Annual Report concerning the financial year 1996, together with the institutions' replies - Volume II Statements of assurance
Date: 1997-11-18
Institutions: European Court of Auditors
Subjects: EU financial instrument, activity report, auditing, budgetary control, financial year, general budget (EU)













EUR-Lex - 31997Y1118(02) - EN






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31997Y1118(02)

Annual Report concerning the financial year 1996, together with the institutions' replies - Volume II Statements of assurance  


Official Journal C 348 , 18/11/1997 P. 0001 - 0097 





ANNUAL REPORT concerning the financial year 1996 (96/C 348/01)The report, together with the institutions' replies to the Court's observations, was transmitted to the authorities responsible for giving discharge and to the other institutions.Bernhard FRIEDMANN (President)John WIGGINSGiorgio CLEMENTEBarry DESMONDPatrick EVERARDArmindo de Jesus de SOUSA RIBEIROAntoni CASTELLSJan O. KARLSSONHubert WEBERAunus SALMIJørgen MOHRKalliopi NIKOLAOUFrançois COLLINGMaarten B. ENGWIRDAJean-François BERNICOTVOLUME II STATEMENTS OF ASSURANCETABLE OF CONTENTSPagePart I Statement of assurance concerning activities financed from the general budgetChapter 19 Statement of assurance and supporting information 5Chapter 20 Analysis of EAGGF-Guarantee and fisheries expenditure 21Chapter 21 Analysis of Structural Fund expenditure 31Part II Statement of assurance concerning the activities of the sixth and seventh European Development FundsChapter 22 Statement of assurance and supporting information concerning the activities of the sixth and seventh European Development Funds 39Annex II (*) Financial information on the general budget, the balance sheet of the European Union and the European Development Funds(*) The diagrams are all in this Annex.THE INSTITUTIONS' REPLIESPagePart I Statement of assurance concerning activities financed from the general budgetChapter 19 Statement of assurance and supporting information 16Chapter 20 Analysis of EAGGF-Guarantee and fisheries expenditure 29Chapter 21 Analysis of Structural Funds expenditure 36Part II Statement of assurance concerning the activities of the sixth and seventh European Development FundsChapter 22 Statement of assurance and supporting information concerning the activities of the sixth and seventh European Development Funds 50PART I Statement of assurance concerning activities financed from the general budgetCHAPTER 19(574*) Statement of assurance and supporting information19.0. CONTENTS Paragraph referenceStatement of assuranceInformation supporting the statement of assurance 19.1 - 19.40Introduction 19.1Scope of the audit 19.2 - 19.5Reliability of the accounts 19.6 - 19.25Understatement of amounts owed by Member States 19.6 - 19.7Overstatement of claims on Member States related to the clearance of the EAGGF-Guarantee accounts 19.8Understatement of cash account balances 19.9 - 19.11Overstatement of commitments still to be settled 19.12 - 19.18Understatement of commitments recorded in the budgetary accounts 19.19Understatement of commitments related to the Structural Funds 19.20Omission of off-balance sheet commitments related to multi-annual obligations for PHARE and TACIS operations 19.21Failure to quantify commitments in respect of pension rights 19.22Understatement of budgetary payments consisting of advances and payments on account 19.23 - 19.25The legality and regularity of the underlying transactions 19.26 - 19.36 Errors affecting the legality and regularity of commitment transactions 19.26Limitations on the audit work relating to payments 19.27Errors affecting the legality and regularity of the transactions underlying payments 19.28 - 19.36Accounting standards, policies and procedures 19.37 - 19.40 Accounting standards and policies 19.37 - 19.39Accounting procedures 19.40Statement of assurance concerning activities financed from the general budget for the financial year ended 31 December 1996I. The Court has examined the consolidated accounts of the European Community for the financial year ended 31 December 1996. These accounts include the balance sheet as at 31 December 1996, the revenue and expenditure account for the financial year ended on the same date and the notes in annex, and were drawn up under the Commission's responsibility in accordance with the provisions of the Financial Regulations. They are summarized in Volume IV of the documents submitted by the Commission to the discharge authorities, and to the Court of Auditors on 30 April 1997(575). Pursuant to the Treaties(576), the Court of Auditors is required to provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions.II. The Court carried out the audit in accordance with generally accepted international auditing standards, to the extent that these apply in the Community context. The audit of revenue was based on the amounts to be recovered and the amounts actually paid to the Community. The audit of expenditure was based on expenditure committed and the payments made. The audit comprised an appropriate range of audit procedures designed to examine, on a test basis, evidence relating both to the amounts and disclosures in the consolidated accounts and to the regularity and legality of the transactions underlying the accounts. It also included an assessment of the accounting principles used and significant estimates made by management, as well as the overall presentation of the accounts. The Court obtained through the audit a sufficient basis for the opinion expressed below.* * *Reliability of the accountsIII. The total amount of debtors representing amounts owed by Member States to the Community institutions, and disclosed in the consolidated balance sheet as 1 981,6 Mio ECU, is not accurately reflected in the accounts:(a) One of the main components of the debtors' figure is understated owing to problems of completeness and valuation. This concerns the separate accounts operated by Member States under Community legislation for recording entitlements to customs duties and agricultural levies which are either unsecured or are contested. The total recorded in the balance sheet was 1 064,2 Mio ECU.(see paragraphs 19.6 19.7)(b) The debtors relating to the clearance of accounts of EAGGF-Guarantee expenditure are overstated by 264,1 Mio ECU, because certain repayments made by the Member States during 1996 were not taken into account.(see paragraph 19.8)IV. Bank account assets of the Communities, recorded in the balance sheet as 11 696,7 Mio ECU, are not accurately reflected in the accounts:(a) Replenishments of bank accounts in certain third countries to a value of several hundred million ECU are recorded as expenditure instead of being recorded as an asset in the balance sheet.(see paragraph 19.9)(b) Community assets of at least 25,9 Mio ECU, the management of which has been entrusted to third parties, do not appear in the cash accounts in the balance sheet.(see paragraph 19.10)(c) The Commission has not performed reconciliations (39,3 Mio ECU) between the general ledger and the confirmations from the banks relating to the imprest accounts of the Mediterranean protocols.(see paragraph 19.11)V. The value of commitments still to be settled (47 489,2 Mio ECU) is understated by a net amount of at least 715 Mio ECU. This figure is made up of both overstatements and understatements:(a) The total value of commitments from differentiated appropriations still to be settled at the end of 1996 is overstated by at least 587 Mio ECU because it includes commitments that were no longer required to meet future payments. In addition, no information was provided by the Commission to demonstrate that a further 466 Mio ECU of outstanding commitments were required to meet future payments.(see paragraphs 19.12 19.18)(b) The value of certain other commitments still to be settled at the end of 1996, as well as the value of the commitments of the year, are understated by some 1 302 Mio ECU due to the practice of the Commission of committing in the accounts less than the full amount actually committed in the fields of cooperation and fisheries. Furthermore, these amounts are not disclosed in the schedule of off-balance sheet commitments.(see paragraph 19.19)VI. The multi-annual obligations disclosed as off-balance sheet commitments (91 134,5 Mio ECU) are inaccurately stated:(a) The accuracy of the amount (88 500 Mio ECU) shown for multi-annual obligations for Structural Funds as off-balance sheet commitments is doubtful because the underlying calculations were found to contain numerous errors.(see paragraph 19.20)(b) Multi-annual obligations of some 4 200 Mio ECU for PHARE and TACIS operations have been omitted from the off-balance sheet commitments.(see paragraph 19.21)(c) The obligations of the Communities in respect of pension rights acquired by its personnel are mentioned in the off-balance sheet commitments, but have not been quantified.(see paragraph 19.22)VII. The total value of advances or payments on account registered during the year as budgetary payments which were not definitive at the end of the year is understated by a net amount of some 19 000 Mio ECU.(see paragraphs 19.23 19.25)Legality and regularity of the underlying transactionsVIII. The substantive legality and regularity of commitments is affected by the errors described at V (b) above, because the amounts actually committed breached the limits of the commitment appropriations fixed by the budgetary authorities.(see paragraph 19.26)IX. The most probable estimate of the rate of substantive errors concerning the transactions underlying payments is about 5,4% of the total recorded budgetary payments of the order of 77 000 Mio ECU.(see paragraph 19.30)X. The audit again showed a high incidence of formal errors affecting payments. In these cases there were failures to comply with the applicable regulations and other conditions.(see paragraphs 19.33 19.36)XI. In a number of cases, estimated to represent 4,3 % of Community payments, it was impossible for the Court to obtain sufficient evidence to reach a firm opinion as to the correct use of Community funds.(see paragraph 19.27)XII. - Except for the effects of the matters summarized in paragraphs III-VII above, the Court is of the opinion that the accounts for the financial year 1996 reflect reliably the Union's revenue and expenditure for the year and financial situation at the end of the year. - The Court is of the opinion that the transactions underlying the revenue entered in the accounts for the financial year, taken as a whole, are legal and regular, within the limits specified in paragraphs 19.4 and 19.5. - Except for the effect of the matters discussed in paragraph VIII above, the Court is of the opinion that the commitment transactions for the financial year are, taken as a whole, legal and regular. - Because of the effect of the matters described in paragraphs IX-XI above the Court declines to provide positive global assurance as to the legality and regularity of the transactions underlying the payments for the financial year.16 October 1997B. FriedmannPresidentEuropean Court of Auditors 12, rue Alcide De Gasperi, L-1615 LuxembourgINFORMATION SUPPORTING THE STATEMENT OF ASSURANCEIntroduction19.1. This third statement of assurance (referred to throughout this report as the DAS)(577) concerns the reliability of the accounts of the European Community and the legality and regularity of the underlying transactions for the financial year 1996.Scope of the audit19.2. Transactions in certain areas audited by the Court are subject to further verification by other authorities, in particular during the clearance of the EAGGF-Guarantee accounts.19.3. The DAS itself contains no conclusions as to the degree of compliance with the principles of sound financial management. This is something which the Court continues to assess and report separately as part of its other work.19.4. Certain cases of deliberate irregularity to the detriment of the Community finances including, for example, the failure to declare dutiable imports cannot, by their very nature, be detected by the usual auditing procedures. The Court is not therefore in a position to give any assurance concerning the absence of cases of this type. However, as part of its financial audit of own resources, during 1996 the Court carried out a specific audit of the procedures for the establishment and recovery of customs duties and agricultural levies in cases of fraud and irregularity. The results of this audit are described in Chapter 1 of this annual report.19.5. Because of the macroeconomic nature of the statistical data on which the GNP and VAT own resources (accounting for about 80 % of Community revenue) are based, the Court concentrated on assessing the adequacy of the procedures applied for compiling these data and guaranteeing their reliability. For the other principal element of own resources, customs duties and agricultural levies (accounting for about 17 % of Community revenue), it was not possible to provide an assurance that all taxable imports have actually been declared and have generated the corresponding revenue. Accordingly, the Court's audit focused on assessing the adequacy of procedures applied for ensuring that the Community's entitlement to customs duties and agricultural levies is properly established as soon as the conditions provided for by the customs regulations concerning entry into the accounts of the entitlement and notification to the debtor have been met.Reliability of the accountsUnderstatement of amounts owed by Member States (paragraph III(a) of the statement of assurance)19.6. The consolidated balance sheet (Item III (a)) shows total debtors of 1 981,6 Mio ECU, representing the amounts due to the Community institutions by Member States as at 31 December 1996. Of this total, 1 064,2 Mio ECU(578) comprises entitlements to customs duties and agricultural levies established by Member States which they have entered into separate (revenue) accounts. Article 6.2(b) of Council Regulation (EEC) No 1552/89 of 29 May 1989(579) sets out the criteria under which Member States use the separate accounts. The Member States are responsible for keeping the separate accounts and report on them to the Commission once a quarter.19.7. Taken as a whole, the Court found that the separate accounts are still affected by significant errors which have a material impact on the completeness of the total debtors' figure disclosed in the consolidated balance sheet. In particular, the Court found that insufficient procedures were in place to ensure that all entitlements to customs duties and agricultural levies that are established and which are either unsecured or are contested are properly brought to account in the separate accounts at an appropriate valuation. The Court is not able to quantify the extent to which the separate accounts and hence the total debtors' figure may be understated, but considers that the amount of the understatement in the separate accounts is likely to be material.Overstatement of claims on Member States related to the clearance of the EAGGF-Guarantee accounts (paragraph III(b) of the statement of assurance)19.8. The Commission chose to follow up on one Court observation by replacing the forward estimates of debts related to the clearance of the accounts drawn up in 1995 with recovery orders. Nevertheless, on the basis of the data calculated at the end of 1995, the total debt thus shown on the assets side of the balance sheet at 31 December 1996 (792,2 Mio ECU)(580) is overstated by 264,1 Mio ECU, since the revenue actually collected in the form of negative expenditure that had been declared in the October 1996 statements of each Member State concerned had not been taken into account.Understatement of cash account balances (paragraph IV of the Statement of Assurance)19.9. Within the field of cooperation with Latin American, Asian and Central and Eastern European countries, projects are covered by financing agreements with authorities in the beneficiary countries. It is the established practice of the Commission to charge to the budget appropriations transfers made to replenish bank accounts opened by project management within the beneficiary countries. Local project costs are subsequently paid from these bank accounts. This money remains the Commission's property until it is properly paid out for the approved purposes. In view of this the Court considers that the Commission's practice is consistent neither with normal accounting practice nor with the relevant provisions of the Financial Regulation which apply to actions covered by financing agreements. The financing agreements stipulate more and more often that the balances on the bank accounts involved remain the property of the Community. Furthermore, paragraph 7 of Article 111 of the Financial Regulation states that 'payments made in the currency of the recipient State shall be subject to a clearance procedure before they are finally booked to the budget appropriations. Clearance shall consist of an examination by the Commission to establish that validation, authorization and payment have been properly effected, in accordance with this Financial Regulation`. All this implies that amounts replenished but not yet cleared should be reflected in the Commission's balance sheet. The Court is not in a position to estimate the outstanding amounts concerned, but it is likely that they are of the order of several hundred million ecus. The fact that the Commission does not share the Court's interpretation of the relevant articles of the Financial Regulation suggests that there is a need to clarify its Title IX, which specifically relates to external aid, in the context of a general revision of this Regulation.19.10. In connection with the MEDIA programmes (heading B3-2010), at the end of the financial year 1996 the Commission transferred 25,9 Mio ECU to a bank account opened by a services company providing technical assistance in implementing these programmes. Moreover, this account is designed to receive interest paid by the bank, as well as repayments from recipients to whom loans have been granted. Although these funds remain Community property, they are not shown in the balance sheet's cash accounts. Furthermore, and as a result of the foregoing, Community follow-up and control procedures are not applied with regard to the utilization of these funds and such utilization is subject only to the prior approval of DG X officials, who, de facto and in breach of the procedures stipulated in the Financial Regulation, are performing the duties of both authorizing officer and accounting officer, in contravention of the same provisions of the above Regulation.19.11. At the request of the Court, the Commission sent out questionnaires and reminders for the purpose of reconciling the bank account balances with data confirmed by the banks themselves. To date, in respect of the bank accounts for aid to Mediterranean countries, five out of a total of seven banks have replied, but no reconciliations have been carried out by the Commission. In the absence of such reconciliations and in view of the materiality of these differences, the accuracy of the related balance sheet figures (39,3 Mio ECU) cannot be confirmed.Overstatement of 'commitments still to be settled` (paragraph V(a) of the statement of assurance)19.12. At the end of 1996, some 60 000 commitments against differentiated appropriations totalling 47 911,7 Mio ECU remained to be settled, 422,5 Mio ECU of which were covered by payment appropriations carried over from 1996 to 1997.19.13. The Court audited a sample of 173 outstanding commitments amounting to 982 Mio ECU that had been selected from pre-1995 outstanding commitments to which no payments had been charged for two successive financial years. The population thus sampled contains 8 518 balances amounting to 6 212 Mio ECU; 2 060 of these balances, totalling 944 Mio ECU, went back to before 1992 and no payments had been charged to them for the last three financial years.19.14. The findings of the Court's audits, with which the Commission authorizing departments were directly associated, lead it to conclude that the Commission was unable to provide evidence that some 17,0 % of the sums relating to these outstanding commitments, totalling 1 053 Mio ECU, still related to an obligation to make further payments; the Court is also of the opinion that at least 9,4 % of the amounts of these outstanding commitments, i.e. some 587 Mio ECU, no longer related to an obligation to make payments.19.15. Moreover, operations that have been blocked for legal reasons, and which therefore probably no longer relate to actual obligations, but which the Commission is unable to cancel are estimated by the Court to amount to approximately 14 % of the commitments, or a total of some 864 Mio ECU.19.16. The time limits for implementing commitments were often exceeded, sometimes by several years. Of the commitments remaining to be settled at the end of 1996, some 9 000 concerned cases where the settlement deadlines had expired.19.17. Separate work carried out by the Court in a specific field corroborated these findings. For example, a selective audit in the field of TACIS and PHARE programmes, which focused on around 100 of the 600 operations committed between 1990 and 1994, makes it possible to estimate that the sum of the commitments outstanding under these programmes that were no longer justified at the end of 1996 is of the order of some a hundred Mio ECU (see Volume I, paragraphs 14.12 14.15).19.18. Although there were some clear improvements in certain fields, the situation regarding outstanding commitments thus leaves little room for satisfaction otherwise. Measures should be taken by the authorizing officers and the budget and financial control departments in order to ensure that outstanding commitments reflect the Community's real obligations in a reliable manner in future. To this end, the Commission should, in addition to putting the situation in order by cancelling all commitments that no longer relate to formal legal obligations, include an estimate in its financial statements of the volume of those of its outstanding commitments that are unlikely to result in a payment in subsequent financial years. The payment appropriations to be entered under forthcoming budgets could thus be better estimated.Understatement of commitments recorded in the budgetary accounts (paragraph V(b) of the statement of assurance)19.19. In certain areas covered by differentiated appropriations the Commission has adopted inconsistent practices as a result of which some effective obligations are not reflected as commitments in the budgetary accounts. This situation results from the fact that the commission decided to enter into obligations which were not covered by the commitment appropriations in the budget. As a result the commitments remaining to be settled at the end of 1996 (581), as well as the total amount of the commitments of the financial year 1996, are understated by 1 302 Mio ECU. This includes:(a) 685 Mio ECU for financing decisions in respect of Cooperation with Mediterranean countries and India (see Volume 1, paragraphs 13.11 13.16), and(b) 617 Mio ECU relating to international fisheries' agreements (see Volume 1, paragraphs 9.18 9.19).These multi-annual obligations were not even disclosed in the schedule of off-balance sheet commitments which form part of the accounts (582).Understatement of commitments related to the Structural Funds (paragraph VI(a) of the statement of assurance)19.20. At 31 December 1996, the Commission showed a sum of 88 513,9 Mio ECU for off-balance sheet commitments made relating to Structural Funds (aid planned for and not committed for the 1994-99 period at 1996 prices), including an amount of 8 476,8 Mio ECU for Community initiatives. These sums represent the difference between the Structural Fund spending scheduled for the 1994-99 planning period and the accumulated commitments for the 1994-96 period recorded in Sincom. As was the case for the preceding year, these commitments include commitments relating to previous planning periods which should have been omitted from this calculation. The result is that the amounts recorded under off-balance sheet commitments are understated. The data on which the amounts entered under the off-balance sheet commitments for the Structural Funds are based, and which were made available to the Court for the purpose of the audit, also call for further observations, the most important being the lack of reconciliation between the figures used by the central accounting departments and those used by the authorizing departments. The overall impact of the anomalies detected in the amount entered under the off-balance sheet commitments is an understatement of at least 2 000 Mio ECU.Omission of off-balance sheet commitments related to multiannual obligations for PHARE and TACIS operations (paragraph VI(b) of the statement of assurance)19.21. The obligations laid down in the multiannual indicative programmes in the context of the PHARE and TACIS programmes, and not yet reflected as commitments in the budgetary accounts, have not been disclosed in the schedule of off-balance sheet commitments which form part of the accounts (583). The amounts concerned are about 2 900 Mio ECU for PHARE and 1 300 Mio ECU for TACIS at 31 December 1996. In the case of PHARE the agreed programmes are signed by the Commission and third countries concerned. In such cases, it could even be argued that these obligations should be recorded as commitments in the budgetary accounts, because differentiated appropriations are designed to cover multi-annual obligations of this kind.Failure to quantify commitments in respect of pension rights (paragraph VI(c) of the statement of assurance)19.22. In 1996, the Commission provided for the first time an overview of the operation of the Communities' pension scheme in the explanatory notes to the off-balance sheet commitments. It did not, however, provide any figures. The 1996 presentation is, nevertheless, an improvement on that for the financial year 1995, when a mere token entry was entered under the off-balance sheet commitments. The Commission has undertaken to carry out an actuarial assessment during 1997 that will take account of all the necessary factors with a view to determining and incorporating, in accordance with international accounting standards, the amount that should be shown in the financial statements.Understatement of budgetary payments consisting of advances and payments on account (paragraph VII of the statement of assurance)19.23. Since 1995, in response to requests made by the Court and the European Parliament, the Commission has made a distinction in its accounting system between the year's payments in the form of advances/payments on account and those comprising definitive payments. This should enable the Commission to draw up a statement of non-definitive payments in its revenue and expenditure account at the end of the financial year(584).19.24. By using the identification parameters in the Sincom accounting system, the Court calculated that the non-definitive payments made for the financial year 1996 amounted to 19 068 Mio ECU. The figure of 1 736 Mio ECU published by the Commission in the 1996 revenue and expenditure account(585) was thus understated by some 17 000 Mio ECU owing to design errors in the computation systems and computer programs used by the Commission to produce this figure (notably the exclusion from non-definitive payments at the end of the financial year of advances/payments on account not yet charged to commitments already settled).19.25. Furthermore, the result arrived at by the Court is affected by the fact that, in spite of the instructions issued in this regard by the accounting officer's and Financial Controller's departments, the authorizing officers did not always clearly identify the amounts that were not definitive. Transactions totalling at least 2 000 Mio ECU, mainly in the fields of external policies and structural measures, are not identified in the accounts as being part payments that are not definitive, the result being that the total for these has been understated by the same amount.The legality and regularity of the underlying transactionsErrors affecting the legality and regularity of commitment transactionsSubstantive(586) legality and regularity errors concerning commitments (paragraph VIII of the Statement of Assurance)19.26. The cases where obligations effectively entered into by the Commission breached the limits of the commitment appropriations fixed by the budgetary authorities are identified in paragraph 19.19.Limitations on the audit work relating to payments (paragraph XI of the statement of assurance)19.27. In a number of cases in the sample of payments - estimated to represent some 4,3 % of the Community budget in 1996 - it was impossible for the Court to obtain sufficient evidence to reach a firm opinion as to the correct use of Community funds. The main causes of the lack of assurance on individual transactions are:(a) in the area of public storage of agricultural produce, problems in reconciling monthly declared figures with the underlying supporting documents and general weaknesses in stock-taking procedures, leading to uncertainty as to the amount chargeable to the Community budget;(b) unforeseeable legal or physical circumstances in Member States which resulted in the Court not having access to the documents essential for its audit.Errors affecting the legality and regularity of the transactions underlying paymentsSubstantive legality and regularity errors concerning payments (paragraph IX of the statement of assurance)19.28. As the Court made clear in paragraph 1.32 of its 1994 DAS report(587), its audit has to cover all stages in the management of Community funds, starting with the Commission's central accountancy and ending with final recipients in the Member States and elsewhere. The Court's audit for the purposes of the Statement of Assurance is aimed at establishing whether the rate of error detected in its sample of transactions verified down to the level of final recipients is low enough to enable it to provide a positive global assurance that the accounts are reliable and the underlying transactions legal and regular. On the basis of extrapolations of its sample results, it provides estimates of the rates of substantive error detected in order to support its conclusions. These estimates should be regarded as indications of orders of magnitude, associated with upper and lower limits at a level of 95 % confidence, rather than as precise measurements.19.29. The total unextrapolated value of substantive errors relating to payments - also taking into account errors occurring outside the sample - is 273 Mio ECU. These errors do not necessarily result from an intent to defraud the Communities. They may also not lead to recovery of the wrongly paid amounts. In the cases concerning the EAGGF-Guarantee, the Court's findings should be taken into account by the Commission when it clears the annual accounts. In the cases concerning the Structural Funds, where there is no comparable clearance procedure, the specific error detected may be corrected in the accounts of current programmes. Where there is evidence that the beneficiary has not acted in good faith, it is up to the national authorities to recover the amounts concerned and reimburse the Community budget. Because it is an extrapolation of the sample results, the Court's estimate of the most likely volume of substantive errors cannot of course serve to identify specific amounts to be recovered.19.30. The overall rate of substantive errors - quantifiable errors directly affecting the amount of the transactions underlying Community funds disbursed - is estimated to be in the range of 3,5 to 8,3 % of total payments: the most likely estimate is 5,4 % of total payments. The error rate for the EAGGF-Guarantee remains, as for the past two years, below the average for the budget as a whole. The Court notes the steps taken to improve financial management in this area. Similar improvements should be made in respect of the Structural Funds, to provide adequate assurance on the proper use of resources so as to reduce the error rate, which still remains higher than the average for the budget as a whole. The Commission decisions to improve the application of Articles 23 and 24 of the Structural Funds Regulation (EEC) No 2082/93(588) are moves in the right direction.19.31. The estimated level of error in the transactions underlying the payments for the financial year 1996 is so high that the Court declines to provide positive global assurance as to the legality and regularity of the transactions concerned.19.32. The majority of the substantive errors affected the eligibility of operations financed by the Community budget. Other substantive errors concerned the reality or the accuracy of the expenditure presented for such financing, the accuracy of the calculation of the amount of the Community contribution, and the existence or quality of the supporting documents on which the payments were based. In terms of impact on the amounts financed, the errors occurred in most cases in Member States (90 %), mainly at beneficiary level (60 %) and also at the level of local (20 %) and central (10 %) authorities responsible for managing the operations. See paragraphs 20.9 20.10 for further analysis of those errors found in the field of the EAGGF-Guarantee and paragraphs 21.16 21.17 for further analysis of those errors found in the area of the Structural Funds. In the case of the Structural Funds, the estimated value of the errors does not necessarily affect the payments made by the Commission in the form of advances. However, as the underlying transactions were financed with EU funds there is a risk that the general budget will be permanently affected by such errors if they are not detected and corrected.Formal legality and regularity errors concerning payments (paragraph X of the statement of assurance)19.33. Many formal errors - errors without any directly quantifiable effect on the amounts of the transactions underlying the Community funds disbursed - were found in the main fields of Community expenditure (EAGGF-Guarantee and Structural Funds - see paragraphs 20.11 20.12 and 21.18 21.19 respectively for further analysis), as well as in other fields, such as development cooperation with the countries of the Mediterranean, Latin America, Asia and Central and Eastern Europe and administrative expenditure. The incidence of formal errors was most marked in the field of the Structural Funds.19.34. These formal errors comprise, for the most part (70 %), cases where the regulatory conditions laid down concerning the subsequent implementation of the measure financed were not complied with and, to a lesser extent (20 %), cases where the management or control procedures stipulated in the Community Regulations were not applied. Taken as a whole, these errors originate mostly at Member State level (80 %), and mainly at the level of central (35 %) and local (25 %) bodies responsible for managing the operations.19.35. The formal errors that arose at Community institution level (20 %) are mainly cases where the management and control procedures were not complied with.19.36. The formal errors that arose at Member State level are characterized by the following:(a) The majority of the many formal errors concern the failure of the recipients or bodies implementing the measures to meet their obligations, particularly as regards keeping separate accounts for measures financed from the Community budget or maintaining the quality of the documents supporting expenditure declarations.(b) The other formal errors relate principally to shortcomings in the establishment and implementation of regulatory controls, which are the responsibility of the relevant authorities in the Member States.Accounting standards, policies and proceduresAccounting standards and policies19.37. In previous reports, and in particular in its DAS reports for 1994 and 1995(589), the Court underlined the need for the adoption of accounting policies to ensure completeness and consistency in the information presented in the consolidated accounts (including consistent treatment by different institutions), and to improve their informative value. In its DAS report for 1995, the Court referred to an external study carried out for the Commission on appropriate accounting standards for the Community's accounts whose results had not yet been made available to it. Having now had an opportunity to review the study, the Court notes that it identified areas in the balance sheet accounts where greater consistency in the accounting treatment is needed. These findings confirm those of the Court itself regarding the accounts of recent years, including those of 1996. The Commission is currently drawing up a manual for the consolidation of its accounts which aims to deal with the problems identified.19.38. In the Court's view, there remains a need for a clear statement of the accounting principles and policies applicable to the accounts of the European Community. This statement might, for example, indicate the fundamental basis of the revenue and expenditure account (for instance, a cash basis or an accruals basis), define the principles applicable to the valuation of balance sheet items (notably, providing for the depreciation of fixed assets) and define a framework for appropriate reconciliation between these two accounts. In preparing this statement of accounting principles the Commission should consider the Directives applicable to enterprises within the Community, and the standards promulgated by the international bodies setting accounting standards, particularly those applicable to the accounts of public sector bodies.19.39. The establishment of comprehensive accounting policies is not an end in itself. It is the means of providing the basic framework for financial reporting from which the Commission should be able to produce a set of financial statements which are responsive to the needs of their users, the budgetary authorities. In particular, the Commission should be able to provide the budgetary authorities with financial statements which are not only concise and easy to understand, but also enhance the transparency of the Commission's operations, and provide a clearer indication of the Commission's financial position as at 31 December 1997.Accounting procedures19.40. Much of the information presented in the balance sheet and in the off-balance sheet commitments is based on information which is not processed by the basic accounting system, but which is provided to the accountant of the Commission on an ad hoc basis. The Court's observations in the context of the DAS, particularly on items such as fixed assets and off-balance sheet commitments, show that these procedures too often fail to ensure that complete and accurate information is included in the accounts. The Commission should ensure that clearly defined accounting procedures are laid down in these areas, the application of which will result in the provision by authorizing officers in operational directorates-general of the information required for incorporation in the accounts.REPLIES OF THE COMMISSIONINFORMATION SUPPORTING THE STATEMENT OF ASSURANCEReliability of the accountsUnderstatement of amounts owed by Member States (paragraph III(a) of the statement of assurance)19.7. The Commission feels that following their introduction in 1990, the B accounts were kept in a manner which improved significantly once the initial problems had been solved. Appropriate rules were introduced to make management more transparent. As these accounts are kept at local level, there are sometimes odd errors, mostly of a formal nature. However, these anomalies cannot lead to the general conclusion that the accounts are not reliable.The Commission agrees with the Court that the separate account cannot include all Community entitlements. Moreover, it feels that, to some extent, this account overestimates the actual entitlements of the EU because some amounts have been entered in it for a long time although there is no hope of recovering them in reality.In order to resolve this problem, the Commission, on 3 July 1997, presented a proposal for the amendment of Regulation No 1552/89 with a view to strengthening the procedure for writing off unrecovered debts within a very specific time limit.Overstatement of claims on Member States related to the clearance of the EAGGF-Guarantee accounts (paragraph III(b) of the statement of assurance)19.8. It is true that, following an error, total entitlement was overstated by 264,1 Mio ECU at 31 December 1996. However, as soon as the error had been discovered, the Commission cancelled the recovery orders in question.The Accounting Officer's department is establishing a monitoring system to prevent this error from being repeated.Understatement of cash account balances (paragraph IV of the statement of assurance)19.9. Article 111(7) of the Financial Regulation applies under the financial protocols which involve a paying agent. Cash advances to the accounts of the financial institution as referred to in Article 111(7) of the Financial Regulation appear in the balance sheet until they are cleared by being charged to the budget.However, when aid is granted unilaterally and not covered by a financial protocol, the procedure in Article 111(7) does not apply and the budget is implemented in accordance with Articles 40 to 53 of the Financial Regulation as provided in Article 105(1) of the Financial Regulation.The Commission also feels that a clearer wording of the Financial Regulation would avoid the differing interpretations noted here. It will endeavour to secure such clarification when the Financial Regulation as a whole is recast. In this connection, it will take into account the comments made by the Court in Opinion 4/97 relating to the seventh series of amendments to the Financial Regulation.19.10. In 1996, the Commission (DG X) signed a contract with an intermediary organization (MEDIA programme assistance, PMA, specialist in financial management). A bank account was opened requiring two signatures:- Holder: MEDIA assistance SC;- Signatures : every transfer order must be initialled by the Commission (DG X) and signed by the contractor. This means that the holder cannot carry out any transaction on this account without the signature of a Commission representative (DG X);- Bank interest: must be transferred each quarter to the Commission's bank account;- The advance written approval of the Commission (DG X) is required for opening, transferring, closing and any change in the operation of the account. The owner undertakes not to invoke any right to this account in the event of cancellation or at the end of the contract.The case referred to by the Court comes under the general problem of payments made by financial intermediaries, of the technical assistance bureaux type, which then distribute the funds to the financial beneficiaries. The Accounting Officer's department would like to come together with authorizing departments and the Court of Auditors to analyse ways of dealing with these transactions in terms of the utilization of budgetary appropriations and of the presentation in the balance sheet of the funds held by financial intermediaries. This analysis should be taken into account in the identification of the general accounting principles applicable to the Union's financial statements which the Commission is undertaking as a preliminary to the publication of the consolidated financial statements for 1997.19.11. Details on the reconciliation of the balances with figures in the general account were given to the Accounting Officer in mid-July 1997.The Commission is considering what measures should be taken so that, in due course, the Accounting Officer will be in possession of the information required to ensure that the amounts entered in the accounts are reliable and that any differences and anomalies are corrected.Overstatement of 'commitments still to be settled` (paragraph V(a) of statement of assurance)19.12   19.14. The Commission is aware of the problem of commitments outstanding and of the need for more systematic monitoring. The instructions given to the Accounting Officer in recent years reflect the Court's concern.19.15. As stated in 19.12-19.14, the Commission agrees with the Court that when commitments do not tally with actual obligations they should be cancelled. Nevertheless, it is not always possible to do this quickly.As pointed out by the Court, when commitments are blocked because judicial proceedings are in progress, the Commission must wait for the judicial authority's decision before cancelling the commitment.In some cases, cancellation is not possible until the programme or project has been cancelled, and then only with the beneficiary's agreement.A number of commitments were cancelled by the Commission on its own initiative at the beginning of the following year or after the Court's inquiry.19.17. At the beginning of this year, a procedure was put in place to close programmes which had expired. Expired programmes and contracts were identified and an audit programme and a plan to recover unused bank balances were prepared. At the end of June 1997, 78 expired centralized programmes had been closed, 1586 expired centralized contracts had been analysed (of which 937 were closed) and 148 commitments were cancelled (partially and finally) representing 34 172 059 ECU. Twenty-one final audits of decentralized programmes were launched and recovery orders were issued for over 2 Mio ECU. The commitments relating to the expired programmes will be cancelled after the final audits.This work can only be done with existing human resources. Concentrating more on this activity could therefore be detrimental to the performance of other tasks (for example, longer payment times).19.18. In response to internal instructions and the Court's inquiry, most of the departments involved have been closely monitoring outstanding commitments in 1997 and have cancelled commitments and closed programmes as necessary. Some authorizing departments have even prepared a special programme for clearance and systematic monitoring. The Commission will ensure that that this work continues as part of the routine activities of the units in question.The Commission will examine the Court's suggestion that the accounts should contain estimates of payments which will probably not be made.Understatement of commitments recorded in the budgetary accounts (paragraph V (b) of the statement of assurance)19.19. In its reply to paragraphs 13.11-13.16 and 9.18-9.19 of the Court of Auditor's Annual Report for 1996, the Commission outlined the reasons why it considers these transactions regular.It is prepared to provide information on these two cases in a note to the balance sheet.The Commission is nevertheless aware of the general problem raised by the Court. It may review all the relevant provisions in the forthcoming recasting of the Financial Regulation referred to at paragraph 19.9.Understatement of commitments related to the Structural Funds (paragraph VI(a) of the statement of assurance)19.20. The Commission is currently comparing the programming figures by objective and by Member States with the DGs responsible for the Structural Funds with a view to making the necessary corrections. The various tables have been sent to them for checking and comments.Omission of off-balance sheet commitments related to multiannual obligations for PHARE and TACIS operations (paragraph VI(b) of the statement of assurance)19.21. The MIPs (multiannual indicative programmes) are not legally binding on either the Commission or the partner country and thus should not be regarded as budgetary commitments. The financial information which the programmes contain is intended merely as a guide. The purpose of the MIPs is to serve as a basis for detailed planning and scheduled discussions between the Commission and the partner country. These discussions result in the annual national operational programmes which lead to budgetary commitments.Since the programmes are also agreed with the beneficiary country and thus imply a political commitment, the Commission will examine how these details should be shown, if appropriate, in the off-balance sheet information.Failure to quantify commitments in respect of pension rights (paragraph VI(c) of the statement of assurance)19.22. The Commission confirms its intention to show an estimate of the overall financial obligation for pensions in the financial statements at 31 december 1997.However, the final results of the actuarial study will not be available until the end of 1998.Understatement of budgetary payments consisting of advances and payments on account (paragraph VII of the statement of assurance)19.23   19.24. It is true that Table 15 of the revenue and expenditure account and financial balance sheet contains errors. These errors are due to the definition of data in the extraction programmes which are used for the production of the information. The programmes will be reviewed and corrected.The legality and regularity of the underlying transactionsErrors affecting the legality and regularity of commitment transactionsSubstantive legality and regularity errors concerning commitments (paragraph VIII of the Statement of Assurance)19.26. As stated at 19.19, the Commission considers that these decisions are regular.Limitations on the audit work relating to payments (paragraph XI of the statement of assurance)19.27. Like the Court, the Commission was also unable to form a clear idea in a number of the cases mentioned. This was because some of the Court's sectoral letters to Member States informing them of the cases examined were sent too late for the Member States to have a reasonable length of time to reply. In these cases, the Commission has only the information provided by the Court and does not have the viewpoint of the beneficiary Member State, which it needs in order to adopt its position or to decide whether an on-the-spot inquiry is necessary. The Commission regrets that the overall results arrived at by the Court are based on a number of cases on which the Commission has been unable to express a fully informed opinion.(a) With regard to the problem specifically mentioned by the Court, the following comments can be made:Article 3(3) of Regulation (EC) No 1663/95 requires certifying bodies to report on the statements of intervention operations and on whether the financial interests of the Community are protected. In the light of the results of the certification procedure for 1996, the Commission has circulated Member States' certifying bodies with a guideline for the audit of intervention storage in 1997, is pursuing improvements in the management of intervention stocks with several paying agencies and has initiated an exercise paying particular attention to year-end stocktaking procedures.The introduction of accreditation criteria for paying agencies and the recent adoption of Regulation (EC) No 2148/96 (Evaluating and monitoring public intervention stocks) should ensure the early introduction of improvements in the management and control of intervention stocks.Errors affecting the legality and regularity of the transactions underlying payments19.28   19.36. The Commission takes note of the overall results of the DAS. It agrees with the Court that the number of errors is still too high. It believes that because of the degree of uncertainty inherent in any statistical method and because it will be some years before the DAS audit has acquired sufficient maturity to determine clear trends in rates of error, the Court's findings must be interpreted with caution.The general rate of error found by the Court covers very different situations, namely 90 % of the transactions carried out in the Member States and 10 % of transactions falling under the Commission's exclusive responsibility.For the EAGGF-Guarantee, where fund management structures are relatively simple, the Commission has been able to rapidly implement reforms which already seem to be bearing fruit. Indeed, the Court acknowledges these improvements (see Introduction p. 0.35).The situation with regard to the Structural Funds is more complex. The many levels of intervention (Community, central government, region, district, contractor, etc.), numerous procedures and the complexity of the structures lend themselves to a higher rate of errors. However, this is not necessarily a sign of less efficient management. The financial implications of such errors for the Community budget are generally neither certain nor easy to assess.In spite of these difficulties, the Commission is equipping itself with the necessary means to improve management. On 23 April 1997, for instance, it adopted a document on the eligibility rules for the Structural Funds. On 15 October 1997 it also approved a regulation laying down specific rules for the Member States with regard to monitoring the Structural Funds (see paragraph 21.6). These measures should produce the necessary improvements in the near future.Lastly, it would be interesting to use the rate of error found by the Court as a way of establishing the level of performance of Community management in relation to that of other administrations. Unfortunately, the lack of an audit similar to the DAS in the Member States and the special features of the Structural Funds, which have a unique comanagement system, do not allow a real comparison to be made.19.32. The Commission notes and endorses the Court's remark that in the case of the Structural Funds, the estimated value of errors categorized by the Court as substantive errors concerning payments does not necessarily affect the payments made by the Commission in the form of advances. The Commission continues to consider that errors of this kind should be categorized separately from the generality of substantive errors. However, the Commission regards these errors with proper seriousness and it corrects or requires the correction of all errors coming to its notice.The Commission notes with interest the cases raised by the Court in the area of EAGGF-Guarantee. In the majority of cases, the Court's findings match the Commission's own and appropriate corrective measures will be taken in the framework of the clearance of accounts procedure. Thus it is reasonable to assume that no significant loss to the Community budget will remain.However, the Commission points out that the risk of errors resulting from human error is difficult to eliminate entirely unless every single transaction was checked. For these obvious cost/efficiency reasons, such an approach is not possible.Accounting standards, policies and proceduresAccounting standards and policies19.37   19.39. As the Court proposes, the Commission feels that the accounting principles which govern the preparation of the accounts of the European Union should be formalized. The Commission will establish its accounting policy bearing in mind the specific character of what constitutes a public institution and will be guided by the principles contained in the fourth and seventh directives and international standards where these are transposable to the public sector and the practices applied by international organizations. On this point the Commission's Accounting Officer would like to thank the Court for the documentation provided. The Commission's aim is to reach an agreement with the Court on the reference standards and how they impact on the structure and the presentation of the financial statements as a preliminary to the production of the revenue and expenditure account and the consolidated balance sheet for 1997.Accounting procedures19.40. The Commission, with the help of an outside consultant, has prepared a consolidation manual. The other institutions will be asked to approve the manual before it is applied to the consolidated balance sheet of the European Union. This manual will enable the Commission to determine the scope of the consolidation of the accounts both in the Commission and for all the institutions and to present information in a standardized form in accordance with generally accepted accounting practices.CHAPTER 20(590*) Analysis EAGGF-Guarantee and fisheries expenditure20.0. CONTENTS Paragraph referenceIntroductory information 20.1Accreditation of paying agencies and the certification of accounts 20.2 - 20.5Reliability of the accounts 20.6 - 20.7Analysis of the Court's audit findings on the legality and regularity of the transactions underlying payments 20.8 - 20.12Substantive errors 20.9 - 20.10Formal errors 20.11 - 20.12Areas of limited assurance 20.13Identification of an area of particular risk 20.14General conclusions 20.15 - 20.17INTRODUCTORY INFORMATION20.1. EAGGF-Guarantee and fisheries expenditure represented in 1996 some 51,3 % by value of total budgetary payments (about 39 430 Mio ECU) and includes the entire expenditure of subsection B1 - EAGGF-Guarantee (39 081 Mio ECU), title B2-5 - Other agricultural operations (81 Mio ECU), title B2-9 - Fisheries and the sea (17 Mio ECU) and chapter B7-80 - International fisheries agreements (251 Mio ECU). The expenditure for subsection B1 - EAGGF-Guarantee - accounts for 99 % of total expenditure in this field and is exclusively managed by the paying agencies in Member States. 1996 was the first year of application of new rules for the paying agencies and for the clearance of accounts procedure. These rules were introduced by Council Regulation (EC) No 1287/95 of 22 May 1995(591) (amending Council Regulation (EEC) No 729/70(592)) and the related implementation rules were established by Commission Regulation (EC) No 1663/95 of 7 July 1995(593).ACCREDITATION OF PAYING AGENCIES AND THE CERTIFICATION OF ACCOUNTS20.2. In its DAS for the financial year 1995(594) the Court indicated the importance of the new procedures for a more effective monitoring of EAGGF-Guarantee expenditure. The certification of accounts, and related accounts clearance decision of the Commission, concern the 'integrality, exactitude and veracity` of the accounts and form the basis for certain financial corrections. The complementary assessment of compliance with EU regulations both at the level of the paying agencies and the final beneficiaries, essential for the evaluation of the legality and regularity of the underlying transactions, will continue to be undertaken by the Commission at a later stage, and further financial corrections may be made in respect of expenditure incurred up to 24 months prior to notification of such corrections.20.3. The key elements of the new procedures are the formal accreditation of paying agencies by the Member States and the certification of the annual accounts by a certifying body. The annual accounts of expenditure charged to EAGGF-Guarantee, as well as the certificates and reports of the certifying body, must be sent to the Commission by 10 February of the following year. By 31 March the Commission is required to communicate to the Member States the results of its verifications of the information supplied as well as any proposed amendments. The accounts clearance decision shall be taken by 30 April of the same year and determines the amounts recognized as chargeable to EAGGF-Guarantee.20.4. Despite these requirements, for 1996 the Commission only adopted a partial decision on 5 May 1997(595). At the statutory deadline no definitive accounts clearance decision could be taken:(a) for those Member States whose certified accounts had not yet been delivered (United Kingdom and Greece);(b) and for those paying agencies for which the evaluation made by the Commission of the certification report or a subsequent visit to the agency revealed, either that the audit work was not sufficient or that there were particular problems which needed clarification (this concerns all paying agencies in France and Portugal, three central and one regional paying agencies in Spain, the German Länder of Rheinland-Pfalz and Sachsen and three out of four Italian paying agencies).20.5. The Commission's decision of 5 May 1997 covered therefore only 12 936,6 Mio ECU or some 33 % of the total EAGGF-Guarantee expenditure. For the other paying agencies that account for some 67 % of the total expenditure declared, the definitive clearance of accounts decision on the recognized expenditure for 1996 was taken on 31 July 1997(596). Table 20.1 indicates the amounts covered by each of the clearance decisions, including the amounts of the financial corrections.RELIABILITY OF THE ACCOUNTS20.6. The Court has considered the implications of the operation of the new system in the DAS context. Satisfactory implementation of the system should improve the reliability of the accounts. In addition the audit procedures required of the certifying bodies might contribute to a better judgment on the operation of the controls over legality and regularity, but there is as yet insufficient information about this aspect of the new procedures. For 1996 the system has achieved a certain measure of progress, but much remains to be done. Certifying bodies in a number of Member States issued audit opinions qualified to some degree in respect of one or more of the paying agencies.20.7. For example, the Court notes that the paying agencies of the United Kingdom presented the final accounts only on the 22 May 1997 to the certifying body, which issued a qualified opinion. Reconciliation problems had persisted between the records of the operational systems within the paying agencies managing the different schemes and the accounting records. Furthermore, accounting records for some of the paying agencies had not been reconciled with those of the coordinating body, responsible for the monthly declarations to the Commission. These declarations continue to be submitted on the basis of advances to the paying agencies rather than the actual payments made by them to beneficiaries, contrary to Regulation (EC) No 296/96(597). It is doubtful whether these problems will be completely resolved before the 1998 financial year. Difficulties with certification were also experienced in a number of other Member States and are currently under investigation by the Court.ANALYSIS OF THE COURT'S AUDIT FINDINGS ON THE LEGALITY AND REGULARITY OF THE TRANSACTIONS UNDERLYING PAYMENTS20.8. Since agricultural guarantee expenditure still accounted in 1996 for more than half of total payments from the general budget, more than half of the transactions tested in the Court's sample were in this area. The Court considers that, in conjunction with other relevant information in its Annual Report, including particularly its assessment of the area aid payments scheme for arable crops (see points 3.1 to 3.79), it has sufficient information to draw certain broad conclusions relating to EAGGF-Guarantee expenditure as a whole.Substantive errors20.9. One in ten of the EAGGF-Guarantee transactions contained in the 1996 sample audited were affected by substantive errors. However, most errors had a relatively small impact on the amounts paid and the rate of most likely error, in terms of the effect on total EAGGF-Guarantee expenditure, is estimated for 1996, as in the two previous years, to be lower than the rate for the general budget as a whole (see point 19.30). All errors detected in the Court's sample originated in the Member States; in terms of impact on the amounts paid about 70 % occurred at the level of administrative bodies and about 30 % at the level of final beneficiaries.20.10. The main error types detected by the Court which account for the vast majority of substantive errors are:(a) errors relating to the eligibility of the expenditure. These errors concern mainly:(i) differences between actual and declared quantitative data (land surfaces, products or livestock). A significant number of errors (however, with relatively small impact on the amounts paid out) were noted in area aid schemes where the final beneficiaries claimed for areas greater than those actually sown;(ii) payments in respect of produce or beneficiaries not fulfilling eligibility requirements;(iii) transactions effected outside the eligibility period;(b) errors in calculating the amount of Community support. These errors concern mainly:(i) application of incorrect rates (aid rates, exchange rates, coefficients, etc.), incorrect calculation methods, and EU contributions to the financing of total costs exceeding maximum limits. Errors of this kind had little impact on the amounts paid out;(ii) failure to apply overall reductions in the aid rates required by the regulations. This type of error occurred essentially in Spain where the national authorities did not apply the required penalties of 137 Mio ECU in relation to the overshoots of the base area qualifying for per hectare aid for arable crops. On 3 September 1997 the Commission, in application of Council Regulation (EC) No 1422/97 of 22 July 1997(598), adopted Regulation (EC) No 1716/97(599) which retroactively exempted Spain from the application of these penalties in respect of the 1995/96 campaign;(c) absence or unreliability of essential evidence required to justify payments, such as proof of arrival of goods at final destination in the field of export refunds.Formal errors20.11. The incidence of formal errors in the context of EAGGF-Guarantee expenditure is significant although it is estimated to be less than the incidence of formal errors elsewhere in the budget. The majority of the errors occurred at the level of the paying agencies although in some cases delay in the promulgation of regulations was a contributory factor.20.12. The most significant types of formal errors relate to:(a) failure to comply with regulatory conditions stipulated for carrying out the measure financed by the Community budget:(i) non-compliance with regulatory deadlines for payments to beneficiaries or for transfer of premium rights;(ii) incomplete supporting documents (mainly in the context of export refunds);(iii) non-compliance with other Community rules (maintenance of registers, incomplete contracts, incorrect declarations supporting compliance with minimal yield requirements, etc.);(b) inadequate implementation and execution of regulatory management and control procedures to be performed by the paying agencies, mainly concerning on-the-spot checks at the level of the final beneficiaries for the area aid schemes.AREAS OF LIMITED ASSURANCE20.13. As explained in paragraph 19.27, in certain areas the responsible authorities were unable to provide sufficient evidence which would allow the Court to obtain assurance as to the correct use of Community funds. This particularly affects the following areas:(a) in the area of public storage in Italy, Ireland and the United Kingdom deficiencies such as inadequate physical checks on quantities were noted by Court auditors and by the certifying bodies. The Court also takes note of the fact that certifying bodies have limited the scope of their audit opinions in respect of public storage in Spain and Portugal;(b) in the area of the storage of sugar, in Denmark changes in stock measurement methods led to uncertainty as to the amount chargeable for the financial year, while in Sweden storage claims were affected by the incorrect treatment of surpluses and shortages;(c) in the area of ewe and goat premiums in Greece, weaknesses in the control system were noted and the actual livestock situation could not be verified in the absence of a reliable register.IDENTIFICATION OF AN AREA OF PARTICULAR RISK20.14. Council Regulation(600) (EC) No 2466/96 delayed until January 1997 the entry into force of the second stage of the integrated administrative and control system (IACS) which included the establishment of an alphanumeric system for the identification of agricultural parcels eligible for support under area aid schemes. Reliable cross-checks of agricultural parcels were in place in very few Member States for campaign 1995/96 (see also points 3.1 to 3.79). In respect of the livestock schemes, delays in the development of computer systems in most of the Member States reduced the effectiveness of checks on the eligibility of the aid claims (see points 4.18, 4.45 and 4.82). The Court therefore notes that, for those Member States who had not completed the implementation of the IACS system for campaign 1995/96, the absence or inadequacy of such checks prolonged the risk that parcels were declared more than once or that ineligible claims for livestock remained undetected.GENERAL CONCLUSIONS20.15. Control measures for EAGGF-Guarantee expenditure, which is characterized by a highly decentralized management, have been systematically tightened over the last few years, and clear responsibilities defined both for the Commission and for the paying agencies. Nevertheless, the Court's audit shows that the implementation of these control procedures, which are intended to detect and correct errors in declarations by beneficiaries prior to actual payment of the aid has proved inadequate in certain cases. It is essential that the paying agencies concerned implement and execute all the control procedures effectively.20.16. The Commission should continue to press for the implementation each year in all Member States of the first stage of the new clearance of accounts procedure within the time schedule established by regulation. The audit carried out by the certifying bodies is a key element in the Commission's monitoring of the performance of the paying agencies, including the full functioning of their internal audit services and other internal control systems. It is important that the Commission succeeds in its aim of accelerating the implementation of the second stage of the clearance of accounts procedure which includes the assessment, by its own services, of compliance with Community regulations, given that it can no longer make corrections in respect of transactions which occurred more than two years previously.20.17. These improvements in a posteriori audit arrangements must be accompanied by the completion of the installation of effective management controls in all the agricultural markets concerned. The IACS in respect of arable crops and livestock premiums must operate effectively throughout the EU, and the land holding registers in respect of other crops (vines, olive oil) must be completed with the minimum further delay (See also points 3.1 to 3.79). Successful completion of these steps will represent important progress in reducing the remaining errors and removing the areas of uncertainty which still affected agricultural guarantee expenditure in 1996.REPLIES OF THE COMMISSIONACCREDITATION OF PAYING AGENCIES AND THE CERTIFICATION OF ACCOUNTS20.4   20.5. On 31 July 1997, the Commission was able to clear the accounts of all the paying agencies, the Member States having forwarded the necessary information, and having undertaken the required additional audit work. It is hoped that with the experience of the first year of the new certification procedure, the Member States will take effective steps to submit their accounts and certificates within the stipulated deadlines.RELIABILITY OF THE ACCOUNTS20.6   20.7. The first implementation of the certification procedure has been encouraging given that 1996 was the first year, and is expected to continue to improve and to give increasing assurance that the Member States' control systems are operating effectively. The Commission will actively pursue this. In previous years, the accounts prepared by Member States' paying agencies were not audited prior to their submission to the Commission. The new certification procedure, which is intended to be based on an audit of accounts to international standards prior to their submission, has given improved credibility to paying agencies accounts for 1996.In this first year, the rigour of the certification procedure has also placed paying agencies under a new and explicit financial discipline requiring, in many cases, changes to existing arrangements. Many of these changes were achieved by the close of the certification procedure; some will require a longer time scale for their resolution. Although certain audit opinions were qualified, none justified the exclusion of the accounts from the clearance decision. The Commission has already established some financial corrections for 1996. The investigations carried out under the compliance phase of the clearance of accounts procedure may result in further financial corrections.The United Kingdom had particular difficulties in the preparation of accounts for 1996 which, arising from the implementation of a new computerized accounts system, were unrelated to the new certification procedure. The Commission is monitoring closely the situation with particular regard to compliance with the accreditation criteria laid down in Commission Regulation (EC) No 1663/95. As of 16 October 1997, the United Kingdom paying agencies will submit monthly declarations of expenditure based on actual expenditure.ANALYSIS OF THE COURT'S AUDIT FINDINGS ON THE LEGALITY AND REGULARITY OF THE TRANSACTIONS UNDERLYING PAYMENTSSubstantive errors and formal errors20.9   20.12. The Commission agrees that, as the Member States are responsible for executing payments charged to the Guarantee Fund, the errors detected occur in the Member States. A certain amount of error in the amounts claimed and paid has to be accepted, as the cost of exhaustively checking 100% of all aid claims would exceed the benefits. Much reliance is therefore placed in the EU instruments on the dissuasive effect of sanctions when incorrect claims are discovered, and of recoveries of irregular claims with penalties. The Commission continues, through the two stages of clearance of the accounts procedure, to ensure that the Member States implement effective control procedures, and that they apply the stipulated sanctions when irregularities are detected. The results of the Court's 1996 DAS audit in the Guarantee Section give some comfort that the Commission's efforts are bearing their fruit.20.10. (b) ii. It is true that Spain had not applied the penalties in respect of the overshoots of the base area. However, by Regulation (EC) No 1422/97, the Council had provided for retroactive exemption from these penalties in respect of the 1995/96 marketing year in the event of exceptional weather conditions, which excluded any financial impact on the Community budget. Consequently, no penalties were to be applied to these regions. The clearance departments will ensure correct application of the exemption.Areas of limited assurance20.13. Checks of the clearance of the paying agencies' accounts made by the certification bodies were based on an analysis of a sample of public warehouses.Checks of the compliance phase of the clearance of accounts of the EAGGF-Guarantee Section immediately revealed errors with respect to public storage and sheep premiums. In addition, a systematic programme of checks is being carried out on the position with regard to stock inventories in all Member States at the beginning of the 1996 financial year and at the end of the 1997 financial year.IDENTIFICATION OF AN AREA OF PARTICULAR RISK20.14. The Commission is monitoring very closely the full and effective introduction of the integrated control system. Those Member States which were unable to introduce all elements of the system in 1996 or 1997 were required to increase the proportion of claims checked on the spot.GENERAL CONCLUSIONS20.15. With the modification of Council Regulation (EEC) No 729/70, and the adoption of Commission Regulation (EC) No 1663/95, the Commission obtained an important reform in the financial management of EAGGF funds by Member States' paying agencies. In 1996 the Commission has worked closely with Member States in order to strengthen financial controls and to make explicit the responsibilities of paying agencies and certifying bodies. Inevitably, as improvements (e.g. the reliability of pre-payment controls; internal control procedures; and internal audit function) were introduced throughout the course of 1996, the situation at the close of the year was, overall, much better than at its opening. Thus, there has been substantial progress. The exceptions, in both the payment systems and the integrated control systems, will be closely monitored by the Commission, and appropriate financial consequences drawn for non-compliance in the clearance of accounts decisions.20.16. The Commission has insisted that Member States submit the annual accounts of their paying agencies by the regulatory deadline of 10 February, in writing and in meetings convened to discuss the certification procedure with Member States. For 1997, the Commission will announce to Member States a measure based on budgetary discipline which will involve the retention of advances and which will be triggered where a paying agency fails to submit its accounts by the regulatory deadline.20.17. The Commission is actively engaged in assisting the Member States concerned to introduce land holding registers, through aerial surveys and field identification systems. Those Member States which fail to meet the deadlines set for the implementation of these registers risk refusal of financing of part of the payments executed in the absence of effective management controls.>TABLE>>TABLE>>TABLE>CHAPTER 21(601*) Analysis Structural Fund expenditure21.0. CONTENTS Paragraph referenceAccounts of the Structural Funds 21.1 - 21.6Systems governing Structural Fund operations 21.7 - 21.15Overall assessment in the context of the DAS 21.7Expenditure systems and the risks of error 21.8 - 21.14Control in Member States 21.8 - 21.9Availability of information on expenditure 21.10 - 21.11Closure procedures 21.12Definition of eligibility 21.13Impact of national legislation 21.14Size of advance payments 21.15Results of the 1996 DAS Audit 21.16 - 21.19Remedial action 21.20 - 21.22ACCOUNTS OF THE STRUCTURAL FUNDS21.1. The Structural Funds and other structural instruments account for around 24 426 Mio ECU or some 31,8 % by value of total budgetary payments. During 1996 commitments made totalled 28 672 Mio ECU of which 16 345 Mio ECU remained open at the end of the year. Further details of budgetary amounts involved in the main Structural Funds can be found in Volume I, paragraphs 6.2-6.3, 7.6-7.14 and 8.1-8.5.21.2. Structural Fund interventions mainly consist of operational programmes approved by the Commission on the basis of proposals from Member States and lasting for up to 6 years. These amounts are committed in annual tranches over the programming period in accordance with the relevant programming documents. The operations are co-financed, generally by public authorities in the Member States.21.3. At the beginning of an operational programme, the Commission's first payment takes the form of an unconditional advance representing a specified percentage (generally 50 %) of the first tranche. Subsequent advances are then made when the Member States declare to the Commission that a given proportion of the previous advance(s) has actually been disbursed in line with the Community objectives and rules. There is no regulatory requirement that these declarations should show details of expenditure. At the end of the programming period a final settlement is made by the Commission of any outstanding balance following examination of an implementation report and the final declaration of expenditure provided by the Member State which is required to contain details of expenditure. The intermediate annual tranches are also closed through the payment of a final balance. The Commission decides on the closure of annual tranches on the basis of a review of annual progress reports prepared and submitted by Member States. These progress reports have no fixed format and content and do not, except for the Social Fund, generally contain details of expenditure. The Commission is therefore not able to identify and exclude ineligible expenditure on the basis of these reports.21.4. Until 1995 the Commission's accounts made no distinction between the Structural Fund disbursements which represented advance payments and those which took the form of final settlements. Table 15 of the revenue and expenditure account, which should now provide such information, is not reliable, as the Commission recognizes in its reply to paragraphs 19.23 to 19.25. Moreover, because the commitments are divided into annual tranches their closure in the accounts does not imply either the closure of a programme or the establishment of definitive expenditure - the latter being limited, except for Social Fund programmes, to the accounting closure of the commitment covering the final tranche. Furthermore the closure in the accounts of commitments related to annual tranches is artificial and misleading because the Commission in certain areas (particularly EAGGF-Guidance) allocates payments relating to later tranches to commitments for earlier tranches (thereby closing them before paying the final balance) and/or fails to adjust commitments after reprogramming (see DAS report 1995, Volume I, paragraphs 3.34 to 3.35). Finally, the annual accounts contain no information on the different programme periods or tranches, and thus do not show the degree of execution of the successive programmes. No accounts are published of closed programmes or programme tranches.21.5. There is thus no direct relationship between the operations at the level of the beneficiaries and the disbursements of the Commission, most of which are in the form of advances. Only when final settlements are made is there a clear and definitive link between the declared expenditure and total Commission disbursements.21.6. The Court has sought to obtain a representative view of the expenditure presented as underlying the declarations. It has used random sampling methods to audit payments to final recipients. The errors found thus relate primarily to the transactions at the level of the intermediate administrative bodies or the final recipients; they do not imply that the Commission's advance payments are necessarily incorrect, because Member States in many cases declare more than the minimum required to justify the advances. Nevertheless there were a number of examples encountered in the course of the audit where it was clear that the amount of eligible expenditure supporting an expenditure declaration was insufficient to justify the payment made by the Commission at the time it was paid. In some cases correct declarations would have resulted in the postponement of Commission payments until later, but in others, where final settlements were concerned, the errors have a direct effect on the amounts of the Commission's payments.SYSTEMS GOVERNING STRUCTURAL FUND OPERATIONSOverall assessment in the context of the DAS21.7. In its successive Annual Reports, and in its 1994 and 1995 DAS reports, the Court has drawn attention to deficiencies in the way in which Structural Fund operations are planned, managed and accounted for (see the chapters in Volume I dealing with the regional Development Fund, paragraphs 6.9 to 6.42 in particular, Social Fund, paragraphs 7.35 to 7.57 and EAGGF- Guidance, paragraphs 8.6 to 8.69). Objectives have not been set in a way which enables progress to be measured, there has been insufficient clarity in prescribing which expenditures can be eligible for Community assistance, reliable accounting systems have not been put in place and there have not been sufficient controls to ensure that expenditure declarations reflect only eligible expenditure. The Commission is taking important steps in the context of its SEM 2000 initiative to address these problems: new rules on eligibility have been agreed with the Member States, and the Commission has just adopted a Regulation aimed at improving the accounting and control framework.Expenditure systems and the risks of errorControl in Member States21.8. The high incidence of substantive errors of eligibility within the 1996 DAS sample of payments - errors which occurred in most Member States - confirms that the administrative and control systems currently in place do not ensure that all Community co-financed expenditure is eligible and that Community rules and regulations are applied. The main responsibility for proper financial management and control rests with Member States. Nevertheless, the Commission, in the exercise of its responsibility for the execution of the EU budget, should ensure that these establish adequate systems and controls which are consistently applied. If this is not achieved then the European taxpayer does not have reasonable assurance that Community funds are properly used.21.9. In two significant areas of EAGGF-Guidance expenditure Community legislation requires that physical inspections be carried out for a predetermined percentage of recipients. The Court's audit work shows examples of the required action not being documented or not even being performed at all (see Volume I, paragraphs 8.44 to 8.45 and 8.65).Availability of information on expenditure21.10. Effective control and monitoring systems require sufficient detailed information on how funds are being used, but the Court has often found that such information is not available in the context of the Structural Funds at regional, national and Community levels. An obligation to provide such information would induce both final recipients and preparers of declarations to assess carefully the type of expenditure for which Community financing is being sought and its conformity with the rules and regulations.21.11. Adequate information on expenditure would make it possible to identify a number of errors, such as ineligible expenditure, lack of co-financing, the presentation of budgeted or expected rather than actual expenditure, and multiple funding of the same project. Furthermore the information would provide the basis for the Commission and the Court to undertake effective risk oriented examinations of expenditure declared.Closure procedures21.12. As noted in paragraph 21.3 above expenditure in Structural Fund programmes remains non-definitive until the operational programmes are closed, at which time appropriate verification of all declared expenditure should occur. However, the first results of the Court's detailed audit work in this area in relation to the Regional Development Fund (see conclusion in Volume I, paragraph 6.39) indicate that the verification procedures in Member States in many of the cases examined could not be relied on to identify and exclude ineligible items from previously declared expenditure. There is thus a serious risk that the type of errors found in underlying transactions identified from declarations supporting advances will remain undetected in the definitive expenditure when programmes are closed, unless there is a substantial improvement in control procedures, in particular in Member States.Definition of eligibility21.13. The imprecise definition of eligibility criteria has on occasion led to differing interpretations by Member States. This imprecision, in conjunction with the absence of effective control and verification procedures, has led to the submission of ineligible expenditure by certain beneficiaries. Examples of this are given in relation to the Regional Development Fund (Volume I, paragraphs 6.45 and 6.46) and Social Fund field (Volume I, paragraphs 7.39 to 7.41 and 7.47). A further risk of error has resulted from the incorrect or inappropriate communication of eligibility criteria within Member States as illustrated within the Regional Development Fund (Volume I, paragraph 6.65).Impact of national legislation21.14. Activities which are co-financed by the Member States are often managed and accounted for on the basis of pre-existing national arrangements. These arrangements sometimes conflict with the relevant European legislation, resulting in beneficiaries presenting expenditure for reimbursement which under European legislation may be ineligible. Some operational programmes are also affected by charges and commissions imposed by national law which should be excluded from Community financing.Size of advance payments21.15. In general, payments of initial advances represent some 50 % of total expenditure for a particular annual tranche. The programming document which fixes the size of each tranche can overestimate a Member State's capacity to absorb expenditure quickly at the start of a programme thus resulting in larger advances than necessary. The size of such advance payments represents not only an inefficient use of Community funds from a treasury standpoint but can also lead to non-compliance with Community legislation defining time limits for transfer of funds from Member States to recipients. This is illustrated by the Court's findings in the Social Fund field (Volume I, paragraphs 7.13 and 7.14). If it becomes apparent that a Member State is not in a position to implement a programme according to the planned time scale, then the remaining amounts may be reprogrammed to subsequent years so accelerating the payment of the first advance in respect of the next tranche.RESULTS OF THE 1996 DAS AUDIT21.16. The rate of substantive error found in the Structural Funds budgetary area is, as in the last two years, estimated to be higher than that for the general budget as a whole (see paragraph 19.30). Over nine tenths by value of the substantive errors found in the Structural Funds audit area originated in Member States, of which some two thirds were at the level of the final recipients of Community funds, with almost all of the remainder occurring at local level.21.17. The majority of substantive errors found fell into the following categories:(a) expenditure not meeting the required eligibility criteria relating to the nature of the action financed, the type of costs claimed or the eligible period;(b) expenditure claimed which had not been disbursed at the time of the declaration.21.18. There was a very high incidence of formal errors involving breaches of the regulatory and control framework applicable to Structural Funds expenditure. Over four fifths of these errors originated in Member States: they were split roughly equally between central, local and final beneficiary levels.21.19. Nearly two thirds of these formal errors concerned breaches of the following regulatory conditions stipulated for the subsequent implementation of the measure financed by the Community budget:(a) national and final beneficiary accounting systems which do not provide for separate identification of expenditure of Community funds;(b) a lack of complete or adequate data on underlying transactions.REMEDIAL ACTION21.20. An important first step towards ensuring adequate control of Structural Funds expenditure and therefore reducing the risk of loss to the Community or other error, is the provision of complete detailed information on the expenditure being financed. The Court notes that the Commission has launched studies in this direction in the context of SEM 2000. Such information could also be used for more efficient management of the programmes, more efficient and effective verification of the actions and better evaluation of progress towards Community objectives.21.21. The Commission should maintain pressure on the Member States to establish effective administrative and control systems which enforce compliance with Community criteria. Such systems should include procedures for adequate and accurate communication of Community requirements, provide for adequate appraisal of requests for Community funding, and specify the arrangements for sufficient analysis and verification of the expenditure. The systems should also provide for regular effective monitoring of projects in qualitative and quantitative terms.21.22. The action under way in the context of the SEM 2000 programme should result in some improvement in the management and control of the Structural Fund programmes during the second half of the current programme period. However, these changes do not address all the problems associated with the operation of the Structural Funds which have been identified in the successive reports of the Court and the Commission. For the next programming period running forward from the year 2000, the basic Regulations need to be reconsidered. While respecting the principle of subsidiarity in terms of the choice by the responsible administrations in the Member State of the detailed actions to be co-financed, the Regulations need to provide for:(a) unambiguous definitions of eligible expenditure at the level of the Regulations;(b) clear and comprehensive reporting and accounting arrangements;(c) the proper discharge by the authorities in the Member States of their responsibilities for the control and certification of expenditure;(d) the imposition of financial corrections where authorities use Structural Funds financing other than in accordance with the Regulations.REPLIES OF THE COMMISSIONACCOUNTS OF THE STRUCTURAL FUNDS21.3. Member States' declarations of expenditure contain, in general, the same level of detail as the financial tables attached to the programming documents and to the Commission co-financing decisions.In June 1995 the Commission drew up and sent to the Member States an annual report schema which also provides the basis for final reports. However, this is not and should not be a rigid framework imposed on the Member States: given the widely differing content of each programme, it is for the national authorities to furnish the information provided for in the schema, but the layout of the presentation is for them to decide.It is not the purpose of these reports to allow the Commission to identify ineligible expenditure. This would not be practicable given the size of the programmes and of the sums involved. The Commission seeks to identify ineligible expenditure in other ways, for example by on-the-spot checks. However, the Commission emphasizes that the primary responsibility for ensuring that ineligible expenditure is not presented to the Commission for co-financing lies with the various authorities concerned in the Member States.21.4. In its reply to paragraphs 3.34 and 3.35 of the DAS Report 1995, the Commission explained its position in relation to the Court's claim that it 'fails to adjust commitments after reprogramming`. Where reprogramming produces a situation where an existing financial commitment is now greater than the corresponding sum in the financial plan of the programme, the Commission, instead of decommitting the difference, makes an adjustment in the next commitment by offsetting the surplus. The Commission takes the view that this practice, which avoids unnecessary financial transactions, is fully justified.As far as EAGGF-Guidance is concerned, according to current practice, each payment is posted to the oldest commitment still existing for the programme in question in order to reduce the number of accounting operations. Otherwise, the general system of accounts would become cumbersome: Community management of operational programmes could easily triple (decommitments, additional commitments as a result of these decommitments, recovery as a result of the decommitments, payments against new commitments, etc.). In a context of simplification of administrative procedures, this would not appear to make optimal use of staff.Moreover, due to frequent modifications of financing plans, the running total for all commitments is corrected when the next instalment is committed and, therefore, the individual commitments no longer correspond to the annual instalments of the latest version of the programme. There can be no logical rule for posting successive payments to the annual commitment of instalments, as these commitments no longer relate to the annual instalments.21.6. Member State final declarations of expenditure may, to the extent that the expenditure declared contains unidentified ineligible items, result in the Commission's paying too much. When such cases are discovered, the Commission makes or requires the necessary correction. The Member States are responsible for ensuring that their declarations do not include ineligible expenditure; the Commission is responsible for ensuring, within the limits of the resources available to it, that the Member States have put in place, and correctly apply, financial management, control and audit systems which tend to prevent such errors. The Commission adopted on 15 October 1997 a Regulation establishing detailed arrangements for the financial control by Member States of operations co-financed by the Structural Funds.SYSTEMS GOVERNING STRUCTURAL FUND OPERATIONSControl in Member States21.8. Most of the errors categorized by the Court as 'substantive` have, for reasons which the Commission explained in its reply to paragraph 3.133 of the 1995 DAS, no adverse effect on the Community budget or accounts and require the Commission to make no financial recovery. The Commission continues to consider that errors of this kind should be categorized separately from the generality of substantive errors. However, the Commission regards these errors with proper seriousness and it corrects or requires the correction of all errors coming to its notice.The Commission Regulation mentioned above aims inter alia at improving the accounting and control framework for management of Structural Fund operations in the Member States.21.9. The Commission will take account of the Court's remark in planning its on-the-spot control activity in this area and in its regular consultations with the Member States about control activity.Availability of information on expenditure21.10   21.11. In the context of the Commission's SEM 2000 initiative, steps are being taken to address the problem of information on how funds are being used, by means of a set of minimum requirements for implementation reports. In the same context, the new Commission Regulation mentioned above includes specific provisions about the detailed information to be made available at the appropriate management level in the Member States. However, given the size of the programmes and of the amounts concerned, it would not be appropriate to require detailed information to be forwarded to the Commission on a systematic basis. The Commission requests and receives detailed information when it is needed, e.g. for the planning of an on-the-spot check.Closure procedures21.12. The Commission agrees about the importance of ensuring that programmes are closed on a correct financial basis. With a view to improving the quality of Member States' expenditure declarations at closure, the Commission Regulation includes a specific requirement for Member States to present, at the time of programme closure, a statement providing an independent conclusion as to the validity of the request for the final payment and the legality and regularity of the transactions underlying the final declaration of expenditure. This requirement should have the effect of encouraging sound financial management and control throughout the life of the programme.The Commission also carries out on-the-spot checks during the programme implementation period, ensures that any problems reported by national or Community controls have been satisfactorily settled before the closure of the programmes and makes ex-post checks on a sample basis. All this helps to ensure the legality and regularity of the Community payments, including the final payment.Definition of eligibility21.13. The Commission formally adopted on 23 April 1997, after lengthy discussions with the Member States in the framework of the partnership, some 30 pages of detailed eligibility rules (see point 21.7 of the Court's comments).The Commission comments, in its replies to the passages mentioned, on the specific examples of ineligible expenditure advanced by the Court.Impact of national legislation21.14. The Commission takes appropriate steps to ensure that such problems are satisfactorily settled.Size of advance payments21.15. The size of the Commission advances is governed by Article 21 of Regulation (EEC) No 4253/88. Modification of the financial plan requires a specific Commission decision, and the Commission examines whether the allocation of the unspent amounts to the subsequent years is reasonable, with a view to ensuring that the Member State does not receive an unduly high advance.The reprogramming system provided for by the rules does not necessarily accelerate the payment of the first advance in respect of the next tranche.In the context of the ESF, the Commission has already adjusted the payment of certain advances in 1996 and undertakes to continue its efforts to extend the practice. It would, however, recall that, thanks to the annual closure of the ESF accounts, compensation is systematically made after the remaining amounts have been reprogrammed to take account of the position with regard to expenditure actually incurred.RESULTS OF THE 1996 DAS AUDIT21.16   17. The Commission notes that over 90% by value of the substantive errors found in the area of the Structural Funds originated in the Member States. Faced with this situation, the Commission corrects or requires the correction of all errors which it identifies or are brought to its attention, usually by requesting the Member Sate concerned to present a corrected declaration of expenditure; and it seeks to ensure that effective financial management and control systems are in place in the Member States and are correctly applied.21.19. The new Commission Regulation includes provisions specifying the requirements for a sufficient audit trail. It is also already clear that the expenditure of Community funds must be separately identified and it is up to the Member State to ensure this.REMEDIAL ACTION21.20   21.22. The basic responsibility for ensuring proper financial control of the operations co-financed by the Structural Funds lies and must continue to lie with the Member States. The Commission's general responsibility is to ensure, within the limits of the human and other resources available to it, that the Member States establish, and correctly apply, financial management, audit and control systems capable of ensuring that proper control. The Commission corrects or ensures the correction of all irregularities which it discovers or are drawn to its attention. The Commission adopted on 15 October 1997 a Regulation establishing detailed arrangements for the financial control by Member States of operations co-financed by the Structural Funds, together with guidelines for its departments on the circumstances in which it would be appropriate, in applying Article 24 of Regulation (EEC) No 4253/88, to make a net correction in the amount of the Community co-financing. The Commission notes the Court's remark that the changes in hand do not address all the problems associated with the operation of the Structural Funds. The Commission intends to review fundamentally the existing Council Regulations and to make proposals for amendments designed to improve financial management and control in the next programming period. It will take the Court's suggestions in this respect into account.PART II Statement of assurance concerning the activities of the sixth and seventh European Development FundsCHAPTER 22(602*) Statement of assurance and supporting information concerning the sixth and seventh European Development Funds22.0. CONTENTS Paragraph referenceStatement of assurance relating to the activities of the sixth and seventh European Development Funds for the financial year ending 31 December 1996 I - XIReliability of the accounts III - IVLegality and regularity of the underlying transactions V - XIInformation supporting the statement of assurance 22.1 - 22.31Introduction 22.1Scope of the audit 22.2 - 22.6Detailed observations on the accounts 22.7 - 22.19Detailed observations on legality and regularity of underlying transactions 22.20 - 22.31Other observations 22.32 - 22.51Comments on other information disclosed 22.32 - 22.36Management of the Stabex bank accounts 22.37 - 22.43Conditions of work programme and direct labour contracts 22.44 - 22.45Operations managed by the EIB 22.46ACP bank accounts for Stabex transfers 22.47 - 22.48Contract conditions on variation of prices in works contracts 22.49 - 22.51Statement of assurance relating to the activities of the sixth and seventh European Development Funds for the financial year ending 31 December 1996 I. The Court has examined the accounts of the sixth and seventh EDFs for the financial year ended 31 December 1996. These accounts include the balance sheets as at 31 December 1996, the revenue and expenditure accounts for the financial year ended on the same date and the notes in annex, as presented in Chapters VIII, X and XI of a Communication from the Commission to the Court of Auditors, the Parliament and the Council under reference SEC(97) 938 final of 27 May 1997. The Court of Auditors provides the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions.II. The Court carried out the audit in accordance with generally accepted international auditing standards, to the extent that these apply in the EDF context. The audit of revenue was based on the amounts of the contributions receivable and actually paid to the EDF. The audit of expenditure was based on expenditure committed and the payments made. The audit comprised an appropriate range of audit procedures, designed to examine, on a test basis, evidence relating both to the amounts and disclosures in the accounts and to the regularity and legality of the transactions underlying the accounts. It also included an assessment of the accounting principles used and significant estimates made by management, as well as the overall presentation of the accounts. The Court obtained through the audit a sufficient basis for the opinion expressed below.Reliability of the accountsIII. The amount disclosed as advances on contracts (for works, services and supplies) is underestimated by at least 336,8 Mio ECU. Moreover, advances are shown as final payments in the financial statements (see paragraphs 22.7-22.8).IV. Despite improvements introduced by the Commission, the accounts are still affected to a significant extent by the following accounting methods or practices:(a) the notes disclosing the amount of commitments unlikely to be used (34,9 Mio ECU to be decommitted plus 530 Mio ECU unlikely to be used) understates their total value by, according to the Court's estimate, some 145,3 Mio ECU (see paragraphs 22.12-22.13);(b) 78,23 Mio ECU have been paid out of the seventh EDF as advances for the eighth EDF and are not disclosed as debtors on the balance sheet of the seventh EDF, but are included in the receipts and expenditure account of the year. Corresponding commitments (totalling 101,5 Mio ECU) for both Stabex and the Centre for the Development of Industry (CDI) are included in the management accounts without being disclosed separately in the balance sheet (see paragraph 22.11);(c) the 19,6 Mio ECU shown as advances for scholarships and technical assistance include expenditure under verification amounting to 14,7 Mio ECU (see paragraphs 22.16, 22.17);(d) the treasury accounts include 3,7 Mio ECU of doubtful accounts and 89,5 Mio ECU of Government bonds and associated interest which are not specifically mentioned in the financial statements (see paragraph 22.15);(e) certain generally accepted accounting principles have not been applied (see paragraphs 22.9, 22.10, 22.18, 22.19).Legality and regularity of the underlying transactionsV. The commitments were not affected by substantive errors of legality and regularity, but the audit showed a high incidence of formal errors (see paragraph 22.21).VI. Of the 101,5 Mio ECU of commitments mentioned under paragraph IV b), 76,2 Mio ECU, related to Stabex, were made as advances for the eighth EDF using funds of the seventh EDF, following a decision by the ACP-EU Council. As the eighth EDF was not yet ratified, these commitments were effected with appropriations that were not available at the time (see paragraph 22.20).VII. Of the 78,23 Mio ECU of payments mentioned under paragraph IV b), 68,6 Mio ECU related to Stabex were made for which, because of the same reasons mentioned in paragraph VI, no sufficient legal basis exists either.VIII. Other than the transactions mentioned in paragraph VII which are of an exceptional nature, the errors found in the sample amount to 8,3 Mio ECU:(a) support for structural adjustment, to the amount of 8 Mio ECU was paid, although no evaluation of the conditionality had taken place;(b) errors in the calculation of amounts paid to contractors totalled 0,3 Mio ECU.On the basis of these results, the most likely amount of substantive legality/regularity errors affecting the year's payments was 21,2 Mio ECU (2,0 % of the payments) (see paragraph 22.28).IX. Although there was an improvement as compared with 1995, the audit again showed a high incidence of formal errors affecting payments. In these cases there were failures to comply with the applicable regulations and other conditions (see paragraph 22.29).X. Based on the results of the sample, the Court is unable to reach a firm opinion as to the correct use of an estimated 4,5 % of the payment transactions mainly due to material obstacles to the audit beyond the influence of the Commission. Moreover, for those related to structural adjustment, because of the weak organization of payments files, the Court was unable to assure itself that all relevant documents were available and taken into consideration at the moment of the authorization of the payments (see paragraph 22.25).XI. - Except for the effects of the matters summarized in paragraphs III and IV above, the Court is of the opinion that the accounts for the financial year 1996 reflect reliably the EDF's revenue and expenditure for the year and financial situation at the end of the year. - The Court is of the opinion that, except for the effects of the matters discussed in paragraphs V and VI, the commitment transactions for the financial year are, taken as a whole, legal and regular. - As regards payment transactions, the Court is of the opinion that, with the exception of the effects of the matters described in paragraphs VII to X above, the transactions underlying the payments for the financial year are, taken as a whole, legal and regular.16 October 1997B. FriedmannPresidentEuropean Court of Auditors 12, rue Alcide De Gasperi, L-1615 LuxembourgINFORMATION SUPPORTING THE STATEMENT OF ASSURANCEIntroduction22.1. The Treaty establishing the European Community entrusted the Court of Auditors with the task of auditing transactions carried out under the European Development Funds. The Court of Auditors is required to provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. This information in support of the statement of assurance sets out the overall results of the work performed under that mandate for operations under the sixth and seventh EDFs for the financial year 1996.Scope of the audit22.2. The DAS itself contains no conclusions as to the degree of compliance with the principles of sound financial management. This is something which the Court continues to assess separately as part of its other work, in particular in the context of its annual and other special reports.22.3. Certain cases of deliberate irregularity to the detriment of the Community finances cannot, by 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 absence of cases of this type.22.4. The audit of 1996 expenditure was based on a statistical sample of 63 commitments (Commission decisions) and 247 payments. The transactions pertaining to the two current EDFs were grouped together for the purpose of the audit and each Fund was treated as part of the same population.22.5. The commitments and payments examined in the context of the sampling procedures accounted for 45 % and 32 % respectively of total commitments and payments for the year. In the fields of Stabex and structural adjustment, the size of the transactions examined was such that most of the movements in that year were examined(603).22.6. At the year-end, to ascertain the appropriations available for re-use, it is necessary to deduct from the capital of each EDF both the final payments disbursed since the start of the Fund and the commitments of appropriations that are awaiting settlement. Table 1 shows the amounts that were expected to be available for re-use at the end of the 1996 financial year and thus also provides a summary overview of the progress of the sixth and Seventh EDF'(604).Detailed observations on the accountsAdvances on contracts (paragraph III of statement of assurance)22.7. Many contracts provide for the payment of advances before the commencement of works, deliveries of supplies or the provision of services. These advances are different from payments on account that are made on the basis of progress reports during implementation. In the accounts, the Commission does not distinguish between advances and final payments, which results in a forced presentation of the use of the appropriations that is not pointed out in the financial statements.22.8. In the 1996 accounts, the Commission presents for the first time a schedule indicating the extent of such advances(605). The schedule in the financial statements showing payments of advances is incomplete due to a computer error. The difference between the figures as analysed by the Court (604,41 Mio ECU) and the financial statements (267,61 Mio ECU) amounts to 336,8 Mio ECU.Accounting principles, methods and practices (paragraph IV (e) of statement of assurance)22.9. The generally accepted accounting principle of gross accounting (not netting off) has not been applied:(a) cash at bank and an overdraft have been netted off in the accounts(606);(b) expenditure to be regularized includes both receipts and income to be regularized, as well as expenses (see paragraph 22.18).22.10. No provision has been made for the following:(a) 2,8 Mio ECU for bank balances with the Central Bank of Zaire (see paragraph 22.15 (a));(b) the unrealized loss of 0,9 Mio ECU on the market value of Government bonds included in the Stabex treasury account (see paragraph 22.15 (b));(c) an amount due of 0,1 Mio ECU for Germany's 1994 contributions that is still outstanding(607) as a result of the exchange rates applied when the contributions were actually paid, and which is unlikely to be recovered.Balance sheetExpenses incurred in advance for the eighth EDF (paragraph IV (b) of statement of assurance)22.11. The audit of the appropriations showed that remainders of the seventh EDF were used to finance operations that would not otherwise have been executed as the eighth EDF has not yet been ratified. Such a situation has never arisen before. More specifically, 78,23 Mio ECU paid out of the seventh EDF as advances for the eighth EDF are not disclosed as debtors on the balance sheet of the seventh EDF, but are included in the revenue and expenditure account of the year. Corresponding commitments (totalling 101,5 Mio ECU) for both Stabex and the Centre for the Development of Industry (CDI) are included in the management accounts without being disclosed separately in the balance sheet and concern:(a) for Stabex the Seventh EDF covered the application years 1990 to 1994. For the application year 1995, the Commission, basing itself on a decision by the ACP-EU Council(608), used unaffected reserves of the seventh EDF, totalling 76,2 Mio ECU to make commitments and to make payments;(b) for the Centre for the Development of Industry (CDI), which had used its 60,0 Mio ECU envelope foreseen in the Financial Protocol annexed to the Lomé fourth Convention, the same method was used, amounting to 25,3 Mio ECU(609);Valuation of the Funds at the end of the financial year (sleeping commitments) (paragraph IV (a) of statement of assurance22.12. In Annex 3.1 to the 1996 financial statements, the Commission presents an analysis of the commitments for which there have been no movements in the accounts for over 18 months. Of these, the Commission has identified total commitments of 34,9 Mio ECU which need to be cancelled (14,8 Mio ECU for the sixth EDF and 20,1 Mio for the seventh EDF). The audit work performed indicates that the Commission's analysis understates the amount of the appropriations that are unnecessarily tied up. A total of 180,2 Mio ECU should be decommitted rather than the 34,9 Mio ECU disclosed in the accounts.22.13. The same Annex 3.1 also indicates that of the 5 096 Mio ECU outstanding commitments, an estimated 530 Mio ECU are unlikely to be paid out. This amount represents the contingency reserves made when the commitments are drawn up. By means of decommitments the fund balances of 2 207,9 Mio ECU available for re-use (Table 1) should be increased by 180,2 Mio ECU, and a further 530 Mio ECU should be taken into account for commitments that are unlikely to be paid out.22.14. It should be noted that included in the commitments to be paid are Stabex transfers of 103,8 Mio ECU, due to Sudan under the seventh EDF. A political decision is required before these monies can be paid over to Sudan.EDF Cash position (paragraph IV (d) of statement of assurance)22.15. The balance of 402,49 Mio ECU in the EDF bank accounts includes:(a) 2,8 Mio ECU for bank balances with the Central Bank of Zaire, which are unlikely to be recovered, and which should be disclosed as doubtful accounts on the balance sheet(610). The EDF authorizing and accounting officers should make provisions to write this amount off;(b) 89,55 Mio ECU of Government bonds (including interest purchased of 1,53 Mio ECU) as part of the Stabex treasury balance of 106,06 Mio ECU. Furthermore, no provision has been made for an unrealized loss of 0,92 Mio ECU on the market value of these bonds as at 31 December 1996.Advances for scholarships and technical assistance (paragraph IV (c) of statement of assurance)22.16. Details of the advances paid for scholarships and technical assistance, amounting to 19,6 Mio ECU are disclosed in the financial statements(611), and broken down into three groups:(a) 4,3 Mio ECU managed directly by 44 Delegations in the ACPs, of which only 0,5 Mio ECU was confirmed to the Court by 26 delegations. For 18 advances totalling 0,3 Mio ECU, no accounting movements had been recorded since 1993, and it is likely that these have been used up. In another case, advances of 1,5 Mio ECU were paid since January 1993, although no expenditure was reported by the delegation;(b) 9,1 Mio ECU of advances to AEC for technical assistance, overstated by 5 Mio ECU for expenses made locally by AEC but not reported at all to the Commission in 1996;(c) 6,2 Mio ECU paid to agencies in the Member States for scholarships was overstated by some 5,2 Mio ECU, which amount had not yet been recorded as expenditure in 1996 by the Commission. In one case, the last accounting entry was made in 1992, but no steps have been taken to recover the outstanding advance (of 78 939 ECU).22.17. The lack of follow-up on these advances and late accounting of expenditure has already been commented upon by the Court(612). The Court notes with satisfaction that the advances have been reduced from 29 Mio ECU to 19,6 Mio in the year to 31 December 1996. However, efforts should be continued to ensure that the accounts are up to date. The asset balance of 19,6 Mio ECU of advances recorded by the Commission cannot be considered to be available for re-use, and the capital of the fund is overstated by some 14,7 Mio ECU.Expenditure to be regularized (paragraph IV (e) of statement of assurance)22.18. Payments made locally in the ACPs are initially to be recorded by the Accounting Officer in a transitory account for expenditure to be regularized, before being attributed to a project and cleared as final expenditure after controls made by the Authorizing Officer and the Financial Controller. At the end of 1996, the amount of 33,8 Mio ECU of expenditure to be regularized actually comprised 3,3 Mio ECU of receipts and income to be regularized and 37,2 Mio ECU of expenses to be regularized, which represents 10,0 % of total local payments in 1996.22.19. Included in the amounts to be regularized are:(a) differences between the year end bank balances on the ACP bank accounts and the balances recorded in the accounting records, this difference being local payments for which the Commission had not received information at the accounts closure date, and which are explained by bank reconciliations. A total of 4,03 Mio ECU thus recorded at the year end on five bank accounts could not be explained by the Commission, as bank reconciliations had not been prepared and procedures for recording local payments as described in paragraph 22.18 were not followed;(b) 1,1 Mio ECU of operations carried out between 1988 and 1993, on which problems were identified in 1994. Three years later, these have still not been resolved and the payments remain outstanding to be regularized.Detailed observations on legality and regularity of underlying transactionsDecisions (primary commitments)Substantive legality/regularity errors (paragraph VI of statement of assurance)22.20. Commitments related to Stabex, totalling 76,2 Mio ECU, were made as advances for the eighth EDF using funds of the seventh EDF on the basis of Decision No 2/96 of 28 June, 1996 by the ACP-EU Council. As the EDF is based upon an international treaty that cannot enter into force before its ratification, the governments of Member States and ACP countries cannot decide upon an anticipated start of the Fund, because the ratification has to be given by the legislative power and not by the executive power (see also paragraph 22.27).Formal legality/regularity errors (paragraph V of statement of assurance)22.21. In total 13 out of 63 commitments (20,6 %) in the sample were affected by some kind of formal errors.22.22. Commitments for two structural adjustment programmes(613) were increased by 3,8 Mio ECU and 4,8 Mio ECU, on the basis of Articles 292 and 311 of the fourth Lomé Convention and Article 62 of the Financial Regulation. However, the procedures laid down in Article 292(1) of the Convention limit additional financing to the traditional types of programme and project. These additional commitments should not, thus, have been authorized following this procedure.22.23. An increasing proportion of structural adjustment measures is financed by subsidies drawn from the national indicative programmes(614). Nine commitments(615) amounting to 84,2 Mio ECU were financed by drawing on the national indicative programmes and resulted in the 10 % limit being exceeded. No information was supplied to the EDF Committee concerning the percentage by which the indicative ceiling of 10 % had been exceeded and the reasons therefore.22.24. For the transactions managed under mandate, it was noted that:(a) the ceiling of 3 % interest rate on risk capital loans(616) was not always strictly adhered to; in cases of on-lending in form of equity participations, higher remuneration was not excluded because the remuneration equals 50 % of any dividends;(b) Article 233.4(b) requires that any financial benefit accruing to the intermediary from the on-lending transaction shall be used for development purposes (after taking into account administrative costs, exchange and financial risks, and the cost of technical assistance). This condition was not included in the finance contracts relating to three commitments;(c) for one commitment for interest rate subsidies the stipulation of Article 235 (b) of the Lomé Convention whereby the interest rate borne by the borrower shall be neither less than 3 nor more than 6 % was not fully adhered to, as the possibility of an interest rate higher than 6 % was not excluded in the finance contract.PaymentsNon opinions (paragraph X of statement of assurance)22.25. In a number of cases estimated to represent 4,5 % of payment transactions, it is not possible to judge on the legality and regularity of the underlying transactions, mainly due to material obstacles to the audit beyond the influence of the Commission.22.26. Supporting documents were found to be missing for a further five local payments totalling 0,1 Mio ECU, regularized during 1996.Substantive legality/regularity errors (paragraph VII and VIII of statement of assurance)22.27. As mentioned in paragraph 22.20 above, a number of payments have been made on behalf of the eighth EDF, using funds of the seventh EDF following decisions by the ACP-EU Council. As the eighth EDF was not yet ratified, the related underlying payments, totalling 68,6 Mio ECU, were made with credits that were not available at the time of payment.22.28. The most likely amount of substantive legality/regularity errors - quantifiable errors directly affecting the amounts of the transactions underlying EDF funds disbursed - affecting the year's payments is 21,2 Mio ECU (2,0 % of the payments):(a) the non-eligibility of payments (no evaluation of the conditionality related to structural adjustment; ineligible supplies for a project);(b) the calculation of the amounts paid to contractors (reimbursement of advances; 16 cases where the prescribed retention of 10 % had not taken place);(c) an amount paid in local currency exceeded the amount committed in that currency.Formal legality/regularity errors (paragraph IX of statement of assurance)22.29. Of the payments, 10,9 % was affected by formal errors - errors without any directly quantifiable effect on the amounts of the transactions underlying the EDF funds disbursed - especially in the area of Structural Adjustment and operations managed by the EIB.22.30. For structural adjustment two payments, totalling 12,7 Mio ECU were contrary to Article 250.3 of the Lomé Convention transferred to accounts outside the EU(617) (USA). Two others were made without the necessary Memorandum of understanding on the use of counterpart funds being concluded(618). As regarding conditionality it was noted that either payments were made when conditions were not all fulfilled or conditionality was changed and/or annulled without informing the EDF Committee.22.31. For the payments of grants the types of errors included the following: the prescribed tendering procedure was not followed, the necessary bank guarantees were not always provided, payments were made on bank accounts other than those stipulated in the contract.OTHER OBSERVATIONSComments on other information disclosed22.32. Apart from the balance sheets, revenue and expenditure accounts and annexes thereto examined in the context of the 1996 DAS, other information presented by the Commission in the financial statements has also been reviewed. The primary objective of this review was to confirm the consistency of the other information with the audited financial statements.22.33. The payments for structural adjustment support and Stabex are in the first instance made into intermediary bank accounts in Europe. For structural adjustment support, according to Article 250.3 of the Lomé Convention, the funds remitted to the beneficiary authorities are to be considered as advances of funds until the authorities in question submit justification for their use. The Commission does not follow this provision in the Convention.22.34. For both instruments (Stabex and Structural Adjustment), local currency counterpart funds are constituted. For the seventh EDF, the Commission has provided details of the payments made, of ecu amounts on deposit on European bank accounts and of the counterpart funds constituted, used and remaining to be used(619):(a) of the structural adjustment support payments to date of 1 308,3 Mio ECU, 76,1 Mio ECU remains on European bank accounts; local currency counterpart funds remaining to be used total 152,3 Mio ECU. However, the delegations confirmed to the Court the amounts of 74,3 Mio ECU and 107,4 Mio ECU respectively;(b) of the 1 610,6 Mio ECU paid for Stabex transfers from the seventh EDF (including payments on account for the eighth EDF), 575 Mio ECU remains on European bank accounts; unused local currency counterpart funds total 222,7 Mio ECU. The delegations confirmed to the Court the amounts of 744,4 Mio ECU and 116,7 Mio ECU respectively.22.35. The figures presented on the special iniative for Africa (rehabilitation)(620) include both EDF funds and budget funds. The total commitments amount to 783,0 Mio ECU of which 592,7 Mio ECU are funded from EDF resources and payments total 227,0 Mio ECU of which 152,6 Mio ECU from EDF.22.36. Finally, the overall authorizations for risk capital, totalling 30,0 Mio ECU of which 5,0 Mio ECU for the sixth and 25,0 Mio ECU for the seventh EDF, are not disclosed at all(621).Management of the Stabex bank accounts22.37. Following a restricted invitation to tender in June 1994, the Stabex bank account was opened in October 1994 for an initial period of one year. The terms and conditions were established by an exchange of letters between the Accounting Officer (DG XIX) and the bank concerned. The account was subsequently renewed, each time for a period of one year, without any changes to these terms and conditions.22.38. The interest offered on the account was one of the critera used for assessing the terms offered by the banks invited to tender. However, the costs of the services offered were not considered at all, and were not mentioned in the terms and conditions for the account. In the absence of any agreement, the successful bank applied costs in accordance with its general terms and conditions. As these account charges were not shown separately, but were deducted from the interest paid to the Commission, the latter was not in a position to judge how much it was actually paying for the account services.22.39. The Stabex account comprises several bank accounts for capital and interest, and a portfolio of Government bonds, managed as a whole in order to maximize the return on the accounts, given the prudent investment policy of the Commission and the liquidity requirement of the EDF. Details of all underlying transactions, bank statements and an overall summary of the Stabex account are provided by the bank. Only one account is maintained in the EDF accounting records, representing the overall Stabex account(622). Accounting entries are recorded on the basis of the overall summary of the Stabex account, which gives details of interest earned, payments, and transfers between the various accounts.22.40. The total Stabex interest earned during the year (15,7 Mio ECU per the accounts) comprises 2,7 Mio ECU interest on the deposits made in the year, 13,8 Mio ECU of interest earned on bonds and 0,9 Mio ECU of capital losses.22.41. The underlying documentation for the Stabex account was found to be incomplete - no bank statements had been kept for two of the bank accounts, and an incomplete set only was available for the other two accounts; the instructions to the bank and confirmations of transactions from the bank were also incomplete. A complete set of bank statements and confirmations of operations are the minimum basic documents required as justification for accounting movements recorded for bank accounts, and it is absolutely imperative that there are controls to ensure that these have all been received and kept. In the absence of supporting documentation, it is not possible to verify what checks had been carried out by the Accounting Officer to ascertain that his instructions were followed, that all income due to the EDF had been received, and that the Community assets were safeguarded.22.42. Within the Accounting Officer unit, no standard procedures have been established as concerns recording of bank operations, recovery of bank charges not due, filing and archiving of bank statements and preparation of bank reconciliations. During the course of the 1996 DAS audit, the lack of consistent and proper reconciling procedures between bank statements and the accounting records (see paragraph 22.19) were noted. For a number of bank accounts operations were incorrectly recorded and follow-up of operations for which no information was available was weak.22.43. These weaknesses have already been drawn to the attention of the Accounting Officer in previous years, but the situation remains unsatisfactory. Standard procedures need to be established and applied in the Accounting Officer unit.Conditions of work programme and direct labour contracts22.44. Of 30 work programme and direct labour payments examined in the context of the 1996 DAS, the contract conditions of 22 related contracts totalling 41,2 Mio ECU, showed a number of weaknesses:(a) in eight contracts, there was no mention of conditions concerning the administrator of imprest accounts, the accountant or the modalities for the recovery of the advance. Responsibilities were not clear as regards payments made from the advance and the accountability of beneficiaries for the use of funds received;(b) on 10 contracts, no procedures were specified for local procurement, and on a further 12 contracts the local procurement conditions applicable were different to those allowed per instructions from the central services. The impact of the differing procurement procedures on the costs eventually borne by the EDF cannot be quantified.22.45. Application of management instructions should be controlled, and all derogations should be specifically approved.Operations managed by the EIB22.46. For the operations managed by the EIB, although the calculations for the interest rate subsidies were checked for the operations in the sample and no errors were noted, the Commission itself still does not check if the elements for the calculation and the calculation mode for amounts paid are in accordance with the Financial Regulation(623) and Article 235 of the Convention.ACP bank accounts for Stabex transfers22.47. Stabex transfers are initially paid from the EDF bank accounts onto intermediary, interest bearing bank accounts in Europe in the name of the ACP State concerned, but for which both the Commission and the ACP State are joint signatories. These monies can only be released when conditions concerning their use have been met(624).22.48. However, the Court came across a case where, pending the agreement on the use of the Stabex transfers, the monies from the intermediary bank account were used to purchase shares in an investment fund. The Commission should remind its Officials and the ACP States concerned that such transactions are in conflict with the Lomé Convention.Contract conditions on variation of prices in works contracts22.49. Changes in the prices of works contractors' costs, such as labour and materials' costs, occurring during contract execution, may give rise to additional payments, referred to as 'variation of prices`. The rules governing the calculation of price variation are detailed in the special tender conditions. Two systems are commonly used: either utilization of published price indices or price variation based on prices effectively paid to suppliers. Both systems imply however that the 'basic rates`, i.e. the cost prices effective at the time of tender opening, are stated correctly, which must be checked during the evaluation of the offers submitted.22.50. The Courts' examination of payments for works contracts revealed one case, where the amount of price variation paid was conform to contract conditions, but yet was economically unjustified, since the stated tender rate was manifestly understated (Uganda, Kampala City Roads, bitumen).22.51. Although the legality/regularity of this payment cannot be contested, the Court draws attention to the fact that the thorough checking of basic cost rates during tender evaluation is essentil, if contractually correct but economically unjustified payments of price variation are to be avoided.REPLIES OF THE COMMISSIONDetailed observations on the accountsAdvances on contracts22.7. In the EDF accounts for 1996, the Commission does distinguish between final payments and advances, making it possible to monitor clearance of the advances.The financial statements show advances as expenditure on projects, which is what they are. The Financial Regulation does not require that advances and payments on account be presented separately.However, the Commission acknowledges the benefits of giving a figure for advances in an annex to the financial statements and did so for the first time in the financial statements for 1996 (Annex 3.4, page 167).In June 1995 the accounting system was improved so that reliable figures on advances paid could be produced at the end of the year: the amount of each advance was recorded, together with the currency in which it was paid. However, it was not possible with the resources available to publish details (currency and amount after conversion) of the backlog of advances recorded before June 1995, in time for closure of the 1996 accounts. The Commission confirms the Court's figures. The differences between those and the figures in the Annexes to the financial statements stem from an error in the computer program, which was corrected in 1997.Accounting principles, methods and practices22.9 (a) The balance sheet gives a single figure for the balance on all bank accounts. The Commission takes the view that, by giving a net figure for the hundreds of accounts in question (all of which are open to inspection), it is helping to make the balance sheet clearer and more readily understandable.22.9 (b) The accounts for local payments cannot be finalized until all the supporting documents accompanying the bank statements have been checked by the authorizing officer and the financial controller to ensure that the payments are charged to the correct heading.A bank statement may include expenditure and income with no supporting documents. As all such transactions should be cleared in the course of the following year, there is no justification for separating them out and duplicating outstanding items.22.10 (a) When the final accounts were being drawn up, it was hoped that the Zairean Government might pay the outstanding amount. This now seems unlikely in the light of recent events and the Commission will take the necessary action.22.10 (b) It is true to say that, for some investments, the realizable value is not the same as the purchase price. However, losses are always offset by interest received. At the end of the year, the Commission makes no provision for losses, interest receivable or profit on realization, but merely records the situation at 31 December.22.10 (c) The Commission has received no reply to its request to the German authorities and must therefore record the amount under profit and loss.Balance sheetExpenses incurred in advance for the eight EDFs22.11. To be prudent, the Commission entered the amounts paid prior to ratification of the eighth EDF as expenditure under the seventh EDF.Thus they are not presented separately from the other expenditure included on the balance sheet and the financial statements.As soon as the ratification procedure is complete, the Commission will ensure that the amounts are charged to the eighth EDF.Valuation of the Funds at the end of the financial year (sleeping commitments)22.12. The accounts show the Commission's legal commitments concerning implementation of the EDF. Commitments are entered in the accounts when the Commission takes the relevant funding decision. Financing agreements or exchanges of letters replacing such agreements constitute contracts which are legally binding on the Commission and the ACP recipient alike. Changes to these contracts can be made only if both parties agree. Hence a project can only be closed if the national authorizing officer agrees and confirms that implementation of the project is complete. To reduce the amount allocated to a project in mid-implementation requires a decision to be taken by the Commission at the request of the national authorizing officer.The amount which the Commission shows can be decommitted (34,9 Mio ECU at the end of 1996) relates to projects in respect of which both parties have agreed to start the closure procedure.The 145,3 Mio ECU difference between the Court's figures and the financial statements can accounted for by four differences in approach:- a differing assessment concerning the resumption of cooperation with certain ACP States and the re-starting of certain projects (26 Mio ECU). The main countries concerned are Equatorial Guinea (four commitments for 6,1 Mio ECU), Gambia (five commitments for 4,2 Mio ECU) following the resumption of cooperation in 1997, and Togo (Sysmin commitment worth 15,7 Mio ECU). Technical studies were launched in early 1997 with a view to redefining the Sysmin project with Togo;- a difference of opinion concerning the decommitment of appropriations for projects on which objections have been made (19,4 Mio ECU): the Commission feels it is more sensible to cancel outstanding commitments when all such objections have been dealt with;- a difference in the criteria applied to the cancellation of commitments to EIB operations (10,9 Mio ECU: the Commission is not empowered to close a project unless the EIB requests it, and the Bank thinks that the projects concerned should continue;- a difference of opinion on the criteria for decommitting projects without accounting movements (89,1 Mio ECU). The Commission will examine which of these commitments can be cancelled. In 1997 it already closed some of the projects, releasing 19,6 Mio ECU in the process.22.13. The 530 Mio ECU shown in Annex 3.1 (page 163) to the financial statements account for 6,3 % of initial commitments. The Commission will conduct a more detailed study of the situation.EDF cash position22.15. See replies to paragraph 22.10.Advances for scholarships and technical assistance22.16. The Commission has started work on clearing the advances for scholarships (delegations and Member States' management bodies) and technical assistance (AEC). This has proved successful and advances shrank by 32 % from 1995 to 1996.(i) The 4,3 Mio ECU covers not only expenditure on projects but also amounts available for future expenditure.In 1996 the Commission worked on clearing the biggest advances (Member States' management bodies and AEC) when resources allowed. Advances for delegations will be dealt with separately in 1997.(ii) From 1995 to 1996, the AEC advance at the closure of the accounts shrank by 40 %. It amounted to approximately four months' expenditure by the AEC, which seems entirely reasonable.In view of the time taken by the AEC to gather together and check the supporting documents for local expenditure (in the ACP States) and the date of closure of the EDF accounts (end-January 1997) it was materially impossible to charge certain items of expenditure made by the AEC in 1996. The expenditure in question, which was charged during the first half of 1997, was equivalent to two and a half months of AEC expenditure.Advances paid to the AEC which had not been cleared when the accounts were closed are presented as assets on the balance sheet in accordance with standard accounting practice.(iii) From 1995 to 1996 there was a 40 % reduction in advances paid to Member States' management bodies. The Commission will continue the process of clearing advances.Advances paid to the Member States' management bodies which had not been cleared when the accounts were closed are presented as assets on the balance sheet in accordance with standard accounting practice.22.17. Given that the EDF accounts are closed at the end of January, it is not materially possible to charge all expenditure made by the management bodies in the course of the year. Advances which are not cleared are therefore presented as assets until the management bodies submit their statements of expenditure. The Commission is willing to add a footnote to the financial statements to the effect that the advances may represent expenditure already incurred against the year in question.Expenditure to be regularized22.18. Local payments still to be regularized when the 1996 accounts were closed amounted to 37,2 Mio ECU, or 2,8 % of total EDF payments, which seems entirely reasonable.22.19 (i) The anomalies pointed out by the Court have been corrected and reconciliations prepared. Instructions on these procedures are to be revised and tightened up this year.(ii) The Commission has identified the transactions in question and will take appropriate action in the course of the year.Detailed observations on legality and regularity of underlying transactionsDecisions (primary commitments)Substantive legality/regularity errors22.20. The Commission's decision concerning the commitments was taken in accordance with the rules laid down in Decision No 2/96 of the ACP-EC Council of Ministers of 28 June 1996, which forms the legal basis for the Commission decision.With regard to the legality of the decision of the Joint Council, Article 366(2) of the Lomé Convention authorizes the Council of Ministers to adopt transitional measures where necessary. This Article was applied by analogy to adopt transitional measures for the switch from the fourth Lomé Convention to the revised fourth Convention and could be applied in a similar way to cover the transition from the first to the second financial protocol (which form an integral part of the Convention). It is regrettable that the decisions in question do not refer explicitly to Article 366(2).The Commission would draw attention to the practical implications for the STABEX transfers if the implementation of the ACP-EC Council of Minister's Decision had been blocked: compensation for export receipts would not have been paid for at least seven countries (Dominica, Senegal, St Lucia, St Vincent and the Grenadines, Togo and Zimbabwe), causing a breakdown of the system for stabilizing their fragile economies (see reply to paragraph 22.11 above).Formal legality/regularity errors22.22. With regard to the decisions to increase funding for the structural adjustment programmes, Article 292(1) of the fourth Lomé Convention was correctly applied to the programmes in question. It is in no way restricted to 'traditional` projects and programmes (it merely refers to 'projects and programmes` covered by the Financing Agreement). This is very clear for programmes funded by the national indicative programme.Where there was no other procedure expressly provided for, the Commission used the same procedure, by analogy, for programmes funded exclusively by the structural adjustment facility. Furthermore, for future reference, Article 25.3(a) of the Internal Agreement for the eighth EDF explicitly provides that the procedure set out in Article 292 of the Convention should also be used for structural adjustment programmes.22.23. The 10 % limit was exceeded when funding from the national indicative programme was used for the nine countries, but this was done in accordance with the rules laid down by the Internal Agreement. The Commission was always under the impression that the EDF Committee was automatically informed when the financing proposals were submitted. However, in response to the Court's comments, instructions have been issued with a view to ensuring than, from 1997 onwards, financing proposals submitted for approval to the EDF Committee, will explicitly mention cases where the 10 % limit is exceeded.22.24 (i) Referring to Article 234, the Court notes that, in the case of equity investment, 50 % of the dividends collected by the financial intermediary must be paid to the EIB, which can sometimes push the rate collected by the Bank above the 3 % mark.If the company in which the EIB borrower has acquired a holding is declared bankrupt or ceases trading, the borrower is no longer required to pay back the relevant part of the EIB loan, which means that the EU Member States carry all the risk attached to transactions of this type. It is only fair, then, that the Member States should receive a share of any profits, particularly in view of the exchange risks they cover.(ii) Referring to Article 233, the Court remarks that the financing contracts do not stipulate that any profit accruing to the intermediary must be used for development, after administrative costs, exchange and financial risks, and the cost of technical assistance are taken into account.As a rule, the intermediaries for the loans in question are ACP states or development banks. Any surpluses are made over to the developing country's treasury, or are used by the financial intermediary for standard loans. Thus the spirit of the Article is observed. It should be pointed out that the excess is set by the EIB at a level which enables the intermediary to cover costs. In ACP States whose currencies are depreciating rapidly, the exchange risk often cuts quite deeply into the intermediaries' margins.(iii) In order to meet the pressing demands of certain clients, the Bank agreed to a number of open-rate, single currency loans. In combination with Article 235(b) limiting the interest rate for loans entered into at the reference, i.e. the ecu, rate, the rules for determining interest rate subsidies on the day the financing contract is signed, make it impossible to fix a ceiling for the interest rate in the contract.PaymentsSubstantive legality/regularity errors22.27. See reply to paragraph 22.20.22.28 (i) In one case, the decision to release the second structural adjustment tranche was taken on the basis of two assessments as to whether or not the relevant criteria had been met. One assessment was carried out by an accountancy firm in January 1996, the other by the Commission in June of the same year.In the other case the Financing Agreement (FA) should indeed have been concluded before launching the tender. The nature of the supplies and objectives of the FA had been respected but adapted to the actual needs confirmed by the national authorizing official within the budget of the FA.(ii) The Commission takes the view that each tranche of a technical assistance contract is approved by the contracting authority as it pays the invoices relating to the work done. To withhold the guarantee while accepting the work for a particular tranche would send contradictory signals. It would be hard for a contracting authority to keep back part of the guarantee for unsatisfactory performance of the contract after accepting the work as it was done.Therefore, the Commission agrees to allow the ACP authorities to negotiate special conditions taking precedence over the general conditions or authorizes 100 % of the value of the work done. In three cases the general conditions laid down by Decision No 3/90 do not apply, in four cases, involving (27 720,60 ECU) the special conditions take precedence over the general ones and in a further nine cases, involving (48 217,23 ECU) 100% of the value of the work done was authorized.The Commission agrees with the Court on one case in which an advance of 6 700 ECU should have been recovered on payment of the first instalment rather than subsequent ones.3) Since the programme in question was a work programme, it was denominated in the local currency The amount paid was ecu denominated, pushing the local currency amount for the work programme above the limit. However, the excess will be recovered either from the following work programme or when the advance is repaid.Formal legality/regularity errors22.30 (a) The Commission acknowledges that it did not fully comply with Article 250(3) of the Lomé Convention in transferring structural adjustment funds for two ACP States to their accounts at banks based in New York. However, this was done with the agreement of both parties to the financing agreement and in the interests of sound financial management; strict application of Article 250(3) would have seriously compromised the transparency and effectiveness of the two governments' currency and reserve policies.(b) One case concerns the disbursement of structural adjustment counterpart funds in accordance with the 'Memorandum of understanding` between the Commission and the government in question. The memorandum had been extended by tacit agreement between the two parties.(c) In one case, the release of funds for a single tranche structural adjustment programme was delayed until the government in question and the International Monetary Fund (IMF) could reach an agreement on the second year of the enhanced structural adjustment facility. In other words, the funds were released only when the conditions laid down in the programme had been met. It is clear from the timing of the decisions taken by the Commission and the IMF that there were no irregularities in the disbursement procedure. Furthermore, the Commission decision was made in parallel with the IMF decision and was consistent with it: the Commission was able to delay disbursement of the tranche until the IMF had officially taken its decision. Notwithstanding this, the Commission was never in any doubt as to the outcome of the decision.(d) In one case, the changes made when the 1994 financing agreement was amended do not affect all the conditions attached to the programme, but only those concerning tax, proof-of-import procedures and the rules governing the setting-up of counterpart funds (reflecting the radical changes made to the exchange system in the country in question). Since the changes were of a purely technical nature (as they related to that particular country), it was not necessary to involve the EDF Committee.(e) In another case, the conditions for release laid down in the financing conditions were met before the decision was taken to release the first tranche of structural adjustment funding; the Commission checked that this was the case in June 1996.(f) In y t another case, the additional tranche of structural-adjustment support, which had been increased under the financing agreement between the Commission and the national government, was used specifically to support the health-care budget and the reforms made to the health-care sector. In view of the special nature of this additional tranche, the assessment of whether the release criteria had been met was restricted to the government's health-care commitments. Macroeconomic considerations and factors relating to fields other than health care were examined in the course of the normal implementation of the programme.22.31 (a) In one case the accelerated tendering procedure should have been followed in accordance with the financing agreement. Due to a misunderstanding of the Contracting Authority about the tendering procedure, a restricted tender was launched followed by a direct agreement. However, when taking the amount into consideration, a restricted invitation to tender should already have been foreseen in the financing agreement.(b) The Commission acknowledges that in two cases advances were paid without a bank guarantee. In the first case the administrative and financial departments viewed the payment, made six months after implementation of the contract had begun, as the first payment for services rendered rather than an advance.(c) In two cases where funds were paid into bank accounts other than those specified in the contracts, the payment order, which had been drawn up and signed by the national authorizing officer and the Head of Delegation, indicated the account into which the money was paid. Thus the parties to the work programme officially agreed, in writing, to the change of account. In the second case, the new account had been confirmed by revised work programme No 5.OTHER OBSERVATIONSComments on other information disclosed22.33. The Commission takes the view that Stabex and structural adjustment payments are presented in accordance with the legislation governing such matters. There is nothing in the Lomé Convention which requires the EDF accounts to show whether funds belonging to ACP States are used for structural adjustment or for Stabex after they have been transferred.The Commission has already provided detailed explanations on this matter in the special supplementary DAS report for 1994 (paragraphs 3.40 to 3.42). However, it would stress that, with regard to balance-of-payments support:- the payment of the funds to the recipient countries represents 'final use`;- the transfers are final;- funds paid into ecu-denominated accounts in Europe and counterpart funds are the property of the recipient country.However, in the interests of openness, the Commission's financial statements include tables showing the use of funds paid into accounts in Europe and counterpart funds (pages 78 to 97 of the 1996 financial statements). It is not required to do so.22.34. The reasons for the difference between the figures are as follows:- not all delegations had replied when the accounts were closed;- there may be additional transactions as the Commission's enquiries relate to November and the Court's to April/May of the following year, and the dates of the bank statements are not necessarily the same;- the Court may have used a different rate to the one valid on 31 December, used by the Commission to calculate the value of the ecu-denominated counterpart funds.22.35. The Commission did indeed present a combined figure for funds from the EDF and the general budget in its comments on the financial statements. It will endeavour to show these two sources of funding separately in future financial statements.22.36. In future, the Commission will provide this information in the financial statements.Management of the Stabex bank accounts22.37   22.38. In the past, the situation concerning the interest to be credited to the Stabex allocation for the sixth and seventh EDFs was not clear.Until the special account was opened, the interest to be attributed to Stabex was calculated according to a formula, but because the balance in the Commission's account was kept at a very low level, there was not as much actual interest as the calculations would suggest. Hence, the Stabex account was opened to solve this problem. It is true that the bank applied its general terms and conditions to this account.As soon as the Commission can be certain that the Stabex contributions will be paid and expenditure for the eighth EDF is programmed, a new call for tenders will be launched with a view to renewing the terms of the contract. Particular attention will be paid to banking charges and the successful tenderer will be required to provide clearer information concerning transactions.22.39   22.41. With regard to the monitoring of accounts, the Commission assures the Court that the necessary documentation is kept on its premises. It is true that, for reasons connected with the German regulations, the bank in question preferred to transfer the bulk of its funds to accounts in Luxembourg.22.42. Reconciliation procedures were not completely standardized, which accounts for the errors concerning five banks (amongst the hundred or so used by the department in question). The errors were corrected immediately. In order to resolve this problem and comply with the Court's recommendation, the Commission intends to standardize working methods, introducing better procedures and tighter supervision of all files dealt with by the unit.Conditions of work programme and direct labour contracts22.44 and 22.45. The Commission pays particular attention to the management of direct labour contracts (work programmes), which are used in an increasingly broad range of areas as recipients become more involved in aid management (e.g. through micro-projects, decentralized cooperation and health-care projects). Guidance is given in the compendium of instructions and a practical guide is now ready and will be distributed in the fourth quarter of 1997.Direct labour contracts performed by the ACP country are not covered by the general regulations (Council Decision No 3/90). However, as the Commission has to approve the contracts, it requires that certain ACP rules be adhered to. The application of these rules should be examined on a case-by-case basis. Brussels grants exemption from the rules when the draft work programme is approved.It is common practice for the arrangements concerning financial and administrative management to be explained in the first work programme and not repeated in subsequent ones.Operations managed by the EIB22.46. The Commission provided a detailed explanation on this matter in the special supplementary DAS report for 1995 (paragraph 3.69). However, it would point out once again that:- under the Lomé Convention (Article 1(2) of the Financial Protocol attached to the fourth Convention), responsibility for managing interest rate subsidies and venture capital is attributed to the EIB. This is confirmed by Article 10(2) of the Internal Agreement, which states that '... risk capital and interest rate subsidies financed from the Fund's resources shall be administered by the Bank on behalf of the Community...`;- the EIB acts as the authorized agent of the Community not of the Commission;- the EIB is responsible for assessing the interest rate subsidies to be granted to the borrower, in accordance with the Convention, the Internal Agreement and the Financial Regulation. These instruments do not require the Commission to check the Bank's calculations, the accuracy of which is ensured by the internal and external checks arranged by the Bank itself.ACP bank accounts for Stabex transfers22.47   22.48. The Commission takes note of the Court's comments and will issue a reminder to the relevant departments.Contract conditions on variation of prices in works contracts22.49   22-51. While it is not possible to check the basic rates applied by the tenderer in his tender, the Commission agrees that, should the price revision clause in a contract not rely on published price indices because these do not exist, it is necessary, in order to guarantee fair competition, that the Administration establish at the time of tendering a list of basic prices applicable to the contract, so that there is an agreed, realistic basis for any price revision which may take place later on.>TABLE>ANNEX II Financial information on the general budget, the balance sheet of the European Union and the European Development FundsPreliminary notes1. Sources of financial dataThe financial data contained in this Annex have been drawn from the revenue and expenditure accounts and the balance sheets of assets and liabilities of the European Communities(625) and of the European Development Funds and from other financial records provided by the Commission. The geographical distribution is in accordance with the indices of the country codes in the Sincom system.2. Monetary unitAll the financial data are presented in millions of ECU (Mio ECU), rounded to one decimal place. They always represent the rounding-off of each exact value and not the sum of the rounded-off figures.3. NomenclatureFor each financial year the Court uses the budgetary nomenclature corresponding to that financial year for the presentation of the historical data. In 1988 there was a significant change in the nomenclature compared with previous financial years: as from that financial year costs incurred in the collection of own resources are no longer shown as expenditure but as negative revenue. In 1991 the nomenclature for expenditure was considerably changed with the regrouping of Commission appropriations into subsections in order to align the budgetary nomenclature of the headings used to encompass the 'multiannual financial perspective`. This should be borne in mind when comparing the various financial years.4. Abbreviations and symbolsEC European Community(ies)ECSC European Coal and Steel CommunityEEC European Economic CommunityEAEC or Euratom European Atomic Energy CommunityEFTA European Free Trade AssociationGNP Gross national productVAT Value added taxATS Austrian schillingBEF Belgian francDEM German markDKK Danish kroneESP Spanish pesetaFIM Finnish markkaFRF French francGBP Pound sterlingGRD Greek drachmaIEP Irish poundITL Italian liraLUF Luxembourg francNLG Dutch guilderPTE Portuguese escudoSEK Swedish kronau.a. Unit of account (until 1977)EUA European unit of account (from 1978 to 1980)ECU European currency unit (as from 1 January 1981)Mio ECU Million European currency unitsDA Differentiated appropriationsNDA Non-differentiated appropriationsCA Commitment appropriationsPA Payment appropriationsAFC Appropriations for commitmentAFP Appropriations for paymentB BelgiumDK DenmarkD GermanyEL GreeceE SpainF FranceIRL IrelandI ItalyL LuxembourgNL NetherlandsA AustriaP PortugalFIN FinlandS SwedenUK United KingdomEUR 15 Total of the 15 Member States of the European CommunityCEEC Central and East European Countriesex-GDR The former German Democratic RepublicNIS Newly Independent States (ex-Soviet Union)EDF European Development FundFYROM Former Yugoslav Republic of MacedoniaACP African, Caribbean and Pacific States signatories to the Lomé ConventionOCTs Overseas countries and territoriesFOD French overseas departmentsRRP Rehabilitation and revival planStabex Stabilization of export earningsSysmin System of stabilization of export earnings from mining productsFR Financial Regulation of 21 December 1977 (see also the foreword on page 2)OJ Official Journal of the European CommunitiesS Budgetary sectionSs Budgetary subsectionT Budgetary titleCh Budgetary chapter0,0 Data between zero and 0,05- Lack of data% PercentageD Diagram referred to within other diagrams (e.g. D IX)SUMMARYPart One: General budget and balance sheet1. Background information on the general budget2. General budget and balance sheet for the financial year 1996 and budgetary implementation during the financial year 1996D I General budget 1996 - estimated revenueD II General budget 1996 - estimated expenditure - appropriations for paymentD III General budget 1996 - appropriations for commitmentD IV Estimated and actual revenue in 1996D V Estimated and actual own resources in 1996, by Member StateD VI Actual own resources in 1996D VII Appropriations for commitment available in 1996 and their utilization, by sector and by institutionD VIII Appropriations for payment available in 1996 and their utilisation, by sector and by institutionD IX Financial perspective: breakdown of appropriations for commitment available from the 1996 budget and implementation; total appropriations for payment available from the 1996 budget and implementationD X Payments made in 1996, by sectorD XI Payments made in 1996, in each Member StateD XII EAGGF-Guarantee - payments made in 1996, in each marketD XIII EAGGF-Guarantee - payments made in 1996, by market and in each Member StateD XIV The Structural Funds: commitments entered into and payments made in 1996, in each Member StateD XV Structural aid - commitments entered into and payments made in 1996, by Member State and in each objectiveD XVI Aid to the countries of Central and Eastern Europe and to the Newly Independent States of the former Soviet Union: PHARE and TACIS programmesD XVII The consolidated revenue and expenditure account and the balance calculated for the 1996 financial yearD XVIII Summary of the consolidated balance sheet of the European Union as at 31 December 19963. Historical data in respect of the implementation of the general budget (1992-96)D XIX Actual own resources in 1996, by Member State (1992-96)D XX Evolution and utilization of appropriations for payment for the period 1992 to 1996, by sectorD XXI Utilization rates of appropriations for payment from 1992 to 1996, by sectorD XXII Annual payments during the period 1992 to 1996, by sector and by institutionPart Two: The European Development Funds (EDF)1. Basic information on the European Development Funds (EDFs) (position as at 31 December 1996)D XXIII The sixth EDF - allocation, financing and distribution of aid, overall utilizationD XXIV The seventh EDF - allocation, financing and distribution of aid, overall utilizationD XXV The sixth and seventh EDFs - utilization of aid by economic sector (position as at 31 December 1996)D XXVI The seven EDFs - evolution of annual payments (1960-96)Part One: General budget and balance sheet1. Background information on the general budget1.1. Origin of the general budgetThe general budget was created by the Merger Treaty(626) (Article 20). It replaced, on 1 January 1968, the three separate EC budgets which existed before that date: the ECSC administrative budget, the EEC budget and the Euratom operating budget. The Euratom research and investment budget was incorporated into the general budget as from 1971 by the Treaty of Luxembourg(627) (Article 10).1.2. Legal basisThe general budget is governed by the financial provisions of the Treaties of Paris(628) (Article 78 ECSC) and Rome(629)(630) (Articles 199 to 209 EEC and Articles 171 to 183 Euratom) and by the Financial Regulations(631).1.3. Main budgetary principles laid down in the Treaties and the Financial RegulationAll items of Community revenue and expenditure are to be included in a single budget (unity). Revenue is to be used without distinction to finance all expenditure and, like the expenditure, is to be entered in full in the budget and subsequently in the accounts without any adjustment of one item against another (universality). The appropriations are specialized according to their nature or intended use (speciality). The budget is authorized for one financial year only (annuality). Budgetary revenue and expenditure must balance (equilibrium). There are some exceptions to these general principles.1.4. Content and structure of the general budgetThe budget consist of a 'General statement of revenue` and a 'Statement of revenue and expenditure`, which itself is subdivided into five sections: (I) Parliament; (II) Council (annexed: Economic and Social Committee); (III) Commission (632); (IV) Court of Justice; (V) Court of Auditors; (VI) Economic and Social Committee and Committee of the Regions. Within each section(633) , items of revenue and expenditure are classified under budget headings (titles, chapters, articles and, where applicable, items) according to their type or the use to which they are to be applied.1.5. Monetary unit of the general budgetThe budget is established and implemented in ECU. The ECU is a unit based on a basket of national currencies. Following the revision of September 1989, the basket of currencies is made up as follows: 1 ECU = 3,301 BEF + 0,6242 DEM + 0,1976 DKK + 6,885 ESP + 1,332 FRF + 0,08784 GBP + 1,440 GRD + 0,008552 IEP + 151,8 ITL + 0,130 LUF + 0,2198 NLG + 1,393 PTE.The rates of conversion at 31 December 1996 between the ECU and the national currencies were as follows: 1 ECU = 13,6965 ATS = 40,1021 BEF = 1,94653 DEM = 7,44655 DKK = 164,167 ESP = 5,81640 FIM = 6,56193 FRF = 0,737273 GBP = 309,502 GRD = 0,745342 IEP = 1 913,72 ITL = 40,1021 LUF = 2,18472 NLG = 195,968 PTE = 8,6280 SEK.1.6. Financing of the general budget (budgetary revenue)The general budget is mainly financed from the Communities' own resources: agricultural levies, sugar and isoglucose levies; customs duties; VAT-based own resources and GNP-based own resources; for more detailed information see the legislation in force(634).Besides own resources, there are other, marginal items of revenue (see Diagram IV).1.7. Types of budget appropriationsTo cover estimated expenditure, the following types of budget appropriations are distinguished in the general budget:(a) differentiated appropriations (DA) are used to finance multiannual activities in certain sectors. They comprise commitment appropriations and payment appropriations:- commitment appropriations (CA) make it possible to enter into legal obligations during the financial year for activities whose implementation extends over several financial years;- payment appropriations (PA) make it possible to cover expenditure arising from commitments entered into during the financial year and/or preceding financial years.(b) non-differentiated appropriations (NDA) make it possible to ensure, during the financial year, the commitment and payment of expenditure relating to annual activities.It is thus important to establish the following two totals for the same financial year:(a) the total of appropriations for commitment (AFC)(635) = non-differentiated appropriations (NDA) + commitment appropriations (CA) (636);(b) the total of appropriations for payment (AFP) (637) = non-differentiated appropriations (NDA) + payment appropriations (PA) (638).Revenue raised in the budget is intended to cover the total appropriations for payment. Commitment appropriations do not need to be covered by revenue.The following simplified presentation (with illustrative amounts) shows the impact of these types of appropriations in each budget year.(see presentation, Annual Report 1995)>REFERENCE TO A FILM>1.8. Implementation of the general budget1.8.1. Responsibility for implementationThe Commission implements the budget on its own responsibility in accordance with the Financial Regulation and within the limits of the appropriations allotted; it also confers upon the other institutions the requisite powers for the implementation of the sections of the budget relating to them(639). The Financial Regulation lays down the implementation procedures and, in particular, the responsibilities of the authorizing officers, accounting officers, administrators of advance funds and Financial Controllers of the institutions(640). In certain specific areas (EAGGF-Guarantee, mainly the Structural Funds) the management of Community funds is shared with the Member States.1.8.2. Implementation of revenueThe estimated revenue is entered in the budget subject to change by amending and supplementary budgets.The budgetary implementation of revenue consists of establishing the entitlements and recovering the revenue due to the Communities (own resources and other revenue); it is governed by certain special provisions(641). The actual revenue of a financial year is defined as the total of sums collected against entitlements established during the current financial year and sums collected against entitlements still to be recovered from previous financial years.1.8.3. Implementation of expenditureThe estimated expenditure is entered in the budget. The budgetary implementation of expenditure, i.e. the evolution and utilisation of appropriations, may be summarized as follows:(a) appropriations for commitment:- evolution of appropriations: the appropriations for commitment allocated in the initial budget can undergo certain modifications until the final appropriations for commitment are obtained: final appropriations for commitment = initial budget (NDA and CA) + amending and supplementary budgets + supplementary receipts(642) + transfers (643) + commitment appropriations carried over from the preceding financial year(644) + non-automatic carryovers(645) from the preceding financial year /uncommitted NDA) + released commitment appropriations from preceding financial years which have been made available again(646) + repayments of advances giving rise to reutilisation(647);- utilization of appropriations: the final appropriations for commitment are available in the financial year for use in the form of commitments entered into (appropriations for commitment utilized = amount of commitments entered into);- carryovers of appropriations from one financial year to the next financial year: non-differentiated appropriations belonging to the financial year which have not been committed may be carried over non-automatically to the next financial year after approval by the budgetary authority (648). Non-utilized commitment appropriations of the financial year may be carried over by the Commission to the following financial year (649). In the case of expenditure on behalf of third parties, carryovers may be repeated;- cancellation of appropriations: the balance is cancelled.(b) appropriations for payment:- evolution of appropriations: appropriations for payment may also undergo modifications before leading to the final appropriations for payment: final appropriations for payment = initial budget (NDA and PA) + amending and supplementary budgets + supplementary receipts (650) + transfers (651) + appropriations carried over from the previous financial year in the form of automatic carryovers(652) or non-automatic carry-overs(653) + repayments of advances giving rise to reutilisation (654);- utilization of appropriations: the appropriations for payment are available in the financial year for use as payments (utilized appropriations for payment = amount of payments made from the appropriations of the financial year);- carryovers of appropriations from one financial year to the next financial year: non-utilized appropriations of the financial year may be carried over to the next financial year in the form of automatic(655) or non-automatic(656) carryovers. In the case of expenditure on behalf of third parties, carryovers may be repeated;- cancellation of appropriations: the balance is cancelled.With regard to actual expenditure, a distinction is made between:- actual expenditure during a financial year = total payments during the financial year = payments against appropriations for payment of the financial year plus payments against appropriations for payment carried over from the preceding financial year;- actual expenditure charged to a financial year = expenditure charged to the consolidated revenue and expenditure account (see paragraph 1.8.4) = payments against appropriations for payment of the financial year plus appropriations for payment of the financial year carried over to the following financial year.1.8.4. The consolidated revenue and expenditure account and the balance of the financial yearAfter the closure of each financial year the consolidated revenue and expenditure account is drawn up. The balance of the year, which is to be entered in the budget of the next financial year on the occasion of an amending budget, is determined therein(657) (see Diagram XVII).1.9. Presentation of the accountsThe accounts for a given financial year are forwarded not later than 1 May of the following financial year to Parliament, the Council and the Court of Auditors; these accounts comprise a revenue and expenditure account and a balance sheet, together with an analysis of the financial management(658).1.10. External auditSince 1977 the external audit of the general budget has been carried out by the Court of Auditors of the European Communities(659).The Court of Auditors examines the accounts of all revenue and expenditure of the general budget. It must provide the European Parliament and the Council with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. It also considers whether revenue has been received and expenditure incurred in a lawful and regular manner, and whether the financial management has been sound. The audits may be carried out before the closure of the financial year in question and are performed on the basis of records and, where necessary, on the spot in the institutions of the Communities and in the Member States. The Court of Auditors draws up an annual report for each financial year and may also, at any time, submit its observations on specific questions and deliver opinions at the request of one of the institutions of the Communities.1.11. Discharge and follow-upAs from 1977 the following provisions are applicable(660): Parliament, on the recommendation of the Council, gives, before 30 April of the second year following the financial year in question, discharge to the Commission on the implementation of the budget. To this end the Council and Parliament in turn examine the accounts presented by the Commission and the annual report of the Court of Auditors. The institutions must take appropriate action on the comments appearing in the decisions giving discharge and report on the measures taken(661).>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>>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>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>PART TWO: THE EUROPEAN DEVELOPMENT FUNDS (EDFs)1. Basic information on the European Development Funds (EDFs) (position as at 31 December 1996)1.1. The first five EDFsBasic information and detailed financial information on the first three EDFs was most recently given in the annual report of the Court of Auditors concerning the 1980 financial year. Information on the fourth EDF was given in the annual report concerning the 1986 financial year and information on the fifth EDF in the annual report concerning the 1990 financial year. Only a few minor sums transferred to the sixth EDF still remain to be paid under the fourth EDF. A summary of the payments made under the first four EDFs is given in Diagram XXVI.1.2. The sixth and seventh EDFs1.2.1. Legal provisions(a) Legal basis in respect of ACP States:- sixth EDF: third ACP-EEC Convention, signed in Lomé on 8 December 1984 (Lomé III);- seventh EDF: fourth ACP-EEC Convention, signed in Lomé on 15 December 1989 (Lomé IV).(b) Legal basis in respect of the OCTs:- sixth EDF: Council Decision 86/283/EEC of 30 June 1986;- seventh EDF : Council Decision 91/482/EEC of 25 July 1991.(c) Establishment of the EDFs:- sixth EDF: internal agreement of 19 February 1985;- seventh EDF: internal agreement of 16 July 1990.(d) Financial Regulations:- sixth EDF: Financial Regulation 86/548/EEC of 11 November 1986;- seventh EDF: Financial Regulation 91/491/EEC of 29 July 1991.1.2.2. Allocations, financing, distribution and type of aidThe EDF allocation after amendments(662) by the Council are as follows:- sixth EDF: 7 919,7 Mio ECU; - seventh EDF : 11 816,3 Mio ECU.The EDFs are financed by the Member States of the European Communities in proportions laid down in the internal agreements (see also Diagrams XXIII and XXIV).The above-mentioned internal agreements provide for distribution of the allocations of the EDFs between the ACP States and the OCTs and between grants, special loans, risk capital, Stabex(663) and Sysmin(664).Part of the allocation in the form of grants is reserved for exceptional aid, support operations for structural adjustment and for interest rate subsidies on loans granted by the European Investment Bank. The rest of the allocation in the form of grants and the allocation in the form of special loans is distributed among the recipient countries, with the exception of funds for the regional projects, administrative costs and a contingency reserve. The amounts thus allocated to the recipient countries, called indicative programmes in the case of ACP States, are used to finance the projects adopted.1.2.3. Monetary unitEDF allocations are denominated in ECUs; for the purpose of converting the monetary units previously applied into ECUs, it has been agreed that 1 u.a. = 1 EUA = 1 ECU.1.2.4. Date of entry into force- sixth EDF: 1 May 1986;- seventh EDF: 1 September 1991.1.2.5. Financial implementationThe Commission draws up a timetable of requests for contributions which, in principle, are to be paid quarterly by the Member States of the European Communities. The use of the EDF resources is shown in the accounts in three stages: (I) financing decision; (II) signing of contracts against funds allocated to national authorizing officers; (III) authorization of payments to contractors.1.2.6. External auditThe Court of Auditors is responsible for the external audit of the EDFs (in accordance with the Treaty).1.2.7. Authority giving dischargeThe European Parliament gives discharge for the financial management of the EDFs, on the recommendation of the Council (in accordance with the internal agreements).>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>>REFERENCE TO A FILM>(1*)(*) The Commission's replies are on page 37.(2)Net traditional own resources (13 583,6 Mio ECU) + collection costs (1 509,3 Mio ECU) = gross traditional own resources (15 092,9 Mio ECU).(3)VAT own resource (36 535 Mio ECU) = VAT own resources for the financial year (35 676,8 Mio ECU) + balances and adjustments from previous financial years (858,2 Mio ECU).(4)GNP resource (21 058 Mio ECU) = GNP resource for the financial year (21 085 Mio ECU) + balances and adjustments from previous financial years ( P27 Mio ECU).(5)OJ C 330, 15.12.1992, paragraphs 1.37-1.54.(6)OJ C 309, 16.11.1993, paragraphs 1.105-1.128.(7)OJ C 327, 24.11.1994, paragraphs 1.3-1.38.(8)OJ C 303, 14.11.1995, paragraphs 1.4-1.89.(9)OJ C 340, 12.11.1996, paragraphs 1.5-1.63.(10)Article 218(1) of Council Regulation (EEC) No 2913/92 of 12 October 1992, establishing the Community Customs Code (OJ L 302, 19.10.1992, p.1).(11)Article 218(3) of Regulation (EEC) No 2913/92.(12)Belgium, Greece, Spain, Ireland, Italy, the Netherlands and the United Kingdom.(13)Article 256 of Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of Regulation (EEC) No 2913/92 (OJ L 253, 11.10.1993, p. 1); Article 258 of Regulation (EEC) No 2913/1992.(14)Reply from HM Customs and Excise of 3 June 1992 to the Court's audit findings of 13.3.1992 collected during a mission from 13 to 20.1.1992.(15)Reply from HM Customs and Excise of 25 October 1996 to the Court's audit findings of 18.8.1996 collected during a mission from 29.4.1996 to 10.5.1996.(16)'Period entry` means that one customs declaration lodged at the end of a given period summarizes all import goods released for free circulation during that given period. Articles 218 and 219 of Council Regulation (EEC) No 2913/92.(17)Council Regulation (EEC/Euratom) No 1552/89 of 29 May 1989 (OJ L 155, 7.6.1989, p.1).(18)Article 17(2) of Regulation (EEC, Euratom) No 1552/89.(19)Article 166 of Regulation (EEC) No 2913/92.(20)Article 801 and Annex 108 of Regulation (EEC) No 2454/93.(21)Germany, Greece, Spain, Ireland, Italy and United Kingdom.(22)Article 840 of Regulation (EEC) No 2454/93.(23)Article 176 of Regulation (EEC) No 2913/92. Articles 805 and 808 of Regulation (EEC) No 2454/93.(24)Article 168(4) of Regulation (EEC) No 2913/92 and Article 804 of Regulation (EEC) No 2454/93.(25)Hamburg, Bremen, Bremerhaven, Piraeus, Thessaloniki, Trieste, Cadiz and Tilbury.(26)Article 50 of Regulation (EEC) No 2913/92.(27)Article 176(2) of Regulation (EEC) No 2913/92.(28)Article 176(1) of Regulation (EEC) No 2913/92.(29)Articles 807 and 808 of Regulation (EEC) No 2454/93.(30)Article 170(1) of Regulation (EEC) No 2913/92.(31)Article 313(3), (a) and (b) of Regulation (EEC) No 2454/93.(32)Article 313(3), (b), second paragraph, and Article 447 of Regulation (EEC) No 2454/93.(33)Article 168, (2) and (4) of Regulation (EEC) No 2913/92. Article 804 of Regulation (EEC) No 2454/93.(34)Article 447 of Regulation (EEC) No 2454/93.(35)OJ C 340, 12.11.1996, paragraphs 1.17 to 1.38.(36)Belgium, Germany, Spain, France, Ireland, Italy, the Netherlands, Portugal.(37)This figure includes the value of authorizations delivered in Luxembourg.(38)Article 552 of Regulation (EEC) No 2454/93.(39)Generally 300 000 ECU or 150 000 ECU in the case of products listed at annex 75 of Regulation (EEC) No 2454/93.(40)Article 648 of Regulation (EEC) No 2454/93.(41)Article 558 of Regulation (EEC) No 2454/93.(42)Article 559(1) of Regulation (EEC) No 2454/93.(43)Article 596(1) of Regulation (EEC) No 2454/93.(44)Article 597(1) of Regulation (EEC) No 2454/93.(45)Aggregation means that all import goods placed under the inward processing regime during a given period (one month or one quarter) are considered to be placed under this regime at the end of that given period.(46)Article 566(2) of Regulation (EEC) No 2454/93 and Article 119 of Regulation (EEC) No 2913/92.(47)Article 569(3) of Regulation (EEC) No 2454/93.(48)Article 561(1) of Regulation (EEC) No 2454/93.(49)The judgment of the Court of Justice in case 103/96 confirms this interpretation.(50)Belgium, Denmark, Germany, Greece, Spain, France, Italy and the United Kingdom.(51)Council Regulation (EEC) No 1468/81 of 19 May 1981 concerning mutual assistance between the administrative authorities of the Member States and cooperation between the latter and the Commission with a view to ensuring the proper application of customs and agricultural regulations. (OJ L 144, 2.6.1991, amended by Council Regulation (EEC) No 945/87 of 30 March 1987 (OJ L 90, 2.4.1987).(52)Court of Auditors - Annual report concerning the financial year 1994, paragraphs 1.12 to 1.44 (OJ C 303, 14.11.1995).(53)Article 221(3) of Council Regulation (EEC) No 2913/92.(54)OJ C 303, 14.11.1995, p. 31.(55)OJ C 260, 5.10.1995, p. 8.(56)Commission Document XXI/1144/95.(57)Council Decision of 28 May 1996 concerning the ex post facto recovery of customs debts (OJ C 170, 14.6.1996, p. 1).(58)Article 9 of Council Regulation (EC) No 3281/94 of 19 December 1994 (OJ L 348, 31.12.1994, p. 1).(59)Community mission carried out in Israel from 22 May to 6 June 1995.(60)Article 26 of Protocol No 1 of the Lomé Convention allows the exporting State a maximum of six months to inform the importing State of the results of ex post facto checks. Council and Commission Decision of 25 February 1991 concerning the fourth ACP-EEC Convention (OJ L 229, 17.8.1991).(61)By virtue of Article 25 of Protocol No 1 of the Lomé Convention, the ACP States communicate to the Commission the impressions of the stamps used; the Commission then communicates them to the Member States. Council and Commission Decision of 25 February 1991 concerning the fourth ACP-EEC Convention (OJ L 229, 17.8.1991).(62)Article 147 of Regulation (EEC) No 2454/93.(63)Commission Regulation (EEC) No 3798/90 of 21 December 1990 instituting a provisional anti-dumping duty on imports of espadrilles originating in the People's Republic of China (OJ L 365, 28.12.1990). Council Regulation (EEC) No 1812/91 of 24 June 1991 instituting a definitive anti-dumping duty on imports of espadrilles originating in the People's Republic of China and covering the definitive collection of the provisional duty (OJ L 166, 28.6.1991).(64)Article 6 of Commission Regulation (EEC) No 1495/80 of 11 June 1980 implementing certain provisions of Articles 1, 3 and 8 of Council Regulation (EEC) No 1224/80 on the valuation of goods for customs purposes, OJ L 154, 21.6.1980, p. 14.(65)Article 248 of Regulation (EEC) No 2454/93.(66)MA Communication 105/93 S2 (95) of 27 July 1995.(67)Eurostat, external trade statistics.(68)OJ L 90, 2.4.1987.(69)Commission Regulation (EEC) No 4062/88 of 23 December 1988 instituting a provisional anti-dumping duty on imports of video cassettes and tapes for video cassettes originating in the Republic of Korea and Hong Kong (OJ L 356, 24.12.1988). Council Regulation (EEC) No 1768/89 of 19 June 1989 instituting a definitive anti-dumping duty on imports of video cassettes originating in the Republic of Korea and Hong Kong, concerning the definitive collection of the provisional duty and closure of the anti-dumping proceedings concerning the imports of tapes for video cassettes originating in the Republic of Korea (OJ L 174, 22.6.1989). Commission Regulation (EEC) No 1034/91 of 23 April 1991 instituting a provisional anti-dumping duty on imports of video tapes and cassettes originating in the People's Republic of China (OJ L 106, 26.4.1991). Council Regulation (EEC) No 3091/91 of 21 October 1991 instituting a definitive anti-dumping duty on imports of video tapes and cassettes originating in the People's Republic of China and concerning definitive collection of the provisional duty (OJ L 293, 24.10.1991).(70)Belgium, Spain, France and Italy.(71)Article 243(2)(a) of Regulation (EEC) No 2913/92.(72)UCLAF letter 2087 of 23.4.1996 to the Subdirector General de Inspección, Departamiento de Aduanas e Impuestos Speciales.(73)OJ L 312, 23.12.1995, p. 1.(74)These are, specifically, Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 (OJ L 155, 7.6.1989) in the case of the VAT resource and Council Directive 89/130/EEC, Euratom of 13 February 1989 (OJ L 49, 21.2.1989) for the GNP resource.(75)Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (OJ L 155, 7.6.1989).(76)Article 33 of Council Financial Regulation of 21 December 1977 (OJ L 356, 31.12.1977) and subsequent amendments.(77)Council Directive No 77/388/EEC of 17 May 1977 (OJ L 145, 13.6.1977) and subsequent amendments.(78)The Court of Auditors' Annual Report concerning the financial year 1988, paragraphs 4.16 to 4.31; Court of Auditors' Annual Report concerning the financial year 1989, paragraphs 1.74 to 1.80; Court of Auditors' Annual Report concerning the financial year 1991, paragraphs 1.99 to 1.102; Court of Auditors' Annual Report concerning the financial year 1995, paragraphs 1.69 to 1.71.(79)Discharge resolutions for the 1988 financial year, paragraphs 15 ff. (OJ L 174, 7.7.1990); for the 1989 financial year, paragraphs 13 ff. (OJ L 146, 11.6.1991); for the 1991 financial year, paragraphs 28 ff. (OJ L 155, 26.6.1993).(80)Article 9 of Council Regulation (EEC, Euratom) No 1553/89.(81)Article 6 of Council Directive 89/130/EEC, Euratom, of 13 February 1989 (OJ L 49, 21.2.1989).(82)Improving the procedures for recovering the VAT own resource and determining the criteria for charging arrears interest, Document SEC(91) 1985 final of 31 October 1991.(83)With regard to the VAT resource, see Article 9 of Regulation (EEC, Euratom) No 1553/89. With regard to the GNP resource, see Article 6 of Directive 89/130/EEC, Euratom.(84)OJ L 175, 13.7.1996, p. 3.(85)OJ L 155, 7.6.1989, p. 1.(86)See the Commission's replies in the Court of Auditors' Annual Report for 1988 (OJ C 31, pp. 265-266).(87*)(*) The Commission's replies are on page 59.(88)OJ L 22, 29.1.1996.(89)Council Decision 94/729/CE of 31 October 1994 (OJ L 293, 12.11.1994).(90)Council Decision 94/729/CE of 31 October 1994 (OJ L 293, 12.11.1994).(91)Commission Regulation (EC) No 296/96 of 16 February 1996 (OJ L 39, 17.2.1996).(92)COM(91) 379 final of 18.10.1991.(93*)(*) The Commission's replies are on page 91.(94)OJ C 313, 12.12.1990, paragraph 4.3.58 and following.(95)Internal document INF 22/92, paragraph 5.3 and following. (Not published, but available to the public from the Secretariat General of the Court. The report was also sent to the European Parliament.) (96)'Development and future of common agricultural policy`. CMO(91) 258 of 22 July 1991, point 1, first indent, p. 3.(97)Council Regulation (EEC) No 1765/92 of 30 June 1992. (OJ L 181, 1.7.1992, p. 12). Council Regulation (EEC) No 1766/92 of 30 June 1992. (OJ L 181, 1.7.1992, p. 21).(98)'Evaluation des incidences financières de la décision sur la réforme de la PAC au cours des exercices budgétaires 1993-1997`, Doc. DG VI/405/91 rev.1 of 8.7.1992.(99)The Council used to fix two types of institutional prices: (a) intervention price: the intervention agencies must, at certain periods of the year, buy in cereals they are offered that have requisite quality characteristics; the cereals are bought in at the intervention price concerned; (b) target price: this served only as a guide for the market price and was abolished as from 1995/96 marketing year; the introduction of a fixed import levy instead of a variable one rendered the target price irrelevant; The real guarantee was and is provided by the intervention price.(100)Commission Regulation (EEC) No 2836/93 of 18 October 1993 (OJ L 260, 19.10.1993, p. 3).(101)The set-aside requirement had four options: rotational, non-rotational, flexible and guaranteed. If rotational was taken it could not return to the same area for at least five years. The other options required the farmers to set aside a higher percentage of their arable land.(102)Equalizing is the method of reducing the difference of yields between regions in order to level out big differences in regional yields.(103)Commission Regulation (EEC) No 1113/93 of 6 May 1993 (OJ L 113, 7.5.1993, p. 14).(104)Council Regulation (EC) No 231/94 of 21 January 1994 (OJ L 30, 3.2.1994, p. 2).(105)'Agricultural Council 13-17/1993, document of 4 January 1994, reference 4056, restrained.(106)OJ L 88, 3.4.1990, p. 1.(107)Study reference 38540006, November 1994.(108)'Development and future of common agricultural policy`, CMO(91) 258 of 22 July 1991, point 1, first indent, p. 3.(109)'Agricultural policies, market and trade in OECD countries - Monitoring and evaluation 1996`, p. 39, OECD 1996.(110)OJ L 355, 5.12.1992, p. 1.(111)Article 10 of Regulation (EEC) No 3508/92.(112)Article 14 of Regulation (EEC) No 729/70 of 21 April 1970 (OJ L 94, 28.4.1970, p. 13).(113)Article 10(3) of Regulation (EEC) No 1765/92 and Article 4(1) of Commission Regulation (EEC) No 3887/92 of 23 December 1992 (OJ L 391, 31.12.1992, p. 36).(114)Regulation (EEC) No 3508/92.(115)According to Article 17(1) of Regulation (EEC) No3887/92.(116)Council Regulation (EEC) No 1765/92 of 30 June 1992 (OJ L 181, 1.7.1992, p. 12).(117)Article 6 of Regulation (EEC) No 3887/92.(118)Council Regulation (EEC) No 762/89 of 20 March 1989 (OJ L 80, 23.3.1989, p. 76).(119)The intervention agency ONIC in France have offices at regional level. Staff of these offices organize field inspection. Normally each regional office of ONIC is responsible for three departments.(120)Article 6(7) of Regulation (EEC) No 3887/92.(121)The topofil is a French device. The topofil is used by pulling out a cotton thread along the distance to be measured. A counting device on the topofil will tell you how much thread was pulled out, telling the length of the measured field.(122)This working paper of the Commission is undated, but has the file No VI/8388/94-EN rev. 4 and it was sent to the Court by DG VI on 5 June 1996.(123)Article 4(1) of Commission Regulation No 2780/92 of 24 September 1992 (OJ L 281, 25.9.1992, p. 5) reads: '... an area of cereals must be fully sown in line with locally recognized standards and maintained until at least the beginning of flowering in normal growth conditions`. Checks, therefore, should be made while plant cover can be verified. Article 6(1) of Regulation 3887/92 etc. states on-the-spot checks should be performed in such a way that effective verification can take place.(124)Council Regulation (EEC) No 1765/92 of 30 June 1992 (OJ L 181, 1.7.1992, p. 12).(125)Commission Regulation (EEC) No 2293/92 of 31 July 1992 (OJ L 221, 6.8.1992, p. 19) and Commission Regulation (EEC) No 762/94 of 6 April 1994 (OJ L 90, 7.4.1994, p. 8).(126)Articles 2(1) and 3(4) of Commission Regulation (EC) No 762/94.(127)Article 12 of Regulation (EEC) No 3887/92.(128)'Estimation statistique des erreurs de mesure des superficies parcellaires agricoles sur images satellites`, Document I.94.105 (Avrain and others) Joint Research Centre, April 1994.(129)Point 2.2.13 of the Commission document of 4 July 1996, 'The use of remote sensing for the administration of area aid in the EU`.(130)DG VI/G.4 'La mise en place du système intégré de gestion et de contrôle (SIGC) dans les 12 États membres`, September 1993.(131)Commission report (CMO(96) 174 final of 29 April 1996).(132)OJ C 65, 2.3.1994.(133)OJ C 327, 24.11.1994.(134)Council Regulation (EEC) No 2075/92 of 30 June 1992, OJ L 215, 30.7.1992, p. 70.(135)Document No 4712/95 of 13.2.1995 of the European Council.(136)Discharge resolution for financial year 1992, document No 95/220/EC of 5.4.1995, OJ L 141.(137)CMO(96) 554 final of 18.12.1996. According to Council Regulation (EEC) No 2075/92 this report was due on 1 April 1996 but was delivered only on 15 January 1997.(138)CMO(96) 554, p. 15.(139)CMO(96) 554, p. 20.(140)CMO(96) 554, p. 25.(141)Special Report 8/93, paragraph 7.15.(142)OJ C 327, 24.11.1994.(143)Document No 4712/95 of 13.12 1995 of the European Council. Document 95/221/EC of 5.4.1995, OJ L 141, 24.6.1995.(144)Document number CMO(94) 117 of 11.5.1994.(145)Increasing of alcohol content by adding beet sugar or concentrated grape must before fermentation.(146)See 'Wine in the European Community`, European documentation periodical 1/1988, Office for Official Publications of the European Communities, Luxembourg, 1988.(147)Commission, 'OCM viti-vinicole, évaluation et défis pour l'avenir`, 14.4.1993.(148)Doc. reference, p. 16 of CAP working notes 1995.(149)OJ L 166, 5.7.1996, p. 14.(150)OJ L 84, 27.3.1987.(151)OJ L 208, 31.7.1986, p. 1.(152)OJ L 62, 5.3.1987, p. 10.(153)OJ L 148, 30.6.1995, p. 37.(154)OJ L 202, 14.7.1989, p. 32.(155)CMO(95) 368, 19.7.1995.(156*)(*) The Commission's replies are on page 118.(157)OJ L 148, 28.6.1968, p. 24.(158)The general upward trend in beefmeat production is characterized by a series of peaks and troughs approximately four to five years apart. The market prices follow a trend inverse to that of production.(159)Document from Meat Outlook Group, Commission, DG VI.(160)The intervention price decline is fixed by Council Regulation (EEC) No 2068/92 of 30 June 1992 (OJ L 215, 30.7.1992, p. 58). The intervention limits together with the premium rates were set by Council Regulation (EEC) No 2066/92 of 30 June 1992 (OJ L 215, 30.7.1992, p. 49) modifying Council Regulation (EEC) No 805/68 of 27 June 1968 (OJ L 148, 28.6.1968, p. 24). The intervention limits were fixed as follows: 750 000 tonnes in 1993, 650 000 tonnes in 1994, 550 000 tonnes in 1995, 400 000 tonnes in 1996 and 350 000 tonnes in 1997.(161)The premium amounts are those in operation from 1995 onwards. In order to enable comparisons to be made, the amounts in force before the abolition of the agricultural conversion factor have been multiplied by the coefficient (1,207509) set by Commission Regulation (EC) No 2417/95 of 13 October 1995 (OJ L 248, 14.10.1995, p. 39). The amount of the special premium was 72,45 ECU in 1993, 90,56 in 1994 and 108,68 in 1995.(162)84,53 ECU in 1993, 114,71 ECU in 1994 and 144,9 ECU in 1995.(163)Common term used for cattle, sheep and goats for which premiums have been requested and for the number of milk cows necessary to produce the reference quantity. It is defined as follows in Annex 1 of Council Regulation (EEC) No 2328/91 of 15 July 1991, concerning the improvement in the effectiveness of agricultural structures (OJ L 218, 6.8.1991, p. 1): the bulls, cows and other cattle over 2 years count for 1 LU; the cattle from 6 months to 2 years count for 0,6 LU and sheep and goats for 0,15 LU each.(164)The number of suckler cows for which the premium is paid is limited to the individual producer's quota. The special premium, on the other hand, is paid in respect of all animals considered eligible in the producer's claim. It is only at the end of the year that the total number of eligible animals is calculated for the region under consideration (usually a Member State). If this total exceeds the regional ceiling by, for example, 5%, the amount of the special premium will be reduced by 5% for all the producers in this region through a reduction in the balance payable. The premiums are, in fact, paid in two instalments, an advance of a maximum of 60% and a balance.(165)Council Regulation (EEC) No 3508/92 of 27 November 1992 (OJ L 355, 5.12.1992, p. 1).(166)Council Directive 92/102/EEC of 27 November 1992 (OJ L 355, 5.12.1992, p. 32).(167)Council Regulation (EC) No 2466/96 of 17 December 1996 (OJ L 335, 24.12.1996, p. 1).(168)See paragraph 3.66 of the Court's annual report concerning the financial year 1991 (OJ C 330, 15.12.1992).(169)140 Mio ECU in 1993, 107 Mio ECU in 1994, 70 Mio ECU in 1995 and in 1996.(170)Feed costs represent between 18% (Ireland) and 66% (Spain) of total inputs (Source: Farm Accountancy Data Network (FADN), 1994).(171)Special Reports No 4/91 on the operation of the Common Market Organization in the sugar and isoglucose market (OJ C 290, 7.11.1991, p. 1) and No 4/93 on the implementation of the quota system intended to control milk production (OJ C 12, 15.1.1994, p. 1).(172)Council Regulation (EC) No 1884/94 of 27 July 1994 (OJ L 197, 30.7.1994, p. 27).(173)Council Regulation (EC) No 2222/96 of 18 November 1996 (OJ L 296, 21.11.1996, p. 50).(174)See Commission report to the Council concerning the application of individual ceilings for producers in respect of the ewe and suckler cow annual premium schemes (COM(96) 430 final of 9 September 1996).(175)Council Regulation (EEC) No 1357/80 of 5 June 1980 (OJ L 140, 5.6.1980, p. 1).(176)See the Commission's reports on certain aspects of the beef and sheep meat sectors included in Annex II of the Commission's proposals concerning the fixing of prices for agricultural produce and certain related measures (1996-97), volume 1, preamble (COM(96) 44 final of 14 February 1996).(177)Council Regulation (EC) No 2222/96 of 18 November 1996 (OJ L 296, 21.11.1996, p. 50).(178)See paragraphs 3.61 to 3.63 of the Court's annual report concerning the financial year 1991 (OJ C 330, 15.12.1992).(179)Less-favoured areas are defined at Article 3 of Council Directive 75/268/CEE of 28 April 1975 on mountain and hill farming in certain less-favoured areas (OJ L 128, 19.5.1975, p. 1). In those areas various schemes are aimed at offsetting the effects of natural handicaps and ensuring a fair standard of living for farmers in order to maintain a viable agricultural community.(180)Council Regulation (EC) No 1588/96 of 30 July 1996 (OJ L 206, 16.8.1996, p 23).(181)Scenario: producer has a reference quantity of milk corresponding to 19 dairy cows, 7 suckler cows, 11 male beef cattle aged under 24 months and 23 hectares forage. Option 1: claims on all animals, receives: 7×144,9 ECU + 11×108,7 ECU = 2 210 ECU. Stocking density = (19×1 + 7×1 + 11×0,6) / 23 = 1,42 LU/h > 1,4: no extensification supplement payable. Option 2: strategic claim: 7×144,9 ECU + 10×108,7 ECU = 2 101 ECU. Stocking density = (19×1 + 7×1 + 10×0,6) / 23 = 1,39 LU/h