some 44 % of the total amount of the commitments for the financial year. In the area of commitments outstanding from previous financial years, the work covered approximately ECU 4 200 million in all, i.e. about 15 % of the total value of the commitments involved.2.17. At the level of the underlying transactions, the financial volume actually audited is much less, in as much as most of the transactions selected at central level are linked to numerous underlying transactions, at least one of which was examined in depth in every case.Other workAudit of the general accounts and of the consolidated balance sheet as at 31 December 19942.18. The checks carried out by the Court in order to achieve the general audit objectives set for this field basically comprise:- examination in the cash management system and general accounts of payment operations which were selected from the central sample,- examination of the main items on both the asset and the liability sides that are included in the Community institutions' balance sheets and in the European Union's consolidated financial balance sheet, as well as a selection of other items,- checking the consistency of the data in the general accounts and the consolidated balance sheet with the data contained in the subsidiary accounts or provided by other services.2.19. The purpose of these verifications was to check that the financial balance sheets were in agreement with the accounting records, that the various assets and liabilities actually existed, that the transactions were legal and regular, that the financial statements gave a fair picture of the financial situation and that generally accepted accounting principles had been applied wherever they were applicable to the public sector.Global consistency checks2.20. The Court continued to implement a programme for the computerized production of illustrative charts and diagrams for the Annual Report concerning the financial year 1994 from data-bases containing the basic accounting data. At the same time, the Court carries out a global reconciliation which enables it, in the context of the DAS, to verify the comprehensiveness of the information in the Commission's revenue and expenditure account and to check that this information agrees with the underlying data in the SINCOM central accounting system.The review of the SINCOM computerized accounting system2.21. The Court also audited the data concerning budgetary expenditure generated by the SINCOM computerized accounting system by carrying out a series of tests designed to ensure that the data recorded in SINCOM were correct, that they had been processed correctly by the computerized system and during the manual operations carried out by the officials authorized to operate the system, and that they were faithfully reproduced in the Commission's budgetary expenditure accounts.2.22. This work also enabled the Court to check that the MUS samples were representative of the data-base from which they had been drawn, by comparing the results of its tests on the whole of the data in the SINCOM data-base with the results of identical tests on the MUS samples.CHAPTER 3 The audit findings3.0. TABLE OF CONTENTS Paragraph referenceGeneral conclusion 3.1The reliability of the accounts 3.2 - 3.100The consolidated revenue and expenditure account 3.2The reservations concerning the consolidated revenue and expenditure accounts 3.3 - 3.43Accounting for revenue and expenditure as negative transactions 3.3 - 3.4Accounting for advances/payments on account 3.5 - 3.14Failure to enter EAGGF-Guarantee expenditure 3.15 - 3.17The discrepancy between legal obligations and accounting commitments 3.18 - 3.26Other observations concerning the consolidated revenue and expenditure account 3.27Final production of the budgetary accounts 3.28 - 3.32The Sincom accounting system 3.33 - 3.41The balance for the financial year 3.42 - 3.43The European Union's consolidated balance sheet 3.44 - 3.100Harmonization of the accounting methods 3.47 - 3.51The Commission's balance sheet 3.52 - 3.91Observations on the execution and entry in the accounts of payments 3.52Reservations concerning tangible fixed assets (Brussels, Luxembourg and delegations) 3.53 - 3.61Property assets in Brussels 3.56Advances and payments on account for fixed tangible assets (premises in the process of being purchased) 3.57 - 3.58Movable assets in Brussels 3.59 - 3.60Movable assets outside the Community 3.61Observations on participations and loans 3.62Observations on the bank accounts 3.63 - 3.69Bank accounting 3.63Specific bank account 3.64 - 3.65Auditing of bank reconciliations (NOSTRO) 3.66 - 3.69Observations on the imprest accounts 3.70Reservations concerning claims on Member States 3.71 - 3.76The separate accounts concerning customs duties and agricultural levies 3.71 - 3.73Claims connected with the clearance of the EAGGF-Guarantee accounts 3.74 - 3.76Observations on potential claims connected with the establishment of frauds and irregularities 3.77 - 3.80Reservations concerning the actual volume of commitments outside the balance sheet 3.81 - 3.90Multiannual decisions and obligations 3.82 - 3.84The time-lag in the accounting period relating to the EAGGF-Guarantee 3.85 - 3.87Guarantee granted for a bank loan 3.88 - 3.89Commitments relating to swap transactions 3.90Observations on the explanatory notes concerning the balance sheet 3.91The financial balance sheets of other Community institutions and organizations 3.92 - 3.100Reservations concerning the tangible assets 3.92 - 3.99Observations on the bank accounts 3.100The legality/regularity of the underlying transactions 3.101 - 3.151Revenue-related transactions 3.101 - 3.121Traditional own resources 3.101 - 3.113Customs duties and agricultural levies 3.104 - 3.109Sugar levies 3.110 - 3.113The own resources based on VAT and GNP (Gross National Product) 3.114 - 3.121The VAT-based own resource 3.115 - 3.116The own resource based on the Gross National Product (GNP) 3.117 - 3.121The Gross National Product (GNP) as an assessment base 3.117 - 3.119The own resource based on GNP (supplementary resource) 3.120 - 3.121Expenditure-related transactions 3.122 - 3.151Cases of expenditure in respect of which the Court cannot give an assurance 3.122 - 3.136The impossibility of auditing certain items of EAGGF-Guarantee expenditure 3.123 - 3.129In Denmark 3.123 - 3.126In the United Kingdom 3.127 - 3.128In Spain 3.129The lack of an adequate audit trail 3.130 - 3.132Particularly unreliable systems which are likely to include errors 3.133 - 3.134The absence of assurance for various reasons 3.135 - 3.136Errors affecting the legality/regularity of the expenditure 3.137 - 3.151Errors affecting the legality/regularity of the commitments entered into during the financial year 3.139 - 3.143The substantial legality/regularity errors concerning commitments 3.139The formal legality/regularity errors concerning commitments 3.140 - 3.143Errors affecting the legality/regularity of the transactions underlying the payments 3.144 - 3.151The substantial legality/regularity errors concerning payments 3.144 - 3.147The formal legality/regularity errors concerning payments 3.148 - 3.151GENERAL CONCLUSION3.1. The Court is of the opinion that:(i)the accounts as drawn up at 31 December 1994 accurately reflect the revenue and expenditure, as well as the financial situation, of the Union; the informative value of these accounts should however be improved in several important respects on which the Court has reservations;(ii)the Court's examination of the revenue entered in the accounts in respect of traditional own resources did not reveal any significant errors; however, it is obviously not possible to give an assurance that all chargeable imports have actually been declared and have yielded the corresponding revenue;(iii)regarding the expenditure, there are too many errors in the transactions underlying the payments entered in the accounts for the Court to be able to give a positive global assurance as to their legality/regularity.THE RELIABILITY OF THE ACCOUNTSThe consolidated revenue and expenditure account3.2. The consolidated revenue and expenditure account gives a true picture of the Union's revenue and expenditure, but nevertheless calls for the following reservations.The reservations concerning the consolidated revenue and expenditure accounts.Accounting for revenue and expenditure as negative transactions3.3. As a result of the actual out-turn for negative revenue and expenditure, the total volume of payments amounts to ECU 63 580,8 million instead of the ECU 60 304,8 million which appears in the revenue and expenditure account.3.4. The Court has always been critical of the recording of revenue as negative expenditure and of expenditure as negative revenue. Although the corresponding operations are provided for in the Community regulations and recording such revenue as negative expenditure - at the initiative of the Commission - is subsequently approved during the adoption of the budget, such devices still impair the informative value of the accounts. Some revenue or expenditure authorizations are still presented and entered in the accounts as negative values and above all there is nothing to tell anyone reading the accounts of their impact. At bugetary implementation level, negative revenue and expenditure amount to ECU 1 472,4 million (costs of collecting traditional own resources) and ECU 1 803,6 million (negative EAGGF-Guarantee expenditure), respectively.Accounting for advances/payments on account3.5. The accounting information concerning the ECU 13 000 million of payments in 1994, which consist of advances/payments on account, is not separately presented in Volume IV.3.6. Advances/payments on account made under the general budget in 1994 and still not settled during subsequent years represent some ECU 13 000 million out of a total of ECU 22 825,8 million of payments for Titles B2 to B7 (operating budget, excluding the EAGGF-Guarantee). Although the Commission has included some supplementary information in the financial statements for 1994, it does not show to what extent the implementation of the general budget (at beneficiary level) is still incomplete.3.7. In significant areas of operational expenditure in Part B of the general budget, mainly in the areas of the Structural Funds, Development Aid and Research and Energy, many of the budgetary payments are made on condition that certain criteria are subsequently met. They often consist of advances/payments on account which represent a specified percentage of the total expenditure envisaged for a particular operation. In very many cases an initial payment on account is followed by further payments on account.3.8. When the operation concerned (at programme or project level) is completed, often several years after the initial advance/payment on account has been made and the relevant criteria have been met, the final payment is made and the preceding advances/payments on account can be considered settled.3.9. The Commission has introduced two tables (Nos 12 and 13) into Volume IV of the 1994 financial statements, which provide additional information in the context of multiannual commitments against which payments are still to be made. These tables show, respectively, the amount of advances/payments on account (made since 1990) not yet settled at the end of 1994, and the amount of payments (on account and final) which were settled during the year.3.10. The magnitude of the amounts (at least ECU 45 000 million) of advances/payments on account outstanding at the end of 1994 should not necessarily be interpreted as an indicator of deficient management. The legal context applicable to the management of the Community funds concerned makes the existence of significant amounts of provisional expenditure inevitable. The disclosure of such information was made possible - following the Court's long-standing recommendation - by the introduction into the SINCOM accounting system, of information indicating the nature of individual payment transactions.3.11. The Commission introduced these measures principally in order to enable it to ensure improved monitoring of advances/payments on account. Such measures are to be welcomed, particularly in the light of the problems revealed when the Court last reviewed the question of the recovery of amounts owing to the Community ().3.12. Although the inclusion of some information on payments on account not yet settled in the annual accounts represents a degree of progress, the Court considers that the current presentation and disclosure of such transactions is not yet adequate because the Communities' financial statements do not disclose all the information which is necessary for a full understanding of the degree to which implementation of the general budget of the Communities for the financial year, as well as for prior years, remains provisional.3.13. The further information required is the following:(i)the degree to which budgetary payments in a financial year consist of advances/payments on account;(ii)the 'evolution` during a financial year of unsettled advances/payments of account;(iii)the years in which the unsettled advances/payments on account originated.3.14. It should be possible to use the data already introduced into the accounting system to provide such information. The following table illustrates how the Court considers such information should be presented in the annual financial statements at the level of budget headings and for the budget as a whole.Failure to enter EAGGF-Guarantee expenditure3.15. EAGGF-Guarantee expenditure amounting to ECU 45,8 million is not included in the accounts for the financial year 1994 and the budgetary principle of annuality was thus not observed.3.16. In order to meet certain items of expenditure declared by the Member States in accordance with the regulations, the Commission, at the end of December 1994, drafted a document requesting transfers of appropriations from Chapter B1-12 (olive oil) to Chapters B1-16 (products of the wine-growing sector), B1-37 (clearance of previous financial years) and B1-40 (income support). Because of administrative delays, it was not possible to carry out the transfers before 31 December 1994 (the final date laid down in Article 104 of the Financial Regulation). Budget headings B1-1640, B1-370, B1-1623 and B1-1630 were thus not allocated sufficient appropriations.3.17. In January 1995 the Commission entered a negative commitment of ECU 45 865 228,22 so as to rectify advances paid to Italy (ECU 18 519 746,48) and France (ECU 27 345 481,74). These were the two countries which, in 1994, declared the largest amounts under the budget headings that lacked sufficient appropriations. This expenditure was charged to the 1995 budget, heading B1-3700 (clearance of previous years), when the Commission decided, in February 1995, on the basis of an ad hoc clearance of the accounts, to enter this expenditure declared by Italy and France during 1994.The discrepancy between legal obligations and accounting commitments3.18. The revenue and expenditure account does not give a fair view of the European Union's legal commitments at the close of the financial year 1994, since certain accounting commitments set out in it no longer relate to legal obligations.Table 3.1 - Proposed presentation (1) of information relating to payments on account >TABLE>>TABLE>3.19. The revenue and expenditure account relating to the budget for the financial year 1994 gives the amount of the commitments to be cleared on 31.12.1994 as ECU 34 942 million (). Part of these accounting commitments, the exact amount of which could not be defined sufficiently precisely by the Court, but which is probably not negligible, still appear in the accounts, although they are not justified by legal obligations.3.20. The Court in fact carried out analytical and direct checks of those commitments where there was a strong likelihood that they no longer corresponded to existing legal obligations. Such commitments are termed 'dormant`, i.e., according to the criteria established by the Court, they are commitments entered into prior to 1990 for which no payments have been charged for three consecutive years, i.e. between 1992 and 1994.3.21. The outcome of the Court's analyses is as follows:- these dormant commitments number 3 040 and account for an approximate total financial volume of ECU 1 185 million- of these, there are 644 commitments at least 10 years old, i.e. entered into before 1985, totalling approximately ECU 368 million overall- there are 98 particularly old commitments, which are at least 14 years old, i.e. entered into before 1981, and account for a total of some ECU 34 million.3.22. These commitments relate mainly to measures under the Structural Funds and development aid.3.23. In the development aid sector, the efforts made by the Commission during the financial year 1994 led to the cancellation of 1 367 commitments which no longer related to legal obligations, with a total value of ECU 177 million. For the purpose of the audit, the Court selected 81 of the 160 residual dormant commitments as at 31.12.1994. It was established that 66 of them totalling some ECU 8,5 million were no longer justified and that they should also have been cancelled.3.24. In the field of the Structural Funds, there are some 27 dormant EAGGF-Guidance commitments totalling about ECU 3 million. Moreover, an analysis of the files in this area showed that, where measures financed under Regulation (EEC) No 355/77 are concerned, 438 projects totalling about ECU 54 million should have been closed and the balance cancelled.3.25. In the regional and social sectors, there were, respectively, 1 872 and 502 dormant commitments, amounting to, respectively, ECU 1 045 million and ECU 59 million.3.26. The Court calls upon the Commission to increase and extend the effort it has started to make in some sectors, such as that of development cooperation, so that the appropriate procedures for ensuring a regular periodic review of such accounting commitments may be set up as soon as possible, and those which no longer relate to legal obligations may be cancelled.Other observations concerning the consolidated revenue and expenditure account3.27. The Court's checks lead it to make the following observations.Final production of the budgetary accounts3.28. The revenue and expenditure account does not exactly reflect the amount of the initial appropriations entered in the budget, as shown in the final adopted version of the general budget of the European Union ().3.29. Column 5/1 of the revenue and expenditure account includes the amounts made available as part of the EFTA countries' contribution as appropriations entered in the initial budget (see table E of Volume II of the revenue and expenditure account), instead of only appropriations entered in the 1994 budget.3.30. The drawing-up of the 1994 charts and diagrams also allowed a small computational error of ECU 307 00 to be identified on page 25 of the revenue and expenditure account, Volume IV, in the column headed 'Total (appropriations available)` and 'Commitments undertaken during 1994`, but this error does not affect the overall total.3.31. The reliability of the revenue and expenditure account is affected very slightly by errors in the charging to the financial year or to the correct budget heading which were detected during the Court's audit of the operations.3.32. Such cases were few (some 10 commitments and payments within the sample selected by the Court and some operations outside) and difficult to extrapolate owing to the nature of the problems identified. Nevertheless, these 10 or so accounting errors directly affecting the reliability of the revenue and expenditure account are too high in number, as they were detected in a relatively limited sample of operations (a thousand or so of the sample commitment and payment operations), to enable the reliability of the revenue and expenditure account to be considered perfectly satisfactory in this respect.The SINCOM accounting system3.33. The entry of budgetary expenditure in the accounts by the computerized accounting system (SINCOM) has proved generally reliable.3.34. The appropriation headings which are the basis for the revenue and expenditure account are in general consistent and coherent with the charging headings in the SINCOM file for the chart of accounts. It was also confirmed that the exchange rates used for the initial conversion of commitments and payments and for the monthly revaluation conform to the official rates published by the Commission (Info-ECU and OJ) and that the programs for revaluing outstanding commitments are based on suitable rates which comply with the regulatory provisions and result in the necessary adjustments at the level of consumption of the appropriations. Automatic controls programmed into the SINCOM system were verified to ensure that the amounts of commitments and payments made did not exceed the appropriations authorised. The commitments and the payments entered in the accounts are authorized, approved and entered in the accounts by the officials authorized to do so, in accordance with the regulatory provisions.3.35. The system allows the Financial Controller's refusals of approval and the Commission's decisions to overrule, or not to overrule, such refusals to be identified in a satisfactory manner. The payments are properly charged to the financial year during which they are entered in the accounts.3.36. The differences between the individual accounting components of the commitments and the commitment balances themselves are almost zero. The balances of individual commitments are properly recorded in the global file used to produce the revenue and expenditure account.3.37. Nevertheless, the Court's audit of SINCOM calls for the following observations:3.38. The amounts of the appropriations entered in SINCOM for the second Supplementary and Amending Budget for 1994 do not agree with the amounts approved by the budgetary authority. Significant discrepancies were noted in the amounts of some appropriations.3.39. An exhaustive comparison was made between a listing produced from the SINCOM files of the supplementary budgets for 1994 and the budgets as published in the Official Journal. Discrepancies due to publication errors were noted in the amounts of the appropriations in 77 budget headings. Consequently, the exact amounts of these commitments and payment appropriations were not supported by the formal legal basis of the Budget as published in the Official Journal.3.40. For budgetary transfers requiring the approval of the budgetary authority, some amounts entered in SINCOM could not be reconciled with the documentation available to the Court.3.41. A reconciliation was made between a print-out from SINCOM of the details of budgetary transfers and the documentation available on those transfers that had been approved or notified to the budgetary authority. The amounts involved in three of these transfers could not be satisfactorily agreed.The balance for the financial year3.42. As emerges from the calculation of the final result of the implementation of the European Union's 1994 budget (revenue and expenditure account and financial balance sheet relating to the transactions under the budget for the same financial year, Volume II, page 11), the balance of the financial year includes an amount of ECU 2,1 million resulting from the contribution to the Community budget by the countries of the European Free Trade Association, who are also members of the European Economic Area. This amount constitutes the difference between the contributions paid (ECU 90,7 million) and the expenditure for the same financial year under this head (ECU 88,6 million).3.43. Owing to a lack of detailed instructions concerning the handling of this balance of ECU 2,1 million in the chart of accounts, and for the sake of prudence, the Commission's accounting services should have entered this amount in a suitable account on the liability side of the financial balance sheet, pending the clearance of the EFTA and EEA accounts, rather than incorporating it in the balance for the financial year.The European Union's consolidated balance sheet3.44. The European Union's consolidated balance sheet, the consolidation of which is the sole responsibility of the Commission, gives a true picture of the Union's financial situation, but nevertheless calls for the following observations.3.45. The audit of the consolidated balance sheet basically involves checking its arithmetical accuracy, as well as the correct consolidation of the balance sheets of the various Community institutions and organizations which comprise the framework for the consolidation. These checks did not reveal any anomalies.3.46. Any Court observations on the financial balance sheets of the Commission and other Community institutions and organizations also concern, as a consequence of the way it is drawn up, the consolidated financial balance sheet.Harmonization of the accounting methods3.47. The presentation of harmonized financial statements and the application of uniform accounting methods and evaluation rules by the various entities included in the consolidation, are conditions, amongst others, which must be met before consolidation can take place. In the context of the Community's accounts, the Commission has been empowered to decide on the accounting methods and to harmonize the presentation of the financial statements (Article 21 of the rules for the implementation of certain provisions of the Financial Regulation of 21 December 1977).3.48. It was observed, however, that the information included in the financial statements is not always uniform, or that the rules applicable to some operations are lacking.3.49. For example, the separate presentation in the balance sheet of computer equipment, for some institutions only, could result in the balance sheet being misinterpreted, since this new presentation has only been applied by the Commission and the European Parliament. It should also be noted that even at the level of the Commission this presentation is not uniform, inasmuch as the computer equipment for the Joint Research Centre is included under equipment and furnishings. As a result, the amount entered in the balance sheet under equipment and furnishings is overstated, whilst the converse is true for computing equipment. The Court agrees that this new presentation has improved the information provided, but the Commission must, nevertheless, urge the other Community institutions and organizations to do the same.3.50. There are no rules governing the presentation in the financial statements of contracts concerning property rights (for example, long leases or leasing contracts), which are often accompanied by a purchase option, or similar rights. These operations, therefore, are not always indicated in the accounts, whether in the balance sheet or the explanatory notes (see paragraphs 3.137 to 3.139).3.51. Given that the various institutions are increasingly resorting to these financing methods, the Commission is requested to use the power conferred upon it by Article 21 of the provisions for the implementation of the Financial Regulation and draw up accounting rules so that, from now on, operations of this type, with certain characteristics, are entered in the financial statements in an appropriate manner.The Commission's balance sheetObservations on the execution and entry in the accounts of payments3.52. The audit at central level - in the cash management system, bank accounting, general accounting and bank reconciliation system (NOSTRO) - of those payment transactions that were selected as part of the central sample and had resulted in disbursements did not reveal any errors worthy of mention in the DAS as regards the reliability of the accounts. With respect to those transactions selected which had not resulted in a movement of funds at central level, as was the case with the majority of the EAGGF-Guarantee transactions, for example, which actually correspond to settlements of advances, the entries in the general accounts were audited.Reservations concerning tangible fixed assets (Brussels, Luxembourg and Delegations)3.53. The Court must express a reservation regarding the value (ECU 254,2 million) entered in the Commission's balance sheet for movable property located in Brussels and Luxembourg.3.54. The Court carried out an audit in respect of the value of the Commission's movable and property assets. The audit involved property amounting to some ECU 445 million in Brussels and Luxembourg, as well as in offices in the Community and at the Delegations outside the Community.3.55. These consisted of properties owned by the Commission (ECU 134 million), advances and payments on account for tangible fixed assets (ECU 12,1 million), vehicles (ECU 11,2 million), computer equipment (ECU 151,5 million) and other movable property (ECU 136,4 million). The total number of movable assets is approximately 450 000. The Court's work led to the following observations (for details, see Chapter 13 of the Court's Annual Report concerning the financial year 1994) ().Property assets in Brussels3.56. The total financial balance sheet value of the amounts shown and substantiated in the notes accompanying the balance sheet is reliable as regards the movable assets owned in Brussels as at 31 December 1994, excluding the amount considered for the fitting-out of the Breydel building, for which a more satisfactory explanation should be given. In fact, there is a difference of some ECU 1,5 million between the amount entered in the financial balance sheet (ECU 8,5 million) and the payments recorded in SINCOM (ECU 10 million).Advances and payments on account for fixed tangible assets (premises in the process of being purchased)3.57. The Court welcomes the change that has been made to the accounting methods, i.e. the introduction into the Commission's financial balance sheet of the item 'Advances and payments on account for fixed tangible assets` (the counterpart of which on the liabilities side is entered under the heading 'Own capital`).3.58. On the other hand, the Commission must make suitable arrangements to ensure that in future it has the means of showing exactly the amounts involved. At 31 December 1994 the value of the assets concerned amounted to about ECU 18,8 million (instead of ECU 12,1 million).Movable assets in Brussels3.59. The Court has no assurance that the amounts concerning movable assets shown in the financial balance sheet give a correct view of the assets owned by the Commission in Brussels and Luxembourg.3.60. This observation is based on the fact that it is impossible to say with absolute confidence that numerous assets are present, owing to the lack of reliable information concerning their location and the practical impossibility of checking the value of the assets entered as such in the SYSBIEN data-base. The sum entered in the financial balance sheet for assets which are subject to this qualification is ECU 254,2 million (equipment and furniture and computer equipment).Movable assets outside the Community3.61. The inventories of property held at Delegations outside the Community (ECU 30,2 million) still contain the same problems which the Court has been criticizing since 1979 in its successive annual reports (). Until recently, none of the necessary checks were carried out at any stage of the process of transmission of data from the Delegations to the Commission's Accounting Officer. The anomalies that were uncovered, in spite of some corrective measures introduced in the meantime, put the Court in a situation where it is unable to obtain an assurance as to the value of assets held by the Delegations.Observations on participations and loans3.62. The breakdown between participations (ECU 15,2 million) and loans (ECU 54,3 million) of the amounts relating to the 'EC Investment Partners` financial instrument does not correspond to the facts because the exact amounts for participations and loans are, respectively, ECU 4,3 million lower and higher than the sums shown in the financial balance sheet.Observations on the bank accountsBank accounting3.63. The efforts made by the Commission in this area have produced positive results, in that the Commission has succeeded in overcoming the backlog in its bank accounting - the accounts are now reconciled every month - and an explanation is given of the differences between the numerical data used in the (subsidiary) bank accounting and the general accounts. On 31 December 1994, the bank balances according to both sets of accounts were identical.Specific bank account3.64. One Commission bank account, the balance on which is relatively small, is not recorded in the accounts.3.65. The Annual Report concerning the financial year 1993 (paragraph 14.122) revealed the existence of a specific bank account which had been opened at a Belgian bank by the Commission in 1991, following the execution of an attachment order in respect of the rent for a building not shown in the Commission's accounts. Although the Commission undertook to do so in its reply, this bank account (BFR 8 million, i.e. ECU 0,2 million) and the corresponding debt are still not recorded in the accounts.Auditing of bank reconciliations (NOSTRO)3.66. The end-of-year bank reconciliations call for a number of remarks by the Court.3.67. This year it was once again difficult to make use of the end-of-year banking reconciliations.3.68. The bank balance and/or the accounting balance in NOSTRO were not the year-end balances for a large number of the bank accounts (see also the Annual Report concerning the financial year 1993, point 14.112 (a)).3.69. The Court insists on the need for the Commission to pay more attention to coordinating the year-end work in this sector in the future, so as to facilitate not only the Court's audit work, but, above all, the year-end work of its own services as well.Observations on the imprest accounts3.70. The amount entered (ECU 7,5 million) for imprest accounts relating to financial protocols with the southern Mediterranean countries does not show the correct amount of the Community funds available in these countries at the close of the financial year.Reservations concerning claims on Member StatesThe separate accounts concerning customs duties and agricultural levies3.71. The magnitude of the errors and problems detected in the separate accounts concerning customs duties and agricultural levies does not allow the Court to conclude that the figure of some ECU 577 million entered in the financial balance sheet is reliable.3.72. Separate accounts are communicated on a quarterly basis. They basically cover customs duties and agricultural levies which have not yet been recovered by the Member States and which are not covered by a guarantee, or which are guaranteed but have been challenged.3.73. The separate accounts held by the Member States, which serve as the basis for the Commission's data, contain numerous errors and omissions, the main one being that they are not exhaustive. For example, at Antwerp in Belgium, a case of fraud involving ECU 49 million discovered and notified to the taxpayer had still not been entered in the accounts by the end of the financial year 1994. The checks carried out in various Member States revealed a variety of shortcomings in the way the separate accounts were kept, particularly in the United Kingdom, where, following the audits carried out, the national authorities called upon the services concerned to make the necessary improvements.Claims connected with the clearance of the EAGGF-Guarantee accounts3.74. The claims on Member States connected with the clearance of the EAGGF-Guarantee accounts for the financial years 1989 to 1991, amounting to ECU 2 000 million, are not shown in the accounts.3.75. The Commission decisions of 30 November 1994 () and 21 December 1994 () resulted in negative corrections totalling approximately ECU 2 000 million, of which three quarters concerned milk quotas in Spain, Greece and Italy. These negative corrections correspond to budgetary revenue to be recovered. These corrections will be made in the financial years 1995 to 1998 by means of negative expenditure entries in Member States' monthly expenditure statements for the financial years concerned.3.76. The Court reiterates its criticisms of such practices, which are not consistent with the financial regulations. Since this is connected with revenue to be recovered, the Commission should have applied the provisions laid down in Article 28 of the Financial Regulation, i.e. establish the estimated debts. This procedure would have made it possible to enter these debts on the assets side of the financial balance sheet, and would thus have made the Community accounts more transparent.Observations on potential claims connected with the establishment of frauds and irregularities3.77. Concerning sums that are likely to be recovered as a result of the cases of fraud and irregularity known to the Commission, the information provided in the Commission's financial statements under the heading 'potential claims` should be improved so as to give the reader of the financial statements an overview of all potential claims of this type. The 'potential claims` heading only covers the cases reported by the Member States themselves relating to the EAGGF-Guarantee. Cases affecting the own resources, which are mostly already entered in the financial balance sheet under the B accounts, are not given, and neither are those concerning the Structural Funds, which are included nowhere. However, declared cases relating to own resources and the Structural Funds imply potential recoveries for the Union amounting to at least ECU 500 million.The data contained in it are the following:>TABLE>3.78. In its 1994 Annual Report on the fight against fraud (), the Commission presents financial information concerning fraud cases affecting the EAGGF-Guarantee, own resources and Structural Funds sectors. These data refer to the financial years 1991 to 1994 only, and cannot be substituted for those which were entered (EAGGF-Guarantee: claims at 31.12.1994 on the basis of cases of fraud declared since the inception of the EAGGF Guarantee), or which ought to be entered (own resources and Structural Funds) in Volume IV of the Union's accounts concerning potential claims, because they do not cover cases pre-dating 1991 for which recoveries are still outstanding. In any case, the report on the fight against fraud is not a financial statement but a descriptive report drawn up by a recently established coordination unit called UCLAF and is based on information furnished mainly by the Member States.3.79. These data are insufficient to fill the gaps in the 'Potential claims` part of Volume IV of the financial statements, which only detail an amount of ECU 1 140,16 million to be recovered in the EAGGF-Guidance sector by Member States, as at 31.12.1994 (Volume IV, page 54, table 2).3.80. In addition, one cannot assume that the information provided by the Member States is 100% correct and, above all, complete. There are good reasons for believing that the picture drawn by the Commission broadly understates the true extent of the phenomenon of declared fraud and irregularities. This doubt is encouraged by the fact that, for example, certain regulations governing the system of notification by the Member States entered into force only recently, or do not compel Member States to update their notifications regularly with regard to the action taken. What is more, in the Structural Funds sector, certain Member States (Italy and Belgium) have not notified anything in this regard since 1990. This doubt is also based on the present state of the system for the financial follow-up of cases of fraud, and on the conditions for recovery and refunding, which the Commission itself considers unsatisfactory ().Reservations concerning the actual volume of commitments outside the balance sheet3.81. Various potential European Union obligations, amounting to at least ECU 88 000 million, are not shown in the financial balance sheet, or even in the Annexes showing off-balance sheet commitments.Multiannual decisions and obligations3.82. The implementation of the Structural Funds falls within the ambit of agreements concluded beforehand with the Member States involved, i.e. the Commission's decisions approving the programmes. These acts establish the European Union's obligation with regard to the parties concerned by stipulating, for a multiannual term, the total amount of the Community contribution. Owing to the fact that the commitment of the appropriations is phased over several years as the annual tranches are implemented, the financial statements should, in order to ensure a true and fair view, show as off-balance-sheet commitments, or in the Annex to Volume IV concerning the European Union's potential obligations and charges, the amount of any obligations which have not yet given rise to corresponding accounting commitments.3.83. The second phase of the reform of the Structural Funds began in 1994, and the decisions adopted at the time accordingly stipulated the total amount to be financed throughout this phase, i.e. from 1994 until 1999.>TABLE>3.84. For the three Structural Funds, the decisions taken in 1994 provided for the granting of total aid of more than ECU 84 765 million. The 1994 tranches gave rise during the financial year to accounting commitments amounting to slightly more than ECU 13 348 million. It follows that, at the close of the financial year, the obligations to be implemented during coming financial years amount to more than ECU 71 417 million. The following table gives the details of the figures.The time-lag in the accounting period relating to the EAGGF-Guarantee3.85. The European Union's legal commitments to Member States, amounting to approximately ECU 16 083 million, by virtue of payments made by the latter under the EAGGF-Guarantee between 16 October and 31 December 1994, are not shown in the off-balance sheet commitments.3.86. Pursuant to Council Regulation (EEC) No 729/90, as last amended by Regulation (EEC) No 1287/95 (), expenditure by Member States in respect of EAGGF-Guarantee operations between 16 October and 31 December is to be reimbursed by the Commission during the financial year 1995.3.87. Since this expenditure - once it has passed the subsequent clearance procedure - is irreversible under the European Union's general budget, the amount should be recorded in the off-balance-sheet commitments in the accounts for the financial year 1994. This is all the more necessary for complete and accurate information as, following the entry into force of the Common Agricultural Policy, particularly as regards arable crops, the expenditure incurred by the Member States during the period in question is, in volume terms, considerable. For example, at 31 December 1994 such expenditure amounted to a considerable sum, namely 43% of the EAGGF-Guidance appropriations for the financial year 1995. This remark does not affect the validity of the amounts of 1994 expenditure charged to the revenue and expenditure account, inasmuch as it includes payments made by the Member States between 16 October 1993 and 31 December 1993.Guarantee granted for a bank loan3.88. The risk taken on by the Community, following the granting of a guarantee of ECU 500 million to a banking syndicate for a loan to the former Soviet Union to finance the import of Community agricultural and food products (), is not shown in the off-balance-sheet commitments. The Community's guarantee covers, up to the amount of ECU 500 million and 98%, any loss of capital and interest in the event of the debtor's default. At 31 December 1994, the sum outstanding in respect of this operation amounted to ECU 132,6 million of capital.3.89. Unlike the reimbursement guarantee on loans granted by the EIB from its own resources to non-Member States and the reimbursement guarantee on loans contracted by the European Communities, the sum set aside to guarantee the loan granted by the banking syndicate is not listed among the off-balance-sheet commitments (potential liabilities).Commitments relating to swap transactions3.90. The commitments concerning currency and interest rate swap transactions (receivables of ECU 975 million and interest deliveries of ECU 996,2 million), which are recorded in the suspense accounts of the 'Balance of Payments` balance sheet, are not shown in the Commission's off-balance-sheet commitments, even though the balance sheet of this financial instrument was consolidated within the Commission's financial balance sheet. The same can be said of the swap transactions involving NCI and Euratom financial instruments, the commitments in respect of which are not even recorded in the relevant financial statements.Observations on the explanatory notes concerning the balance sheet3.91. Generally speaking, an improvement was noted in the quality of the explanatory notes to the Commission's balance sheet. However, the Commission is requested to continue its efforts in this area.The financial balance sheets of other Community institutions and organizationsReservations concerning the tangible assets3.92. The Court expresses reservations as to the value (ECU 121,1 million) of movable assets entered in the respective balance sheets of several Community institutions and bodies.3.93. For the European Parliament, the amount entered in the financial balance sheet (ECU 86,9 million) does not correspond to the amount recorded in the IMMO database, which constitutes the inventory register. Moreover, the adjustments to be made following the last three-yearly physical check, which was completed in 1994, had not yet been incorporated in the financial balance sheet as at 31 December 1994.3.94. For the Council, the adjustments to be made following the last three-yearly physical check, which was completed in 1994, had still not been incorporated into the amount entered in the financial balance sheet (ECU 28,6 million) as at 31 December 1994. According to the Council, these adjustments relate to some 1 250 items, which are still recorded in the inventory register but whose existence could not be confirmed.3.95. In the cases of the Economic and Social Committee (ESC) and the Committee of the Regions, the amount entered in the financial balance sheet, which, as for the other institutions, was calculated by the properties department, is not based on the inventory register. The deficiencies noted with regard to the inventory register (e.g. entries in varying currencies, not converted into ECU, missing totals, blank pages, etc.) make reconciliation with the figure in the accounts almost impossible. Furthermore, no physical inventory check has been made for at least 12 years.3.96. Neither the balance sheets, nor the notes to the balance sheets, of the European Parliament, the Council and the Court of Justice provide information as to the existence of significant property or similar rights (ECU 292 million), or as to property obligations (ECU 1 823 million).3.97. The Parliament has concluded two long-lease contracts with an option to purchase (with respective terms of 27 and 20 years) which involve a building in Brussels (ECU 1 000 million, excluding interest), on the one hand, and a building in Strasbourg (ECU 443 million, excluding interest), on the other. There is no information concerning these transactions in the financial balance sheet or the related notes.3.98. The total of the advances disbursed by the Council for the construction of the 'Consilium` building in Brussels amounted to ECU 292 million as at 31 December 1994, out of an estimated final cost at 31 December 1993 of ECU 332 million. These advances, which were charged to the budget, are not included in the balance sheet, and nor is the financial commitment in respect of the balance of about ECU 40 million shown in the off-balance-sheet commitments, in contrast with the Commission's practice (see paragraph 3.57).3.99. On 15 November 1994, the Court of Justice signed an agreement with the Luxembourg State concerning its buildings. This agreement, though not described as such, evinces all the main features of a leasing-finance contract, and contains a property-transfer clause. Pursuant to this agreement, the Court of Justice has undertaken to make an annual payment of approximately ECU 634 million until, at the latest, 31 December 2015. Ownership of the buildings will be transferred automatically to the Court of Justice on the day when all of the payments made equal the Luxembourg State's sale price for the buildings. An independent expert will draw up a final detailed account for the total sales price, taking into account all the payments already made by the Court of Justice in the form of rent or capital payments. The financial commitment connected with this agreement (which may be estimated at some ECU 340 million if nothing more than the capital payments to be made until 2015 is taken into account) is not shown in the balance sheet or the notes.Observations on the bank accounts3.100. The Court is unable to express an opinion as to the reliability of the amount for demand deposits (ECU 0,9 million) shown on the assets side of the ESC's financial balance sheet, given that the banking reconciliations up to 31 December 1994 had not been done.THE LEGALITY/REGULARITY OF THE UNDERLYING TRANSACTIONSRevenue-related transactionsTraditional own resources3.101. Regarding the traditional own resources, the audits carried out on a sample of underlying transactions in the Member States did not uncover any elements that might cast doubt on the legality/regularity of the corresponding revenue, or which made it possible to uncover any substantial errors that were sufficiently significant to affect the Community budget at the level of entitlements established and collected. Nevertheless, it must be clear that the sample selected by the Court cannot be extracted from the whole of the population concerned, since, obviously, no authority has a list of imports containing those not declared to the customs authorities. The same problem arises above all in connection with taxes based on declarations. This being the case, it is not possible to make any judgment as to the completeness of the traditional own resources.3.102. The audit work in respect of the traditional own resources included tests on the working of the national systems for the centralization of the underlying operations.3.103. It should be noted that the sample of underlying transactions is selected on the basis of the sums recovered by the Commission. This approach does not, therefore, allow for any assessment of cases of exemption or application of a zero rate of customs duty or, a fortiori, undeclared transactions. During the audit of revenue from customs duties and agricultural levies, this drawback was overcome pragmatically for imports that were exempt or zero-rated by analysing transactions in respect of which no entitlement or levy had been established alongside those transactions in respect of which entitlements had been collected.Customs duties and agricultural levies3.104. The Court's audit of the transactions selected from the sample and its audit of other transactions, selected at random, did not reveal any major problems as regards the reliability and substance of the accounts. The main problems encountered concerned legality/regularity, particularly with regard to meeting the deadline for making funds available.3.105. The most probable cumulative value for serious errors concerning customs duties and agricultural levies is not very high, being of the order of ECU 10 million.3.106. The checks that were made during the audit of transactions sampled for the DAS also revealed various problems, especially concerning the deadlines for making own resources available. For example, in Denmark regular delays involving some 10% of the revenue established were noted in the two offices visited. In some offices in Greece the revenue received on the last day of the month is automatically carried forward to the next month. In the Netherlands, the entering in the accounts of entitlements established by means of periodic declarations is delayed in certain cases. The Commission should remind Member States that they must observe the time limits for making funds available and it must ensure that it receives the default interest owed.3.107. It is, in fact, most likely that the greatest risk to revenue from customs duties and levies is non-declaration, which, by definition, escapes, to a very large extent, the investigations conducted for the purpose of producing the DAS. The amount of irregularities declared by the Member States to the Commission, as well as irregularities concerning transit that were not reported, represent about ECU 300 million, or 2% of customs duties and agricultural levies recovered. The extent of this phenomenon in the field of traditional own resources makes it essential to strengthen the fraud prevention and detection mechanisms.3.108. It should be noted that, in practice, any import-related fraud is automatically accompanied by fraud relating to VAT on imports, which, in the final analysis, affects the VAT own resource. However, the impact of this loss, which may be estimated at about ECU 60 million, is relatively minor.3.109. In the final analysis, errors and fraud also have an impact on the GNP resource, as a supplementary resource.Sugar levies3.110. The sample to be audited included nine transactions, one of which concerned a taxpayer located at the Ile de la Réunion. This could not be checked beyond the paying agency stage. Of the eight transactions actually audited down to taxpayer level, three were considered to be affected by errors.3.111. The first error concerns the payment of the balance of the production levy by the United Kingdom one month after the time limit stipulated in the Regulation, which provides that the payments are to be prepared in October, ready for payment to the Commission in December. It was however noted that the 1993 balance, amounting to ECU 15 952 344, was only paid to the Commission in January 1994. Thus it follows that the revenue for 1994 was overstated by the amount of the balance. The same thing appears to have occurred in 1994, when the sum of ECU 14 974 768, which should have been paid over in December 1994, was, in fact, paid over in January 1995. Moreover, the sum owed in 1994 was not entered in the Commission's balance sheet under established entitlements to be recovered. Furthermore, default interest should have been received in respect of these late payments.3.112. The audit of the balances of levies paid by France in December 1994 revealed that the supplementary levies, which should be booked to a specific budget item (item 1160), were, in fact, booked to item 1100 relating to sugar production levies. This booking error overstates the revenue entered under item 1100 by ECU 32 011 134, leaving a corresponding deficit under item 1160.3.113. In Spain, a warehouse had not been approved by the administration and was, therefore, not on the official list of approved warehouses. As a result, no storage subsidies should have been received for the sugar sold out of this warehouse (nor should the storage costs have been reimbursed).The own resources based on VAT and GNP (Gross National Product)3.114. The own resources based on VAT and GNP do not call for any comments by the Court as far as the reliability of the calculations and the legality/regularity of the procedures used to determine the basic data are concerned.The VAT-based own resource3.115. The audits covered:- calculation of the uniform rate and the various elements involved in its definition, and of the resulting twelfths,- examination of the statements relating to the financial year 1993 which have an effect on the VAT receipts for the financial year 1994 through the balance mechanism,- recovery and entry in the accounts of the twelfths, balances and adjustments,- correct transposition into the various national legislations of the VAT Directives concerning harmonization between the Member States.3.116. These various audits did not reveal any major problems that were likely to affect the Commission's accounts. It should, nevertheless, be emphasized that the Commission has expressed various reservations concerning the content of the statements, and has noted various cases where the VAT Directives have been transposed incorrectly. However, the financial impact of these situations may be very diverse, and to calculate it requires work which is often long and complex, to such an extent that it cannot be quantified.The own resource based on the Gross National Product (GNP)The Gross National Product (GNP) as an assessment base3.117. The GNP is calculated on the basis of the national accounts drawn up in each Member State, using complex statistical and econometric methods, by the specialist public bodies which enjoy a monopoly in this area. The data supplied to the Commission by the Member States are checked twice, firstly by the Commission (EUROSTAT), on the basis of Article 19 of Regulation (EEC, Euratom) No 1552/89, and secondly, by the GNP Committee, in accordance with Article 7 of Directive No 130/85/EEC. In October 1994, the GNP committee delivered its opinion on the data relating to the financial year 1993, in which it said that 'the figures reflect the Member States' continuing and optimum efforts to produce comparable and representative data`.3.118. The Court's audit of the reliability of the national accounts is limited by laws on statistical secrecy, and would, moreover, require a far greater number of personnel with specific expertise in the techniques of national accounting than are available to the Court. In addition, owing to its statistical nature, the GNP macro-economic aggregate does not lend itself to an audit concerning the legality and regularity of the underlying transactions with the objective of producing a DAS.3.119. It was for this reason that the audits focused on the Member States' compliance with the regulatory concepts and procedures laid down in the Council Directive of 13 February 1989 (89/130/EC, Euratom) concerning the harmonization of the manner in which the Gross National Product is calculated at market prices (). The absence of solutions to the problems referred to in paragraphs 1.117 et seq. of the Court's Annual Report concerning the financial year 1994, and in particular the matter of reservations not lifted by the Commission, did not enable the objectives of exhaustiveness, reliability and comparability in respect of the GNP aggregates forwarded to the Commission by the Member States to be achieved as of the financial year 1994. The impact of these reservations, or of other unresolved problems, on the quality of the GNP assessment base and, consequently, on the VAT and GNP resources system, cannot be estimated owing to a lack of the appropriate resources.The own resource based on GNP (supplementary resource)3.120. With regard to this resource, the Statement of Assurance (DAS) focuses on the reliability and the legality/regularity of the methods used to establish the GNP own resource, and the following aspects are taken into account:(a)the fixing of the own resources ceiling,(b)the calculation of the uniform rate for the own resources 'supplementary assessment base`,(c)the calculation of the sums owed by each Member State in respect of this supplementary resource,(d)the calculation of the monthly twelfths to be paid, and their recovery and entry in the accounts,(e)the calculation of the annual balances and adjustments to previous balances, and their recovery and entry in the accounts.3.121. The checks carried out by the Court in respect of the abovementioned points did not give rise to any observations concerning the financial year 1994.Expenditure-related transactionsCases of expenditure in respect of which the Court cannot give an assurance3.122. In several areas, representing about 14 % of Community spending, the Court is unable to express an opinion. This unsatisfactory situation is largely due either to the inadequacy of the information made available to the Court or to the unreliability of the systems in place for the management of the transactions the Court was required to audit. As a result, in those cases where the Court observed errors, the extrapolated numerical results given in this document may well underestimate the impact of these errors, since the extrapolations were made on the supposition, in the auditee's own interest, that there were no errors in the part of the budget on which the Court does not express an opinion.The impossibility of auditing certain items of EAGGF-Guarantee expenditureIn Denmark3.123. The Court did not receive from the Danish administration the adequate necessary data for it to prepare and carry out the audit work within a reasonable period of time after the accounts were closed. Accordingly, the Court cannot provide any assurance in respect of EAGGF-Guarantee expenditure in Denmark, which amounted to some ECU 1 300 million in 1994.3.124. In order to arrive at the transactions underlying EAGGF-Guarantee payments to Member States, the Court draws its sample from within the accounts of the national paying agencies. Before drawing the sample, the Court needs to reconcile the paying agencies' accounts with the corresponding declarations sent to the Commission. This is necessary in order to ensure that the sub-population to be sampled tallies with the data entered in the central accounts of the Communities, and therefore also corresponds to the overall population on which the sampling criteria are based.3.125. The Court announced its forthcoming audit of EAGGF-Guarantee expenditure to the Danish authorities in February, ten weeks in advance of the scheduled mission date (25 April), and one week later specified the nature of the information required for the preparation of the mission. During the three months which followed (up to mid-May) the Danish authorities asked for the mission to be postponed by three weeks (a request to which the Court agreed, postponing it to 15 May), after which the Court received, well after the agreed deadline of 20 April, two batches of documents (received by the Court on 28 April and 12 May) containing information which neither matched the declared expenditure nor enabled the Court to check or re-perform the reconciliations which had supposedly been prepared. Owing to these circumstances, the Court has been unable to carry out its audit.3.126. The problems with the paying agent seem to be similar to those observed by the Court during its audit of the financial year 1993. Moreover, the Court observed that, contrary to what the Danish authorities had suggested, the Commission had, in April 1995, concluded, for the financial year 1994, in a letter to the Danish authorities, after evaluating the results of an audit of the accounts for the financial years 1993 and 1994, that 'the different sets of accounts and EDP systems used... do not provide a proper basis for producing the monthly and annual reports` and that 'internal reconciliation for most of the measures is still outstanding and the annual declaration has still not been finalized`, and that 'there is a risk of error in the amounts declared to the Commission` ().In the United Kingdom3.127. It was also impossible to check certain items of agricultural expenditure in the United Kingdom amounting to ECU 244 million since no information at all had been sent by the British authorities.3.128. It was in fact impossible to reconcile expenditure on the ewe premium in Scotland and Northern Ireland (totalling ECU 106 million) because the national authorities had not supplied all the requisite information. In addition, ECU 27 million had to be excluded from the audit of expenditure in Scotland (mainly cultivation area aid) because the magnetic tapes sent to the Court were not complete. Moreover, the Court could also not audit expenditure amounting to about ECU 111 million in the field of five-year set-aside schemes and dairy product withdrawal because it had received no information thereon from the British authorities.In Spain3.129. During the reconciliation of global data declared to the Commission with data supplied by the regional authorities and the Spanish paying agencies, the unexplained significant differences (ECU 119 million) relating to 10 budget headings (amounting to ECU 2 200 million in all) made it impossible to carry out a full audit.The lack of an adequate audit trail3.130. The Court's audit in the Member States could not be satisfactorily carried out in certain cases because it was not possible to identify the underlying transactions concerned, due to the lack of an audit trail which linked payments made from the Community budget to such transactions at the level of beneficiaries. As a result, it is evident that no conclusion could be reached as to the legality/regularity of such transactions. Out of a total sample of 567 payments this problem was encountered 17 times, which indicates that some 3% of payments made from the Community budget in 1994 are likely to be affected by such problems.3.131. In order to give an assurance as to the legality/ regularity of the underlying transactions at the level of beneficiaries, the Court selected a sample of items at the level of the Communities' central accounts and traced these through the accounting records in the Member States until such transactions were identified at national, regional and local level, as appropriate. As regards the EAGGF-Guarantee, the selection was made on the basis of the national paying agencies' monthly statements, which were, moreover, reconciled with the accounting data in the Commission's accounts.3.132. In the following cases, for the reasons stated, the lack of an audit trail has rendered this impossible:(a)in the case of social sector expenditure, the manager of the Spanish intermediary was unable to provide any list of the beneficiaries who had received payments (two cases);(b)the accounting system at a Dutch training centre which held a subsidized training programme in the social sector Fund does not allow the total costs to be broken down in respect of the individual training measures;(c)a British company receiving a subsidy in the regional sector has gone out of business; no representative of the company or the company's accounts were available;(d)the data concerning the monthly EAGGF-Guarantee expenditure forwarded by the Greek authorities to the Commission did not match the data sent to the Court. A reconciliation was thus not possible (two cases);(e)in the social sector, the financial management of a Spanish intermediary organization makes it impossible to pinpoint the origin of the funds (national or Community) used to finance individual training programmes;(f)the accounting system of an Italian paying agency responsible for administering measures financed by EAGGF-Guarantee does not enable a link to be made between individual payments and the beneficiaries;(g)the documents supporting the number of hours worked (one case) and the calculation of overheads (one case) in connection with research programmes in the United Kingdom financed by Community funds were not available;(h)in the context of the EAGGF-Guarantee, one Greek paying agency was not able to supply the details of a beneficiary for whom the agency had settled an amount;(i)in the context of the EAGGF-Guarantee, a Spanish paying agent could not supply a list of payments concerning special premiums for tobacco;(j)the accounts of a Spanish cooperative in receipt of EAGGF-Guarantee aid did not permit the quantities of oil concerned to be checked;(k)absence of supporting documents for a declaration given by the German authorities in the regional sector;(l)in the field of regional development in Portugal, the Court could not obtain access to the necessary information for it to be able to check the observance of the regulations regarding the deadline for transferring Community funds from the Treasury to the authorities responsible for managing the projects financed (three cases).Particularly unreliable systems which are likely to include errors3.133. In certain specific cases of Community expenditure under the EAGGF-Guarantee the Court's audit has revealed that the systems which have been put in place to manage the underlying transactions are particularly unreliable and error-prone. Although the individual transactions verified in this area only contained one or two cases of serious errors, in many cases it was not possible to carry out a valid audit and the risk that significant errors may exist is considerable. Out of a total sample of 567 payments, this problem was encountered 36 times, which indicates that, for some 6% of the payments made against the Community budget in 1994 under these systems, it is impossible to give any assurance as to the legality and regularity of the underlying transactions. The Community expenditure in 1994 in the specific fields concerned amounted to over ECU 2 800 million. This problem usually arises in the same fields as those for which the Commission itself refused to accept significant sums in the context of previous clearance decisions.3.134. In certain specific areas of EAGGF-Guarantee expenditure concerning cotton and storage, no assurance could be obtained because the Court's analytical review revealed serious inconsistencies between global inputs and outputs involving production processes or storage. The differences indicated that serious overpayments could have been made because of the absence or the non-functioning of the systems of internal control. However, in most of the other non-opinion cases concerning EAGGF-Guarantee expenditure the lack of audit assurance resulted from inadequate administrative controls, often in combination with an inadequate physical inspection of the existence of the goods (e.g. stocks of agricultural products) or of other evidence of the object of the aid (e.g. an area of land cultivated or set aside). In this connection cases were found for which the responsible administrative bodies in the Member States could not prove, by means of valid supporting documents, that the event or transaction which had led to a payment had actually taken place.The absence of assurance for various reasons3.135. For various reasons (timetable difficulties, legal or material obstacles, etc.), the Court was unable to audit fourteen transactions within its sample.3.136. In fourteen other cases the Court was able to obtain partial assurance only, owing to the specific problems encountered during the audit (lack of substantiating documents, lack of clear information concerning apparent anomalies).Errors affecting the legality/regularity of the expenditure3.137. Some of the errors detected by the Court relate to commitments, and others to payments. A number are substantial in nature, whilst others are formal (see definition of the difference in paragraph 1.46). The results of the legality/regularity audit are set out separately, i.e.:- results affecting the commitments:- substantial aspect,- formal aspect,- results affecting the payments:- substantial aspect,- formal aspect.3.138. The following table provides a summary quantification of the serious errors, which are described below.Errors affecting the legality/regularity of the commitments entered into during the financial yearThe substantial legality/regularity errors concerning commitments3.139. The Court's audit of the commitments did not uncover any substantial serious errors.The formal legality/regularity errors concerning commitments3.140. The most likely cumulative volume of the transactions affected by serious formal errors concerning commitments, of which there are few and the direct impact of which on the amounts chargeable to the budget cannot be quantified, is of the order of ECU 720 million.3.141. A detailed assessment of this financial impact is given in the tables in Annex I. The known value of transactions affected by this type of error, the direct impact of which on the amounts charged to the budget is not quantifiable, has been established as a result of the Court's work at some ECU 76 million.3.142. These serious errors mainly affect the decision and commitment rules (absence of compulsory prior decision or opinion). They originate within the Community institutions.3.143. They were mainly detected in the fields of administrative expenditure, development cooperation and regional development and are listed in Annex II.Errors affecting the legality/regularity of the transactions underlying the paymentsThe substantial legality/regularity errors concerning payments3.144. The most probable cumulative amount of the very numerous serious substantial errors concerning payments, which resulted in the sums concerned being wrongly charged to the budget, is of the order of ECU 2 386 million.3.145. A detailed assessment of the financial significance of these errors is given in the tables in Annex III. This extrapolated sum is corroborated by the volume of known errors identified as a result of those identified in the sample, as well as outside the sample, during the Court's work in support of the DAS or its other work. The volume of known errors detected as a result amounts to around ECU 254 million.>TABLE>3.146. These serious substantial errors vary greatly and particularly affect the eligibility of transactions for Community financing, the reality or correctness of the expenditure financed, the accuracy of the way in which the Community contribution was calculated and the quality of the supporting documents on which the payments were based. They occurred in most cases at national administration level. Some concerned the Structural Funds. In that case - where payments by the Commission consist of advances or payments on account - the existence of errors at the level of the underlying transactions, in particular down to final beneficiary level, does not necessarily mean that the payments by the Commission were themselves incorrect at the time they were made. However, as such underlying transactions were financed with European Union funds, the General Budget is affected by these errors.3.147. These errors (which are listed in Annex IV) were detected in most areas of Community expenditure (agricultural guarantee, fisheries, Structural Funds, research and aid to Eastern Europe). In all of these areas errors were found which resulted in the EC budget paying non-eligible costs. These errors included:- payments in respect of activities or beneficiaries ineligible for aid,- payments of claims overstated because of the inclusion of fictitious or wrongly calculated costs (including exchange rate errors),- differences between expenditure declarations and records held on-the-spot or physical stocks,- payment of claims made prematurely on the basis of forecasts rather than actual expenditure,- payments which result in the EC bearing more than its maximum share of total costs,- reimbursement by the EC of VAT refundable by the Member States to the beneficiaries,- irregular deduction of commission by administering bodies of funds intended for beneficiaries,- payments in respect of agricultural products not meeting product specifications or quality standards.The formal legality/regularity errors concerning payments3.148. The most likely volume of transactions affected by the numerous serious formal errors concerning payments is of the order of ECU 2 880 million. These errors are also likely, in some cases, to have resulted in a loss to the Community budget, but their direct impact on the amounts chargeable to the budget is not itself quantifiable.3.149. A detailed assessment of the financial significance of this is given in the tables in Annex V. The known value of transactions affected by this type of error, the direct impact of which on the amounts chargeable to the budget is not quantifiable, has been established as a result of the Court's audit work at some ECU 454 million.3.150. These serious formal errors affect in particular the authorizing procedures implemented by the authorizing officer and the Financial Controller, the tendering procedures and the beneficiaries' compliance with certain obligations. They originated just as much at national administration level as at the Commission.3.151. These errors (which are listed in Annex VI) were detected in a number of areas of the budget (administrative expenditure, agricultural guarantee, Structural Funds and research). They included:- the non-respect of Community regulations and procedures, such as instruction to make payments without the Financial Controller's visa, non-respect of payment dates and non-compliance with rules on sub delegation;- failure to respect contracts or EC regulations (e.g. on tendering procedures),- failure to carry out adequate controls in accordance with the regulations,- payments made without adequate supporting documentation,- payments directed to the wrong operational programme,- advance payments made on the basis of erroneous records of previous expenditure,- advance payments made in respect of commitments which were irregular,- failure by Member States and/or beneficiaries to maintain separate accounting records as required by regulations.CHAPTER 4 Lessons to be drawn from the Statement of Assurance4.0. TABLE OF CONTENTS Paragraph referenceThe DAS audit results concerning the underlying transactions in respect of expenditure 4.1 - 4.4Implications concerning the quality of the Community systems of financial administration 4.5 - 4.8Remedial action required 4.9 - 4.17 At the level of the Commission 4.9 - 4.12 At the level of the Member States 4.13 - 4.17THE DAS AUDIT RESULTS CONCERNING THE UNDERLYING TRANSACTIONS IN RESPECT OF EXPENDITURE4.1. In respect of expenditure, the Court's audit indicates that there are too many errors in the transactions underlying the payments for the Court to be able to provide a global positive assurance in respect of the legality and regularity of those transactions.4.2. In respect of the legality and regularity of payments, serious substantial errors - errors directly affecting the amounts of Community funds paid out - are estimated to be in the range ECU 1 500 to 3 700 million, or 2,9 to 5 % of total payments: the most likely estimate is ECU 2 400 million, or 4 % of total payments. Apart from these errors, the Court could not obtain assurance about a further 14 % of total payments: some 2,5 % of the relevant expenditure could not be audited at all, 3 % lacked an adequate audit trail, about 6 % was covered by systems found to be so inadequate that the necessary assurance could not be obtained, and a further 2,5 % could not be completely audited for a variety of practical reasons. The obverse of these statements is that the Court's audit indicates that at least four fifths of EC payments should be without serious substantial error with regard to the legality and regularity of the underlying transactions, except to the extent to which they might be affected by concealed deliberate irregularities not susceptible of detection through the Court's audit procedures.4.3. Serious formal errors of legality and regularity are estimated to occur in respect of some 4,8 % of total payments. Since such errors by definition affect the total amounts of the transactions concerned, no estimate is possible of the impact of the existence of these errors on the amounts of money actually paid out.4.4. The detection of serious substantial errors, amounting to ECU 207 million in terms of known error, does not necessarily imply that the beneficiaries concerned deliberately defrauded the Communities of this amount. The existence or not of a deliberate intent to defraud can only be determined in each case by further investigation.IMPLICATIONS CONCERNING THE QUALITY OF THE COMMUNITY SYSTEMS OF FINANCIAL ADMINISTRATION4.5. The rate of serious substantial error revealed by the Court's audit confirms the Court's repeatedly expressed view that the systems which have been put in place to ensure the financial administration of Community operations are too often unreliable. This view has been reinforced by the Court's identification of areas in which the systems were particularly inadequate, even if the transactions audited in detail were often apparently free of significant substantial error. The errors and systems weaknesses detected occur mainly in the main areas of Community expenditure, agriculture and Structural Funds, and originate most often in bodies in the Member States responsible for the administration of Community expenditure programmes. This is not surprising because these fields represent some 75 % of Community expenditure, and thus of the Court's sample of underlying transactions. In the case of errors affecting EAGGF-Guarantee expenditure, the audit frequently found a readiness to transfer monies to final beneficiaries without sufficient verification of the elements on the basis of which such payments had been claimed. In the case of the Structural Funds, a number of transactions audited revealed inadequate supporting evidence for expenditure declarations by national authorities to the Commission.4.6. The measures which could reasonably be expected to be implemented to prevent errors, while at the same time ensuring that those entitled to Community support receive it within a reasonable time scale, or subsequently to detect errors, are too often non-existent or poorly applied. The multi-layered structure of the financial management of Community operations in Member states, involving the Commission and Member State bodies at national, regional and local levels, inevitably leads to complications in terms of the complexity of systems of financial administration, and sometimes to internal inconsistencies between elements of these systems which often were not designed primarily to administer the Community operations concerned. Furthermore, basic data relating to Community operations at the level of final beneficiaries is often not passed up the line to those responsible for their financial administration at a higher level, whether in the Member States or at the Commission. This inevitably restricts their ability to monitor, control and audit such operations in an efficient and effective manner.4.7. In specific fields of EAGGF-Guarantee activities, systems of financial administration were encountered which were so inadequate that the Court is not in a position to provide any assurance as to the legality/regularity of the underlying transactions (see points 3.133 and 3.134).4.8. Three chapters in the Court's Annual Report 1994, published at the same time as this report, describe a number of system weaknesses, many of which have also been encountered and reported on by the Court in previous years, at the level of the Commission and in the Member States in the operation of the Structural Funds. The Statement of Assurance audit, which has the objective of giving an overall assurance about the totality of the EC budget and is based on a random sample of commitments and payments, along with the audit covering all aspects of monetary flows from the Commission to the final beneficiaries, has confirmed the existence of a significant number of errors brought about as a result of these weaknesses.REMEDIAL ACTION REQUIREDAt the level of the Commission4.9. If the problems identified at the level of the Commission in the DAS audit of the 1994 accounts are to be overcome, the Commission's approach to the planning and management of Community expenditure programmes will need to be changed.4.10. Attention needs to be focused on two objectives:(a)the reduction in the rate of errors, mainly formal in nature but in many cases serious, occurring within its direct responsibility. In part this means ensuring that prescribed procedures are followed and deadlines met, but it also requires greater attention to the quality of expenditure planning before commitments are made and advances paid;(b)the development of its monitoring role, so as to enable it to act effectively to secure a reduction in the rate of errors, mainly of a substantial nature, occurring in the administration of Community expenditure programmes by bodies in the Member States. Only if the Commission can secure the necessary information, and demonstrate its willingness to act on it, for example by withholding further payments, will it be able to discharge effectively its responsibility under Article 205 of the Treaty on European Union for the execution of the Community budget.4.11. Particularly in the area of the Structural Funds, the Commission needs to intensify its monitoring of the progress of the programmes and their compliance with the regulations. Progress in ensuring that objectives are clearly identified, actions appropriately defined, and realistic timetables established for their execution will facilitate the Commission's task. In any event it will never be either appropriate or possible for the Commission to supervise the execution of these programmes in detail, but it must make every effort to ensure that payments are only made when the conditions applicable are met. In the view of the Court, as was previously made clear in its opinion on the draft framework regulation concerning the protection of the Community's financial interests, it is desirable that financial sanctions should be available against administrations which persistently fail to implement programmes in accordance with applicable policies and regulations.4.12. The three stage initiative launched in 1995 by the new Commission with a view to achieving 'Sound and Efficient Financial Management` () represents a very important step in the right direction. The Court recognizes that improvements will take time to achieve; it will be looking for the relevant evidence in its audits of 1996 and subsequent years.At the level of the Member States4.13. The reduction in the rate of substantial errors occurring at the level of the administering bodies in the Member States requires improvements in their financial management systems in the spirit of new Article 209a of the Treaty on European Union. In the interests of the European citizens effective steps must be taken to ensure that payments of Community funds are only made in pursuit of Community objectives and when all the appropriate conditions are satisfied.4.14. Action is required to ensure that:(a)the systems in the Member States are properly adapted to serve the Community objectives (as well as, where appropriate those of Member State administrations);(b)an adequate measure of control over compliance with prescribed conditions for the receipt of Community funds; and(c)that payments made on behalf of the Community are fully and promptly accounted for, and that related information is made readily available to those ultimately responsible for their management and audit.4.15. Concerning specifically the field of EAGGF-Guarantee, the Member States should improve their systems for managing Community operations so as to ensure that the criteria in the regulations are adequately and consistently applied. It is important that the effectiveness of administrative controls and physical inspections on the spot be increased. Member States should further ensure that the amounts declared to the Commission are based on actual payments which have been reconciled on a monthly basis to the accounts of the respective paying agencies.4.16. With regard to the Structural Funds, the Member States must play their proper role in ensuring that programmes are executed in accordance with the regulations, that accounting for expenditure is fully complete and transparent, that claims to the Commission for payment, and payments to beneficiaries, are made only when all conditions are satisfied and all suporting material is available, and that full information is readily available concerning both the physical advancement of programmes and expenditure acutally incurred. Progress towards these objectives is essential if there is to be sufficient assurance in future about the regularity and legality of Structural Fund operations: it is equally the key to achieving greater efficiency, economy and effectiveness in this major part of the EC budget.4.17. The Court acknowledges the Commission's recent initiative to reform the clearance of accounts procedure with the intention of improving the performance of national paying agencies responsible for Agricultural Guarantee funds, and of ensuring that such payments are fully and promptly accounted for (). The Court equally takes note of the Commission's stated intentions to improve the planning process governing expenditure from the Structural Funds for the 1994 to 1999 period, and the monitoring and evaluation of the results of that expenditure. In its future audits the Court will be concerned to assess progress towards the achievement of these objectives.This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 25 and 26 October 1995. For the Court of Auditors André J. MIDDELHOEK PresidentANNEX I>REFERENCE TO A FILM>ANNEX IISUMMARY OF THE SERIOUS FORMAL LEGALITY/REGULARITY ERRORS CONCERNING COMMITMENTS(cf. paragraph 3.143)Various areas1. Commitments were entered into without the institution's prior decision to provide the finance.2. Commitments entered into after the payments were made.The area of administrative expenditure3. A contract and additional clauses agreed between the European Parliament and the city of Strasbourg concerning the renting of the IPE III building which were only partially submitted beforehand for the opinion of the Advisory Committee on Procurements and Contracts.Regional sector4. A commitment lower than the amount of the contribution provided for in the Commission's decision.Tourism sector5. A bid accepted following a pre-selection procedure, despite a lack of information essential to its assessment.Development cooperation6. A supplementary commitment was based on a Commission decision which was irregular because it was adopted, on 10 December 1993, without sufficient appropriations being available.ANNEX III>REFERENCE TO A FILM>ANNEX IVSUMMARY OF THE SERIOUS SUBSTANTIAL LEGALITY/REGULARITY ERRORS CONCERNING PAYMENTS(cf. paragraph 3.147)Agricultural sector1. Storage costs in respect of quantities of cereals the existence of which had not been proved.2. A stock of physical cotton different from the stock stated in the accounts audited, thus implying an over-declaration concerning the quantity of raw cotton.3. Subsidization of tomatoes which were unsuitable for processing.4. Coefficients which overestimated packaging costs.5. Surface areas subsidized different from the actual areas.6. Quality coefficients overstating the qualities subsidized.7. A payment made twice to the same beneficiary.8. Tobacco production premiums paid for quantities exceeding those stipulated in the contracts.9. Tinned meat not containing the ingredients (according to the laboratory certificate) justifying the rate applied for the payment of export refunds.10. Underestimation of the profit on sales in the calculation of the public-storage costs.11. Underestimation of the amount of the subsidy paid owing to the misapplication of the agricultural conversion rate.12. Application for a premium unacceptable owing to its submission after the deadline.13. An item of expenditure declared for 1994, whereas it should have been charged to the financial year 1995.14. Non-imposition of penalties in respect of the late submission of a subsidy application.15. Overvaluation of the amount of aid owing to the incorrect classification of the land set aside.16. Declared expenditure in excess of actual expenditure.17. An over-high final payment made owing to the use of an incorrect exchange rate and to the oversight of an advance already paid.18. A subsidy paid for processing products which did not meet the specifications.19. An amount recovered lower than the amount owed.20. A set-aside subsidy paid for ineligible land.21. A premium paid in respect of ineligible breeding stock.22. Overestimation of stock depreciation owing to the application of the wrong coefficients.23. No deduction in respect of overlapping subsidies.24. Subsidy increased owing to the application of the wrong agricultural conversion rate.25. Subsidy paid in respect of a non-existent winegrowing plot.26. Non-application of the pro-rata reduction in cases of non-compliance with the obligation to set aside 15% of the land.27. Expenditure declared although the corresponding payments had not been made to beneficiaries.28. Sugar storage subsidies which should have been paid monthly and charged to the financial year 1993.29. Reimbursement of the costs of sugar stored in an unauthorized warehouse.30. Advances in excess of the ceilings stipulated in the Regulation.Fisheries31. The payment of a final balance on the basis of documents that were not adequate according to the regulations.Regional sector32. Items of 1991 and 1992 expenditure declared as justifying other expenditure in 1993 presented as justification for an advance paid in 1994, compounded by a statement of expenditure which did not correspond to the accounts of the beneficiary audited, and computing equipment subsidized under a telematics project.33. The payment of costs connected with ineligible operations.34. Expenditure lacking conclusive justification, certified by a Member State.35. Declared expenditure below that in the beneficiary's accounts.36. Expenditure declared lower than the eligible expenditure incurred.37. Unpaid invoices and/or provisions included in a statement of expenditure.38. VAT, which was deductible for the beneficiary, included in the statement of expenditure.39. Expenditure in respect of which the supporting documents could not be produced.40. Expenditure outside the eligibility period.41. Advances paid in excess of the limits stipulated in the Regulation.42. Expenditure which was ineligible because it did not relate to the project financed under the Operational Programme concerned.43. A building used for purposes other than those which justified (and conferred entitlement to) the Community contribution.Social sector44. The financing of a general pre-training measure where only a training measure leading to qualification was eligible, combined with certification of expenditure based on previous supporting documents which was insufficiently substantiated by the Member State.45. Use of PRODEP II funds as finance for PRODEP I operations.46. Declared expenditure in excess of actual expenditure.47. Social Fund aid used for training students who were neither unemployed nor seeking work.48. Subsidies used for an ineligible re-training measure were recovered by the regional authorities, but not repaid to the Commission.49. The financing of ineligible training measures for infant and primary school teachers50. An advance paid on the basis of estimated expenditure instead of actual expenditure.51. Funds transferred between Operational Programmes to cover costs which increased as a result of significant changes in exchange rates.Environment52. Declared expenditure relating to an advance paid, rather than the final beneficiary's actual expenditure.EAGGF-Guidance53. Expenditure declared equivalent to an advance paid, rather than the final beneficiary's actual expenditure.54. The levying of a commission by the administrative body on subsidies paid to beneficiaries.Research55. An expenditure statement artificially inflated in such a way that the Community contribution financed all of the costs.56. Expenditure submitted for Community support which had already been financed by a national research institute.57. Declared costs overstated by using exaggeratedly high rates or omitting to deduct the amount of an advance already paid.Aid to Eastern European countries58. Financing of the ineligible VAT portion of a PHARE project.Administrative expenditure59. Payment by the Commission of the purchase price of the 'Clovis/Wilson` plot, even though it was not payable because the related contract had not been signed in the presence of a notary.ANNEX V>REFERENCE TO A FILM>ANNEX VISUMMARY OF THE SERIOUS FORMAL LEGALITY/REGULARITY ERRORS CONCERNING PAYMENTS(See paragraph 3.151)Administrative expenditure sector(a)Commission1. Instruction to pay the salaries of Commission officials sent to banks before the corresponding payment order had been approved by the Commission's Financial Controller.2. A case of non-reliability of the procedure for certifying the correctness of the amounts to be paid.3. Supporting documents relating to the reason for the payment missing.(b)Parliament4. Non-compliance with the Community procedures for awarding contracts.Agricultural sector5. A case where the stipulated check of at least 5% of the physical stocks was not carried out.6. Granting of the subsidy and release of the bank guarantee before on-the-spot checks had been carried out.7. Non-fulfilment of the obligation to carry out a 5 %-minimum check.8. Contrary to Article 67 of the rules for the implementation of the Financial Regulation, reimbursement of a veterinary laboratory's expenditure on the basis of unpaid invoices.Regional sector9. The reduction of the initial tranches during the reorganisation of a programme did not lead to a reduction in the corresponding commitments and payments, which were only corrected by offsetting against subsequent tranches.10. A payment of state assistance not notified in good time to the Commission by the beneficiary.11. Non-compliance with Community and/or national procedures for awarding contracts.12. The provisions applicable to the conversion of national expenditure into ECU were not complied with.13. Expenditure in excess of that declared.14. Projects approved in the absence of prior technical or environmental-impact studies.15. Payment to beneficiaries of sums higher than the advance paid to the Member State.16. Global subsidy not divided into individual subsidies by the intermediary organization.Social sector17. Separate accounts were not kept.18. Payment of a new advance on the basis of a declaration containing expenditure concerning measures not initially provided for but approved retroactively.19. Persons involved in vocational training unaware of Social Fund co-financing because of disregard of the principle of advertising.Research20. Adequate supporting documents not available in support of declared costs.21. A payment was authorized for an amount higher than the limit stipulated in the act of sub-delegation.22. A payment erroneously charged in part to the wrong budget heading and an erroneous commitment.ANNEX ACHARTS AND DIAGRAMS Nos I TO VIII>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>REPLIESCommission ReplyTABLE OF CONTENTS PageGeneral comments 69Chapter 3: The audit findings 70Chapter 4: Lessons to be drawn from the Statement of Assurance 79Annex II: Summary of the serious formal legality/regularity errors concerning commitments 80Annex IV: Summary of the serious substantial legality/regularity errors concerning payments 81Annex VI: Summary of the serious formal legality/regularity errors concerning payments 84Annex I: General comments concerning the EAGGF 87Annex II: Comments on the co-financing mechanisms in the area of the structural Funds, with special reference to the European Regional Development Fund 88GENERAL COMMENTSAs the Court observes, the approach adopted for the first Statement of Assurance (DAS) given under Article 188c of the Treaty was necessarily experimental.With reservations on the first application of the Court's experimental methodology and in the particular circumstances of this first DAS exercise, the Commission accepts the validity of the global results for 1994 in relation to the accounts and the underlying transactions as a whole.However, as principal auditee, the Commission would like to make some observations on the DAS methodology and the audit approach which it believes could consolidate the effectiveness of the DAS as an instrument for improving accounting methods and presentation in future years.The Commission agrees in general with the Court's adoption of the technique of Monetary Unit Sampling (MUS) as an appropriate statistical aid for deriving audit conclusions on the accounts and the underlying transactions.Nevertheless, the application of this methodology is without any precedent in a context such as the general budget and these first results must be treated with prudence.It so happens that for 1994 the probable error detected for commitments was less than 0,1 %, comfortably within any reasonable margin of audit acceptability, whereas the probable result for payments was of the order of 4 %, a result which is not particularly sensitive to the precise parameters of the sampling methodology. Nevertheless, the target established by the Court as a starting point for analysing the audit results could, under more marginal conditions, impose an unduly severe test on the auditee.In such marginal circumstances with a sample size of 600 and with a required degree of accuracy of 1 % within 95 % confidence limits, the MUS would impose on the auditee a maximum of between 1 and 2 sample errors. In other words, for the auditor's risk of delivering a false positive result to be reduced to 5 %, the auditee must bear a risk of receiving a false negative result of as much as 67 %.In order to overcome this unfavourable aspect of MUS from the auditee's point of view, whilst recognizing the need to keep the sample size within the Court's logistical possibilities, it is suggested that the initial target should relate to the probable rather than to the maximum error. This would correspond to the Court's own preference, in the event, for basing its conclusions on probable errors.The development of the method and the appropriate target of performance should be aligned on the benchmark of good practice at the level of national administrations.An evolutionary nature of this approach to the DAS would also be appropriate in view of other experimental features of MUS as applied to the general budget, in particular the double layer or cascade aspect of many of the transactions.Account should also be taken in future of the heterogeneous nature of a population covering a wide range of policy sectors and the necessarily wide skip interval (at present ECU 120 million) between samples, which embraces in some cases entire policy areas.Appropriate adjustments of the MUS methodology, for instance selective stratified sampling, should make it possible to develop the potential of the DAS in future years as an effective instrument for focusing on particular sectors requiring attention.The Commission would prefer the Court to consolidate its experimental approach by visibly taking account of the work of other audit bodies. A major share of the budget is, as the Court points out, co-financed with national and regional authorities. One of the Court's principal conclusions for 1994 is that important payment errors occur at the level of the final beneficiaries in Member States, for instance in the Structural Funds.However, the Commission understands that, in spite of the Court's best efforts, the necessary cooperation with other audit bodies, which in the Commission's view would increase the degree of confidence in the DAS results, has not so far been developed.The Court has also apparently not been able to make any direct use of the audit systems of the Commission itself, which the Commission finds surprising in view of the significant improvements of recent years.There is also the question of the accounting standards that the Court can expect the Commission to apply in the context of the general budget.On the one hand, there are the financial regulations governing the budget as a whole and the regulations relating to particular budget sectors which establish a unique legal framework for the Community's general budget.Secondly, there are general principles of good accounting practice that can be applied in the public sector and, although outside the existing legal framework, could also apply to the general budget. In accordance with what would be normal practice for auditing purposes, the Commission has taken steps to provide the Court with access to early drafts of the accounts and is convinced that the nature of presentation and interpretation and any requests made by the Court with relation to a particular year should be negotiated in advance, rather than being the subject of reserves by the Court in the DAS itself.The Commission respects the Court's right to comment on the appropriateness of the legal framework where it appears to conflict (in the Court's view) with wider principles of accounting and presentation. However, with particular reference to the Court's reservations on the 'informative value` of the accounts, the Commission would prefer a clear distinction to be drawn between the Court's comments on the legal framework itself and its comments on the reliability of the accounts and the legality and regularity of underlying transactions within the existing legal framework.Finally, in accordance with good auditing practice, the whole of the DAS and the Special Report, together with the results of individual sampling exercises and other audit results should be made available to the Commission and, where appropriate, to national authorities in time for the results to be properly investigated in advance of the adversarial procedure.CHAPTER 3The audit findingsGENERAL CONCLUSION3.1. (i)The Commission has noted the Court's observations and will endeavour to take action on them in future years by examining appropriate solutions with the Court.(ii)The Commission notes that the Court can assure the legality and regularity of receipts as regards the traditional own resources recorded in the accounts. As the Court states, it is obvious that it will never be able to give assurances about the exhaustiveness of the traditional own resources, even if it audited all the customs operations declared.(iii)The Commission would draw attention to its programme for the improvement of financial management (SEM 2000), the third phase of which will reinforce partnership with the Member States. This programme should lead to a substantial reduction in the number of errors noted by the Court in the underlying operations.THE RELIABILITY OF THE ACCOUNTSThe consolidated revenue and expenditure account3.2. The Commission will carefully examine the Court's observations in order to find appropriate solutions.The reservations concerning to the consolidated revenue and expenditure accountAccounting for revenue and expenditure in the form of negative operations3.3. In going beyond the requirements of the existing legal framework, the Court's presentation of the figures gives a different picture of the execution of the budget as adopted by the budgetary authority.3.4. In order to resolve the problem of presentation raised by the Court, the Commission will examine the appropriate solutions to be introduced. At all events, gross amounts of traditional own resources are recorded in the budget headings concerned and the net amounts in the financing tables.Accounting for advances/payments on account3.5. Volume IV on which the Court has based its audit consists of the revenue and expenditure account and the consolidated balance sheet of the European Union and is no more than a summary of the situation of the Commission's accounts.The Court can test the reliability of the accounts by consulting the details on advances and payments on account in the SINCOM accounting system. There is no rule obliging the Commission to provide this information in Volume IV of the revenue and expenditure account.3.6 - 3.14. The payments on account described by the Court as not definitive are made regularly on the basis of supporting documents laid down by the sectoral regulations concerned. It is only in exceptional cases that these payments may later have to be recovered; this would then be carried out in accordance with the rules applying to the recovery of entitlements.When developing the SINCOM2 system, the Commission will consider the development of the additional programmes necessary for presenting the data in the way desired by the Court.3.10 - 3.11. As the Court notes, the Commission is also determined to improve the monitoring of outstanding commitments.To this end, the monitoring and reporting systems are constantly being developed to serve as more effective instruments in the clearance of outstanding commitments. The 1995 revenue and expenditure account should provide better and more detailed information on changes in outstanding commitments.Failure to enter EAGGF Guarantee expenditure3.15. The procedure for the transfer of appropriations, which would have averted this situation, could not be carried out in time because of an administrative problem.3.16 - 3.17. Although every effort was made to present the end-of-year transfer of appropriations between EAGGF Guarantee Section chapters for 1994 to the budgetary authority within the time limit laid down in Article 104, the Commission was unable to do so for technical and administrative reasons.The year-end time limits laid down for operations of this type border on the impossible. The slightest hiccup like a computer breakdown or the mal-distribution of mail could lead to the recurrence of a situation like that of Christmas 1994 which was criticized by the Court (incidentally the first of its type since this procedure has existed). Provision should therefore be made that, in duly substantiated emergencies, the time limit for the Council's decision should be reduced to fifteen days and the presentation of the transfer decision by the Commission should be deferred by the same length of time.The discrepancy between legal obligations and accounting commitments3.18. The Commission is aware of the problem of dormant commitments and has tightened up its monitoring procedures.3.19 - 3.22. The accounting departments send regular statements of dormant commitments to the authorizing officers who are asked to take the necessary measures. In summer 1995 it was decided that this instrument for the monitoring of dormant commitments should be devolved to the administering departments which could then be responsible for carrying out a continuous control.3.24. In accordance with Article 10 of Regulation (EEC) No 4256/88, the Commission is currently making arrangements for the cancellation of commitments for all projects predating 1 January 1989 for which no final request for payment was made before 31 March 95. These projects come under Regulations (EEC) No 17/64, (EEC) No 355/77, (EEC) No 1760/78, (EEC) No 269/79 and (EEC) No 2088/85 and involve a total of around ECU 32,6 million. A request for payment has usually been made for the other old projects, which can thus be closed at the end of 1995.3.25. Most of the Social Fund commitments involve Portuguese and Belgian projects which are now before the courts. These projects will be closed after the courts reach their verdict, leading to payment, the issue of debit notes or the cancellation of commitments.As regards ERDF, most of the open commitments mentioned by the Court concern old projects approved under Regulation (EEC) No 1787/84, which provided no legal basis for closure. Regulation (EEC) No 4254/88, as amended in 1993, has now provided a deadline of 31 March 1995 for the submission of final payment claims for projects adopted before 1 January 1989 under the old Regulation. The Commission is now closing all projects adopted before 1 January 1989.3.26. The ESF and the ERDF regularly review their open commitments in order to assist their management. In the case of the ESF in particular, each time a final payment is submitted, the remaining commitments are cancelled a few months later so that the Member State can take action in accordance with the balance received.Final production of the budgetary accounts3.28 - 3.29. For the sake of transparency and in order to make the revenue and expenditure account easier to read, a note has been included in Volume II of the revenue and expenditure account (p. 169) to inform the reader that Column 1 of Tables 1, 5 and 7 (Appropriations entered in the initial budget) covers the operations in the course of the financial year relating to the appropriations available as a result of the contribution made to the Community budget by the EFTA countries which belong to the EEA.3.30. The adding-up error noted by the Court results from an error in a formula in the EXCEL spreadsheet.The SINCOM accounting system3.38 - 3.39. The amounts entered into the SINCOM system correspond to the amounts presented in the Master Copy prepared by the Commission for the publication of supplementary and amending budget (SAB) 2/94 under the authority of the European Parliament and which included four columns, two of which distinguish transfers and the SAB itself. They also correspond to the presentation made by the Council in its letter of amendment No 1 to draft SAB 2/94. The SAB published in the Official Journal merged these two columns and gives rise to misinterpretation. The Registry of the European Parliament consulted the Commission on how to correct this problem. The Commission suggested either that the SAB be published in a corrected form in line with the Master Copy or that a corrigendum be issued to indicate that the 'SAB 2/94` column also comprises transfers.3.40 - 3.41. Several factors contributed to the apparent discrepancies in the transfers referred to by the Court. In one case there had been a printing error in Parliament's notification; in the other case, the Commission misinterpreted a decision by Parliament's Committee on Budgets.When this misunderstanding was revealed, measures were taken to rectify the situation: the appropriations entered in the headings concerned are fully in line with the decisions taken by the budgetary authority.The balance for the financial year3.42 - 3.43. The annual balance contains ECU 2,1 million as the contribution made to the Community budget by the EFTA countries belonging to the EEA.This amount forms an integral part of the outturn of the 1994 budget of the European Union.In accordance with generally accepted accounting principles, the balance is allocated on the basis of the rules and/or other decisions taken by the competent bodies.In this case no decision had been taken on the allocation of this specific amount (refund to the States concerned, entry in the reserve, deduction of the contribution to be paid for 1995, carryover of appropriations). As a precaution, the amount was therefore not allocated and was kept as cash resources in order not to prejudice its subsequent allocation.If the situation should arise again, the Commission will make a separate entry in its balance sheet for the amount relating to the contribution made by the EFTA countries belonging to the EEA.The European Union's consolidated balance sheet3.46. Some of the discrepancies in the balance sheets of the various bodies and institutions were eliminated when the accounts were reprocessed during consolidation. In particular, this was the case with some of the assets of the Publications Office which are not included in the Commission's balance sheet while all these assets are contained in the consolidated balance sheet without any duplication or omission.Harmonization of the accounting methods3.47, 3.48 and 3.51. The Commission fully shares the Court's concern about the need for harmonized accounting rules and methods between the various bodies and institutions covered by the consolidation exercise.The Commission's accounting officer has taken the initiative to organize periodic meetings with the accounting officers of the various institutions in order to harmonize the presentation of the financial statements.The 1994 consolidated accounts have been considerably improved, particularly as regards the clearance of the interinstitutional accounts.Other appreciable improvements should follow in the 1995 accounts. However, this harmonization of accounting rules and methods can only be gradual since, in some cases, it may lead to substantial changes in the procedures and management systems applying in the various institutions.As regards the specific case of inventories and the rules for entry of property assets in the balance sheet, the Commission will present its draft internal rules on inventories to a meeting of the accounting officers of the other institutions in late 1995, so that appropriate harmonization can be examined.3.49. The Commission will ensure in future that the other Community bodies and institutions apply the same rules for the presentation of their balance sheet for computer equipment.3.50. In the light of generally accepted accounting principles and international accounting standards, the Commission will examine the extent to which contracts concerning property rights should be included in its financial statements.Tangible fixed assets (Brussels, Luxembourg and delegations)3.53, 3.54, 3.55, 3.59 and 3.60. The Commission agrees that there are problems in identifying the location of some of its tangible fixed assets which might lead to inaccuracies in estimating the value of the items entered in its inventory.To remedy this, it has started to modernize its equipment (affixing bar code labels for optical reading) at the same time as conducting a physical inventory and adopting a new regulation for asset management. All these operations should have been completed by the end of the first quarter of 1996.Property assets in Brussels3.56. According to the balance sheet at 30 September 1994 the value of the Breydel building was ECU 68 781 725, including ECU 8 492 546 for the conversion of the building in Article A-204 of the 1991 and 1992 budgets.As no clearly established criteria were available at the time, the figure for conversion relates only to work and orders awarded to the firm which built the Breydel. After a thorough check of the payment accounts submitted by the Court of Auditors, it appeared that other expenditure should also be taken into consideration since it increased the building's value. Some of the items contained on the Court's list cannot, however, be accepted since they relate to consumables.Once these items are taken into account, the figure for conversion should be corrected to + ECU 9 447 301 instead of + ECU 8 492 546.Advances and payments on account for fixed tangible assets (premises in the process of being purchased)3.57 and 3.58. The Commission notes the Court's approval of the change in accounting method and will ensure that the values are corrected for future balance sheets.The errors mentioned by the Court result from the fact that the current procedures for checking the Commission's inventories are based solely on a compilation of data from outside the accounts. The installation of the new SINCOM2 system should rule out any recurrence of these errors.Movable assets in Brussels3.59 and 3.60. Much of the problem in connection with movable assets resulted from the hasty evacuation of the Berlaymont for safety reasons and the increase in the number of departmental removals because of the increase in the number of buildings. Of the criteria used in Sysbien, the indication of the building and floor appear the most important; the other indications (town and office) are useful but not indispensable: the nomenclature for the buildings makes indication of the town superfluous and not all the movable assets are necessarily located in an office (e.g. photocopiers and fax machines shared by a number of departments). The financial regulations do not, incidentally, lay down specific identification criteria as regards location.The Commission has been aware of the problem and launched an operation which is designed to lead to a general physical inventory of all its 450 000 movable assets by the end of 1996 and to the modernization of asset management techniques, including the gradual introduction of a system of bar code labels for optical reading. The Commission has taken the measures necessary to gain control of the situation in the course of 1996.Movable assets outside the Community3.61. The Commission agrees that there are still shortcomings as regards the delegations' inventories. It has taken a number of measures to remedy the inadequacies noted (appointment of an official specifically responsible for a detailed check of the inventories received from the delegations, on-site inspections by officials on mission from Directorate IA.E).Observations on participations and loans3.62. The Commission has entered the Community's assets in the accounts in accordance with the type of finance to which they relate and not in accordance with the actual situation as regards disbursement or the financial institution concerned. In future it will be sure to enter them into the accounts in accordance with the actual situation as regards disbursement.Observations on the bank accountsBank accounting3.63. The Commission is aware of the importance of keeping bank accounts up to date. It has therefore taken steps to make up all the backlog following the installation of the new bank accounting system SINCOM GB/GT.Specific bank account3.64 - 3.65. The error was corrected in the course of 1995.Auditing of bank reconciliations (NOSTRO)3.67. The Commission has made an effort to simplify the end-of-year bank reconcilations for 1995, in particular by making changes to the software used.3.68. During the transitional period between 31 December and the date on which the accounts are finally closed the bank statements cover transactions relating to both the current financial year and the previous financial year. To improve monitoring, the details for the previous financial year are entered in the bank accounts as a thirteenth month; the bank balances can thus be reconciled with the accounts.A change made to the NOSTRO software in 1995 should make it possible in future to draw up a balance of the accounts at 31 December which covers these details from the bank statements for the following year. The bank balances and the balances of the accounts would thus be year-end balances.3.69. The changes and corrections made to the Commission's computerized bank reconciliation system should facilitate the Court's audit and its own end-of-year operations.Observations on the imprest accounts3.70. It is true that at 31 December 1994 the balance of ECU 7,5 million did not correctly reflect the bank account balances concerning financial protocols with the Mediterranean countries.Although the Commission has deployed additional staff to perform the necessary reconciliations, the work was not completed for the closure of the 1994 financial year and therefore the necessary corrections are being made in the 1995 accounts.The Commission, like the Court, has encountered problems in obtaining transaction details from certain banks, but believes that the reconciliations can be completed so that the accounts will reflect the correct balances for the 1995 closure.Reservations concerning claims on Member StatesThe separate accounts concerning customs duties and agricultural levies3.71 - 3.72. Since the separate accounts (B accounts) were introduced to monitor the recovery of amounts which are not covered by guarantees or which are contested by the taxable person, the Commission has checked how the system is applied by the Member States. A report containing the Commission's comments on inspections conducted between 1990 and 1992 was submitted to the Council and Parliament in January 1994. The inspection operation was subsequently followed through and the Commission asked the authorities to remedy the shortcomings found (e.g. inaccurate entries, no references to entry or recovery dates, failure to record certain amounts).The Commission will continue its efforts to eliminate the shortcomings in the keeping of the B accounts.Finally, the Commission would point out that as a rule these shortcomings will not necessarily jeopardize the making available of the own resources in question since the rules state that they are not made available until they are actually recovered.3.73. The case in Belgium: The Commission is currently in contact with this Member State to see why the amount in question has not been established.The case in the United Kingdom: The Commission has on a number of occasions asked the United Kingdom authorities to correct the separate accounts. The United Kingdom authorities have given assurances on this matter.Claims connected with the clearance of the EAGGF-Guarantee accounts3.74. The Commission will ensure that the department authorizing the claim issues a notice of entitlement to ensure that it is entered in the accounts. In future the Commission will record these data in its revenue and expenditure account and balance sheet.Observations concerning potential claims connected with the establishment of frauds and irregularities3.77 - 3.78 - 3.79. The Commission will examine how the presentation of potential claims in the financial statements can be improved. However, like the Court, it would note that information on own resources may already be found in the balance sheet for the B accounts. Item III-B on the assets side of the balance sheet (pages 37-38 of Volume IV of the revenue and expenditure account and consolidated balance sheet) records ECU 577 million in established own resources still to be recovered, broken down by Member State.The same item also contains recovery orders and notices of entitlement for cases where the Commission considers the amounts to be recoverable, but for which the Member States have not yet initiated the necessary recovery procedures and which are therefore to be regarded as potential claims.3.80. The amendment of Regulation (EEC, Euratom) No 1552/89 proposed by the Commission and now being discussed by the Council should lead to a substantial improvement in the financial monitoring of cases of fraud and irregularities.The changes proposed provide for the compulsory notification of the state of the recovery procedure, including referral to the legal authorities where appropriate, more frequent fraud reports (quarterly instead of half-yearly) and the updating of these reports.Reservations concerning the actual volume of commitments outside the balance sheet3.81 to 3.90. The Commission is prepared to examine the facts raised by the Court in individual cases so that they may be properly dealt with.THE LEGALITY/REGULARITY OF THE UNDERLYING TRANSACTIONSRevenue-related transactionsTraditional own resources3.101. The Commission notes that, overall, the audit findings may be considered satisfactory as regards traditional own resources. The Commission agrees with the Court that, by definition, it is not possible to draw up a list of undeclared and undetected imports.3.103. The Commission would like to be informed of the pragmatic methods used by the Court to take account of exempted or nil-duty imports.Customs duties and agricultural levies3.105. Given the total volume of traditional own resources, the Court extrapolates the 'likely error` to around ECU 10 million; this is below the acceptable error threshold which the Court has fixed at 1 %.3.106. As regards the discrepancies noted by the Court, appropriate contacts have been established with the Danish authorities so that interest may be charged on late payment in accordance with Article 11 of Regulation (EEC, Euratom) No 1552/89.As regards the cases in Greece and the Netherlands, the Commission will contact the competent authorities so that the situation may be remedied.The Commission has proposed an adjustment of Regulation (EEC, Euratom) No 1552/89 to eliminate the problem of the monthly closure of the accounts not always falling on the same date.Sugar sector levies3.111. Wherever this appeared necessary, the United Kingdom applied the time limits for the making available of amounts recovered since it considered that the sugar levies were not guaranteed. This practice will change with the Council's adoption of the amendment of Regulation (EEC, Euratom) No 1552/89 which expressly states that sugar levies should be entered in the accounts referred to in Article 6 (2) (a) of that Regulation.3.112. The case mentioned by the Court concerns an incorrect entry in the accounts which has no financial consequences.The own resource based on the Gross National Product (GNP)The Gross National Product (GNP) as an assessment base3.119. The Commission considers that the particular shortcomings and specific inaccuracies which continue to exist in the GNP aggregates of the various Member States and which are subject to reservations which the Commission has still to withdraw do not necessarily prejudice the reliability and comparability of national GNPs as a whole. Nevertheless, the Commission is continuing its efforts to persuade the Member States to find solutions for these shortcomings and inaccuracies.Expenditure-related operationsCases of expenditure in respect of which the Court cannot give an assurance3.122. The problem raised by the Court does not involve the Community administration. The Commission is unable to give an opinion on the difficulties encountered by the Court.The Member States will have to provide the necessary explanations.The impossibility of auditing certain items of EAGGF-Guarantee expenditure3.123 - 3.129. First of all, it is up to the three Member States involved to give their replies to the Court's conclusions. As the Commission has not yet cleared the accounts, it cannot be bound by these conclusions.The lack of an adequate audit trail3.132. (a) The administering bodies must be able to identify the beneficiaries who have received assistance. The body mentioned by the Court has been repeatedly audited by the Commission, revealing serious management problems which led to two tranches being blocked and a proposal to reduce the amount under Regulation (EEC) No 4253/88. The Commission will continue its efforts to overcome the current problems with this body and will not fail to provide the Court with regular information on developments.(b) The Commission will have the costs of the centre audited in order to establish the breakdown between the various courses and thus determine whether the expenditure put forward for Community cofinancing needs to be recalculated.(c and (k) If necessary, the British and the German authorities will be requested to correct their statements of expenditure. However, the amounts concerned have no impact, for the moment, on ERDF payments because the expenditure declared considerably exceeds the minimum level of expenditure required for triggering the ERDF payment.(e) The ESF audit departments inspected the body concerned and arrived at the same conclusions just before the Court conducted its audit. The audit report has been forwarded so that measures can be taken as soon as possible.(d, (f, (h, (i, and (j) As regards the cases concerning EAGGF Guarantee, the Commission plans to examine the shortcomings in greater detail during the clearance of the accounts for 1994. The accounting requirements in connection with the new clearance procedure (such as certification) should remedy future 'discrepancies` of this type.(l) There are no absolute time limits for transferring resources from Member State to final beneficiary. The three-month period mentioned in Article 21 (5) of Regulation (EEC) No 4253/88 applies 'as a general rule` and depends on the beneficiaries' applications being in order.The systems which are unreliable by nature and likely to contain errors3.133 - 3.134. The Commission notes that sector letters have been drawn up for all these cases. It would point out that, in some cases, corrections were already made in clearance of the 1991 accounts; it will propose corrections for the other cases in the clearance exercise for 1992. In future clearance exercises it will give priority to the other cases which the Court regards as unreliable.The substantial legality/regularity errors concerning commitments3.139. The Commission welcomes this finding which shows that its efforts to improve its management and control procedures have not been in vain.The formal legality/regularity errors concerning commitments3.140. The Court estimates that the rate of error for serious formal errors concerning commitments is 1,1 %, close to the 1 % unacceptable error threshold fixed by the Court.Nevertheless, the Commission will try to improve this state of affairs by scrupulously complying with the rules of procedure. However, it feels that most of these errors do not have a direct effect on the budget. The figure of ECU 720 million quoted by the Court should not therefore be misinterpreted.For example, the Court mentions a case in connection with the Cohesion Fund which, it claims, involves ECU 13 854 800 (see Annex 2.4). This is in fact the figure resulting from the amendment of the Commission's initial decision which allocated ECU 14 547 120 to Ireland. The Court considers the Commission's delay in notifying the Member State of the amending decision as a 'serious formal error`. The Commission does not agree with this interpretation. At all events, the wrong amount should be the difference between the initial and the amended amount, i.e. ECU 692 320 and not the ECU 13 854 800 used for extrapolating the total volume of serious formal errors.The Commission can thus only stress the uncertainties involved in the interpretation of errors and the resulting extrapolations by the Court.Substantial errors affecting the legality and regularity of the transactions concerning paymentsThe substantial legality/regularity errors concerning payments3.144. The Commission does not always agree with the Court's interpretation of the rules, particularly as regards the eligibility of expenditure. As a result, the Commission feels that the figure put forward by the Court for serious substantial errors concerning payments does not fully reflect the actual situation. The impact on the Community budget depends on the form taken by the substantial error and is, according to the Commission, lower than the figure quoted by the Court.3.146. Like the Court, the Commission notes that the errors 'occurred in most cases at national administration level`; this raises the question of the respective responsibilities of the Commission and the Member States in the management of the general budget of the Community.The Commission has made improvement of financial management its top priority and on 29 March 1995 adopted a work programme (SEM 2000); phase 3 of the programme will focus on improving partnership with the Member States.This programme should eventually lead to more effective management of the Communities' finances at all levels.3.147. The Commission replies to the Court's observations on substantial errors concerning payments are contained in Annex 4.The formal legality/regularity errors concerning payments3.148 - 3.150. The Commission considers that, in most cases, the formal errors have no impact on the Community budget.3.150 - 3.151. As stated at 3.148, most of these cases have no impact on the Community budget. The same is true of the cases raised by the Court where the Financial Controller granted his approval later than provided for in the Financial Regulation in subsequently confirming the grounds for payment.In another case, the Member State paid the beneficiaries larger amounts than the advance received by the Commission. This has no effect on the budget since the final payment from the Community budget was restricted to the amount of the advance.CHAPTER 4Lessons to be drawn from the Statement of AssuranceTHE DAS AUDIT RESULTS CONCERNING THE UNDERLYING TRANSACTIONS IN RESPECT OF EXPENDITURE4.1 - 4.2. The conclusions reached by the Court are the outcome of a method used for the first time in connection with the general budget, which is thus still experimental. The Court's findings must therefore be interpreted with the necessary caution.By and large the Commission accepts the Court's findings. However, it does not agree that all the cases noted by the Court should be classified as serious errors on the basis of an interpretation of the rules governing the eligibility of expenditure. It would also point out that substantial errors in connection with the Structural Funds, and in particular the Regional Fund, do not automatically have an impact on the Community budget, as the Court itself confirms at 3.146. With this in mind, the amounts extrapolated by the Court should also be treated with some caution. However, the Commission admits that there are still too many errors and has therefore adopted a programme to improve financial management (see 4.9-4.12).The Court states that it is unable to provide assurance in respect of 14 % of payments. The Commission cannot express an opinion on events in the Member States or on the value of the percentages since the method of calculation used to determine them is not specified.4.3. As it stated at 3.148, the Commission considers that, in most cases, the formal errors had no impact on the Community budget.4.4. The Commission shares the Court's view that the substantial errors in connection with payments do not, in themselves, constitute frauds.IMPLICATIONS CONCERNING THE QUALITY OF THE COMMUNITY SYSTEMS OF FINANCIAL ADMINISTRATION4.5. The Commission shares the Court's wish for the improvement of some of the audit systems in the Member States. Steps have already been taken in this direction in the reform of the clearance of the EAGGF Guarantee accounts. Others have been adopted by common agreement under the programme to improve financial management.4.6 - 4.7. The scope which the Court had decided to give to the statement of assurance by extending it 'to the level of final beneficiaries` highlights the diversity and complexity of the systems set up in the Member States to administer Community operations.In the case of EAGGF Guarantee, the reform of the clearance of accounts which entered into force on 16 October 1995 leads to closer monitoring of expenditure in collaboration with the Commission.Each Member State is obliged to set up a coordinating body responsible for providing the Commission with detailed financial information on the operations of the paying agencies and the harmonized application on national territory of Community rules concerning the CAP.The national paying agencies must also be approved in accordance with the clearance criteria laid down by the Commission in order to ensure a high level of supervision of payments and their accounts must be certified by a special outside body.As far as substance is concerned, the necessary explanations concerning the inconsistencies noted in the systems may be obtained only from the Member States concerned.REMEDIAL ACTION REQUIREDAt the level of the Commission4.11. The Commission has taken careful note of these views. It agrees in particular that it cannot and should not supervise in detail the execution of Structural Fund programmes in the Member States. It will also carefully examine the Court's suggestion about financial sanctions.4.9 - 4.12. The Commission is aware of the need to improve financial management at every level and accordingly adopted on 29 March 1995 a work programme to improve financial management entitled 'Sound and Efficient financial Management` (SEM 2000). The planned reform will occur in three phases:- Phase 1 is concerned with the consolidation of the system within the present operating framework (rationalization and simplification of procedures, improved training for the staff of financial units, modernization of management instruments). The introduction of the SINCOM2 accounting system falls within this framework,- Phase 2 aims for a substantial reform of financial management culture within the Commission around the following main themes: greater transparency in budgetary choices, development of an evaluation culture, development of the depth and scope of the internal audit function, integrated management of human and financial resources in the operational directorates and possible changes to the rules. The Commission adopted the basic recommendations on 26 July 1995 and the actual measures are to be presented by the end of 1995,- Phase 3 consists of reinforcing partnership with the Member States where they assume the responsibilities of Community management. A steering group has been meeting regularly since October to propose improvements to the procedures of financial control and evaluation. A number of protocol agreements have been signed between the Member States and the Commission (Directorate-General for Financial Control) in order to obtain access to national audit reports.The Commission hopes that implementation of the whole SEM 2000 programme will significantly reduce the number of errors directly attributable to it, in particular through the introduction of an efficient integrated audit mechanism at Commission level.As regards the Member States, Phase 3 should lead to better synergy between the Commission and the national authorities so that the Community budget may be executed as effectively as possible.Annex IISummary of the serious formal legality/regularity errors concerning commitments(see 3.143) Various areasPoint 2 This involves the commitment of expenditure for regular staff paid from the research budget and was authorized once the appropriations in question were made available in the accounting system (SINCOM) on 25 January 1994.Regional sectorPoint 4 The decision referred to by the Court was prepared in late 1994 and did indeed provide for the commitment of ECU 14 547 120.The financial administrator found that the commitment appropriations available did not cover the whole of this amount. It was therefore decided to amend the decision and allocate ECU 13 854 800. This correction was immediately sent to the Commission Secretariat-General so that the amending decision could be forwarded to the Member State. Unfortunately, this correction could not be incorporated in time and the decision finally notified to the Member State did not mention this correction.After discussing the matter with the Irish authorities, the Commission will amend the decision in line with the monitoring committee's conclusions of 25 July 1995 and will take this opportunity to make the necessary corrections.The payments were made on the basis of the corrected financing plan.The Commission would point out that this was an exceptional case which arose as a result of a regrettable combination of circumstances. However, this operational error had no effect on the implementation of the project. The Commission therefore considers it excessive to classify the error as serious.Development cooperationPoint 6. This concerns a water engineering project in Morocco involving ECU 16 million, of which ECU 5,1 million had been committed in 1993 and ECU 10,9 million in 1994.The appropriations were spread over two financial years as insufficient funds were available in 1993. The Commission decision was therefore accompanied by a clause to the effect that it would be charged to items where funds were available in the budget.As it has already told the Court, the Commission is willing to re-examine this procedural aspect and accept any suggestions the Court might have in this respect.Annex IVSummary of the serious substantial legality/regularity errors concerning payments(see 3.147) Agricultural sectorPoint 1 The actual storage figures (recorded in each store in spring 1995) are now being compared with the figures in the accounts; this exercise should have been completed at the end of 1995.Point 28 Because of the absence of controls and the delays in payment the EAGGF has proposed:- a correction of 10 % in the 1992 clearance exercise to cover the period from 16 October 1991 to 15 October 1992,- a correction of 10 % in the 1993 clearance exercise to cover the period from 16 October 1992 to 31 December 1992,- a correction of 2 % in the 1993 clearance exercise to cover the period from 1 January 1993 to 30 June 1993.These corrections come to a total of around Lit 3,5 billion.FisheriesPoint 31 The case mentioned by the Court of Auditors concerns joint venture SM/IT/1/92 under Regulation (EEC) No 4028/86.The Community rules state that the request for the payment of the balance of the aid must be accompanied by the first periodic report on the activities of the joint venture.This report was duly received in the case in question and was examined by the Commission. Despite the absence of a number of subsidiary documents in the report, which did not affect the level of the balance to be paid, the other documents supplied were considered sufficient to proceed with the payment requested. It should be pointed out in this connection that the Member State concerned confirmed the accuracy of the information contained in the beneficiary's request for payment.Regional sectorPoints 32-43 For most of the cases mentioned by the Court, the Commission cannot, for the moment, make specific comments, because the information available is not sufficient to determine the specific ineligible amounts and form an opinion. The Commission has initiated an examination of the cases under Article 24 of Regulation (EEC) No 4253/88 and will obviously take into account any further information which the Court may be able to provide.See also the general comments on DAS errors concerning the Member States in Annex II of the Commission's reply.Point 33 1. Cohesion FundOn examining the first intermediate payment, the Commission discovered from the supporting documents submitted by the Member State that the expenditure provided for in the decision had been exceeded by ECU 572 779. This expenditure was judged ineligible under the initial decision and was thus deducted from the amount to be considered for this payment.However, before considering any change in the level of assistance, the Commission asked the Member State for further information in letter No 171845 of 16 December 1994 on the type of expenditure submitted and the amounts involved in order to assess whether this expenditure could be considered eligible.From the replies received the Commission could not find any expenditure outside the project's period of eligibility. Nevertheless, the possibility is still available of conducting an on-the-spot inspection.If the expenditure were then to prove ineligible, the Commission would take the appropriate financial measures when the balance is paid.The transaction was thus conducted properly.2. Structural FundsThe DAS error concerns the financing of non-eligible actions. This case has already been explained by the Spanish authorities in their reply to the relevant sector letter.In July 1993, the relevant monitoring committee decided to finance certain new actions, without modifying the total project cost. This modification was proposed to the Commission in November 1993 and approved by the Commission in July 1994. The Court's auditors considered the action to be non-eligible because the transfer of the money to the final beneficiary was made before the Commission's decision.The practical effect in this case was that a Commission payment was made two months early.Point 41 In one specific case, the Court presents as an error the Commission's advance payments above the limits set by the Regulations. This concerns old actions for which Council Regulation (EEC) No 1787/84 was applicable. The actions were projects (not multiannual programmes, as today) for which there was no annual allocation of expenditure, despite the long implementation period which was often required. In cases where the beneficiary had realized expenditure above the approved project cost but the works had not yet been completed to allow the submission of the required 'completion report`, the Commission agreed to make an additional interim payment, retaining only 5 % of the total grant, as a guarantee for the submission of a satisfactory 'completion report`. This practice has been applied by the Commission for many years, always in relation with the old projects which are all being settled in 1995. The wording of the old Regulation allowed such an interpretation.Social sectorPoint 44 The Commission agrees with the Court's objection and considered pre-training eligible provided that it is followed by training. It is obviously not checked in every case but gauged overall. The Member States have been asked to show their monitoring tables on the subject during the various audits.The Commission will ask the Member State for information to check whether the operations were eligible. As regards the lack of grounds, the procedures with France were reviewed and improved in 1994.Point 45 The Commission also detected this error and took the necessary steps to put it right. It was discussed at a number of meetings with the Member State and the system has now been changed so that these errors will not recur.Point 46 The various errors and excess payments will be corrected when the final payments are made in each of the cases mentioned.1. Italy - The ineligible amounts will be deducted from the request for the payment of the balance. In addition, payments in respect of operations under judicial investigation will be suspended.2. Greece - The Commission will examine this case with the Greek authorities and take any measures required.3. Italy - The Commission will make the appropriate corrections to the balance as regards the tranches for 1990, 1991 and 1992.Point 47 Italy - The persons attending the vocational training courses mentioned by the Court must be looking for a job before starting the course. In these circumstances, the trainees may satisfy the conditions laid down in the programme. The Commission will examine the case mentioned by the Court.Point 48 See point 46.Point 49 Greece - After analysing the files, the Commission undertakes to check the eligibility of the case mentioned by the Court and, if necessary, initiate a procedure under Article 24 of Regulation (EEC) No 4253/88 after allowing the Member State to give its opinion.Point 50 Because of the formal procedures in this sector the Commission is unable to consider the type of expenditure before paying the advance. If an administering officer spends less than the advances received, the 'overpayment` for the year, duly substantiated by the Member State, is set against the following annual tranches.Point 51 Although remaining within the overall assistance available under the CSF, the Court correctly pointed out that the transfer of funds at operational programme (OP) level was not in conformity with the regulatory position as governed by the financial provisions of the coordination Regulation (EEC) No 4253/88.As long, therefore, as no extension was decided, no legal basis existed under which the amendments proposed by the Member State could be approved. As a result, balances paid by the Commission were limited to the amounts covered by the financial plans for the OPs concerned without any account being taken of the planned amendments.In acknowledging the financial implications at final beneficiary level, the Commission could envisage extending the validity of the programmes under consideration at 31 December 1995 thereby allowing modifications in accordance with the monitoring committee procedures outlined under Article 25 of the coordination Regulation.Such budgetary amendments would, however, remain within the Structural Funds allocations contained under the Edinburgh financial perspective and would respect the implementing decisions already taken.EnvironmentPoint 52 The Commission does not know the exact context referred to by the Court. However, it would point out that, in cases where the final beneficiary is the principal, it takes account of the amounts he pays to the firm awarded the contract, even in the case of advances for the provision of public works equipment in line with the conditions in the contract between the principal and the contractor, since this is actual and justifiable expenditure carried out for the benefit of a third party and is not a financial transfer.EAGGF GuidancePoint 53 In a letter sent to the Italian authorities the Court notes that the statement of eligible expenditure in Italy's request for the second advance for 1993 contains items of expenditure paid as an advance before the the start of the work to a beneficiary who had not incurred expenditure. The Court also noted that the Italian authorities had twice paid an advance to the same beneficiary for no apparent reason.The Commission is of the opinion that advances of this type should be omitted from the statements of expenditure submitted with the request for the balance. The rules of financial implementation applicable to the forms of assistance state that the requests for the balance should be based on the expenditure actually incurred by the final beneficiaries and backed up by supporting documents.However, advances based on work and intermediate invoices which have been duly established and controlled may be entered in the statements of expenditure in support of the intermediate balances.Point 54 The Commission understands from the sector letter sent to Portugal that 0,5 % (compensatory allowances) and 1,5 % (investment premium) have been deducted from the aid for payments made by the IFADAP in 1994 under the new programme for 1994-99. As new rules are now in operation, it is understandable that not all the finer points were appreciated and that the IFADAP continued to deduct a percentage of the Community aid. As soon as it learned that this practice was continuing, the Commission contacted the IFADAP which, in its reply of 21 December 1994, promised to pay the whole Community contribution in future.ResearchPoint 55 The statements of costs of one partner in a research project were audited on the spot by the Court of Auditors and the findings were sent to the Commission on 26 April 1995. A detailed inquiry was then launched under the direction of UCLAF and the results are now awaited.Point 56 The Court considers that a claim for Community assistance for expenditure already financed by a national research institute is a level 1 error.The Court of Auditors sent a sector letter in respect of this operation on 30 June 1995 and DG XII replied in memo 026134 of 11 September 1995.The payment in question followed the presentation of the statement of expenditure signed by the contractor. During its on-site audit, the Court of Auditors discovered that the expenditure had already been financed by the Natural Environment Research Council (NERC).The Commission has informed the contractor that the £ 8 532 for the operation concerned will be deducted from the next payment.From the documents presented to DG XII, the operation appeared legal and regular.Point 57 The Court considers that the overevaluation of declared costs resulting from application of excessive rates should be classified as a level 1 error.The Court of Auditors sent a sector letter in respect of this operation on 1 June 1995 and DG XII replied in memo 023110 of 31 July 1995.The payment in question followed the presentation of the statement of expenditure signed by the contractor. After the Court's on-site audit, DG XII wrote to the contractor for explanations in connection with the working hours declared, the rate employed and the persons covered by the Community assistance. The contractor's reply and the ongoing control of expenditure on staff and overheads should produce precise information on whether there has been an error. If the costs have been put too high, DG XII will recover the funds.From the documents presented to DG XII, the operation appeared legal and regular.Aid to East European countriesPoint 58 The Commission confirms that a VAT payment of ECU 874 was made. However, as the Court admits in the specific sector letter for this case, a procedure was initiated for the recovery of this amount.Administrative expenditurePoint 59 The error mentioned by the Court was quickly detected and was corrected almost immediately, but the payment was already under way. It was therefore quickly recovered (the wrongly paid amount was recovered from the banks within a period of seven days when staff were not working).Annex VISummary of the serious formal legality/regularity errors concerning payments(see 3.151) Administrative expenditure (a) CommissionPoint 1 As the Staff Regulations require an official's salary to be paid to his account on the 14th of each month, it is sometimes necessary to send instructions to the banks well before this date for preparation (in some cases advance notice of eight working days is required).The banks do not make these payments until the last moment so the accounting departments may still intervene if necessary.It should be noted that all the transactions noted by the Court were correctly recorded. The discrepancy found by the Court therefore had no effect on the outturn for the financial year.The Commission has now altered its rules of procedure to avoid any recurrence of such a situation.Point 3 It appears that an error was made when the documents were sent to the Court, with the result that the file contained a supporting document for a payment operation which did not relate to the acquisition of the central kitchens.Agricultural sectorPoint 8 Article 4 (4) of the contract does not state that the supporting documents must consist only of invoices. The article refers to 'necessary supporting relevant documents`.The procedures employed by a public body like CNEVA are well known: an order form is drawn up following a specific budgetary commitment and is then approved in line with strict public accounting rules, guaranteeing the reliability of the amount entered. A duly authenticated order form is a perfectly good supporting document.The Commission did not merely pay the expenditure submitted on the basis of the order forms:- a decision was taken on eligible expenditure during an on-the-spot control visit; 8 % of the expenditure submitted was refused,- the examination of the eligible expenditure was based on documents provided by the contractor in Fougères, the place where the expenditure occurred,- most of these supporting documents consisted of order forms, virtually all of which were marked 'invoiced`. Only some of the order forms were accompanied by an invoice, which was normal since they had been processed directly by the Central Administration of the CNEVA in Paris. The Commission's decision to base its control on the only series of documents which were both exhaustive and verifiable on the spot appears appropriate,- various documents including the invoices and the balance sheet at 11 October were subsequently forwarded by the CNEVA. As they had been presented after the expiry of the time limit laid down in Article 3 of the contract, they were not taken into consideration for the payment audited by the Court, but were attached to the files.It was therefore justified to take account of the order forms as 'relevant documents`.Regional sectorPoint 9 According to the Court's interpretation, the reduction of an annual tranche of an operational programme as a result of reprogramming should lead to a reduction in the accounts of the commitment and the corresponding payments.If, when the financial plan for a programme is changed, the commitments and/or advances already entered in the accounts exceed the new amounts entered in the new plan, the Commission makes an adjustment in the next proposal for commitment and/or payment by offsetting the surplus committed or paid.The phenomenon mentioned by the Court results from the transition from project-based management to programme-based management in the Structural Funds. An operational programme is a series of coordinated multiannual activities. For financing purposes, this set of activities is divided into tranches and the Community advances are cleared overall in relation to the expenditure actually declared by the Member States in their requests for payment and not in relation to each individual operation covered by the programme.In these circumstances, the Commission does not accept that its practice in this sector may be considered wrong.Points 10-14 See general comments on DAS errors concerning the Member States in Annex II of the Commission's reply, as well as the comments on points 32-43 of Annex 4.Point 15 The Member State is paying the beneficiaries in line with its own national rules and contractual commitments. The Commission does not intervene in these transactions which are the responsibility of the Member State.Point 16 The Commission will investigate the matter once all information has been made available.Social sectorPoint 17 The Commission will issue a reminder concerning the obligations relating to the accounts for co-financed projects.Point 18 The Court's comment relates to the operational programme providing 'level 3` training. This training is provided for the unemployed and is meant to prepare them for a job. The changes were made so that the trade sector receiving the vocational training measures could be targeted more effectively.Point 19 The Commission recognizes that some co-financed activities have not been advertised in line with the rules in force. During its controls the Commission noted this shortcoming and made a point of stressing the importance of complying with the rules. The Commission will continue to attach particular importance to the advertising of activities which it cofinances.ResearchPoint 20 The Court considers that the absence of documents in support of the declared costs should be classified as a level 2 error.The Court of Auditors sent a sector letter in respect of this operation on 1 June 1995 and DG XII replied in memo 023110 of 31 July 1995.The payment in question followed the presentation of the statement of expenditure signed by the contractor. After the Court's on-site audit, DG XII wrote to the contractor for explanations in connection with the costs declared. The contractor's reply and the ongoing control of expenditure on staff and overheads should produce precise information on whether there has been an error. If the costs have been put too high, DG XII will recover the funds.From the documents presented to DG XII, the operation appeared legal and regular.Point 21 The Court considers that the authorization of a payment exceeding the limit laid down in the act of subdelegation should be classified as a level 2 error.As part of the decentralized system now being introduced, DG XII has included a number of computer controls to ensure that the subdelegations in the local system tally completely with those recorded in SINCOM. An error of this type should not therefore recur.However, the payment operation was basically correct and corresponded to a payment due.Point 22 The Court's comment is indeed justified; the payment in question was charged incorrectly in 1994. This error was corrected in 1995 and therefore did not have any impact on either the Community budget or the contractors' entitlements.ANNEX IGENERAL COMMENTS CONCERNING THE EAGGF1. (Point 1.11 of the Court's text) The Court rightly notes that the transactions that underly the accounts audited by the Court for 1994 may be checked again at a later date by various Commission departments and, in certain cases, by the Member States, which may lead to financial corrections being made.In the final sentence it adds that it is 'normal and desirable that such corrections should be made and taken into account by the departments and authorities involved during the financial years in which they arise`.This raises the question of whether the Commission can, without any further checks, use the errors detected by the Court in connection with the Member States and noted in this report as a basis for making subsequent corrections in respect of the Member States concerned, for example for EAGGF Guarantee in the clearance-of-accounts procedure.2. (Point 1.15 of the Court's text) As stated in the general comments, the Commission feels that the Court cannot ignore the work of other audit bodies even if, as it notes, it is not carried out under its control and in accordance with its own evaluation criteria.To take an example, the Commission would like the Court to consider the ex-post controls conducted by the Member States in connection with EAGGF Guarantee payments under Regulation No 4045/89 which lead to corrections and to the recovery of amounts wrongly paid (sometimes these amounts are offset against future payments).Another example, again in the EAGGF sector, is consideration of the EAGGF's clearance-of-accounts exercise which leads to recommendations as soon as the findings are known and could subsequently lead to financial corrections.3. (Point 1.29 of the Court's text) As a result of the assessments conducted by the Commission in the Member States' paying agencies, for instance as part of the clearance of accounts, it was possible to improve the system of internal control introduced by the Member States. They also led to financial corrections, some of which were substantial. However, the Court claims that it could not 'place a significant amount of confidence in the quality of these systems`. This claim, which relates to the method used, is likely to be misinterpreted by the parties concerned and have a counter-productive effect on the execution of the Community budget. Indeed, the Member States could take the Court's comment as a pretext for disputing the corrections and recommendations made by the Commission.4. (Points 2.7 to 2.10 of the Court's text)In the case of EAGGF Guarantee expenditure, even if the Member States experience difficulties - usually administrative difficulties - in providing relevant information about aid recipients, the EAGGF has in the past three years been able to introduce practical arrangements in virtually all the Member States so that its auditors and investigators have the essential individual data for the clearance of accounts.Futhermore, the reform of the clearance of accounts, with the new obligations on Member States in connection with the approval of paying agencies, the establishment of a coordinating body in each Member State to provide the Commission with the data it needs for its control activities and the certification of the accounts of the paying agencies, should allow for the gradual introduction of the harmonized database containing all the information to be administered or controlled.ANNEX IICOMMENTS ON THE CO-FINANCING MECHANISMS IN THE AREA OF THE STRUCTURAL FUNDS, WITH SPECIAL REFERENCE TO THE EUROPEAN REGIONAL DEVELOPMENT FUNDThe Court of Auditors acknowledges (point 3.146) that in the area of the Structural Funds, errors in the underlying transactions do not necessarily affect the amounts of the advance payments made by the Commission. This is an important point which the Commission develops below, using the example of the European Regional Development Fund (ERDF).ERDF paymentsERDF payments are mainly advances to Member States for the implementation of multiannual programmes. The limits on the amounts to be advanced are fixed on the adoption of each programme. The timing of each payment, after the initial advance, is related to the expenditure declared by the Member State. The Commission establishes threshold levels (trigger points) of expenditure, required to be achieved and declared by the Member State in order to receive a certain payment. When the Member State declares expenditure above a certain 'trigger point`, it receives the pre-fixed advance. At the closure of the programme, Commission and Member States make the final settlement. If the Member State has not made sufficient expenditure, it refunds part of the amounts received. If it has made expenditure above the budget of the programme, it limits the ERDF payment claim to the maximum grant approved.Underlying transactionsIn considering the concept of underlying transactions in the area of the Structural Funds the following points can usefully be kept in mind:1. Nature of advances: Advances concern future, not past actions; so there is no 'cause-effect` relation between the ERDF advances and the individual expenditure items included in the declarations. When advancing money to Member States, the Commission does not compensate the expenditure declared but facilitates the national financing, transferring funds according to the progress of the implementation of the programmes. Advance payments are conditional on the progress of the programme, whose completion is proved at the closure stage by the submission of a satisfactory completion report.2. Lack of a clear, direct, quantifiable relationship between advance payments and expenditure declared: the amount of expenditure declared is different from the ERDF advance and it is usually well above the minimum level of expenditure required for triggering the advance. Also, the rate of advancing money to Member States is different from the grant rate. It is practically impossible to relate in a clear, quantifiable way any ERDF advance to the individual expenditure items included in the Member State declaration. The ERDF system, by nature, has no such audit trail.Selection of projectsBecause of this situation, the Court, in the area of the Structural Funds, selects a project from the declaration supporting the ERDF advance under examination. It assumes that the expenditure declared for this project is representative of the advance, and that the error rate for the project is the error rate for the advance. It is not possible to identify any specific hit-ECU and make the substantive test of it required by the standard DAS approach.Definition/quantification of errorsThe Court considers as ERDF errors the amounts of ineligible expenditure found at the level of the Member States. This definition and quantification of errors gives rise to the following comments:- the amounts of ineligible expenditure found at the level of the Member States relate to earlier ERDF advances and not to the ERDF advance being examined,- the ineligible expenditure could affect the timing but not the amount of the advances,- expenditure declared above the trigger points or above the approved budgets does not result in any ERDF payment; this additional expenditure, which could compensate any ineligible items, is not taken into account by the Court,- ineligible expenditure items are partly financed by Member States; the presentation of errors needs to reflect this.The safety marginThe continuous implementation of the Structural Fund programmes and the cost overruns in relation to the approved budgets usually result in Member State declarations of expenditure exceeding considerably the minimum levels required for the ERDF payment. This constitutes a safety margin protecting the legality and regularity of ERDF payments: even if Member State declarations include some ineligible expenditure items, ERDF payments are usually justified by the sums of eligible items. The Commission takes account of this margin when planning and executing its on-the-spot checks. Especially at the final settlement stage, the programmes which are closing within the approved budget (and therefore lacking this inherent protection) are considered as 'risk areas` by the Commission and take priority for the Commission's ex-post controls of closed programmes.The DAS 94 errors concerning ERDFFor the Member State errors presented in DAS 94 as ERDF errors, the Commission has compared:- the amount of error identified by the Court,- the amount of expenditure declared by the Member State when claiming each payment,- the qualifying expenditure, i.e. the expenditure that would have been taken into account if the error had been known before the time of the payment; this is the difference between the error found and the expenditure actually declared,- the threshold level of expenditure required to be declared by the Member State for triggering the payment,- the impact of the Member State error on the Commission's payments.With the exception of one doubtful case the expenditure declared, even after the correction for the error, is higher than the expenditure required for the payment; this means that even if the Commission had been aware of the error at the time of the payment, it would have made the same payment, without breaching any regulatory provision. The Member State errors thus had no direct impact on the Commission's payments and therefore, on the assumption that they are not symptomatic of other errors not audited by the Court, do not require any recovery of amounts paid or any accounting correction in the ERDF records.The Commission considers these Member State problem cases included in DAS 94 rather as 'potential risks` to be taken into account in the ERDF financial procedures, especially at the closure of the programmes.Reply of the European ParliamentICReservations relating to tangible fixed assetsPoint 3.93. The reservations expressed by the Court concerning the value of the European Parliament's movable property are likely to be withdrawn when the findings of the 1994 inventory have been definitively established.On the basis of those findings, i.e. in the light of the inventoriable property physically present, the authorizing officers responsible will be called on to update the IMMO database.On the basis of the new data in IMMO, the value of the movable property can be corrected and entered in the balance sheet by the accounting officer.Point 3.97. The amounts paid during the financial year 1994 under the long lease conferring a right in rem in respect of the Léopold building have not been incorporated into the tangible fixed assets figure - although they are included in the amount of payments effected - since the European Parliament will not become the owner of the building until the option to purchase has been exercised.However, the European Parliament agrees with the Court's call for rules to be adopted to harmonize, between all the institutions, the presentation of this type of operation, in accordance with the detailed rules for the implementation of the Financial Regulation, following a meeting of the respective accounting officers in order to lay down the practical arrangements for applying the relevant accounting procedures.Annex IISummary description of the serious formal legality/regularity errors relating to commitmentsPoint 3. Prior consultation of the Advisory Committee on Procurement and Contracts (CCAM) on the IPE III contract for Strasbourg. Expenditure authorization 00 015-1675 (DAS sample MPP5).The matter of the rental agreement for the IPE III building in Strasbourg was indeed submitted in advance to the CCAM and, as the Financial Controller stresses, a favourable opinion was delivered in Opinion No 75 of 23 July 1990.Although agreement in principle for rental had already been established by Additional Agreement 3 of 29 December 1986, the tenancy was formalized by Additional Agreement 5, signed in October 1990, Article 4 of which states that the rent for additional facilities would be laid down in due course by an additional agreement.Additional Agreement 6 subsequently regulated the handover of, and rent (FF 462/m2) for, the additional facilities.Therefore the authorizing officer did observe the rules by consulting the CCAM in respect of Additional Agreement 5, which forms the specific rental agreement for extension III to the IPE building.Annex VIDescription of the serious formal legality/regularity errors relating to paymentsPoint 4. Lack of an invitation to tender for the campaign carried out by the Institut Belge d'Information et de Documentation.The campaign referred to was carried out in anticipation of the 1994 European elections. What was involved was a flat-rate contribution to a campaign organized with other public and private organizations, i.e. INBEL (Institut Belge d'Information et de Documentation), the Commission, the Ministry for Foreign Affairs, RTBF and BRTN. Because, then, there were practical or legal reasons why the service could only be provided by a group of suppliers coordinated by INBEL, the authorizing officer, as the Financial Controller notes, made the contract by private treaty pursuant to Article 58 (d) of the Financial Regulation, which authorizes private treaty where for technical, practical or legal reasons the supply of goods or services can only be carried out by a particular contractor or supplier.Reply of the CouncilRe 3.94. The Council move (July 1994-June 1995) has meant that the procedures established for removing certain old or obsolete property from service have, for practical reasons, not been able to be followed strictly.The necessary adjustments in the inventory are being carried out and will be included in the 1995 balance sheet.Re 3.98. The Council will, as from the financial year 1995, carry over to the balance sheet the total amount of advances charged to Article 297.Any balance in the financial commitment will be covered by a note in the balance sheet.Reply of the Court of JusticeTangible fixed assets3.99. In the Annex to its balance sheet for the financial year 1994, the Court of Justice has merely shown the total rental figure in respect of the building forming the subject-matter of the 'lease purchase` agreement concluded by it with the Luxembourg State on 15 November 1994. At the time when that balance sheet was drawn up, the Court of Justice was not yet in possession of the other definitive financial details to be determined by the independent expert (Articles 8 and 9 of the agreement), and it consequently considered it inappropriate to show estimates in its balance sheet, a fortiori since the sums in question were very substantial. In that connection, provisional calculations recently drawn up by the independent expert (in September 1995) appear to vindicate the prudent approach adopted by the Court of Justice, since, according to the expert, the total liabilities of the Court at 21 December 1994 amounted to only about half of the ECU 340 million estimated by the Court of Auditors.Furthermore, the accounting rules currently applying to fixed assets, as laid down by the Commission pursuant to Article 21 of the detailed rules for the implementation of the Financial Regulation, refer only to purchases. However, the abovementioned agreement of 15 November 1994 remains, throughout its duration, in the nature of a lease. Since, therefore, an 'atypical` agreement is involved, the Court of Justice considers that that agreement should preferably be included in its next balance sheet on the basis of specific rules laid down by the Commission in accordance with Article 21 aforesaid.Reply from the Economic and Social Committee and the Committee of the RegionsTangible fixed assets3.95. The Economic and Social Committee and the Committee of the Regions (COR) acknowledge the shortcomings pointed out by the Court of Auditors as regards the keeping of inventories and other records.Inventories will be computerized as soon as possible, by sharing and applying the Commission's ad hoc software.Bank accounts3.100. At the time when the Court of Auditors conducted its audit the financial service was contending with:- the complexities of an accounting system comprising three interconnected, but separate parts,- an increasing number of transactions due to the arrival of the COR,- the changeover in the system for reimbursing ESC Members (from cash to cheques), resulting in a substantial increase in the banking transactions to be supervised.The Competent service is still not in a position to reconcile bank accounts, despite its efforts and partial success.In the mean time a computerized reconciliation programme for payments to Members' has been developed but is still not fully operational.Once this programme is finalized, it is planned to develop a similar programme for other accounts.() The Court has decided, for reasons of convenience, to use the acronym DAS in all of the Union's languages.() Article 188C of the Treaty establishing the European Community, Article 160C of the Treaty establishing the European Atomic Energy Community, and Article 45C of the Treaty establishing the European Coal and Steel Community, as regards the transactions under the ECSC's former administrative budget which were incorporated into the general budget by the Merger Treaty of 8 April 1965.() There are separate Statements of Assurance for the EDF and ECSC (unpublished).() Documents SEC(95) 253 final, SEC(95) 254 final and SEC(95)255 final.() Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977, p. 1), as last amended by Council Regulation (ECSC, EC, Euratom) No 2730/90 (OJ L 293, 12.11.1994, p. 7.() Volume IV should not be confused with the Financial Report which is published by the Commission, in the absence of any statutory obligation and for its own communication needs. This report is published later in the year and deals, to a large extent, with the financial statements presented in volume IV. It is not forwarded to the Court officially and is not covered by the DAS.() These charts and diagrams are identical to Nos I to IX and (in the case of No VIII) XIX included in the annual report on the financial year 1994.() With regard to the VAT resource, Article 11 of Regulation (EEC, Euratom) No 1553/89 stipulates that Community control must focus on the reliability and efficiency of the systems in force in the Member States. Finally, the statistical and macro-economic nature of the GNP resource does not allow for examination of the procedures leading to its establishment.() In this regard, it should be pointed out that this correspondence is not generally guaranteed, since it is connected with cases of fraud concerning own resources, and the methods applied by the Court, based on the data contained in the Community and national systems, do not, in principle, enable identification of the cases of contraband and other physical transactions nor declared.() OJ C 309, 16.11.1993.() In particular, the audit standards published by the Audit Standards Committee of the International Organization of Supreme Audit Institutions (INTOSAI).() Generally by means of 'sector letters` which are forwarded to those concerned following on-the-spot audits.() OJ L 141, 24.6.1995, p. 61.() Annual report concerning the financial year 1991, paragraphs 16.13 to 16.53 (OJ C 330, 15.12.1992).() SEC (95)252, pp. 313 to 315.() OJ L 34, 7.2.1994.() OJ C 303, 14.11.1995.() Annual Report concerning the financial year 1979, part two, paragraph 4.9, third indent and the Commission's reply.Annual Report concerning the financial year 1985, paragraph 10.50.Annual Report concerning the financial year 1989, paragraph 1.105 and the Commission's reply.() OJ L 386, 31.12.1994, pp. 24 and 26.() OJ 352 of 31.12.1994, p. 82.() Doc. 6449/95 FIN 150.() (COM(95) 98 Final of 29.3.1995.() OJ L 125, 8.6.1995.() Council Regulation (EEC) No 599/91 of 5 March 1991.() OJ L 49, 21.2.1989, p. 26.() Letter from the Commission to the Danish Permanent Representation, D(95) LK/jm/AF/176.() SEC(95) 1013, 11.7.1995.() Council Regulation (EC) No 1287/95 of 22 May 1995 (OJ L 125, 8.6.1995, page 1).