Opinion No 1/2000 on a proposal for a Council Regulation amending the Financial Regulation of 21 December 1977 and separating the internal audit function from the ex ante financial control function (fifth paragraph of Article 24 of the Financial Regulation)
Date: 2000-10-05
Institutions: European Court of Auditors
Subjects: commitment of expenditure, financial control, financial regulation, general budget (EU), implementation of the budget, management audit

17.11.2000

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Official Journal of the European Communities

C 327/1

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(Information)

COURT OF AUDITORS

OPINION No 1/2000

on a proposal for a Council Regulation amending the Financial Regulation of 21 December 1977
and separating the internal audit function from the ex ante financial control function (fifth
paragraph of Article 24 of the Financial Regulation)

(submitted pursuant to Article 279 EC)

(2000/C 327/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

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

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

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

Having regard to the Financial Regulation applicable to the gen-
eral budget of the European Communities (1), as most recently
amended by Council Regulation (EC, ECSC, Euratom) No 2673/
1999 of 13 December 1999 (2), and in particular Articles 21, 24,
139 and 142 thereof,

Having regard to Commission Regulation (Euratom, ECSC, EC)
No 3418/93 of 9 December 1993 laying down detailed rules for
the implementation of certain provisions of the Financial Regula-
tion of 21 December 1977 (3), and in particular Articles 34 to 43
thereof,

Having regard to the proposal submitted by the Commission for
a Council Regulation amending the Financial Regulation of 21
December 1977 and separating the internal audit function from
the ex ante financial control function (4),

(1) OJ L 356, 31.12.1977, p. 1.
(2) OJ L 326, 18.12.1999, p. 1.
(3) OJ L 315, 16.12.1993, p.1.
(4) Commission Document 2000/135 (CNS) — COM(2000) 341 final.

Having regard to the request for an opinion on this proposal, sent
by the Council to the Court of Auditors on 14 June 2000 and
received by the Court on 21 June 2000,

Whereas the Commission has developed a project for creating an
‘Internal Audit Service ... to assist management ... to (1) control
risks, (2) monitor compliance, (3) provide an independent opin-
ion about the quality of management and control systems, and (4)
make recommendations for improving the efficiency and effec-
tiveness of operations and ensuring that Commission resources
are used cost-effectively (security for money and value for money)’;

Whereas the system thus envisaged also includes the following
provision. ‘Each Directorate-General will set up a specialised audit
capability (that could range from an individual relying largely on
the work of the Internal Audit Service to a fully-fledged unit),
reporting directly to the Director-General, to carry out reviews of
the internal control system of the DG as well as reviews of the
management and use of Commission funds paid to external ben-
eficiaries’;

Whereas ‘an audit progress committee will be set up. Its job will
be to monitor (1) the control processes of the Commission through
the results of audits of the Internal Audit Service and the Court
of Auditors, (2) the implementation of audit recommendations,
including those from the Court of Auditors accepted by the Com-
mission, and (3) the quality of audit work’;

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Whereas, in the Commission’s words, this system ‘should fully
remedy the “de-responsibilising effect” and eliminate the potential
conflict of interest between financial control and internal audit
that marks current arrangements’ (1);

Whereas the Commission’s proposal for separating the internal
audit function from the financial control function pending a fuller
recasting of the Financial Regulation is a development that has
been advocated by the Court for a very long time,

In particular, the Court pointed out that the organisational
3.
and operational consequences of the suggestion that the financial
controller should also act as internal auditor are not set out clearly.
In the absence of clarification and safeguards it would not offer
sufficient compensation to protect the financial system against
any internal control defect that might result from the discontinu-
ation of prior approval. Furthermore, abolishing prior approval
completely would only be acceptable if it were to be replaced by
other procedures that offer at least equivalent safeguards and
could also involve officials other than the financial controller (4).

HAS ADOPTED THE FOLLOWING OPINION:

1. As long ago as 1981 (2), the Court mentioned the latent con-
flict between the power of the financial controller to give prior
approval, and thus to authorise expenditure, and the task of sub-
sequently evaluating the same expenditure on the basis of sound
financial management criteria, which is, in fact, the function of an
internal auditor.

2. More recently, the Court observed, ‘The main objectives of the
whole set of financial regulations should be to help the Commu-
nities to achieve their political aims effectively by allocating their
budgetary resources in the best possible way, to guarantee the
legality and regularity of their acts, to protect their assets and to
ensure the disclosure and the transparency of their financial
operations. To this end, a new Financial Regulation should in par-
ticular contain the following principles and provisions:

— the status and powers of the financial controller should be
redefined, on the assumption that he would exercise the func-
tions of internal auditor of the institution,

— a clearer indication of the scope of authorising officers’ pow-
ers in respect of financial management and financial control.
Since the prior approval procedure is likely to be used signifi-
cantly less or even, in the end, to disappear, additional provi-
sions need to be introduced to ensure the legality, regularity
and sound financial management of Community measures
and to protect the Communities’ financial interests, in par-
ticular to prevent officials from having to face any situation
where a conflict of interest arises between the interests of the
service and the interests of third parties,

— on the same assumption, the powers of the accounting officer

need to be strengthened’ (3).

(1)

‘Reforming the Commission’ — A White Paper, Part I, COM(2000)
200 final/2, p. 26-27.

(2) European Court of Auditors, Study of the financial systems of the

European Communities (1981) (OJ C 342, 31.12.1981, p. 1).

(3) Opinion No 4/97 on the proposal for a Council Regulation (Euratom,
ECSC, EC) amending the Financial Regulation of 21 December 1977
applicable to the general budget of the European Communities, para-
graph 16, first subparagraph and paragraph 16(c) (OJ C 57, 23.2.1998,
p. 4).

4. The Court’s recommendations were drafted in the context of
radical changes in the role of the financial controller, combined
with increased responsibility for authorising officers and account-
ing officers and the creation of a real internal audit function (5).

5. On a similar point, the International Organisation of Supreme
Audit Institutions states, ‘Management often establishes an inter-
nal audit unit as part of its internal control structure. While inter-
nal auditors can be a valuable resource to educate and advise on
internal controls, the internal auditor should not be a substitute
for a strong internal control structure.’ (6)

It might, therefore, be preferable for the system that is under
6.
consideration to be comprehensive, rigorous and consistent, espe-
cially as there is always a possibility that the solution that is being
proposed for a transitional period might remain in force for longer
than the Commission anticipates.

Scope of the reform

7.
Internal audit is defined as ‘an independent, objective assur-
ance and consulting activity designed to add value and improve
an organisation’s operations. It helps an organisation accomplish
its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, con-
trol and governance processes’ (7). Therefore, ‘the scope and objec-
tives of internal audit vary widely and depend on the size and
structure of the entity and the requirements of its management’ (8).

(4) Opinion No 4/97, paragraph 15, fifteenth indent and paragraph 5.5

of the Annex.

(5) Opinion No 4/97, paragraph 5.10 of the Annex.
(6)

Intosai Internal Control Standards Committee, Guidelines for internal
control standards, June 1992, paragraph 74.

(7) Definition of the Institute of Internal Auditors (IIA), approved by the

(8)

IIA Board of Directors on June 26, 1999.
International Federation of Accountants — Handbook 1999 — Tech-
nical Pronouncements, ISA No 610, paragraph 5.

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8. The internal audit function must be included in the Financial
Regulation as a general concept, but the method of designating
the internal auditor (whether an individual or a unit), the detailed
objectives of the duties, scope of the work and implementing pro-
cedures are a matter for the institutions themselves to decide, in
terms of their specific characteristics and requirements, having
due regard to current international internal auditing standards.
The text of Article 24 of the Financial Regulation should be
amended accordingly. An alternative text for Article 2 of the
Commission proposal is suggested in the Annex.

Independence of the internal auditor

11. The proposal gives the internal auditor an official status
similar to that of the financial controller. However, because of the
importance of the principle that an auditor must be independent
of the persons or bodies audited, this principle should be laid
down in the Financial Regulation itself. The Financial Regulation
should provide, without ambiguity, that in carrying out his duties
the internal auditor is responsible only to the institution that des-
ignated him and that he reports direct to that institution.

The incompatibility of the internal auditor function and other
functions

The duties of an internal auditor

12. The draft Article 24a mentions two of the duties required of
an internal auditor. However, as explained in paragraph 7, the
objectives, nature and list of duties to be carried out by the inter-
nal auditor may vary according to the institution in which the
internal audit is carried out.

9. The proposed reform provides for the internal auditor func-
tion to be added to the functions that are traditionally part of the
Communities’ financial procedure, namely authorising officer,
financial controller and accounting officer.

13.
It would, therefore, be advisable for the internal auditor’s
duties to be defined in terms that are more general, by means of
a reference to the current international standards governing this
matter.

10. Article 24a does, indeed, provide that the internal auditor is
to be independent of the financial controller. Nevertheless, in
order to properly provide the necessary overall balance in the
internal control system, a further amendment should be added to
the measures already proposed by the Commission. The fourth
subparagraph of Article 21 of the Financial Regulation should set
out the principle that the functions of authorising officer, finan-
cial controller and accounting officer may be combined neither
with each other nor with the function of internal auditor.

The creation of a new title in the Financial Regulation

14. The office of internal auditor, unlike the offices of authoris-
ing officer, accounting officer and financial controller, does not
include any powers that affect the implementation of the budget.
For that reason the Commission’s proposed amendment to the
Financial Regulation should be included in a separate title, rather
than in Title III of the Financial Regulation.

This opinion was adopted by the Court of Auditors in Luxembourg at its meeting of 5 October 2000.

For the Court of Auditors

Jan O. KARLSSON

President

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Official Journal of the European Communities

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PROPOSED ALTERNATIVE TEXT FOR ARTICLE 2 OF THE COMMISSION’S PROPOSAL

(ref. 2000/0135(CNS)

ANNEX

‘Article 2

A new title is added to the Financial Regulation:

THE INTERNAL AUDITOR

1. Each institution shall establish an internal audit function within the institution. The internal audit function shall be
independent of the financial controller.

Internal auditing is an assurance and consulting activity designed to add value and improve the institution’s operations, as
well as helping it to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the
management and control processes.

2. Each institution shall designate the internal auditor according to the method appropriate to its specific characteristics
and requirements.

In carrying out his duties the internal auditor shall be responsible only to the institution that designated him and shall report
direct to the institution.

Each institution shall, according to its specific characteristics and requirements, decide the scope of the internal auditor’s
work and adopt detailed objectives and procedures for the internal audit function, having due regard to international internal
auditing standards.

3. The internal auditor shall be guaranteed the independence and access to information that he considers necessary for the
performance of his duties. In particular, where the internal auditor is an official or other servant of the institution that has
designated him, he shall, in order to be able to exercise his duties, have access to the same information as the financial
controller and, in order to maintain his independence, shall be subject to the same rules and specific measures as are appli-
cable to the financial controller under the eighth and ninth paragraphs of Article 24.’