Communication from the Commission - The 2002 review of the implementation of activity-based management in the Commission, including clarification of the methodology for the establishment of Annual Activity Reports
Date: 2003-01-21
Institutions: European Commission
Subjects: activity report, administration of the Institutions, operation of the Institutions

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 21.1.2003
COM(2003) 28 final

COMMUNICATION FROM THE COMMISSION

The 2002 review of the implementation of activity-based management in the
Commission, including clarification of the methodology for the establishment of Annual
Activity Reports

   
TABLE OF CONTENTS

1.

2.

2.1.

2.2.

Introduction.................................................................................................................. 3

The Commission’s internal management system: breaking new ground and
consolidating the fundamental principles and instruments .......................................... 3

2001: First year of implementation.............................................................................. 3

2002: Adjusting the internal management system to the strategic planning and
programming cycle....................................................................................................... 3

2.3.

Outlook and challenges for 2003 ................................................................................. 5

3.

Main management instruments for the services: management plan and annual activity
report ............................................................................................................................ 6

3.1.

The cornerstone of the system: the management plan ................................................. 6

3.1.1. A consolidated structure............................................................................................... 7

3.1.2. Gradual introduction and simplification of concepts ................................................... 7

3.1.3.

Importance of implementation ..................................................................................... 8

3.2.

The annual reporting instrument: the annual activity report........................................ 8

3.2.1. Clarification of the structure of the annual reports ...................................................... 8

3.2.2. Clarification of the methodology ................................................................................. 9

3.2.3. Clarification of the process ........................................................................................ 10

3.2.4. Budget execution of shared or decentralised managed activities............................... 11

4.

General calendar and chart of the cycle ..................................................................... 11

2

1. 

INTRODUCTION

This  communication  stems  from  the  conclusions  of  the  Communication  on
“implementing  activity-based  management  (ABM)  in  the  Commission”,1  whereby
the Commission requested that “an annual evaluation of ABM implementation be
presented to the College starting with the 2002 exercise”.

The first section summarises the main steps taken since 2001 to implement activity-
based management.

Section 3 goes on to set out a number of adjustments to the instructions contained in
the Communication on implementing activity-based management in the Commission.

2. 

THE  COMMISSION’S  INTERNAL  MANAGEMENT  SYSTEM:  BREAKING  NEW  GROUND
AND CONSOLIDATING THE FUNDAMENTAL PRINCIPLES AND INSTRUMENTS

The  Commission  is  committed  to  modernising  its  internal  management  system  as
part of administrative Reform. The political objective at the centre of the Reform, i.e.
placing the political priorities firmly at the heart of its organisation, will have a better
chance of working if accompanied by the introduction of a management system that
enables  the  Commission  to  allocate  resources  appropriately  to  priorities  and  core
business.  The  first  element  has  been  implemented  through  the  establishment  of  the
strategic  planning  and  programming  cycle.  The  second  element  has  been  fulfilled
with  the  introduction  of  activity-based  management.  These  two  elements  serve  the
same political purpose in different contexts.

2.1. 

2001: First year of implementation

Following  the  adoption  of  the  White  Paper  on  Reform,  a  strategic  planning  and
programming function2 was gradually set up in the fourth quarter of 2000 and started
to operate at the beginning of 2001. The main task of this function is to design, set in
motion and follow up  the cycle that defines  the  Commission's  policy  priorities  and
ensure the right match between tasks and resources for the following year.

It  was  necessary  to  define  the  concepts  and  develop  the  practical  instruments  to
enable services to translate priorities into operational terms, as well as following up
all  their  activities  and  the  use  of  resources  in  a  coherent  and  uniform  way.  The
Communication  on  Activity-Based  Management3  (ABM)  set  out  the  structure  and
the functioning of the new internal management system of the Commission.

2.2. 

2002: Adjusting the internal management system to the strategic planning and
programming cycle

In 2002  efforts focused on  improving the  internal management system to  make  the
cycle function more effectively. The second cycle improved on the following points:

1

2

3

Communication of 25 July 2001 (SEC(2001)1197/6&7)
Provided for by the Communication of 25 July 2001 (SEC(2001)1197/6&7)
ABM Communication (SEC(2001)1197/6&7)

3

                                                
(cid:1)  The Commission singled out three priorities, which were broad in nature, spread
over all Commission activities and complementary to each other, and able to give
a lead to all services in the Commission.

(cid:1)  An inter-institutional dialogue was developed with both the European Parliament
and the Council. It took place for the first time and the institutions have to become
accustomed with this new procedure. Following the dialogue, the Parliament and
the Council endorsed the three priorities for 2003 proposed by the Commission as
being  at  the  heart  of  the  EU  agenda.  This  dialogue  was  based  on  a  timetable
agreed  with  the  Parliament,  and  in  August  the  Commission  took  stock  of  the
follow-up to the Annual Policy Strategy.

(cid:1)  The new  Financial Regulation was adopted, which provides  the legal instrument
for the management of resources by objectives and indicators. The structure of the
budget  is  based  on  the  Policy  Areas  and  Activities  of  the  Commission,  and  the
obligation  to  transmit  Annual  Activity  Reports  to  the  Budgetary  Authority  is
defined.

(cid:1)  The  Commission’s  Legislative  and  Work  Programme  for  2003  was  prepared  on
the  basis  of  the  updated  Annual  Policy  Strategy  following  the  inter-institutional
dialogue  and  announced  for  the  first  time  which  proposals  would  undergo  an
extended impact assessment in 2003.

(cid:1)  Following  the  different  steps  in  the  cycle,  all  services  developed  annual
management  plans,  established  on  the  basis  of  a  common  standard.  A  complete
ABM Guide codifying ABM rules and practice was developed and put on line.

(cid:1)  IRMS,  the  specific  IT  tool  designed  to  support  activity-based  management,  was
widely  expanded    and  was  used  for  the  preparation  of  the  list  of  initiatives
attached to the Commission’s Legislative and Work Programme.

(cid:1)  The  first annual  activity reports (AARs) for 2001 were prepared  by  all  services.
These  were  subsequently  consolidated  in  the  Synthesis  of  Annual  Activity
Reports.4

4

COM(2002)426, adopted on 24 July 2002

4

                                                
In brief:

2002  has  been  a  year  of  consolidation:  the  new  Financial  Regulation  was
adopted;  a  more  meaningful  Annual  Policy  Strategy  in  terms  of  policy  and
resources  was  followed  by  extended  inter-institutional  dialogue  and  the
ensuing Work Programme; and the Commission prepared the first AARs and
their  Synthesis.  At  the  same  time,  the  internal  management  system  has  been
developed and simplified. The introduction of IRMS was widely expanded  and
used for the 2003 Legislative and Work Programme and the management plan.

2.3. 

Outlook and challenges for 2003

2003  will  be  the  first  year  where,  after  consolidation,  the  political  cycle  and  the
internal management system servicing it will be fully operational.

(cid:1)  The  Annual  Policy  Strategy  (APS)  will  be  adopted  by  the  Commission  for  the
third  time.  The  2004  APS  will  contain  a  reinforced  multi-annual  policy
dimension, as a basis for inter-institutional discussion on the European Council’s
multi-annual strategic programming.

(cid:1)  In 2003, the 2004 Budget will be prepared for the first time following the Activity

Based Budgeting (ABB) form.

(cid:1)  To  strengthen  the  information  base  for  policy-making,  impact  assessments  will
become  a  standing  feature  of  the  cycle.  The  Commission  will  decide  which
extended impact assessments to carry out at the time of the APS decision and the
Legislative and Work Programme.

allocation  of 

(cid:1)  Evaluation should inform the decision-making process on policy priorities and the
corresponding 
appropriate
resources, 
implementation  of  the  activities  as  well  as  being  a  regular  reporting  tool.  These
were the underlying goals of the Communication "Focus on results: strengthening
evaluation  of  Commission  activities".5  The  first  two  years  of  implementation  of
in  a  report,6  which  proposes  nine
these  measures  have  been  covered 
recommendations to further strengthen the use of  evaluation in  the Commission.
These nine recommendations will be implemented by the central services and the
operational DGs supported by the Commission’s Evaluation Network.

contribute 

the 

to 

(cid:1)  Monitoring the implementation of priorities and objectives will be developed both
in  the  services,  which  will  pursue  a  structured  follow-up  to  their  management
plans, and at the level of the Commission, through a newly set up interservice co-
ordination  group  that  will  ensure  the  follow-up  of  the  Legislative  and  Work
Programme  and  will  monitor  the  delivery  of  key  initiatives  in  the  management
plans.

5

6

SEC(2000)1051 of 26.07.2000
Report  of  10.10.2002 on  the  implementation  of  the  Communication:  "Focus  on  results:  strengthening
evaluation of Commission activities". The report is available at the following address:
http://www.cc.cec/budg/networks/i/evaluation/en/notices/index.htm.  The  recommendations  are  set  out
in section “Synthesis of conclusions and recommendations”.

5

                                                
(cid:1)  Another  important  focus  of  the  work  carried  out  on  the  consolidation  of  the
internal  management  system  has  been  to  clarify  concepts,  regarding  both  the
management plan and the annual activity report.

(cid:1)  In  the  context  of  the  interoperability  exercise  led  by  ADMIN/DI,  IRMS  will  be
developed on the basis of the experience gained to ensure it fulfils better its role
as an IT vehicle to support the implementation of ABM in the Commission.

In brief:

2003 will be the first year in which all the elements of the cycle are in place and
the internal management system is set to support it, including the preparation
of the first official ABB budget. Monitoring of results will be a priority both at
DG level and Commission-wide.

3. 

MAIN  MANAGEMENT  INSTRUMENTS  FOR  THE  SERVICES:  MANAGEMENT  PLAN  AND
ANNUAL ACTIVITY REPORT

The  fundamental  principles  of  the  Commission’s  internal  management  system  are
translated from  an operational point of view into  two  main  instruments:  the  annual
management  plan  and  the  annual  activity  report.  These  instruments  have  already
been established in all services on the basis of common instructions. They have been
designed to correspond to what the management system requires both at central and
at service levels in terms of planning, monitoring and reporting.

Setting  them  up  has  required  a  high  level  of  commitment  and  investment  from  all
services, as normally  happens  when  new management elements are introduced  into
an organisation. Moreover, major efforts to clarify and simplify have been made for
2003, which should facilitate the work in the services. If necessary, the Commission
is ready to further rationalise the process in the coming years.

3.1. 

The cornerstone of the system: the management plan

The management plan is the tool by which the political orientations and priorities are
translated  into  the  operations  of  the  Directorates-general,  based  on  common
standards  and  a  common  language,  enabling  comparability  and  accountability
Commission-wide.  It  covers  all  the  activities  of  a  service,.  It  is  the  cornerstone  of
activity-based  management  in  that  it  is  the  Commission-wide  management
instrument and the main information source for the cycle. On the one hand, it helps
each service to plan, follow up and report on its activities, actions and resources in
conformity with its mission statement and set objectives. On the other hand, it is the
information base upon which the answers to the Annual Policy Strategy circular, to
the  budgetary  circular  (both  for  the  following  year)  and  to  the  Annual  Activity
Report circular will be built.

6

Basic structure of the annual management plan:

Section 1
Mission Statement

Section 2
Service Level:
Strategic objectives
Key APS Initiatives
Evaluation plan
Total resources

Section 3
Activity level:
Specific objectives and indicators
Resources per activity
All actions (APS and others)

3.1.1.

A consolidated structure

The 2003 management plan consolidates the structure of the 2002 management plan:

(cid:1)  The  mission  statement  is  permanent,  unless  the  service  has  undergone  major

internal changes.

(cid:1)  Strategic objectives at service level are normally relatively stable, and indicators
are not necessarily required at this level; the key APS initiatives are well known
through  the  development  of  the  whole  political  cycle  and  confirmed  in  the
Legislative and Work Programme; allocation of resources has to be adjusted to the
budget adopted by the budgetary authority.

(cid:1)  The specific objectives at activity level should stem from the strategic objectives
at service level and are measured by the relevant indicator(s) as appropriate. The
means of achieving the specific objectives are the actions. An action is carried out
over a certain period of time and consumes resources to produce outputs that help
to achieve a specific objective. Actions are therefore at aggregate level for reasons
of clarity; they entail a series of outputs which are normally the focus of middle
management.

3.1.2. Gradual introduction and simplification of concepts

(cid:1)  A very flexible approach has been applied to objectives and indicators: for 2003,
they are mandatory at activity level only (given that strategic objectives at service
level  may  be  replaced  by  the  list  of  specific  objectives  for  all  activities).
Moreover,  only  output  indicators  are  mandatory  at  activity  level,  unless  impact
indicators are considered more appropriate by the service.

(cid:1)  Actions  are  not  shown  separately,  but  are  integrated  in  the  activity  level,  giving
greater coherence to the presentation of the management plan. To make for clear
and  swift  reporting,  actions  should  be  defined  at  an  aggregated  level,  because  a

7

reasonable number of actions facilitate follow-up and management. They may be
developed in more detail internally for daily management purposes.

3.1.3.

Importance of implementation

Attention  is  drawn  to  the  need  to  ensure  thorough  implementation  of  management
plans. This will be a key element for 2003:

(cid:1)  An  important  aspect  is  the  internal  process:  it  is  crucial  for  top  management  to
take  a  lead  in  the  preparation  of  the  management  plan  by  setting  strategic  and
specific objectives. This gives direction to the bulk of the activities and motivates
middle management and their staff  to  suggest  appropriate  actions  to  achieve  the
objectives. The process does not stop with the finalisation of the planning version
at  the  beginning  of  January:  after  that  it  is  necessary  to  set  up  a  follow-up  and
review  process  that  enables  managers  to  monitor  implementation  of  the
management  plan  in  a  dynamic  way  and  to  readjust  priorities,  schedules  and
resource allocation where necessary.

(cid:1)  Thorough implementation  of the annual  management  plan  will  make  it  easier  to

prepare the corresponding annual activity report.

3.2. 

The annual reporting instrument: the annual activity report

The  annual  activity  report  is  the  other  fundamental  instrument  in  the  internal
management  system,  as  it  contains  an  overview  of  the  results  obtained  by  each
service  and  reviewed  by  the  Commission,  through  the  Synthesis  of  annual  activity
reports.  Therefore,  it  has  value  both  as  a  management  and  as  a  policy  tool.  In  line
with the logic of the system, the annual activity report reports on the execution of the
annual  management  plan.  Much  effort  has  been  invested  in  the  clarification  of  the
structure and the methodology of annual activity reports.

3.2.1.  Clarification of the structure of the annual reports

The  content  of  the  annual  report  mirrors  the  management  plan  and  is
structured around the following sections:

(cid:1)  global  overview  of  the  year,  with  reference  to  the  global  environment,  policy
(including  both  APS  priorities  and  core  business)  and  management  main  events
and results; state of play in the implementation of the Reform; global resources;

(cid:1)  analysis  activity  by  activity  of  the  attainment  of  objectives,  with  comparison
between actual results and expected results; highlights on APS actions carried out
in 2002; table of resources;

(cid:1)  if appropriate, answers to the recommendations expressed by the European Court
of Auditors and in the finalised audits of the Internal Audit Service and follow-up
to  the  plan  of  action  stemming  from  the  annual  activity  report  of  the  previous
year;

(cid:1)  appraisal of internal control systems;

(cid:1)  general conclusions;

8

(cid:1)  declaration  of  the  Director-General  or  Head  of  Service,  accompanied  if

appropriate by reservations.

The annual report will have three annexes:

(cid:1)  a description of the internal process used to establish the annual report, including
internal consultations, information flow and sources and relevant documentation;

(cid:1)  draft accounts of the service;

(cid:1)  table reporting on the implementation in the service of the Commission’s internal

control standards.

3.2.2.  Clarification of the methodology

In the Synthesis of the first annual reports exercise, the Commission noted the need
to improve and clarify the methodology for the annual reports, in particular regarding
reservations, materiality, sub-delegations and cascading.

After examination, the following clarifications are considered appropriate:

1. 

The prime objective of the declaration is not the assessment of policy results, but an
undertaking that the service concerned functions properly. The authorising officer by
delegation therefore gives “management assurance” as to the  regularity and legality
of financial transactions (and the principles  of  sound  financial  management),  based
on  the  existence  and  smooth  functioning  of  internal  control  systems.  This
management assurance has to be distinguished from the “audit assurance” given by
auditors,  whether  internal  or,  as  is  the  case  in  the  DAS,  the  European  Court  of
Auditors.

The declaration is an expression of the responsibilities conferred under the Charter in
the field of control systems, of sound financial management and of the legality and
regularity of transactions. The declaration represents an explicit demonstration of the
personal responsibility and accountability for the management of the resources at the
disposal of the Director General.

In  analysing  the  functioning  of  his/her  service  to  express  this  responsibility,  the
Authorising Officer by delegation may  come  across organisational shortcomings or
deficiencies  within  the  service  concerned.  In  such  cases,  (s)he  may  express  a
reservation,  in  order  to  inform  the  Commission  of  the  problem,  and  indicate  the
measures and timeframe planned to resolve it.

The non-achievement of some of the policy objectives assigned to the service due to
unmanageable  risks,  as  well  as  immaterial  deficiencies  (see  below)  cannot  be
expressed by a reservation, but may be identified as a specific  “observation” in the
body of the annual report.

2. 

Judgment as to the level of risks in the service belongs exclusively to the  Director-
General,  who  decides  on  the  level  of  materiality  according  to  his/her  service’s
circumstances. However, as reservations were not interpreted consistently during the
first  exercise,  a  common  qualitative  and  quantitative  threshold  needs  to  be  defined
beyond  which  deficiencies  are  generally  significant  or  material  and  a  reservation

9

should  be  made.  A  deficiency  may  be  presumed  to  be  material  (and  therefore
highlighted in the form of a reservation) when it falls under the following categories:

(cid:1)  if it concerns the non-implementation of one or more internal control standards;

(cid:1)  if it affects or is likely to affect the Commission’s reputation;

(cid:1)  if it concerns one issue which is relevant for the reporting period and is raised by
the  European  Court  of  Auditors  in  its  published  annual  reports,  specific  reports
and  opinions,  or  a  critical  or  important  issue  identified  by  the  Internal  Audit
Service in its finalised audit reports.

The quantitative materiality threshold is 2%, i.e. when the amount of the transaction
(in the broad sense) affected by the deficiency represents more than 2% of the budget
allocated to the ABB activity of the service concerned.

DGs  and  Services  may  decide  to  deviate  from  this  threshold  if  they  deem  that  the
nature of the risks and controls, based on the DG's assessment of the risk and control
environment  in  which  the  DG/Service  operates,  makes  the  standard  threshold
inappropriate.  In  such  circumstances,  the  specific  thresholds  established  should  be
justified and documented in the Annual Activity Report.

A reservation will normally be lifted the following  year, as a result of the remedial
measures  taken,  but  where  its  impact  lasts  more  than  one  year,  Directors-General
will have to repeat it.

On cross delegations, the transitional measures applied in 2002 are confirmed (i.e.
the  sub-delegated  funds  will  be  reported  on  in  the  AAR  and  declaration  of  the
authorising officer by delegation), with the additional requirement that in the written
sub-delegation  understanding  the  authorising  officer  by  delegation  should  clearly
state the conditions under which the sub-delegation is granted (e.g. regular reporting,
controls, etc.).

In  conformity  with  the  reporting  requirements  set  out  in  the  Charters  for  sub-
delegated  authorising  officers,  no  provision  is  made  for  the  cascading  of
responsibilities  down  through  the  lower  hierarchical  levels  by  way  of  declarations
similar to the one signed by the Director-General. The declaration has, however, to
be  based on documented  reporting  from  within the  DG. Annex 1  to the  report  (see
point 3.2.1) will provide all the necessary information on the internal process and the
flow of information.

More  detailed  instructions  to  services  are  to  be  found  in  the  updated  guidelines  on
the  declaration  of  the  authorising  officer  by  delegation  in  Annex  1,  which  are
mandatory.  More  instructions  on  the  preparation  of  the  2002  Annual  Report  are
circulated by the Secretary-General and the Director-General for the Budget.

3. 

4. 

3.2.3.  Clarification of the process

(cid:1)  In  order  to  improve  the  coherence  of  declarations  and  reservations  made  in
application  of  these  guidelines,  a  peer  review  process  will  be  held  whereby
Directors-General will submit the reservations that they intend to lodge 4 weeks
before  the  deadline  for  submission  of  the  annual  reports,  so  that  they  can  be

10

reviewed,  in  particular  regarding  materiality,  in  one  of  the  Directors-General
meetings prior to finalisation of the Annual Reports. This is without prejudice to
the individual responsibility of Directors-General in signing their declarations.

(cid:1)  The person responsible for preparing the annual report and signing the declaration
for  year  n  in  the  case  of  a  change  of  Director-General  should  be  the  Director-
General  in  office  at  the  time  the  annual  report  has  to  be  finalised  and  the
declaration  signed  (April  of  year n+1).  The need  to  ensure  the  continuity  of  the
service between  the  outgoing  and  the  incoming  Director-General  means  that  the
successor has to endorse all the responsibilities and tasks of his/her new function.

3.2.4.  Budget execution of shared or decentralised managed activities

Whilst the key principles referred to above with regard to making reservations apply
to  most  aspects  of  the  budget,  it  is  clear  that  the  part  of  the  budget  dealing  with
shared  management and/or decentralised arrangements warrants special  attention  in
order to reflect the particular control and risk issues faced when responsibilities are
shared between the Commission and third parties.

From  the  user’s  perspective  it  is  essential  for  the  nature  of  the  control  and  risk
environment to be conveyed as clearly as possible in the body of the main report in
order to fully understand the context of any reservations made by the AOD.

With  this  in  mind  DGs  should  expand  and  clarify  in  the  body  of  their  Annual
Activity Reports the nature of those responsibilities and ensure that the Declaration is
free of any ambiguities.

4. 

GENERAL CALENDAR AND CHART OF THE CYCLE

A  considerable  amount  of  work  has  gone  into  improving  synergies  between  the
components of the cycle and the information base contained in the main management
tool, the annual management plan. As a result, all the information in the management
plan  will  be  used  across  the  cycle  to  feed  into  the  Annual  Policy  Strategy,  the
Preliminary  Draft  Budget,  the  Legislative  and  Work  Programme  and  the  Annual
Activity Reports.

11

Dec. of
year n-2

February of
year n-1

March/Dec
of year n-1

Oct. of
year n-1

Dec. of
year n-1

Oct. year
n-1/ Jan.
year n

April year
n+1

July year
n+1

The strategic planning and programming cycle

Orientation
debate

Annual Policy
Strategy (APS)

Budgetary
procedure

Inter-
institutional
dialogue

Legislative and
Work Programme

Budget

Annual
management
plan

Monitoring of
implementation

Annual activity
report

Synthesis of the
Annual Activity
Reports

12

13

Annex

Guidelines on the declaration of the Authorising Officer by Delegation and his/her
reservations in the annual activity report

TABLE OF CONTENTS

1.

2.

2.1

2.2

2.3

2.4

3.

3.1

3.2

3.3

3.4

Introduction................................................................................................................ 15

The founding elements of the declaration.................................................................. 15

Scope and content ...................................................................................................... 15

Reservations ............................................................................................................... 17

The concept of materiality ......................................................................................... 18

Requirements for making and reporting reservations ................................................ 19

Procedural Issues........................................................................................................ 19

Procedure concerning the lodging of reservations/Reservations concerning the
functioning of another service.................................................................................... 19

Change of Director-General....................................................................................... 19

Sub-delegation to an AOD ......................................................................................... 21

Budget execution of shared or decentralised managed activities............................... 21

ANNEX 1: Text of the Declaration in English and French ..................................................... 24

ANNEX 2: Terminology.......................................................................................................... 26

14

1.

INTRODUCTION

The  content  and  scope  of  the  annual  activity  reports  (hereinafter  called  'annual
reports') and declarations, as well as the related procedures, were set out for the first
time in two Communications (SEC(2001)875/6 and SEC(2001)1197/6&7) adopted
by the Commission. Working on the basis of  specifications laid down in the  above
Communications  and  internal  guidelines  addressed  to  Directors-General  on  8  April
2002,  a  first  cycle  of  annual  reports  was  carried  out  in  2002  for  2001.  The
Commission adopted a Synthesis of the Annual Reports of its Directors-General on
24  July  2002,  which  was  transmitted  to  Parliament  and  Council  together  with  the
annual reports concerned. This Synthesis contains an action plan containing specific
provision  for  the  methodology  for  preparing  annual  reports  to  be  clarified  (Action
10).

In  accordance  with  the  Charter  for  authorising  officers  by  delegation  (AODs),
each  Director-General  or  Head  of  Service  has  to  report  annually  on  the  activity  of
his/her  Directorate-General  or  Service  and  the  management  of  its  resources.  This
obligation takes the form of a report and a declaration.

In  line  with  Action  10  of  the  Synthesis  of  annual  reports  for  20017  and  with  the
Communication  on  “The  2002  review  of  the  implementation  of  activity-based
management in  the Commission, including clarification of the methodology for  the
establishment of Annual Activity Reports”, these guidelines8 aim to:

(cid:1)  promote a common understanding of the founding elements of the declaration;

(cid:1)  clarify the scope and use of reservations;

(cid:1)  define materiality;

(cid:1)  outline certain specific cases.

2.

THE FOUNDING ELEMENTS OF THE DECLARATION

2.1.

Scope and content

In terms of scope, the declaration covers a narrower area than the Annual Report.

The overall objective of the Annual Report is for the Director-General to report on
the  policies  for  which  (s)he  is  responsible  and  on  the  achievement  of  the  policy
objectives set in relation to the political priorities and key initiatives targeted by the
Commission.  It  also  takes  in  other  core  activities  assigned  to  the  DG  or  service
concerned. It is therefore an assessment of the policy results achieved by the service

7

8

Action  10:  the  Secretariat-General,  acting  in  conjunction  with  DG  for  Budget,  DG  for  Personnel  and
Administration  and  the  Internal  Audit  Service,  will  review  and  enhance  before  the  end  of  2002  the
methodology  and  guidance  for  producing  the  Annual  Reports  for  2002,  paying  particular  attention  to
the question of materiality, to the definition of the scope of potential reservations to be included in the
accompanying declarations and to the handling of cross delegations.
These Guidelines also apply to the management of the European Development Fund.

15

                                                
with the resources allocated. In this respect it is a mirror image of the Management
Plan  of  the  service,  since  it  reports  on  the  delivery  of  the  objectives  and  activities
identified in the Management Plans with the resources allocated to the service. In a
separate  chapter,  the  Director-General  reports  on  specific  control  and  the  risk
environment  faced  and  on  the  progress  made  in  implementing  sound  systems  of
internal  control  which  are  in  line  with  the  requirements  of  the  Commission-wide
internal control standards. The report also includes the relevant accounts.

The declaration annexed to the Annual Report is an expression of the responsibilities
conferred  under  the  Charter  to  maintain  the  internal  control  systems  necessary  to
provide reasonable assurance as to the legality and regularity of transactions, and the
achievement  of  sound  financial  management  and  use  of  the  allocated  resources  for
represents  an  explicit
their 
demonstration of the personal responsibility and liability for the management of the
resources at his/her disposal.

intended  purposes.  The  declaration 

therefore 

In  reviewing  the  evidence  to  support  this  declaration,  the  Authorising  Officer  by
delegation may discover organisational shortcomings or internal control weaknesses
within the service concerned. In such cases, (s)he may express a reservation, in order
to inform the Commission of the problem and indicate the measures and timeframe
planned  to  resolve  it.  Non-achievement  of  the  political  objectives  assigned  to  the
service and not linked to sound financial management should not be expressed by a
reservation,  but  could  take  the  form  of  a  specific  observation  in  the  body  of  the
annual report.

In  the  declaration  the  Director  General  or  Head  of  Service  signs  following  the
standard text in the annex, s/he shall

(cid:1)  declare that the information contained in his/her report give a true  and fair  view
(the concept of true  and fair view is a term which has a precise meaning for the
accounting and auditing professions. In the context of the Annual activity reports,
it  means  that  the  contents  of  the  annual  report  give  a  reliable,  complete  (no
material omissions) and correct view of the state of affairs in the service);

(cid:1)  state  that  (s)he  has  reasonable  assurance  that  the  resources  assigned  to  the
activities described in this report have been used for their intended purpose and in
accordance  with  the  principles  of  sound  financial  management,  and  that  the
control  procedures  put  in  place  give  the  necessary  guarantees  concerning  the
legality and regularity of the underlying transactions;

(cid:1)  confirm that (s)he is not aware of any matter not reported in the declaration which

could harm the interests of the institution.

Directors-Generals  or  Heads  of  Services  will  be  able  to  base  their  declarations  on
their knowledge of activities and staff and on all the elements at their disposal and in
particular on the results of the self-assessment exercise, internal controls conducted
on  an  ex-ante  and  ex-post  basis,  including  ongoing  work  of  the  internal  audit
capability,  observations  by  the  Internal  Audit  Service,  Financial  Control  and
OLAF,  and  any  lessons  which  could  be  learnt  from  the  reports  of  the  Court  of
Auditors.  In  taking  into  account  this  information  Directors-General  should  pay
particular  attention to  the elements of the  internal  control  system  (and  any  relevant
reviews  thereof)  which  have  been  specifically  designed,  implemented  and  used  to

16

provide management assurance on the use of resources, sound financial management
and legality and regularity of transactions.

2.2.

Reservations

During the first annual reporting exercise, a certain amount of confusion was created
by  the  fact  that  a  large  of  number  of  reservations  were  entered  which  did  not
correspond  to  the  scope  and  definition  set  out  below,  but  were  general  remarks  to
highlight general risks in the functioning of the service, its environment, or the policy
objectives assigned to it, which were not  technically  meant to describe  deficiencies
qualifying  the  declaration.  Often  the  terms  “observation”,  “qualification”  and
“reservation”  were  used  and  considered  as  equivalent,  in  the  sense  that  they
accompany the declaration.

A deficiency could be:

(cid:1)  a weakness in the design or operation of the internal control structure,

(cid:1)  a shortcoming in the achievement of sound financial management,

(cid:1)  failure to comply with the principles of legality and regularity,

(cid:1)  a risk which is not sufficiently addressed though appropriate mitigating controls,

or

(cid:1)  an error or omission in the financial statements.

In order to have a  common  understanding  of the  basic concept  of  reservation,  only
material deficiencies as defined below should be subject to a reservation mentioned
in the declaration. Non-manageable risks and non-material (see below) observations
should  be  clearly  expressed,  if  necessary,  in  the  body  of  the  annual  report,  and
identifiable as such in the text.

internal  control  deficiency  does  therefore  not  necessarily 

An 
imply  a
reservation.  Not  every  deficiency  is  significant  enough  to  warrant  a  separate
disclosure.

this 

judgement 

the  Director-General  should  have 

In  making 
the
responsibilities given to him/her and for which (s)he is accountable. They should also
take  into  account  the  fact  that  the  Annual  Activity  Report,  the  declaration  and
accompanying  financial  information  are  addressed  to  the  Commission.  One  should
expect to have a reasonable degree of assurance as to the accuracy of the information
presented, but the nature of internal control systems means that it is unreasonable to
expect  absolute  precision  and  no  system  can  provide  absolute  certainty  against  the
risk of error or misappropriation of resources.

in  mind 

Deficiencies  which,  because  of  their  magnitude  or  significance,  either  in  terms  of
quantity,  particular  nature  or  context  (or  all  three),  should  be  subject  to  separate
disclosure  in  the  form  of  a  reservation  in  the  declaration  are  said  to  be  material.
Only material deficiencies should be included as reservations in order to ensure that
the  declaration  remains  meaningful.  A  deficiency  is  therefore  considered  to  be
material if it is probable that the judgement of a reasonable person relying upon the

17

declaration and any  related  information would have been changed or influenced by
disclosing the problem in question. Similarly, a deficiency is material if its omission
would have the same effect.

The key question, therefore, is how to determine materiality.

2.3.

The concept of materiality

Whether  a  deficiency  is  material  or  not  can  be  considered  in  quantitative  and/or
qualitative terms, but it should always be seen in the context of the situation which
gave rise to that deficiency, whether this be a weakness in the design and functioning
of  internal  control,  sound  financial  management,  specific  risks  or  known  errors  or
omissions.

Deficiencies  can  also  be  material  by  nature  and/or  context.  A  deficiency  which  is
material  by  nature  is  concerned  with  inherent  characteristics  rather  than  just  its
monetary value (e.g. reputational risk). Although it may not be material by nature or
amount,  a  deficiency  may  be  material  by  context  because  of  the  circumstances  in
which it arises.

Determining  quantitative  levels  of  materiality  requires  the  AOD  to  consider  the
level  at  which  a  deficiency  in  monetary  terms  should  be  reported  as  a  separate
disclosure in the declaration. Using quantitative thresholds aids the reporting process
in determining the most important issues  and provides the information on  which to
base decisions.

A  deficiency  may  be  presumed  to  be  material  when  it  falls  under  the  following
categories:

(cid:1)  if it concerns the non-implementation of one or more internal control standards;

(cid:1)  if it affects or is likely to affect the Commission’s reputation;

(cid:1)  if  it  concerns  a  critical  or  important  issue  raised  by  the  European  Court  of

Auditors, or in the finalised audits of the Internal Audit Service;

The quantitative materiality threshold is 2%, i.e. when the amount of the transaction
(in the broad sense) affected by the deficiency represents more than 2% of the budget
allocated to the ABB activity of the service concerned.

DGs  and  Services  may  decide  to  deviate  from  this  threshold  if  they  deem  that  the
nature of the risks and controls, based on the DG's assessment of the risk and control
environment  in  which  the  DG/Service  operates,  makes  the  standard  threshold
inappropriate.  In  such  circumstances,  the  specific  thresholds  established  should  be
justified and documented in the Annual Activity Report.

However,  it  should  be  emphasised  that  the  above  criteria  are  only  indicative.  They
aim at assisting Directors-General in reaching a final judgement on what is material
in the specific circumstances of their own service. Directors-General may decide to
depart  from  the  above  guidelines  where  a  different  level  of  materiality  is  more
appropriate  according  to  the  specific  circumstances  of  the  service  concerned.  They
should explain in the report the level of materiality applied for their declaration.

18

All material deficiencies will be presented in the annual report and disclosed in the
declaration,  by  reference  to  the  relevant  section(s)  of  the  annual  report.  When  a
deficiency  is  considered  for  disclosure  but  discarded  as  not  being  material,  the
authorising  officer  by  delegation  should  ensure  that  his/her  service  retains  all
documentation relevant to it.

2.4.

Requirements for making and reporting reservations

Reservations should be reported in the following format:

(cid:1)  specific in terms of their  cause  (internal  control  system deficiency,  specific  risk,
etc.)  and  what  part  of  the  declaration  they  affect  (legality  and  regularity,  sound
financial management, use of resources);

(cid:1)  quantifiable in terms of monetary amounts or scope;

(cid:1)  including a brief assessment of the potential impact, for example, in terms of the
operations  of  the  DG/Service,  accuracy  of  the  financial  information,  etc.,  and
potential impact on the assurances provided in the declaration itself;

(cid:1)  including  brief  details  of  corrective  action  planned  to  deal  with  the  issue  raised

and the prospective timescales.

The use of reservations should be limited to material deficiencies which directly
impact on the wording of the declaration itself and which the Director-General
believes would influence the users of the information.

As  regards  the  timeline  for  corrective  actions,  where  the  deficiency  cannot  be
corrected  before  the  next  annual  report,  the  reservation  should  be  repeated  and
progress reported.

In  extreme
Reservations  should  not  make 
circumstances, it is quite possible that the Director-General may not be able to give
the assurance required by the declaration.

the  declaration  meaningless. 

PROCEDURAL ISSUES

lodging 
Procedure 
concerning the functioning of another service

concerning 

the 

of 

reservations/Reservations

3.

3.1.

If  a  Director-General/Head  of  Service  wants  to  express  a  reservation  on  material
weaknesses  in  his/her  internal  control  systems  caused  by  another  DG  or  Service,
(s)he may do so, but (s)he has to report this to the other DG at least one month before
finalising his/her report, within the context of the peer review procedure. In this case,
it is important to organise a dialogue between the parties concerned and to focus on
common action plans to be proposed to the Commission.

3.2.

Change of Director-General

The  person  responsible  for  preparing  the  annual  report  and  signing  the  declaration
for year n in the case of a change of Director-General should be the Director-General
in office at the time the annual report has to be finalised and the declaration signed

19

(April  of  year  n+1).  The  need  to  ensure  the  continuity  of  the  service  between  the
outgoing and the incoming Director-General means that the successor has to endorse
all the responsibilities and tasks of his/her new function.

The  Charter  on  the  mission  and  responsibilities  of  the  authorising  officer  by
delegation  does  not  provide  for  any  exception  to  this  principle.  Moreover,  the
carryover should allow the successor to obtain all the information needed to prepare
the report and sign the declaration. This, obviously, does not affect the scope of the
respective  responsibilities  of  both  Directors-General,  as  set  out  in  the  Staff
Regulations, the rules of the Financial Regulation and the Charter9.

The  Director-General  who  signs  the  annual  report  will  receive  a  “testament”
(internal,  for  the  use  of  his/her  successor)  from  his/her  predecessor  (including
“acting”  Directors-General),  in  which  the  latter  reports  on  his/her  management  for
the part of the year when (s)he was in charge. His/her successor then has the right to
comment on the situation left by his/her predecessor in  the  annual report that (s)he
subsequently signs.

The  report  of  the  outgoing  Director-General  should  include,  in  particular,  the
following elements:
(cid:1)  a description of achievements against objectives (see annual management plan);

(cid:1)  a  description  of  the  measures  taken  to  ensure  the  proper  handover  of
documentation  and 
financial  and
organisational  issues,  including  internal  controls  and,  as  appropriate,  an
accounting  annex  with  the  level  of  execution  of  commitments  and  payments,  in
order to ensure the continuity of activities and identify potential problems;

information  on  political,  operational, 

(cid:1)  indication of problems, existing or potential, that could give rise to a  reservation
in the next  annual  report  and  measures  taken  or  proposed  to  solve  the  problems
identified.

A  draft  of  the  report  should  be  addressed  by  the  outgoing  Director-General  to  the
incoming Director-General  in  good  time before  the  change  takes  place.  A  dialogue
should be conducted between both Directors-General to avoid any misunderstanding
and  lack  of  clarity  of  the  information  transmitted.  The  report  should  be
communicated  to  the  Commissioner  before  the  change  of  Director-General  takes
place.

Finally,  the  Synthesis  of  annual  reports  for  2001  provides  that  Commissioners  can
ask  the  Director-General  to  present  his/her  activity  report  to  the  Parliamentary
Committee  concerned.  Here  again  the  principle  which  should  prevail  is  that  of  the
continuity of the service. Therefore, at the request of the Commissioner responsible,
the Director-General in charge of a service when Parliament examines the Synthesis
report should present the annual report relating to the previous year, whether or not
(s)he was responsible for this service during that year.

9

See  Annex  1  to  the  Memorandum  to  the  Commission  on  the  annual  report  and  declaration  -
SEC(2001)875/6 of 27 June 2001.

20

                                                
3.3.

Sub-delegation to an AOD

This section only refers to sub-delegations between AODs10.

(cid:1)  The  delegating  AOD  and  the  authorising  officer  by  sub-delegation  sign  an
understanding  which  contains  the  instructions  given  by  the  former  on  the
frequency of reports and controls to be carried out by the latter.

(cid:1)  The  authorising  officer  by  sub-delegation  informs  the  AOD  in  writing  of  the
likely reservations and solutions that (s)he proposes to apply to the management
of the sub-delegated funds.

(cid:1)  The declaration of the authorising officer by delegation covers the sub-delegated
funds and, if need be, (s)he expresses any reservations (and solutions) that seem
appropriate to him/her on the basis of the reporting  of  the authorising officer by
sub-delegation.

(cid:1)  Where the authorising officer by sub-delegation does not meet his/her obligation
to  report  on  the  management  of  the  sub-delegated  funds,  (s)he  will  retain  full
responsibility for this breach of the understanding and  the  authorising  officer  by
delegation will clearly indicate this in his/her declaration.

3.4.

Budget execution of shared or decentralised managed activities

Whilst the key principles referred to above with regard to making reservations apply
to  most  aspects  of  the  budget,  it  is  clear  that  the  part  of  the  budget  dealing  with
shared  management and/or decentralised arrangements warrants special  attention  in
order to reflect the particular control and risk issues faced when responsibilities are
shared between the Commission and third parties.

For operations carried out under shared or decentralised management11, the Charter
for  Authorising  Officers  by  Delegation  requires  the  annual  report  to  contain  a
description of measures taken by the Authorising Officer by delegation to:

–  determine  to  what  extent  the  beneficiary  States  have  put  in  place  appropriate
management  and  control  systems  and  to  what  extent  these  systems  give
satisfactory assurance as to the regularity of the underlying operations in terms of
the law applicable;

–  check the accuracy of the amounts declared;

–  make financial corrections where the beneficiary State’s control procedures have

proved inadequate.

10

11

It is recalled that this section is based on the contents of the Charter of  Authorising Officers by Sub-
delegation.
It  has  to  be  noted  that  budgetary  support  in  the  context  of  external  aid  is  a  form  of  centralised
management.

21

                                                
From  the  user’s  perspective  it  is  essential  for  the  nature  of  the  control  and  risk
environment to be conveyed clearly in the body of the main report in order for them
to  fully  understand  the  context  of  any  reservations  made  by  the  Director-General.
The particular concerns expressed by the Court of Auditors in respect of the annual
reports  and  declarations  made  for  2001  related  to  inconsistencies  and  ambiguities
concerning  shared  and  decentralised  management  issues  and  need  to  be  addressed.
The  Court  felt  it  was  not  always  clear  what  the  declaration  covered  in  terms  of
responsibilities, citing certain services with shared management arrangements where
the declaration appeared to cover the whole of the budget whereas the annual report
itself focused mainly on issues more directly under its control.

Directors-General should expand and clarify in the body of their annual reports the
nature  of  those  responsibilities  and  ensure  that  the  declaration  is  free  of  any
ambiguities. To this effect, Directors-General should, in the report itself, set out:

–  the  nature  and  extent  (monetary  amounts)  of  the  activities  covered  under  shared

management and/or decentralised arrangements;

–  the  basis  for  establishing  the  control  framework  and 

the  allocation  of
responsibilities, i.e. brief outline of the decision-making processes, including the
legal basis, used by the Commission and third parties to establish that framework;

–  a summary of the key responsibilities and tasks exercised by both the Commission

and relevant third parties;

–  a summary of the details of the control framework third parties have to abide by

and the supervision arrangements established by the Commission.

When  making  reservations  Directors-General  should  apply  the  requirements  as
outlined  in  Paragraph  2.4  above,  i.e.  state  the  cause,  quantify  the  scope,  assess  the
impact  and  outline  corrective  action  already  undertaken  or  planned.  To  ensure  that
the user fully understands the reservation, the Director-General should, in addition:

–  state  where  the  operational  responsibility  for  the  weakness  lies,  either  with  the
Director-General’s service, Member States or third countries - (or combinations of
these);

–  for  each  weakness,  state  the  amounts  involved,  and  specifically,  the  amounts
impacted  by  the  control  weaknesses,  and  for  which  a  Commission  decision  on
exclusion of financing is being prepared but has l not yet been taken;

–  disclose the amounts paid  over  the  years  to  give  an  indication  as  to  the  level  of
uncertainty on the regularity and legality of the underlying transactions, in those
cases where Community funds have started to flow, although Member States and
third  countries  have  not  yet  implemented  the  control  framework  for  the
management of Community funds or, though such a framework exists, it has not
yet  been  reviewed  by 
the  Director-General’s  services,.  This  disclosure
corresponds systematically to a reservation;

22

–  make  an estimate  of the  amounts  not  covered  by  the  declaration  on  legality  and
regularity  of  the  underlying  transactions,  in  cases  where  the  Director-General’s
service  did  review  the  control  framework,  but  where  supervision  has  not  been
performed  in  full  or  where  the  potential  financial  exclusion  has  not  yet  been
assessed. This also requires a reservation;

–  assess the coherence, in the light of the extent and scope of the reservations made,

between those reservations and the assurances contained in the declaration.

23

ANNEX 1: TEXT OF THE DECLARATION IN ENGLISH AND FRENCH

I, the undersigned,

Director-General of
Head of Service of

In my capacity as authorising officer by delegation

Declare that the information contained in this report gives a true and fair view1.

State that I have reasonable assurance that the resources assigned to the activities described in
this report have been used for their intended purpose and in accordance with the principles of
sound financial management, and that the control procedures put in place give the necessary
guarantees concerning the legality and regularity of the underlying transactions.

This  reasonable  assurance  is  based  on  my  own  judgement  and  on  the  information  at  my
disposal, such as the results of the self-assessment, ex post controls, the work of the internal
audit capability, the observations of the Internal Audit Service2 and Financial Control2 and the
lessons  learnt  from  the  reports  of  the  Court  of  Auditors2  for  years  prior  to  the  year  of  this
declaration.

Confirm that I am not aware of anything not reported here which could harm the interests of
the institution.

However the following reservations should be noted:

[where appropriate

the authorising officer by delegation could, by way of reservations, note any particular risks
which may have been run in using appropriations, or report any malfunctions; in this case an
indication should be given of remedial measures taken or planned by the authorising officer
by delegation].

Place …………….., date .................

………(signature)

1

2

True and fair in this context means a reliable, complete and correct view on the state of affairs in the
service.
Delete if not applicable

24

                                                
Modèle de déclaration de l’ordonnateur délégué
couvrant le rapport d’activité annuel à partir de 2002

Je soussigné

Directeur général de
Chef de Service de

en ma qualité d'ordonnateur délégué

Déclare par la présente que les informations contenues dans le présent rapport sont sincères et
véritables1.

Affirme  avoir  une  assurance  raisonnable  que  les  ressources  allouées  aux  activités  décrites
dans  le  présent  rapport  ont  été  utilisées  aux  fins  prévues  et  conformément  au  principe  de
bonne  gestion  financière  et  que  les  procédures  de  contrôle  mises  en  place  donnent  les
garanties nécessaires quant à la légalité et la régularité des opérations sous-jacentes.

Cette  assurance  raisonnable  se  fonde  sur  mon  propre  jugement  et  sur  les  éléments
d’information  à  ma  disposition,  comme,  par  exemple,  les  résultats  de  l'auto-évaluation,  des
contrôles  ex  post,  des  travaux  de  "l'internal  audit  capability",  des  observations  du  Service
d'audit interne2 et du Contrôle financier2 ainsi que des enseignements retirés des rapports de la
Cour des comptes2 relatifs aux exercices antérieurs à celui de cette déclaration

Confirme en outre n’avoir connaissance d’aucun fait non signalé pouvant nuire aux intérêts de
l’institution.

Toutefois les réserves suivantes doivent être relevées :

[le cas échéant.

L'ordonnateur délégué pourra au titre des réserves relever notamment les risques particuliers
auxquels  l’exécution  de  ses  crédits  auront  été  exposés,  ou  relever  des  dysfonctionnements;
dans ce cas, elles doivent être accompagnées de l'indication des mesures prises ou envisagées
par l'ordonnateur délégué pour y remédier].

Fait à …………….., le ………(signature)

1

2

Sincère et véritable dans ce contexte signifie une vue fiable, complète et correcte de l’état des affaires
dans le service.
Supprimer si non applicable

25

                                                
ANNEX 2: TERMINOLOGY

In  order  to  avoid  any  misunderstanding  with  the  DAS  approach  of  the  Court  of
Auditors, it is proposed that the declaration should be known as the “declaration of
the Authorising Officer by delegation”.

Legality addresses the issue of compliance with the regulations in force. Regularity
means compliance  with internal  procedures,  guidelines  and  standards  of  behaviour.
The  principle  of  sound  financial  management  corresponds  to  the  principles  of
economy, efficiency and effectiveness. According to the definition quoted in the new
financial regulation, the principle of economy requires that the resources used by the
Institution  to  engage  in  its  activities  must  be  made  available  in  good  time,  in
appropriate  quantity  and  quality  and  at  the  best  cost.  The  principle  of  efficiency  is
concerned  with  the  relationship  between  resources  employed  and  results  achieved,
while the principle of effectiveness is concerned with attaining the specific objectives
set and the intended results, using the available resources.

The  self-assessment  reflects,  as  felt  by  the  management  of  the  DG,  the  level  of
compliance of the internal control systems with the standards in place for the period
concerned.  In  addition,  it  allows  weaknesses  of  the  internal  control  systems  to  be
identified,  taking  into  account  the  properties  of  the  DGs'  transactions  and
environment. Finally, management assessment helps to identify the major risk areas
for the sound functioning of the Directorate-General/Service.

Internal audit is defined as the unit or service that provides independent, objective
assurance  and  consulting  services  designed  to  add  value  to  and  improve  on  an
organisation’s  operations.  The  internal  audit  activity  helps  an  organisation  to
accomplish  its  objectives  by  bringing  a  systematic,  disciplined  approach  to
evaluating  and  improving  the  effectiveness  of  risk  management,  control  and
governance processes.

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