Court of Auditors — Annual Report concerning the financial year 2002 - Report on the activities financed from the budget, together with the institutions' replies
Date: 2003-10-09
Institutions: European Court of Auditors
Subjects: European Court of Auditors, European Development Fund, activity report, financial year, general budget (EU)

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COURT OF AUDITORS

In accordance with the provisions of the Treaties (Article 45c(4) of the ECSC Treaty,
Article 248(4) of the EC Treaty and Article 160c(4) of the EAEC Treaty) and Articles 143 and
181(2) of the Financial Regulation of 25 June 2002 applicable to the general budget of the
European Communities, and Articles 116 and 135(2) of the Financial Regulation of 27 March
2003 applicable to the European Development Funds, the Court of Auditors of the European
Communities, at its meeting of 8 and 9 October 2003, adopted its

ANNUAL REPORT

concerning the financial year 2002

(2003/C 286/01)

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.

Juan Manuel FABRA VALLÉS
(President)
Giorgio CLEMENTE
Hubert WEBER
Aunus SALMI
François COLLING
Maarten B. ENGWIRDA
Jean-François BERNICOT
Robert REYNDERS
Máire GEOGHEGAN-QUINN
Vítor Manuel da SILVA CALDEIRA
Lars TOBISSON
Hedda von WEDEL
David BOSTOCK
Morten Louis LEVYSOHN
Ioannis SARMAS

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CONTENTS

Page

General introduction ..................................................................................................................................

5

REPORT ON ACTIVITIES FINANCED FROM THE BUDGET

Chapter 1 — The Statement of Assurance and supporting information ..........................................

Chapter 2 — Budgetary management .....................................................................................................

Chapter 3 — Own resources ....................................................................................................................

Chapter 4 — The common agricultural policy .....................................................................................

Chapter 5 — Structural measures ............................................................................................................

Chapter 6 — Internal policies, including research ................................................................................

Chapter 7 — External actions ..................................................................................................................

Chapter 8 — Preaccession aid ..................................................................................................................

Chapter 9 — Administrative expenditure ..............................................................................................

Chapter 10 — Financial instruments and banking activities .................................................................

REPORT ON THE ACTIVITIES FUNDED BY THE SIXTH,
SEVENTH AND EIGHTH EUROPEAN DEVELOPMENT FUNDS
(EDFs) .........................................................................................................................................................

ANNEXES

Annex I — Financial information on the budget of the European Union ....................................

Annex II — Reports and opinions adopted by the Court of Auditors during the last five years .

11

53

75

97

155

193

227

259

287

309

325

III

XIX

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GENERAL INTRODUCTION

Structure and content of the report

0.1.
In recent years the Statement of Assurance has
become an increasingly important element of the Court’s
Annual Report. This year’s Report places the Statement,
together with the information supporting it, in chap-
ter 1. For the first time the Statement is also published
with the consolidated accounts (1) of the European Com-
munity in a separate edition of the Official Journal of the
European Union.

0.2. A further change to the Report is the consolida-
tion of the Court’s observations on budgetary manage-
ment into a separate chapter (chapter 2). In previous
years these observations were presented in the indi-
vidual chapters dealing with the European Union’s rev-
enue and spending.

0.3. The chapters covering revenue and the major areas
of spending, which reflect the headings of the financial
perspective (2), have as their main element detailed analy-
ses and results of the audit work carried out in the con-
text of the Statement of Assurance for the respective
area. In the terminology of Article 248(1) of the EC
Treaty, as amended by theTreaty of Nice, these sections
are described as ‘specific assessments’. These assess-
ments form the main basis for the Statement of Assur-
ance, as described in paragraphs 1.1 to 1.6 of this
Report. The chapters also contain the results of reviews
following up progress made on implementing the rec-
ommendations made by the Court in previous Special
and Annual Reports. Summaries are given of the 13
Special Reports published by the Court since the last
Annual Report (3). There is also a chapter covering
instruments and banking activities. The
financial

Annexes to chapters 3 to 9 provide monitoring ele-
ments for evaluating financial management of the EU
budget.

0.4. As the European Development Funds are financed
outside the EU budget, the Court’s observations, includ-
ing a Statement of Assurance, are presented in a sepa-
rate section of this report.

0.5. The Commission’s replies, and, where appropri-
ate, those of the other institutions, are published along-
side the observations of the Court.

0.6. This 26th Annual Report is being published at a
time when there are two major developments affecting
the financial management of the European Union. The
first is the continuing reform of the Commission in
general, and of financial management in particular, and
the second is the accession in May 2004 of 10 new
Member States.

The reform of the Commission

0.7. The reform of the Commission, begun in 2000 (4),
comprises a number of ambitious and fundamental
measures aimed at improving both financial and opera-
tional management and control. Progress continued to
be made during 2002, building on that begun in 2001.
In particular positive steps were taken in respect of
readying the Commission for implementation of cer-
tain provisions of the new Financial Regulation from
1 January 2003. These included the increase in the
responsibility of authorising officers by delegation, espe-
cially regarding internal control, and the introduction of
a central internal audit service, complemented by inter-
nal audit capabilities within each Directorate-General.

(1) Article 129(4) of Council Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 on the Financial Regula-
tion applicable to the general budget of the European
Communities (OJ L 248, 16.9.2002, p. 1).

(2) The financial perspective, which is determined by an
interinstitutional agreement between the European Parlia-
ment, the Council and the Commission, sets limits on
expenditure for each of seven categories (headings) of
expenditure for commitment appropriations, and on total
expenditure for payment appropriations. The Court does
not present a separate chapter for the Reserves heading,
as its resources are only used through transfer to one of
the other headings.

(3) A full list of the reports and opinions adopted by the
Court in the last five years is included in Annex II to this
Report.

the

reform,

introduction of

0.8. Other highlights of the reform include establish-
ing and applying internal control standards, establish-
ing key performance indicators, undertaking account-
ing
activity-based
management, and the devolution of much of the respon-
sibility for the management of external actions to del-
egations. The Commission itself recognises that whilst
progress has been made, much remains to be done and
cites difficulties in recruiting sufficient numbers of staff
with the required financial experience, and establishing
and promoting the necessary risk-management culture.

(4) White Paper on reforming the Commission issued on

1 March 2000 (COM(2000) 200 final).

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0.9. Of critical importance for ensuring sound finan-
cial management within the Commission are the inter-
nal control standards (5). These represent the minimum
level of tools and procedures designed to help in defin-
ing the internal control systems within the Commis-
sion’s Directorates-General. By the end of 2002 these
standards were not being applied to the minimum level
throughout all Directorates-General, despite the fact
that they were intended for full implementation one
year earlier. The Court can only underline the necessity
of ensuring the effective and complete application of
the standards, as they, together with the principle of the
responsibility of Directors-General, represent the cor-
nerstone for much of the reform within the Commis-
sion.

0.10. The year 2002 is the second that Directors-
General have been required to produce annual activity
reports and accompanying declarations. These set out
their own assessment of compliance with financial man-
agement requirements such as operating adequate inter-
nal control systems, and to what extent they provide
assurance that Union finances are soundly managed. As
noted in this Annual Report, the Court found some
improvements in the quality and consistency of these
reports, many of which are based on the recommenda-
tions made in its 2001 Annual Report. However, fur-
ther progress is needed, particularly in the definition
and quantification of reservations, and in the consis-
the approach followed by the different
tency of
Directorates-General.

0.11. As the Court has pointed out repeatedly in the
past, the areas of the budget for which management is
shared, for example with Member States, pose particu-
lar challenges due to their complexity and the many lay-
ers of administration involved. The expenditure con-
cerned represents the vast bulk of the budget by value
and comprises notably agriculture and structural mea-
sures. In these areas the Directors-General have many
reservations on the systems in place in Member States
and their ability to assure the legality and regularity of
underlying transactions.

sought a legal opinion clarifying the respective rights
and responsibilities of the Commission and the Mem-
ber States in the area of shared management. The Court
will continue to follow this closely.

0.13. The need for progress in the management of
funds where responsibilities are shared should not, how-
ever, divert attention away from improvements still
needed in the management of expenditure for which
the Commission is directly responsible.

0.14. The Commission is seeking to apply a compre-
hensive and systematic approach to managing and moni-
toring the reform process. Identified weaknesses are
accompanied by practical action plans agreed by the
Commission, against which progress is subsequently
measured. However, as pointed out in chapter 1 (6),
there is a need to consolidate all the various action plans
and updates of the White Paper, in order to make it
easier to monitor progress of the reform and ensure
that it is being applied coherently and consistently
throughout the whole organisation. This would enhance
the open and transparent approach to which the Com-
mission is committed.

Enlargement

0.15.
In late 2002 the European Union agreed upon
the largest wave of enlargement in its history. The acces-
sion of the 10 countries concerned requires significant
efforts for them in terms of adopting and implement-
ing the acquis communautaire, setting up the necessary
management and control structures to administer EU
aid and coping with the challenges arising from decen-
tralisation. From the outset the Commission has oper-
ated a policy of decentralisation for the administration
of the EU funds, albeit starting with a high level of ex
ante Commission control often exercised through its
delegations. As accession has approached, the level of
decentralisation has increased in order to provide a good
basis for administering shared management schemes —
agriculture and structural measures — when the acces-
sion countries become full Member States.

0.12. The scale of the task facing the Commission in
these areas is considerable and it is likely to take several
years before significant progress is made. Some
Directorates-General are only at the stage of obtaining
a detailed description of systems in Member States. Fur-
thermore, it was only in 2002 that the Commission

0.16. As this report describes, delays in setting up the
required structures for financial management and con-
trol have meant that EU funds have been made avail-
able more slowly than initially planned to potential
beneficiaries in the countries concerned. The Court has
also found weaknesses in the Commission’s monitoring

(5) Communication to the Commission of 18 December 2001

(SEC(2001) 2037/4).

(6) Paragraph 1.115.

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of the systems being put into place. Efforts are therefore
still required by both the accession States and the Com-
mission to ensure efficient and effective management of
EU funds, and timely delivery of aid to beneficiaries.

0.17. The period following enlargement will see other
significant changes such as the implementation of
activity-based management and accrual accounting
together with the full application of the provisions of
the new Financial Regulation. It is imperative that the
Commission devotes adequate resources to these tasks
to help assure a quality of management that meets the
legitimate expectations of the citizens of the Union.

0.18. By the time the Court’s next annual report is
published, the Union will have welcomed 10 new Mem-
ber States. Enlargement will add both to the size of the
Union’s budget and the scale and complexity of the
management challenge faced by the Commission and
Member States. It will also increase the scope of the
Court’s work as external auditor of the budget of the
enlarged EU. The Court, as a fully independent audit
institution, is preparing for this challenge.

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REPORT ON THE ACTIVITIES FINANCED
FROM THE GENERAL BUDGET

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CHAPTER 1

The Statement of Assurance and supporting information

TABLE OF CONTENTS

Statement of Assurance

Reliability of the accounts

Legality and regularity of the underlying transactions

Information in support of the statement of assurance

Introduction

Action plan for the modernisation of the accounts

Reliability of the accounts

Observations concerning the consolidated statements on the
implementation of the budget

Observations concerning the consolidated financial statements: balance
sheet

Legality and regularity of the underlying transactions

Own resources

Common agricultural policy

Structural measures

Internal policies

External actions

Preaccession aid

Administrative expenditure

Reform of the Commission’s internal control system

The White Paper actions

Implementation of the action plan annexed to the Synthesis of the annual
activity reports of the directors-general at the Commission for the year
2001

Annual activity reports and declarations of the directors-general for the year
2002

The Commission’s Synthesis report for 2002

Conclusion

Paragraph

I-V

II-III

IV-V

1.1-1.110

1.1-1.6

1.7-1.8

1.9-1.35

1.10-1.16

1.17-1.35

1.36-1.61

1.36-1.40

1.41-1.45

1.46-1.49

1.50-1.54

1.55-1.58

1.59

1.60-1.61

1.62-1.110

1.65-1.74

1.75-1.76

1.77-1.98

1.99-1.105

1.106-1.110

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STATEMENT OF ASSURANCE

I. Pursuant to the provisions of Article 248 of the Treaty, the Court has examined the consolidated annual
accounts (1) of the European Communities for the financial year ended 31 December 2002. It carried out its
audit in accordance with its own audit policies and standards, which are based on international standards that
have been adapted to the Community context. Through its audit, the Court has obtained a reasonable basis for
the opinion expressed below. In the case of own resources the scope of the Court’s audit work was limited (2).

Reliability of the accounts

II.
In the Court’s opinion, the consolidated annual accounts of the European Communities and the notes to
them were drawn up in accordance with the provisions of the Financial Regulation of 21 December 1977 and
with the accounting principles, rules and methods set out in the annexes to the consolidated financial state-
ments (3). Except for the effects of the observations in paragraphs (a) to (d) and the remark in paragraph III, they
faithfully reflect the revenue and expenditure of the Communities for the year and their financial position at the
year-end:

(a)

(b)

(c)

(d)

in the absence of sufficient budgetary appropriations, 820 million euro of legal commitments are included
amongst the off-balance sheet commitments;

the called-up part (240 million euro) of the Commission’s commitment (520 million euro) to the capital
of the Galileo joint undertaking does not appear as such on the assets side of the balance sheet;

the transitional accounts entered on the assets side of the balance sheet in the sum of 91,1 million euro
and in the sum of 714,9 million euro on the liabilities side should be redistributed amongst the various
other balance sheet or revenue and expenditure (operating) account headings according to the nature of
their individual components;

in the absence of effective internal control procedures for miscellaneous revenue and advances, the Court
cannot be certain that the transactions relating to the sundry debtors item have been correctly and com-
pletely recorded.

III. As has been the case in the past, the origin of the Court’s observations lies in the Community accounting
system, which was not designed to ensure that the assets are fully recorded. In this context, the Court notes that
on 17 December 2002 the Commission adopted an action plan for the modernisation of the European Com-
munities’ accounting system. The action plan is supposed to become fully effective as from the 2005 financial
year.

(1) Namely ‘Revenue and expenditure account: execution of
the budget’ and ‘Consolidated balance sheet’, which make
up Volume I of the annual accounts of the European
Communities, 2002 financial year.

(2) Firstly, the Court’s audits focus on macroeconomic statis-
tics for which the underlying data cannot be audited
directly, and secondly, they cannot possibly cover the
imports that have not been subject to customs supervi-
sion.

(3) See Annex 1, Volume 1, of the final accounts of the Euro-

pean Communities, financial year 2002.

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Legality and regularity of the underlying transactions

In view of the results of its audits, the Court is of the opinion that the transactions underlying the consoli-
IV.
dated annual accounts of the European Communities, taken as a whole, are legal and regular in respect of the
revenue, commitments, administrative expenditure and pre-accession aid, although in the latter case the super-
visory systems and controls are particularly in need of strengthening.

V. As regards other payments, the Court established that:

(a)

(b)

(c)

(d)

in the case of EAGGF Guarantee Section, the payments were, again, materially affected by errors. Arable
crops are less exposed to the risk of error than animal premiums, whereas the other categories of expen-
diture, which are not subject to the integrated administration and control system (IACS), are exposed to
greater risk, as well as being subject to less efficient controls;

in the case of the structural measures, in spite of an improvement in the supervisory systems and controls,
especially at Commission level, the same types of error occurred at Member State level with the same
frequency as in previous years;

in the case of internal policies, the transactions are still affected by significant errors in terms of legality
and regularity. In the case of the research framework programmes, these errors are likely to persist if the
rules governing the programmes are not revised;

in the case of the external actions, the irregularities noted in the past are persisting at local level. As a result
of a process of management decentralisation that is still ongoing, the supervisory systems and controls do
not yet provide the Commission with assurance of the legality and regularity of the payments at the level
of the bodies responsible for implementing development projects.

8 and 9 October 2003

Juan Manuel FABRA VALLÉS
President

European Court of Auditors
12, rue Alcide De Gasperi, L-1615 Luxembourg

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INFORMATION IN SUPPORT OF THE
STATEMENT OF ASSURANCE

Introduction

1.1. Pursuant to Article 248 of the Treaty, the Court of
Auditors provides the European Parliament and the
Council with a Statement of Assurance concerning the
reliability of the accounts and the legality and regular-
ity of the underlying transactions (the DAS). The Treaty
of Nice clarified this mandate by authorising the Court
to supplement this statement with specific assessments
of each major area of Community activity. For the 2002
financial year the Court therefore wished to consolidate
the basis for its statement by relying more systemati-
cally on an examination of the operation of the super-
visory systems and controls set up by the Commission
in each of these major areas. This development in the
Court’s audit approach takes into consideration the key
elements of the administrative reform undertaken by
the Commission at the beginning of 2000 and, in par-
ticular, the reorganisation of its internal control system.

1.2. The aim of the work on the reliability of the
accounts of the European Communities is to obtain rea-
sonable assurance that all the revenue, expenditure,
assets and liabilities have been properly registered and
that the financial statements faithfully reflect the finan-
cial position at the end of the year.

1.3. The aim of the work on the legality and regularity
of the underlying transactions is, to obtain sufficient
evidence of a direct or indirect nature to prove that the
underlying transactions are in accordance with the appli-
cable regulations or contractual provisions and, that the
total amount involved in these transactions has been
correctly calculated.

1.4. With regard to the legality and regularity of the
underlying transactions, the Court has based its state-
ment on a number of separate sources:

(a)

(b)

an examination of the operation of the supervi-
sory systems and controls set up both in the Com-
munity institutions and in the Member States and
third countries;

an examination of samples of transactions for each
major area by carrying out checks down to final
beneficiary level;

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(c)

an analysis of the declarations of the directors-
general and of the procedures applied in drawing
them up;

(d) where necessary, an examination of the work of
other auditors who are independent of Commu-
nity management procedures.

1.5. Once again, the Court paid particular attention to
the process of reform at the Commission and, more
especially, to the follow-up given to the action plan
annexed to the Synthesis of the annual reports and dec-
larations of its directors-general for the 2001 financial
year (see paragraphs 1.62 to 1.110)

1.6. Lastly, for every major area subjected to specific
assessment, the Court wished to provide certain key
information to serve as a basis for monitoring and
evaluating developments in these areas in the longer
term. This key information is presented in table form in
the annexes to Chapters 3 to 9.

Action plan for the modernisation of the accounts

1.7. On 17 December 2002 the Commission adopted
an action plan for the modernisation of the European
Communities’ accounting system (4). This plan, which is
a response to a number of previous observations by the
Court, is designed as a follow-up to the new provisions
of the Financial Regulation adopted in June 2002 (5). It
states that the reformed accounting system is to be
completely in accordance with accruals-based account-
ing principles and will be applied gradually and, will
only be fully effective in the 2005 financial year. The
plan is made up of two strands, one concerning the
adoption of the new accounting framework (6) and the
other the development of the information systems
required for its implementation (7) (see paragraph 1.92).
Provision was made for two committees under this plan
and they were constituted during the first quarter of
2003 (a project oversight board and an advisory com-
mittee for accounting standards).

(4) Communication from the Commission — Modernisation
of the Accounting System of the European Communities
((COM(2002) 755 final of 17 December 2002).

(5) See also Resolution of the European Parliament concern-
ing discharge for the 2001 financial year, paragraph 23
(OJ L 148, 16.6.2003).

(6) Action 16 of the Action Plan (COM(2002) 426 final of

24 July 2002).

(7) Action 17 of the Action Plan (COM(2002) 426 final of

24 July 2002).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.8. At this stage the action plan calls for two com-
ments:

1.8.

introduction of the accounting standards neces-
sary for a genuinely accruals-based accounting sys-
tem is singularly complicated by the constraints
associated with, firstly, applying the principle of
annuality of appropriations and, secondly, the rules
on sharing management with the Member States.
In fact, the Commission very often only becomes
aware at a very late stage of the events which, in a
classic accruals-based accounting system, consti-
tute the economic events that trigger entries in the
accounts (8). The Commission should therefore
exercise prudence and define the economic events
that give rise to accounting entries in a way which
allows it to maintain control over the process (9).
Whatever methods the Commission adopts in the
end, it is important that the recording base remains
comparable from one year to the next and is defined
without any ambiguity (10);

in view of the scale of the work to be undertaken,
the timetable laid down for the development and
introduction of the new systems appears over-
ambitious. As a consequence, there is a risk that
the Commission will be forced merely to make
gradual adjustments to the current, fragmented
systems and not take advantage of the opportu-
nity for rationalisation which would be provided
by an in-depth reform of the management infor-
mation systems that ultimately lead to entries in
the accounts (11).

(a) The Commission has established an accounting stan-
dards committee,
in accordance with its action plan
referred to in the Court’s point 1.7, the members of which
include two internationally renowned experts in public
accounting standards, and in which representatives of the
Court of Auditors participate as observers. This commit-
tee is examining the issues mentioned by the Court, and
the standards to be adopted by the Accounting Officer
will fully reflect this committee’s opinions.

(b) The Financial Regulation requires that accrual account-
ing be introduced by the year 2005. The Commission’s
first priority when modernising its accounting systems is
to respect this deadline. The Commission’s other aim is
that the central system should integrate all accounting
functions and provide all services with extensive informa-
implementation of their pro-
tion on the financial
grammes, projects and commitments. This second aim
may be reached over a longer time-scale, as mentioned in
the Commission’s action plan. Given the specificities of
its many heterogeneous activities, there will still be a
need for local information systems in certain services but
these will not have any accounting function.

(a)

(b)

(8)

In many areas, the Commission is often only able to
record invoices and applications for payment which it
often receives long after work has been carried out or ser-
vices rendered.

(9) See in this connection the provisions of Article 133(2) of
the Financial Regulation of 25 June 2002 (OJ L 248,
16.9.2002, p. 1).

(10) A system cannot be assumed to be an accruals-based sys-
tem as long as the economic event that gives rise to an
entry is not always the same one that underlies the entries
in the accounts.

(11) To be precise, a new integrated system applying the soft-
ware currently in use and retaining or developing local
systems within the existing architecture. In addition, it is
laid down in the action plan itself that between now and
2005 the accruals data will not all be taken from the cen-
tral accounting system.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Reliability of the accounts

1.9. The Court’s observations concern the final con-
solidated annual accounts for the 2002 financial
year drawn up by the Commission in compliance with
the provisions of
Financial Regulation of
25 June 2002 (12).

the

Observations concerning the consolidated statements on
the implementation of the budget

Provisional components of the implementation of the budget

1.10. Certain transactions are likely to be corrected at
a later date by the Commission’s services or by the
Member States. In the course of subsequent financial
years checks may lead to corrections, which will only be
recorded at the time they are made. Such corrections
may arise, for example, in the context of the procedure
for clearance of the EAGGF-Guarantee paying agencies’
accounts (see paragraphs 4.60 to 4.62), sometimes sev-
eral years after the end of the financial year concerned.
In the case of the VAT and GNP own resources, the pro-
visional amounts are adjusted during subsequent finan-
cial years in terms of the final information for the finan-
cial year in question. These adjustments may be decided
up to the end of the fourth year following the financial
year in question (13). Lastly, this is the case in the con-
text of the closure procedure for projects and pro-
grammes (internal policies, external actions and Struc-
tural Funds) when adjustments are made to allow for
ineligible expenditure.

1.11. The possibility of such corrections is not cur-
rently acknowledged in the end-of-year accounts. In
order to make readers aware of the scale of possible cor-
rections, the amount involved in corrections made in
previous financial years to entries for the most impor-
tant areas could be mentioned in a note to the annual
accounts. Apart from these ‘clearances’, which finalise
the amounts of expenditure or revenue for past finan-
cial years, there are other uncertainties that may affect
the accounts temporarily, for example, the reservations,
amounting to some 300 million euro, issued by the
bodies certifying the accounts of the agricultural pay

(12) Article 129(3) and Article 181 of Council Regulation (EC,

Euratom) No 1605/2002.

(13) Except where questions have been raised either by the
Commission or by the Member States within the four-
year period. In such cases there is no deadline.

1.11. The Commission will analyse the best method of
including explanations of these matters in the consolidated
annual accounts.

Any corrections arising from Certifying Body reservations and
the exclusion of certain accounts from the financial clearance
decision (disjunction) are dealt with in identical fashion to the
conformity corrections. The accounts can only recognise the
amounts recovered when the Commission’s decision is final.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

ing agencies (see paragraph 4.8(b)). Another source of
uncertainty is the fact that the Commission excluded
from its financial clearance decision for the 2002 year
paying agency accounts representing a quarter of the
expenditure declared for the 2002 financial year, pend-
ing further information or the finalisation of certain
audit work (see paragraph 4.58(a)).

Budget revenue

1.12. A number of observations relating to the record-
ing of own resources are to be found in paragraphs 3.4
to 3.13, 3.37 and 3.55.

Expenditure (commitments and payments)

Agricultural expenditure — Modulation

In the context of

1.13.
the common agricultural
policy (14), the Member States have the possibility of
reducing the payments due to farmers under certain aid
schemes and using the sums thus withheld to finance
additional rural development measures. The amounts
retained must be used by each Member State before the
end of the third financial year following the one in
which the sum was withheld. After that date any unused
funds are returned to the Community budget.

1.14. The effect of this system (known as ‘modula-
tion’) is to subtract from the funds for aid schemes under
heading 1a of the financial perspective, amounts which
appear under similar headings in the consolidated state-
ments on the implementation of the budget, and, in
reality, to allocate them to rural development measures
under heading 1b. This complies with neither the prin-
ciple of specification nor the principle of annuality, both
of which apply to EAGGF-Guarantee expenditure. In
addition, the Commission’s accounts present expendi-
ture which has not yet been implemented as having
already been effected.

(14) Council Regulation (EC) No 1259/1999 (OJ L 160,
26.6.1999, p. 113) and Commission Regulation (EC)
No 963/2001 (OJ L 136, 18.5.2001, p. 4).

1.14. What the Court interprets as a de facto reallocation
of amounts from heading 1a to 1b is expressly foreseen by
Articles 4 and 5 of Council Regulation (EC) No 1259/99.

The accounting treatment of modulation will be examined in
the context of the move to accrual accounting in 2005.

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External actions

1.15. While the agreements run over several years the finan-
cial obligation of the Community is clearly broken down into
annual instalments in the basic text (financial protocol). For
this reason, in a given financial year, the Commission only
makes the commitments for the relevant instalment.

The New Financial Regulation, which came into force on
1 January 2003, provides both under Title I ‘General provi-
sions’ and Title II ‘Implementation of the budget’ for the pos-
sibility of annual instalments for commitments where the
action extends over several financial years, as long as the basic
instrument provides for this.

1.16. The Protocols with the Mediterranean third countries
are international treaties that cannot be wound up without the
agreement of both parties. Satisfactory progress is being made
in gradually winding up the remaining projects under these
protocols year after year.

1.15.
In the case of the international agreements in
the fisheries sector, the legal commitments exceeded the
appropriations available for 2002 by 538 million euro.
Likewise, for other external actions, the legal commit-
ments exceeded the appropriations available by 282 mil-
lion euro. These amounts are shown under the off bal-
ance sheet commitments.

1.16. At the end of 2002, the off balance sheet com-
mitments relating to the financial protocols with Medi-
terranean third countries totalled 193,4 million euro
compared to 159,1 million euro at the end of 2001.
They represent the difference between the total amount
for the signed protocols and the total commitments
entered since 1978. Some of these protocols were con-
cluded more than 20 years ago (15). The Court reiterates
the observation made in its Annual report concerning
the 2001 financial year (16), calling on the Commission
to initiate the negotiation procedure for winding up
these protocols together with the accounting commit-
ments still in abeyance (164 million euro).

Observations concerning the consolidated financial state-
ments: balance sheet

Participations and loans granted from the budget

The Galileo joint undertaking

1.17. The Galileo joint undertaking was set up on
28 May 2002, following the adoption of Council Regu-
lation (EC) No 876/2002 of 21 May 2002. The called-up
part (240 million euro) of the Commission’s commit-
ment (520 million euro) to the capital of this undertak-
ing does not appear as such on the consolidated balance

(15) Commitments in the 1970s and 1980s.
(16) Annual Report concerning the 2001 financial year, para-

graph 9.16 (OJ C 295, 28.11.2002).

1.17. The Commission will consider the various aspects
of its involvement with the Galileo programme so as to anal-
yse further the best accounting treatment for the annual
accounts of 2003. To best reflect the current situation in the
definitive accounts of 2002 and given the fact that there are
no accounts available for the joint undertaking for 2002, the
EUR 120 million paid to the programme in 2002 has been
treated as an advance payment, i.e. as an asset under the
heading ‘Sundry debtors’. The amounts committed not yet
paid (EUR 120 million) are already included in the commit-
ments not covered by carryovers of payment appropriations in

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sheet of the European Communities at 31 December
2002. Sundry creditors is also understated by 120 mil-
lion euro, corresponding to the fraction of the capital
called up by the joint undertaking that has not yet been
paid.

the off-balance-sheet liabilities. An amount has also been
included on the off balance sheet for the amounts not yet com-
mitted of EUR 280 million and an explanation added to the
explanatory notes.

ECIP

1.18. ECIP (European Community Investment Part-
ners) is a financial instrument created more than 20
years ago to support joint ventures between undertak-
ings of Community origin and undertakings in devel-
oping countries (Alamedsa (17)). In 2002, the Commis-
sion wrote off in the full residual value of the loans and
investments entered into under this financial instru-
ment. Although the Commission’s justification for this
decision is that it is a matter of prudence, the Court
considers that, in the absence of adequate analytical
information, there is a risk to the financial interests of
the Communities for the following reasons:

1.18. The 100 % reduction in value was applied because
the information required to calculate the exact value of the
participations and loans granted under the ECIP was not
available.

(a)

(b)

at 31 December 2002, the write-down (18) was reg-
istered without it being possible to identify the
constituent parts of the gross amount of 67,6 mil-
lion euro to which it applies;

in spite of the commitments it made in 2002,
investments in joint undertakings (22,9 million
euro) have still not been evaluated by the Commis-
sion, which has not made the necessary effort to
acquaint itself with the true situation.

(b) The Commission is presently establishing a coherent
approach for valuation and is collecting data from the 15
different financial institutions concerned. The conclusion
should be available in time for the 2003 accounts.

MEDIA I

1.19. The MEDIA I programme was launched at the
beginning of the 1990s to support development of the
European film industry over the period 1991 to 1995.
The aid granted takes the form of grants and loans. The
loans are only to be repaid if the revenue earned by the

(17) Asia, Latin America, the Mediterranean and South Africa.
(18) ‘Write-down’ in the sense used in Article 195 of Commis-
sion Regulation (EC, Euratom) No 2342/2002 of
23 December 2002 laying down detailed rules for the
implementation of Council Regulation (EC, Euratom)
No 1605/2002 on the Financial Regulation applicable to
the general budget of the European Communities (OJ L 357,
31.12.2002, p. 1).

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1.20.
In the case of the MEDIA programme the Commis-
sion has not written off any amounts due to it. Based on the
prudence principle, it has written down the value of the receiv-
able relating to two files where recovery orders (totalling EUR
6.8 million) have already been raised.

Furthermore, the Commission has undertaken to bring its
analysis up to date regarding the situation of all the loans
granted under MEDIA I. It should, therefore, be in a position
to present an up to date situation of these loans in the assess-
ment at 31 December 2003 after having taken actions, that
may be called for as a result of this analysis.

films reaches the set targets. Failing this, the loans are
converted into grants. The loans granted under MEDIA I
totalled 26,7 million euro at 31 December 2002.

In 2002, because of a lack of adequate informa-
1.20.
tion about certain transactions,
the Commission
recorded a write-down of 6,8 million euro. However,
the Commission has carried out no follow-up of these
transactions. The Court considers that there is insuffi-
cient justification for the 26,7 million euro and that, in
addition, any debt write-offs resulting from these write-
downs should be formally decided by the authorising
officer by delegation (19).

Eurotech Capital, Venture Consort and Joint Venture Programme

1.21. These instruments were set up in cooperation
with financial intermediaries. Community aid was paid
into venture capital funds which invested in various
industrial sectors (high-tech sectors in particular). The
amounts invested are not repaid to the Community
budget unless the project is successful. At the end of
2002 the balance for the three programmes amounted
to 19,2 million euro.

1.22. The Commission was not able to provide a
detailed valuation of its investments in these pro-
grammes. In addition, the Commission wrote off in full
the amounts invested in these venture capital funds,
even though repayments are still being made for all the
instruments. The write-downs recorded should have
been formally decided by the authorising officer by del-
egation before they were entered in the accounts.

1.22. As far as the presentation of the invested amounts in
the balance sheet of the Community is concerned, the Com-
mission considers that a write-down of 100 % is fully justi-
fied on the basis of the principle of prudence. In fact the very
nature of investments in risk capital and other high risk busi-
ness areas such as joint ventures in the CEEC and NIS coun-
tries carries an inherent potential risk of loss.

(19) See paragraph 4.6 of the charter of authorising officers
by delegation (see SEC(2000) 2203/5 of 13 December
2000).

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Amounts receivable

Recording of sundry debtors

1.23. The Commission has not yet resolved the prob-
lem of producing a complete record of sundry debtors.
In spite of the new tools which have been placed, step
by step, at the disposal of the authorising officers (docu-
mented procedures and computer applications), the
Court’s audits again showed that provisional payments
had been treated as final expenditure and that the enter-
ing of amounts to be recovered in the accounts is not
timely (see paragraphs 1.17 to 1.22 and 1.25 to 1.27).
In the absence of effective internal control procedures
for miscellaneous revenue in the authorising officers’
departments, the Court cannot obtain assurance that
the Commission’s record of amounts receivable is com-
plete and accurate. In a report submitted in March 2003,
the Commission’s internal auditor also expressed reser-
vations about the reliability of the recording procedures,
and, like the Court, considered that Action 96 of the
White Paper (20) on more effective management of the
recovery of unduly paid funds must be continued. In
this respect, it is unlikely that the reasons for lifting the
reservation which the Director-General for Budgets gave
in his declaration for 2002 will overcome the short-
comings of the procedures followed in the authorising
officers’ departments. The Court considers that the
Commission must set up a system which ensures that
all departments actually fully assess and record miscel-
laneous revenue, without delay, as soon as the relevant
economic event occurs (21).

Traditional own resources

1.23. The Commission is improving its mechanism for the
identification and recovery of debts.

It has undertaken a review of all commitment balances which
have remained open for an extended period in order to identify
overdue payments. Within the framework of the modernisa-
tion project, it will assure accounting controls over prefinanc-
ing which will assist authorising departments to identify items
for which justification is overdue.

As from 30 June 2003, it has put in place a system of regu-
lar reporting to authorising departments of forecasts of rev-
enue and of recovery orders which are overdue. This reporting
mechanism will be improved along with developments in its
IT systems.

1.24. At 31 December 2002 the established entitle-
ments recorded in the separate accounts, known as the
‘B accounts’ (see paragraphs 3.8 to 3.13), were the sub-
ject of a value adjustment of 1 136,2 million euro. This
reduction is an acknowledgement that there is doubt
about full recovery of many of the amounts receivable
entered in the B accounts. Due to the lack of detailed
informationabout the sums in question, this value adjust-
ment is only an approximate total.

1.24. As noted by the Court of Auditors, the value adjust-
ment is at present the result of an approximation based mainly
on statistics about recoveries. On 1 July 2003, the Commis-
sion tabled a new proposal
to amend Regulation
No 1150/2000, incorporating a proposal for an improved
management of the amounts entered in the B account (COM
(2003) 366 final). It is expected that a more accurate value
adjustment can be effected once this proposal is adopted.

(20) Annual Report concerning the financial year 2001, para-

graph 9.67.

(21) This is a particularly relevant field for application of inter-
nal control standard No 17 concerning supervision (see
table 1.3).

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EAGGF-Guarantee

1.25. A number of certifying bodies expressed reser-
vations concerning the exhaustiveness and accuracy of
the evaluation of the sums due to paying agencies from
those entitled to aid under EAGGF-Guarantee. The
amounts owed by these debtors were estimated to be
2 376 million euro at the end of 2002 (2 263 million-
euro at the end of 2001). The Commission applied a
write-down for irrecoverable debts totalling 1 086 mil-
lion euro, i.e. 46 % of the gross amount of the debt. The
write-down identified was that proposed by the paying
agencies. The Commission has no knowledge of the
detail of the transactions in question.

1.25. The write down created is based on an estimate of
each paying agency. The requirement for such an estimate was
introduced for the financial year 2001 for the first time. It
was then decided to review the estimate considering the lack
of experience of the paying agencies in this respect.

For 2002, the Commission considered more appropriate to
base the write down on the initial estimate, assuming that the
paying agencies were in a position to better evaluate the
chances of recoveries. The findings of the certifying bodies on
the management of debts are being dealt with in the frame-
work of the 2002 clearance procedure (‘Article 8’ letters fol-
lowing the analysis of the certifying bodies’ reports), includ-
ing, if necessary, the proposal for application of financial
corrections.

In the meanwhile, in the framework of the Task Force Recover-
ies created by the Commission in December 2002, all the
irregularity cases communicated by the Member States until
1999 are being cleared. The relevant decision will give rise to
a clear situation concerning whether the financial consequence
of the lack of recovery shall be borne by the Community bud-
get or not.

Structural Funds

1.26. At 31 December 2002, the amounts receivable
in respect of the Structural Funds were understated by
80 million euro because of an error in applying the pro-
visions relating to repayments of advances for 24 pro-
grammes still in the process of being implemented (see
paragraph 5.35).

1.26. This observation is based on a different interpreta-
tion of one provision of the regulations. The Commission does
not share the Court’s view that it ought to have requested the
repayment of the advances in these cases and therefore that
this amount is owed.

External actions

1.27. At 31 December 2002, an amount of 1 090 mil-
lion euro (22), based on a listing of the amounts held by
financial intermediaries, is shown in the balance sheet
under sundry debtors. The Commission cannot provide
the justification for the sums thus entered in the accounts

1.27. The Commission would highlight the large amount of
work it carried out in order to draw up the list of financial
intermediaries. This work will be useful for the changeover to
accrual accounting as all the relevant information will already
have been collected. From that point onwards, the use of

(22) Including 81 million euro of interest.

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and the declaration of the director-general responsible
for enlargement again includes a reservation concern-
ing the reliability of the estimate (amounting to 519 mil-
lion euro). These uncertainties stem from the lack of an
accounting system which allows valuation of the actual
use, by financial intermediaries, of the sums paid by the
Commission. In previous annual reports (23), the Court
has already pointed out that the Commission should set
up an appropriate accounts monitoring system.

1.28. The Commission stated in reply to the Court’s
previous observations (24) that it would follow up, as
appropriate, a recovery order for 3,05 million euro
issued in 1999 to a bank which had not made the pay-
ments due, as stipulated, to one of the Commission’s
partners in the field of external aid. The only develop-
ment on the file, however, is a request for an opinion
from the Legal Service of the Commission, to which
there was still no reply at the end of June 2003.

Interest on advances and payments on account to third parties

non-accounting records will be minimal as the New Financial
Regulation requires that prefinancing payments be identified.
The financial statements received from the national authori-
ties are certified by them, and are accompanied by extracts
from the bank accounts.

In the framework of the modernisation project for the account-
ing systems, an accounting standard for prefinancing pay-
ments is being prepared. The improvements to the IT systems
will allow for the correct bookkeeping and clearing of the pre-
financing payments.

1.28. After a thorough analysis of the legal situation, con-
tacts between the Commission services and the debtor took
place with a view to achieving an amicable settlement of the
case. Further procedural steps are being envisaged with a view
to obtaining recovery of the debt in question.

In its Annual Report concerning the 2001 finan-
1.29.
cial year (25), the Court pointed out that the interest
yielded by funds deposited with financial intermediar-
ies had not been recorded as budgetary revenue. As at
31 December 2002, the unrecorded interest for the
financial year (see paragraph 1.27) amounted to 15 mil-
lion euro, increasing the total interest still to be recorded
to 54 million euro. Where the interest received is used
to finance expenditure on actions and programmes,
these transactions are not included under budgetary
expenditure, which distorts the figures for the actual
Community contribution.

1.29. While not all the interest generated by pre-financing
payments made to third parties was recorded as budgetary
revenue, all interest due has been included in the general
accounts and the balance sheet.

A new accounting procedure for this interest has been foreseen
by the New Financial Regulation, which applies from 1 Janu-
ary 2003 onwards and the Commission is committed to its
implementation and thus to the correct accounting treatment
of this interest in the future.

(23) Annual Report concerning the financial year 2000, para-
graph 9.7 (OJ C 359, 15.12.2001) and the Annual Report
concerning the financial year 2001, paragraph 9.25
(OJ C 295, 28.11.2002); the Court considered it advisable
for the Commission to obtain certification of the data in
question by an independent auditor.

(24) The Commission’s reply to paragraph 9.26 of the Annual
Report concerning the financial year 2001 and para-
graph 5.65(d) of the Annual Report concerning the finan-
cial year 1998 (OJ C 349, 3.12.1999).

(25) Annual Report concerning the financial year 2001, para-

graph 9.27.

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Joint Research Centre

1.30. An amount of 16,4 million euro relating to
advances of VAT in connection with purchases by the
Karlsruhe and Petten establishments of the Joint Research
Centre appears in the claims on Member States. This
amount covers transactions in the period 1998 to 2002.
The Commission is unable to obtain recovery of these
sums, because its accounting system does not allow it
to provide the two Member States in question with the
detailed information which they need in order to reim-
burse the VAT. At the end of 2002 the Commission had
neither recorded a write-down for a doubtful debt nor
raised with the authorities in the Member States in
question the possibility of effecting recovery by means
of an alternative ad hoc procedure.

1.30. Due to technical problems that accompanied the
introduction of a new accounting system the backlog in VAT
reimbursement can only be eliminated now that this new sys-
tem has become fully operational. Since there is no prescrip-
tion for Commission reimbursement claims provided for in the
application agreements of the Protocol with the Member
States concerned, the Commission considers that these debts
can still be recovered and that these debts do not need to be
written down. The Commission agrees, however, that recovery
has become a very urgent matter even without such time lim-
its. This is why the Commission has undertaken efforts dur-
ing the last months to guide and facilitate the necessary recov-
ery actions. Furthermore, the IT systems have now been
enhanced to give the level of detail required for the recovery of
VAT payments made to Members States. The Commission
will therefore be submitting supported requests to both the
German and Dutch tax authorities to recover VAT advanced
since 1998.

1.31. A new accounting standard for pensions is currently
being prepared as part of the modernisation of the account-
ing systems project. This will be discussed by the Accounting
Standards Committee. The Commission feels that it would be
more appropriate to deal with this issue in the accounts when
the standard has been adopted to avoid making numerous
changes in the meantime.

Provisions for liabilities and charges

1.31. The provision for pension rights increased by
27 % in 2002, from 15 300 million to 19 500 million
euro. This increase covers a reduction in the discount
rate (2,28 % at 31 December 2002 compared to a rate
of 3,35 % at the end of 2001). In its annual report for
the 2001 financial year (26), the Court considered that
the way in which pension rights were treated in the
accounts was inappropriate. In effect, it consists of
entering a provision for pensions in the balance sheet
under liabilities, to be deducted from the economic
result and, as a counterpart, an amount receivable from
the Member States which guarantee payment of the
pensions. This neutralises, ipso facto, the impact on the
economic result. Pending the adoption of a definitive
method by the Commission’s accounting officer, fol-
lowing an opinion by the advisory committee for
accounting standards (see paragraph 1.7), the Commis-
sion has retained this presentation for the 2002 finan-
cial year.

(26) Annual Report concerning the financial year 2001, para-

graph 9.17.

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1.32. The amount of the provision is based on an
update, according to a simplified model, of an actuarial
study made in 1997. Until such time as a completely
new actuarial study has been carried out (one is sched-
uled for 2003), the reliability of the amount entered in
the balance sheet cannot be verified (27).

1.32.
For the calculation of pension rights, the Commis-
sion employs an expert to carry out a full actuarial study
every five years. Besides this five-yearly analysis, the figures
are adjusted every year, using the method suggested by the
expert, on the basis of changes in interest rates.

Following independent expert advice received the Commission
is awaiting the results of the latest valuation (end 2003) to
verify if the simplified approach used in calculating the changes
in the provision is appropriate.

1.33. There was a calculation error in respect of the depre-
ciation of stocks due to the use of an erroneous coefficient for
purchases in September.

1.34. The presentation of the ‘Appropriations to be carried
over’ in the annual accounts of the Commission will be analy-
sed as part of the project to establish the accounting stan-
dards. The Commission feels that it would be more appropri-
ate to make changes when the standard has been adopted and
new information about the expenses cycle will be available.

1.35. The Commission agrees with the Court’s finding. It
points out that under the new accounting standards currently
being developed, such amounts will be shown under other bal-
ance sheet headings and revenue and expenditure not booked
will be treated as it should using the accrual principle. The
Commission feels that it would be more appropriate to make
such a reclassification when the standard has been adopted to
avoid making numerous changes in the meantime.

1.33. As a result of a calculation error, the additional
depreciation of stocks from agricultural intervention
measures has been understated by 17,4 million euro. In
doing this the potential loss on disposal of the stocks,
which is included among the off balance sheet commit-
ments, has been over-stated by the same amount.

Current liabilities

1.34. An amount of 4 847 million euro is included as
payment appropriations to be carried over under cur-
rent liabilities. This includes an amount of 3 254 mil-
lion euro (28) which is in the nature of a provision, in
that it has been calculated as a global amount based on
expenditure estimates by the Member States and the
reliability of those estimates is the subject of reserva-
tions by Commission services. In view of the unusual
global character of the estimate, presenting these pay-
ment appropriations to be carried over under current
liabilities is inappropriate.

Transitional accounts

1.35. Sums of 91,1 million euro and 714,9 million
euro appear under the transitional account headings on
the assets and liabilities sides of the consolidated bal-
ance sheet. These accounts contain transactions of vari-
ous kinds and the amalgamation that this entails
adversely affects the transparency of the information.
For example, the assets side includes revenue to be col-
lected (12,5 million euro), charges entered in advance
(63,1 million euro) and expenditure to be charged (15,5
million euro). On the liabilities side the item includes

(27) Annual Report concerning the financial year 2001, para-

graph 9.30.

(28) The breakdown of this amount between the budget head-
ings concerned is not supported by any specific informa-
tion about the actions actually in progress.

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carryovers of appropriations (147,5 million euro), rev-
enue not booked (515,3 million euro) (29), and amounts
owing to the European Investment Bank (51 million
euro). These various items should be reclassified accord-
ing to their nature under other balance sheet headings.
Revenue and expenditure to be recorded should not
appear on the end-of-year balance sheet, but should be
included in the accounts of revenue and expenditure (30).

Legality and regularity of the underlying transactions

Own resources

1.36. The scope of the Court’s audit work was subject
to the limits explained in paragraphs 3.5 and 3.35.

1.37. An examination of the work done by the Com-
mission’s traditional own resources control unit showed
that the unit has well-established working methods, that
the selection of investigations is based on risk analyses
and that each Member State receives at least one visit
per year (see paragraph 3.15). However, it is not the task
of this unit to provide assurance that resources have
been fully identified and established (see paragraph 3.17).

1.38. With regard to the systems for collection of cus-
toms duties for freight arriving at European airports,
the Court noted that a number of customs services did
not devote enough attention to the risks of omission or
incorrect treatment of the imported goods (see para-
graph 3.34).

1.38. The Commission is working with the Member States
to improve the exchange of risk information between the major
EU airports. Risk information relating to financial and non-
financial risk categories is being exchanged directly between
the customs services located in EU airports and this system
will continue to be developed in partnership between the Com-
mission and the customs services of the Member States.

1.39. As regards the VAT and GNP own resources,
national procedures do not always allow the audit trail
to be followed through to the amounts notified in the
Member States’ VAT returns (see paragraph 3.44). The
Commission’s VAT inspections revealed shortcomings
in the recording of the bases required to calculate the

(29) Includes 387 million euro corresponding to advance col-

lection of own resources for two Member States.

(30) In view of their incidence on carryovers of appropria-

tions.

1.39. The Commission has replied in detail to the Court’s
observations in Chapter 3, and in particular in its replies to
paragraphs 3.44, 3.45, 3.51, 3.52 and 3.57. The Commis-
sion will examine the problems raised by the Court regarding
audit trails, the recording of VAT payments and the nature of
GNP controls with a view to taking measures to ensure that
the data communicated by the Member States meet the high-
est possible standards.

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amounts owed by the Member States (see para-
graph 3.37), as well as delays in forwarding data, which
hampered inspection activities (see paragraph 3.39).
The Commission’s checks in respect of GNP contribu-
tions focus mainly on methodological questions with-
out any standardised control procedures having been
set up (see paragraphs 3.40, 3.41 and 3.51). In this area,
controls should be intensified in order to improve the
reliability of the calculation of the most important own
resources (see paragraph 3.57).

1.40. Subject to the above observations, the work car-
ried out by the Court on the supervisory systems and
controls and on the underlying transactions and data
did not reveal any material errors affecting the legality
and regularity of own resources (see paragraphs 3.34
and 3.55).

Common agricultural policy

1.41.
In the agricultural field, the Court examined the
system for certifying the annual accounts of the paying
agencies for the 2002 financial year, as well as the
operation of the integrated administration and control
system (IACS) administered by the same paying agen-
cies. This work completed the verification, with the final
beneficiaries, of a sample of payments covering the
whole of heading 1 of the financial perspective. The rel-
evance of the declaration by the Director-General of the
Directorate-General for Agriculture in respect of the
transactions of the year 2002 was also studied. As the
declaration relies, to a large degree, on information
relating to financial years previous to 2002, it is still of
only limited use in the context of the Court’s Statement
of Assurance (see paragraphs 4.18 to 4.20). Whilst it is
accepted that agricultural expenditure is subject to spe-
cial procedures relating to the clearance of accounts, the
fact nevertheless remains that there are other sources of
information that would make it possible for the Director-
General for Agriculture’s declaration to be based, to a
greater extent, on an assessment of the legality and
regularity of the transactions for the year for which the
declaration is issued.

1.41. Article 53.5 of the new Financial Regulation pro-
vides that ‘In cases of shared or decentralised management, in
order to ensure that the funds are used in accordance with the
applicable rules, the Commission shall apply clearance-of-
accounts procedures or financial correction mechanisms which
enable it to assume final responsibility for the implementa-
tion of the budget in accordance with Article 274 of the EC
Treaty and Article 179 of the Euratom Treaty’.

Thus, the assurance on the EAGGF Guarantee can be based
on the existence of an effective clearance of accounts procedure.
The fact that corrections are decided some years after the year
of the expenditure concerned is an integral part of the clear-
ance procedure. The correction mechanism is completed by the
assurance which can be gained from the accreditation of pay-
ing agencies, the annual certification procedure and the IACS,
which permit a great deal of reliance on the control over the
expenditure declared.

In the Annual Activity Report 2003 Directorate-General for
Agriculture will present in more detail the functioning of the
clearance procedure and of the control systems related to the
transactions of the financial year for which assurance is given.

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1.42. Although the certifying bodies provide the Com-
mission with useful information about the operation of
the paying agencies, they are only required to certify
whether the paying agencies’ management and infor-
mation systems are capable of ensuring that payments
are effected correctly (see paragraph 4.8(d)). This being
the case, their conclusions provide only limited assur-
ance when it comes to evaluating the legality and regu-
larity of the payments to final beneficiaries.

1.43. Apart
from the case of Greece (see para-
graph 4.17(c)), IACS is an appreciable source of infor-
mation in respect of the legality and regularity of approxi-
mately 58 % of EAGGF-Guarantee payments. In the
sub-field covered by IACS, there is a lower risk of error
for arable crops than for animal premiums (see para-
graph 4.49(b)).

1.43. The insufficient implementation of the IACS in Greece
has been addressed by the Commission both through legal
proceedings and financial corrections imposed within the clear-
ance of account procedure. The Commission has in 2003 put
in place a particular follow-up of the implementation of the
IACS in Greece to support the effort made by the Greek pay-
ing agency (OPEKEPE) to rectify the situation.

1.44. As regards expenditure which is not covered by
IACS, for example aid paid in relation to quantities pro-
duced (olive oil, cotton, tobacco and dry fodder), rural
development aid, export refunds or intervention stor-
age, the Court found, for 2002, control weaknesses and
lack of plausibility. The Court also found errors affect-
ing, amongst other things, payments relating to storage
of grape must and support for bananas and dried grapes.
The aid for replanting vineyards was subject to special
risks (see paragraphs 4.34 to 4.42). The shortcomings
which the Commission found in the execution of Mem-
ber States’ ex post checks for some of the measures in
question mean that the Court cannot use the results of
those checks in the context of its Statement of Assur-
ance (see paragraphs 4.46 and 4.47).

1.44.
Issues arising concerning bananas, dried grapes and
the storage of grape must continue to be dealt with under the
clearance of accounts procedures, with corrections proposed
where appropriate. The same approach is adopted where
Member States’ physical and documentary checks (Regulation
386/90) or the a posteriori controls (Regulation 4045/89)
are found to be inadequate. The Commission also makes rec-
ommendations for further improvements and provides feed-
back on information received from Member States.

1.45.
In general terms, the Court found that common
agricultural policy expenditure was materially affected
by errors. However, it also emerged that there are varia-
tions between the main categories of agricultural expen-
diture as regards the risk affecting their legality and
regularity. Arable crops are less exposed than animal
premiums, while the other categories of expenditure are
exposed to a more critical level of risk and are subject
to less efficient controls (see paragraph 4.49).

1.45. The Commission has sought to switch support to
direct payments to farmers as, inter alia, such a change in
policy limits the risk to the Fund and helps to protect EU tax-
payers’ interests. For the other categories of expenditure the
Commission has imposed, wherever appropriate, compatibil-
ity with IACS, thereby allowing cross checks. Dissuasive sanc-
tion systems have been introduced in the relevant schemes
(fruit and vegetables, tobacco, dried grapes, etc).

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Structural measures

In 2002, the directorates-general responsible for
1.46.
the Structural Funds worked to improve the supervi-
sory systems and controls. Progress was noted in the
organisation of the Commission’s departments (see
paragraph 5.53). Nevertheless, there were still short-
comings in the implementation of the internal control
standards (see paragraphs 5.7 and 5.8) and in the appli-
cation of the procedures for repayment of unused
advances (see paragraph 5.35).

1.46. The Commission has undertaken to implement the
internal control standards as soon as possible and, as the
table annexed to Chapter I shows, is already in the process of
implementing them where there are still shortcomings. It will
ensure that they are applied. The Commission considers that
any remaining deficiencies identified do not seriously put in
doubt the quality of its internal control systems.

On the issue of repayments of unused advances, see the Com-
mission’s reply to paragraph 1.26.

1.47.
In a shared management framework the main
supervisory systems and controls on the implementa-
tion of the Community budget are located in the Mem-
ber States. The Court’s audit confirmed that there are
still weaknesses in these systems (see paragraphs 5.15 to
5.32).

1.47. Through its own audit work in the Member States,
the Commission has found that in general Member States
have made significant improvements both in relation to the
systems for closure of 1994-1999 programmes and for the
implementation of the 2000-2006 period. However, further
improvement is necessary in some cases and the Commission
will take the necessary steps to ensure that weaknesses are cor-
rected.

1.48.
For example, there was found to have been little
progress on the closure of the various forms of inter-
vention from the 1994 to 1999 programming period
(see paragraphs 5.16 to 5.21). The introduction of Regu-
lation (EC) No 2064/97 for the 1994 to 1999 program-
ming period was hampered by a delay in the dis-
tribution of adequate guidelines, which led to
misinterpretations on the part of the Member States. It
also meant that the necessary systems were not set up
in time for them to be fully effective before programmes
were closed. Although the Commission increased the
number of inspections carried out in the Member States,
these did not provide it with the required guarantees as
regards the legality and regularity of the transactions in
the 1994 to 1999 programming period (see para-
graphs 5.16 to 5.21).

1.48. The slower than expected progress achieved in clos-
ing 1994-1999 programmes in 2002 was due to the fact
that for most programmes Member States only submitted clos-
ure documents shortly before the deadline of end-March 2003.

After the adoption of Regulation No 2064/97 the Commis-
sion did provide detailed guidelines in plenty of time on the
key aspects of application, particularly in the audit manual
for the Structural Funds, and on the requirements for the clos-
ure of the 1994-1999 programmes. It has also carried out a
great many audits to check that the necessary systems have
been put in place. This process will continue with the verifica-
tion of the final documents and ex post audits of a sample of
the programmes completed.

1.49.
In general terms, Regulation (EC) No 438/2001
provides a framework which favours improvement of
the control systems for the programming period 2000
to 2006 (see paragraphs 5.26 to 5.32). The Court’s audit
nevertheless revealed a repetition of errors of the same
type and with the same frequency as in previous years.
The Commission should therefore intensify its on-the-
spot checks on the implementation and sound opera-
tion of the supervisory systems and on the legality and
regularity of the underlying transactions (see para-
graphs 5.39 to 5.41).

1.49.
From the substantial work that has been carried out
for the 2000-2006 period, the Commission has been able to
conclude that Member States have in general made significant
steps in improving their systems. However, there are certainly
further improvements required, and the effective functioning of
the systems needs to be regularly verified. The Commission
will pursue its audit strategy to achieve this aim in order to
provide a basis for assurance as to payments made by the
Funds.

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Internal policies

1.50. The Court’s audit revealed delays in the imple-
mentation of some internal control standards by
directorates-general responsible for internal policy
actions (see paragraphs 6.14 to 6.16).

1.50. The implementation of internal control standards is
a matter for each directorate-general and is explained in the
annual activity reports.

1.51. At Commission level, the audit did not reveal
any material errors. This is due to the fact that the Com-
mission can only check the reasonableness of the expen-
diture declared (see paragraph 6.21).

1.51. Only full financial audits can determine with cer-
tainty and exactitude the correctness of the costs claimed by
beneficiaries and the conformity with the provisions of the
research contracts. It is for that reason that the Commission
has substantially reinforced its audits on the level of benefi-
ciaries since the launch of the Fifth Framework Programme.
For the Sixth Framework Programme cost claims by benefi-
ciaries will need to be certified by independent auditors.

1.52. On the other hand, on-the-spot audits carried
out by the Commission itself or on its behalf showed a
large number of over-declarations of expenditure by the
final beneficiaries of indirect research contracts (see
paragraph 6.50). The volume of errors found confirms
the findings of audits carried out by the Court in recent
years. To a large extent these errors are a consequence
of the rules governing the research framework pro-
grammes, and there is a fair risk that they will persist if
the rules are not changed (see paragraph 6.58). The
procedures for recovery of unduly paid sums also proved
to be slow (see paragraphs 6.51 and 6.52).

1.52.
In an effort to reduce the number of errors in the dec-
larations of expenditure, an action plan following on from
Action 1 of the synthesis of the annual activity reports for
2001 was put into effect in January 2003. The rules on
managing the research framework programmes were essen-
tially laid down by the legislator (Parliament and Council).

As regards the recovery of sums paid in error, the Court’s
investigations concern only one directorate-general. As part of
the reform, work is being undertaken at Commission level to
improve recovery procedures.

1.53. The Court’s work on the TEN-T (31) showed that
the Commission’s decisions to grant aid were flawed in
form (see paragraphs 6.25 to 6.27) and that deficien-
cies were affecting the implementation of controls (see
paragraphs 6.28 to 6.32).

(31) Trans-European transport network.

1.53.
Further to the recommendations made by the Court
last year, the Commission took immediate steps to improve
the standard text of the 2002 Decisions, in particular, the
technical annex, as mentioned above. From 2003 onwards
the final beneficiaries also will be informed by the Commis-
sion of the financial Decisions awarded. Further improve-
ments continue to be developed within the new version of the
Commission decision 2003 for the Multiannual Indicative
Programme (MIP) and mainly the clarification of each part-
ner involved in the implementation of the project and in the
using of funds.

Necessary action to considerably increase the number of ex-post
audits have been taken. In addition to the normal on-the-spot
ex-post controls before releasing the final payment, a frame-
work contract with an external audit company (to be

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operational end 2003) together with the reinforcement of the
Directorate-General’s financial audit cell will allow an increase
in the number of ex-post audits undertaken on TEN-T projects.

1.54.
For 2002, the Court’s observations confirm its
conclusions from previous years, namely that the trans-
actions in the area of internal policies are still affected
by significant errors in respect of their legality and of
their regularity at beneficiary level (see paragraphs 6.57
and 6.58).

1.54.
In an effort to reduce the number of errors in the dec-
larations of expenditure, an action plan following on from
Action 1 of the synthesis of the annual activity reports for
2001 was put into effect on 1 January 2003. The synthesis
of the annual reports and declarations by directors-general for
2002 also provides for a joint financing operation, which will
look into the possibility of introducing flat-rate elements into
the subsidies so that, for example, checks can focus on the
situations involving the highest risks. The measure would also
involve developing common standards for risk management
and the assessment of the costs and benefits of control activi-
ties.

External actions

1.55.
In 2001 the reorganisation of the departments
responsible for external aid focused on the redistribu-
tion of tasks between headquarters’ departments and
delegations. This is a lengthy exercise, and 2002 was a
year of transition. Although most of the supervisory
systems and controls were in place by the end of 2002,
they had not all been operational for the full year (see
paragraph 7.3).

1.55. The major improvements in procedures and struc-
tures, which began in 2001, continued in 2002 and 2003.

1.56.
Few errors were found in the transactions at
headquarters and delegation levels, even though inter-
nal control weaknesses were found there. A fairly large
number of irregularities was found among the bodies
responsible for carrying out development aid projects.
These irregularities were usually contraventions of con-
tract provisions, especially those concerning tendering
procedures, the probative value of supporting docu-
ments and the eligibility of expenditure (see para-
graphs 7.34 and 7.43).

1.56. Measures have been taken to address the concerns of
the Court, in particular through the application in 2003 of
new standard contracts. Any request for intermediate and
final payments under these contracts must be accompanied by
duly audited accounts. The Commission is aware of the need
to ensure implementing organisations understand and follow
contract provisions accurately. The transfer of management
responsibilities to delegations should allow better monitoring
of implementation on the ground.

implementing actions

1.57.
In the area of humanitarian aid an audit approach
was introduced in 2002 whereby the bodies responsible
for
frequently non-
governmental organisations) are subject to systematic
audits (see paragraph 7.9). In the area of development
aid the number of audits relating to operations financed
by the general budget increased, but remains moderate.

(most

1.57. The annual external audit plan for 2003 aims at the
development and implementation of a methodology for ‘audit
of external operations’ and work was set in hand to develop a
coherent and comprehensive audit strategy.

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No overall strategy for the recourse to and follow-up of
audits was adopted (see paragraph 7.10).

It is composed of two parts: a first that focuses on the support
function of the ‘external audit’ unit of the Office and a second
that lays down a list of projects and programmes to be audited.

The horizontal actions by the ‘external audit’ unit include the
development of a methodology for external audits and the set-
ting up of a training programme for officials at headquarters
and in delegations.

The implementation of the 2003 audit programme should
address many of the concerns expressed by the Court.

1.58. All the necessary supervisory and control systems
were in place in 2002 to give reasonable assurance as to the
legality and regularity of transactions effected by EuropeAid
in 2002.

1.59. The Commission is tightening up its controls, is car-
rying out further training measures and issuing instructions
to its delegations in candidate countries.

1.58. The Court’s audit showed that, in 2002, the
Commission’s supervisory systems and controls were
not yet sufficiently developed for them to provide it
with assurance as to the legality and regularity of the
underlying transactions at the level of the bodies respon-
sible for carrying out development projects (see para-
graph 7.43).

Pre-accession aid

1.59.
In the area of preaccession aid, the Court exam-
ined, for each of the three programmes Phare, ISPA and
Sapard, the quality of the supervisory systems and con-
trols (see paragraphs 8.3 to 8.5, 8.14 to 8.22, 8.23 to
8.26) and a sample of transactions at the level of ben-
eficiaries of Community funds (see paragraph 8.38). In
addition, it analysed the audits and checks carried out
by the Commission (see paragraphs 8.6 to 8.9, 8.14 to
8.22 and 8.24 to 8.29) and by the paying agencies in
the candidate countries within the framework of these
programmes (see paragraphs 8.12, 8.13, 8.30 and 8.31),
and also examined the declarations of the directors-
general (see paragraphs 8.32 to 8.37). The Court noted
that, although the errors found did not have a signifi-
cant impact, it appeared that further improvements to
the supervisory systems and controls set up by the
Commission were still necessary (see paragraphs 8.45
to 8.49).

Administrative expenditure

1.60. The Court’s audit revealed weaknesses in the
operation of the supervisory systems and controls in
the institutions audited (see paragraphs 9.5 and 9.12).
Shortcomings were also noted in the implementation
of internal control standards by the Directorate-General
for Administration (see paragraphs 9.6 to 9.11 and 9.26
and 9.27).

1.60.
In his 2002 Annual Activity Report, the Director
General of Directorate-General for Personnel and Administra-
tion does indeed mention the existing weaknesses in the
implementation of the Internal Control Standards, but a
remedial plan was approved (see 9.6) and individual points
were addressed (see 9.26. and 9.27.).

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Supervision, control and risk assessment can always be refined,
strengthened and updated, and Directorate-General for Per-
sonnel and Administration will consider the Court’s sugges-
tions to improve its risk assessment methodology.

1.61. Apart from these weaknesses, the Court’s find-
ings for 2002 confirm the conclusions concerning pre-
vious years, that the transactions relating to administra-
tive expenditure are not, on the whole, affected by
material errors (see paragraph 9.28).

Reform of the Commission’s internal control system

1.62.
In the context of the Statement of Assurance
(DAS) for the 2001 financial year the Court examined
the progress of the administrative reform of the Com-
mission (32) and concluded that it would have to wait
for the reform to take effect fully before it could evalu-
ate the impact of
the reform on its own audit
approach (33).

1.63. For the 2002 year, the Court continued its exami-
nation of the reform and sought to assess the assurance
provided by the Commission’s new internal control sys-
tem as regards the legality and regularity of the transac-
tions underlying budgetary payments. In doing so it
studied in particular:

(a)

(b)

(c)

how directorates-general’s annual management
plans were able to contribute to this assurance of
legality and regularity (see paragraphs 1.68 to 1.74);

the execution of the action plans instigated in
response to the declarations of the directors-general
for the 2001 financial year (see paragraphs 1.75
and 1.76);

the annual reports of the directors-general and
declarations for 2002 and their Synthesis (see para-
graphs 1.77 to 1.105).

(32) In January 2000 the European Parliament invited the
Commission to undertake a reform of its management.
Accordingly, on 5 April 2000, the Commission presented
its White Paper ‘Reforming the Commission’ (COM(2000)
200 final).

(33) See the Court’s Annual report concerning the financial

year 2001, paragraphs 9.48 and 9.71.

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1.64. According to Article 274 of the EC Treaty the
Commission is responsible for implementing the bud-
get. Not all operations follow the same management
model however and the impact of the Commission’s
reform varies, depending on the area in question. There
are thus several possible scenarios:

(a)

in the case of own resources, management (basis
of assessment and recovery) is delegated to the
Member States. In this instance the reform is only
concerned with supervision of the arrangements
that have been put in place;

(b)

in the case of expenditure, the Financial Regula-
tion (Article 53) provides for four separate scen-
arios:

(i)

(ii)

(iii)

the Commission has sole responsibility for
implementing actions. In this case it is act-
ing on a centralised basis (direct manage-
ment) and the reform affects all the proce-
dures for executing expenditure;

the national authorities in the Member States
have been given responsibility for opera-
tional management (EAGGF-Guarantee and
Structural Funds). In this case, management
is shared and the Commission must verify
that the national authorities’ application of
the regulations has been compliant. In this
case the Commission reform affects only the
Commission activities that are concerned
with supervising implementation;

the Commission may leave the beneficiary
States to implement certain operational
aspects once it has carried out an ex ante
control (preaccession aid). Management is
then said to have been decentralised and the
reform impacts on most aspects of manage-
ment, in the same way as when the Com-
mission calls on the services of a proxy in a
centralised management context;

(iv)

lastly, the Commission may entrust certain
operations to international organisations and
it is then a matter of joint management. In
this case the reform’s impact is the same as
for centralised management.

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The White Paper actions

Area: ‘Audit, financial management and control’

1.65. Chapter V of the White Paper ‘Audit, financial
management and control’ defined the internal control
arrangements that the Commission was to introduce
before July 2001. As of 31 December 2002 nine of the
36 actions described in that Chapter were still in progress
(see table 1.1).

Table 1.1 — Main unfinished actions in Chapter V ‘Audit, financial management and control’ of the White Paper
(Situation at 31 December 2002)

Action No

Objective

Measures still to be undertaken

66

Financial irregularities panel

74

Contracts database

78

Minimum standards for internal control

81

82

85

Strengthening the role of the directorates-
general control function (audit capabilities)

Declaration by the Director-General in her/his
annual activity report

Design of adequate internal controls and
financial processes

92

Guidelines for sound project management

95

Optimisation of early warning system

96

More effective management of recovery of
unduly paid funds

Source: Court of Auditors.

The panel was instituted by the new Financial Regulation (Article 66(4)). It is to
become operational in 2003.

The prototype of the contracts database exists. Two pilot projects have been
implemented.

The end product is expected to be in general use by the directorates-general at
the end of 2004.

The internal control standards were adopted on 13 December 2000 (SEC(2000)
2203) and amended on 21 December 2001 (SEC(2001) 2037).

Their implementation is still in progress (see paragraphs 1.81 to 1.88 and
table 1.3). Additional guidelines for sensitive functions and supervision are being
drafted (see paragraph 1.76).

A communication was adopted on 30 October 2000 (SEC(2000) 1803).

Three directorates-general stated that introduction of the audit capability is not
yet complete.

There are still shortcomings in the 2002 declarations as regards the scope of the
reservations and this makes it difficult to form a reasoned assessment of the
Commission’s management (see paragraphs 1.89 to 1.98).

Following the first stage of change in financial procedures as required by the
White Paper, various risks were identified as part of the ‘Overall assessment of
the readiness of the Commission services for integrating the new Financial Regu-
lation in their internal control systems’ procedure. On 17 December 2002 the
Commission instructed the directors-general to take steps to overcome these risks
and to inform the central financial service of any problems (SEC(2002) 1362
final).

Adoption of the guidelines was delayed by the change in the lead manager
department.

The central database for all contracts and subsidies, which is for monitoring
financial relations with beneficiaries, should be made operational as soon as pos-
sible.

Decentralisation of debit notes to directorates-general will be implemented in
2003. The audit capabilities’ observations and recommendations are to be taken
into consideration and supervision of recoveries at central level should be intro-
duced (see paragraph 1.23).

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1.66-1.67. An up-date of the White Paper action plan
implementation has been provided on a regular basis since
2000 and widely disseminated. The last Reform progress
review was produced in January 2003 (COM/2003/0040
final/2) and the Synthesis of the 2002 Annual Activity
Reports and declarations of the directors-general adopted on
9 July 2003 presents an overview of the main Reform achieve-
ments in 2002 (COM(2003)391 final). The Commission is
considering the manner in which a state of play of the reform
will be made, in order to hand over the task of consolidating
the reform to the new college.

1.66. A fair number of the actions linked to the reform
of the internal control system have medium or long
term aims which will not be achieved until after the
dates initially set. For example, for nine of the 27 areas
covered by White Paper actions that have theoretically
been completed, the targets have not yet been fully
achieved, or implementation is not yet satisfactory (34).
All these areas are also covered either by the Commis-
sion action plan of 24 July 2002 (35) (see paragraph 1.75)
or by other action plans adopted since then (36). To these
action plans can be added the various action plans
mentioned by the directors-general in the context of
their annual activity reports in reply to the reservations
set out in their declarations.

1.67.
In view of the numerous developments since
April 2000 (37), the Court considers that an update of
the White Paper would be useful, in order to have a full
picture of the targets that still have to be achieved and
to establish a revised timetable (38) taking the new con-
straints into account. This would simplify follow-up of
all the initiatives that are currently being implemented
within the overall framework of the reform of the Com-
mission’s internal control system.

Area: activity based management

1.68. Chapter III of the White Paper instituted activity
based management. It is a matter of refocusing the

(34) Actions 66, 71, 78, 80, 81, 82, 85, 95 and 97.
(35) Communication from the Commission to the European
Parliament and the Council, Synthesis of the annual activ-
ity reports and declarations of the directors-general and
heads of service (COM(2002) 426 final of 24 July 2002).
(36) See SEC (2002) 1362 final of 17 December 2002, ‘Overall
assessment of the readiness of the Commission services
for integrating the new Financial Regulation in their inter-
nal control systems’ and SEC(2002) 1378 final of
20 December 2002, ‘Commission action plan pursuant
to the recommendations of the Court of Auditors in its
Annual Report relating to the 2001 budgetary year’ and
COM(2003) 391 final of 9 July 2003, ‘Synthesis of annual
activity reports 2002 of DGs and services’.

(37) See Communication from the Commission ‘Progress
review of reform’ (COM(2003) 40 final of 30 January
2003, p. 2).

(38) For eight of the nine actions currently in progress (actions
74, 83, 87, 90, 92, 93, 94 and 96) the initial deadlines
have been exceeded.

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1.69. The allocation of resources to priorities is done through
the Annual Policy Strategy. It is based on the assessment of
the objectives and initiatives proposed by the services regard-
ing their contribution to the achievement of the priorities
defined by the college. The Annual Policy Strategy constitutes
a reference framework for the preparation of the Commission’s
preliminary draft budget.

1.70. The Annual management plans have been developed
and implemented in all services to translate the Commission’s
priorities into concrete objectives and actions with the related
resources allocations. The main function of the DGs annual
management plans is therefore to monitor the implementa-
tion of the activities through all directorates-general. Only the
major impacts on resources related to the reform of the inter-
nal control system are reflected in these plans.

1.71. The monitoring of the internal control standards
implementation is conducted through the annual activity
reports and the related declaration of each directorate-general,
and the overview reports to be elaborated by the Central
Financial Service, (see Action 5.4.5. of the 2002 Synthesis).

The resource needs estimation relating to the management
and control activities are made by the services in the frame-
work of the Annual Policy Strategy and the Preliminary Draft
Budget exercises.

Commission’s strategic objectives on its main areas of
responsibility, optimising the use of available resources
by matching the strategic objectives to services’ opera-
tional programmes and then, by means of an evaluation
process which includes indicators, assessing the impact
of the actions undertaken.

1.69. At the end of 2002, the Commission had com-
pleted the first full management cycle using its new
approach (strategic planning, programming, implemen-
tation and accounting). At that point progress had been
made in allocating resources by objectives and monitor-
ing performance against indicators.

1.70. The observations that follow analyse the role of
the annual management plans of the directorates-
general, in providing a solid foundation for the main
aspects of the reform of the internal control system
which are supposed to ensure that the underlying trans-
actions are legal and regular.

1.71.
In order to choose between allocating resources
to policy implementation or investing them in strength-
ening the internal control system (39), each directorate-
general should:

(a)

(b)

take stock of the activities that help to provide rea-
sonable assurance that the underlying transactions
are legal and regular;

link these internal control system activities to one
or more specific objectives, together with impact
indicators for measuring the progress achieved;

(c)

estimate the financial and human resources needed
for the pursuit of these objectives.

(39) See COM(2002) 426 final of 24 July 2002, p. 31.

28.11.2003

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39

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.72.
In general, the substance of the directorates-
general’s annual management plans is improving, but
interpretation of the concepts of activity, subactivity,
action, objective and indicator sometimes varies. It is
thus difficult to compare the annual management plans
and to evaluate the relative effort devoted to strengthen-
ing supervisory systems and internal controls. Further
gains could be made by improving the definition of the
indicators to be used both to measure the extent to
which the objectives of legality and regularity of trans-
actions have been achieved and to gauge the use of
resources (40).

1.72.
Important efforts have been deployed in 2002 and
are further developed to ensure a common comprehension of
the ABM concepts (training, ABM-Guide, ABM working
groups). Where the ‘activity’ concept is quite clear as it cor-
responds to the budgetary nomenclature, further effort is still
needed to clarify the notions of corresponding actions, objec-
tives and indicators. This should improve the comparability
sought by the Court.

However, it has to be stressed that the Commission does not
intend to impose a totally uniform structure for the services’
management plans, as they have to reflect their specific activi-
ties and related organisation.

1.73.
Financial and human resources are assigned to
activities without it being possible to discern which of
them are allocated to supervision, which to the internal
control systems and which to issues relating to the
legality and regularity of the underlying transactions.

1.73. As all management plans are structured following
the budgetary activities nomenclature, it is today not possible
to identify the resources that are specifically devoted to control
and issues relating to the legality and regularity of the under-
lying transactions. However, further developments are envis-
aged in the Commission’s Job Information System, which
would allow to identify the number of staff involved in man-
agement and control issues, and an investigation has been
launched to check whether in a later stage it would be pos-
sible to obtain even the full time equivalent, taking into
account the proportion of time spent on these activities.

1.74. The main objective of the management plans is
to enhance the efficiency of the Commission’s services
and so ensure that policies are implemented, but the
plans are not yet sufficiently operational as far as the
internal control system and issues relating to the legal-
ity and regularity of the underlying transactions are
concerned. If management plans are to enhance the
quality of expenditure, they must include specific objec-
tives and performance indicators for these aspects of
each directorate-general’s activity (41).

1.74. Even though the management plans are not primarily
intended for the purpose of either monitoring the internal
control standards implementation or measuring the extent to
which the legality and regularity of transaction have been
respected (see the Commission’s reply under 1.70 above), the
Commission is prepared to explore the possibility of strength-
ening the use of the management plans as operational tools
with respect to the internal control systems.

(40) The 2002 year was a transitional period during which
indicators were introduced on an experimental basis.
(41) Internal control standards: 7 objective setting; 10 moni-
toring performance against targets and indicators.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Implementation of the action plan annexed to the Syn-
thesis of the annual activity reports of the directors-
general at the Commission for the year 2001

1.75. For the 2001 year (42), the Synthesis of the annual
activity reports and declarations of the directors-general
highlighted the main difficulties encountered in intro-
ducing the reform of the internal control system and
proposed a plan of 18 actions for resolving them (13
cross-cutting actions (43) and five specific actions (44).

1.76. Progress on most actions was encouraging. Six
actions are still problematic (see table 1.2). In the case
of the cross-cutting actions the problems encountered
in 2002 essentially concerned the treatment of ‘sensi-
tive functions’, supervisory issues related to internal
control, especially the need to perfect the methods, tools
and technology of supervision (45), and the non-
inclusion of action plans in annual management
plans (46).

1.76. The Commission takes note of the table 1.2., which
concerns the situation of the actions planned in the 2001
Synthesis as at 31 December 2002. In the meantime, progress
has been achieved, or actions completed. Actions still on-
going have been included in the 2002 Synthesis’ action plan
and as concerns more specifically the inclusion of these action
plans in the annual management plans, follow up will be
strengthened under the 2002 Synthesis’ action plan.

Table 1.2 — Implementation of the action plan annexed to the synthesis of the annual activity reports and
declarations of the directors-general for 2001, actions still in progress on 31 December 2002

Action

Area

Final date for implementa-
tion

Description of action

1

2

4

8

12

18

Research programmes

End 2002

External actions

End 2002
Not set
In 2003

Structural Funds

Not set

Simplify financial management, rationalise standard contracts and reinforce con-
trols

Review reciprocal responsibilities of directorates-general responsible for external
actions
Highlight inherent risks of external actions
Evaluate the operation of decentralisation towards Commission delegations

Clarify Commission responsibilities as regards shared management of the Struc-
tural Funds

Internal control
standards

End 2002

Practical guidelines for the treatment of sensitive functions and supervision

Shared management

March 2003

Analyse difficulties associated with shared management and communication
specifying authorising officer’s responsibilities in areas of shared management

Action plans

September 2002

Include action plans in annual management plans

Source: Court of Auditors.

(42) COM(2002) 426 final of 24 July 2002.
(43) Actions 5, 6, 7, 8, 9, 10, 11, 13, 14, 15, 16, 17 and 18.
(44) Actions 1, 2, 3, 4 and 12.
(45) See paragraph 2.1.5 of the Communication ‘Overall assess-
ment of the readiness of the Commission services for
integrating the new Financial Regulation in their internal
control systems’, SEC(2002) 1362 final of 17 December
2002.

(46) For the specific actions (see paragraphs 5.9, 6.8 and 7.37).

28.11.2003

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41

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Annual activity reports and declarations of the directors-
general for the year 2002

Preparation

1.77. As of mid-2002, all the Commission directorates-
general had, for the first time, lodged an annual activity
report on the policies followed in 2001. At the end of
this first year the Court had hoped for improvements in
the guidance given by central services, in the methodol-
ogy and terminology to be used, and in the consistency
of the directors-general formulation of reservations (47).

1.78.
For the 2002 financial year, with a view to the
entry into force of the new Financial Regulation, the
Commission endeavoured to remedy the shortcomings
reported in relation to the 2001 financial year:

(a)

by drawing up instructions with the aim of clarify-
ing the methodology for establishing annual activ-
ity reports (48);

1.78. With reference to the 2002 Annual activity reports
exercise, a number of methodology points for improvement
have been identified and mentioned in the 2002 Synthesis
(section 4.4). They will be addressed through an up-date of
the guidelines for the preparation of the 2003 Annual activ-
ity reports, based amongst other on the best practises identi-
fied in the 2002 Annual reports exercise. Further details are
given under 1.90, 1.91, 1.93-1.94 and 1.95 hereinafter.

(b) by advancing presentation of the circular on the
2002 annual activity reports by four months, so
that they would not have to be drafted with undue
haste;

(c)

by introducing a peer review prior to finalisation
of the annual activity reports, in order to improve
consistency, especially as regards any reservations
expressed in the declarations.

The measures adopted helped to improve certain situ-
ations. However, it might still be useful if past experi-
ence could be turned to good effect as clarification for
the content of certain reservations or, as an illustration
of shortcomings mentioned in the body of the activity
report.

(47) Annual report concerning the 2001 financial year, para-

graphs 9.72 to 9.91.

(48) ‘The 2002 review of the implementation of activity-based
management in the Commission, including clarification
of the methodology for the establishment of annual activ-
ity reports’, COM(2003) 28 of 21 January 2003 (falls
under action 10 of the Synthesis report), and ‘Clarifica-
tion of the responsibilities of the key actors in the domain
of internal audit and internal control at the Commission’,
SEC(2003) 59/3 of 21 January 2003 (falls under action
13 of the Synthesis report).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.79. The guidelines for the 2002 financial year intro-
duced new elements into the annual reports, which in
future must:

(a)

(b)

report on progress with the implementation of
previous action plans;

specify the extent to which the 24 internal control
standards have been implemented.

1.80.
In their annual reports for 2002 the directorates-
general have on the whole reported on the situation
regarding action plans adopted in response to the 2001
annual activity reports. In many cases they note that
significant progress has been made, leading to the with-
drawal of their reservations. On the other hand, very
few directorates-general mentioned the implementation
of the cross-cutting actions provided for in the 2001
Synthesis report (see paragraph 1.75).

1.80. The Commission acknowledges that, while the report-
ing on actions planned in response to reservations made in the
2001 Annual activity reports of each directorate-general has
proved satisfactory, not all the directorates-general have given
sufficient indication on the implementation by them of the
Synthesis action plan. More precise guidelines will be issued
in this respect in the context of the 2003 Annual activity
reports.

Implementation of internal control standards

1.81.
In their activity reports all the directorates-
general gave an evaluation of the extent to which the 24
internal control standards had been implemented rela-
tive to the Commission’s baseline standard. The infor-
mation thus given was generally well-balanced (see
table 1.3).

1.81. The Commission recognises that improvement is
needed in certain areas of the internal control framework (sec-
tion 3.2. of 2002 Synthesis). A major effort is being per-
formed by the Commission directorates-general, with the sup-
port of the central services, to achieve as much as possible full
compliance with the baseline requirements of the 24 Internal
Control Standards by end 2003 (See Action 5.4.5. of the
2002 Synthesis).

The control environment

1.82.
In this area, which covers the organisational mea-
sures necessary for internal control, application of the
internal control standards was satisfactory, with the
exception of the treatment of sensitive functions (Inter-
nal control standard 5) and the management of staff
competence from the point of view of recruitment,
training and mobility (Internal control standard 3).

Performance and risk management

1.83. This area includes the essential management
aspects (programming, risk management and perfor-
mance monitoring). Around one third of directorates-
general considered that they had not yet reached the
Commission’s baseline standard for both Internal con-
trol standard 10, ‘Monitoring performance against objec-
tives and indicators’, and Internal control standard 11,

28.11.2003

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43

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44

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Official Journal of the European Union

28.11.2003

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

‘Risk analysis and management’. This corresponds to
the weaknesses identified in the context of activity-
based management (see paragraphs 1.68 to 1.74).

Information and communication

1.84. The ‘information and communication’ element
concerns all the procedures designed to provide the
necessary data for the reports on the implementation of
the budget and management plans. Only half the
directorates-general satisfied the minimum requirements
for management charts in relation to management infor-
mation (Internal control standard 12).

Control activities

1.85. This area covers the very wide spectrum of activi-
ties that provide the Commission’s authorising officers
by delegation with reasonable assurance that objectives
have been achieved and risks brought under control.
This is the area that is still posing the most problems.
Whereas directorates-general usually considered that
they had made good progress as regards the segregation
of duties (Internal control standard 16), around two
thirds of them have not yet implemented the minimum
requirements laid down as regards Internal control stan-
dards 17, ‘Supervision’, and 19, ‘Continuity of opera-
tions’. Progress was even less (20 %) in the case of Inter-
nal control standard 15, ‘Documentation of procedures’.

Audit and evaluation

1.86. Since an internal control system must provide
those responsible with reasonable assurance that activi-
ties are being carried out, in accordance with their
instructions, the results of independent audits cannot
be ignored.

1.87. Only five directorates-general said that they had
not met the baseline standards for audit reports and the
follow-up of them (Internal control standard 21). The
Court’s work nevertheless showed that this area still
calls for further effort (see paragraphs 5.44 to 5.52 and
6.61 to 6.64).

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Official Journal of the European Union

45

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.88.
‘each
Internal control standard 24 states that
directorate-general shall conduct an annual review of its inter-
nal control arrangements to act as a basis for the directorates-
general statement on internal control in the annual activity
report’. All directorates-general did this review.

1.88. As regards the systems for recording and cor-
recting internal control weaknesses (Internal control
standard 20), half the directorates-general said they met
the baseline standards. The level of progress declared
for the annual review of internal control (Internal con-
trol standard 24) is better. However, the Court’s review
still showed problems with the application of this stan-
dard (see paragraphs 5.10 to 5.14, 6.5 to 6.19, 7.35 to
7.39, 9.24 to 9.27).

Declarations of the directors-general

1.89. The declaration annexed to the annual activity
report is an affirmation by the director-general that the
internal controls introduced in the departments in ques-
tion offer reasonable assurance that the underlying trans-
actions are legal and regular. In their declarations
directors-general may highlight internal control weak-
nesses, or even the existence of irregularities. In such
cases they issue reservations and draw up an action
plan which includes deadlines for implementation.

1.90. The explanations given by the Commission in
order to clarify the concept of materiality include the
use of reservations to improve consistency. The expla-
nations provided have had a positive impact, especially
for the directorates-general that are responsible for
implementing research policy (see paragraphs 6.9 and
6.10). However, the scope of the reservations and the
formulation of the corrective action envisaged could be
further improved (see paragraphs 4.16 to 4.21, 5.10,
6.19, 7.39 and 8.32 to 8.37).

1.90. Clearer guidelines and a peer review of potential res-
ervations carried out at several levels have made it possible to
achieve the increased consistency the Court refers to. Room for
further improvement still exists, as recognised in the 2002
Synthesis (section 4.4.). Accordingly, the guidelines on 2003
Annual activity reports will seek to obtain a standard format
for the reservations made by the Directorates-General, includ-
ing information such as concrete evidence, impact on the
assurance (even though reservations will not always have a
monetary impact), the materiality criterion used and the cor-
rective action envisaged.

1.91.
In order to facilitate assessment of the actual
scope of the reservations the guidelines set the material-
ity threshold as a function of the budget for the activity
in question (49). Directors-general may deviate from this

1.91. This issue will be raised again in the updated guide-
lines for the 2003 Annual activity report and closely followed
up during the peer review of potential reservations.

(49) The materiality threshold has only been expressed in
financial terms. Three other criteria were adopted: the
extent to which internal control standards have been put
in place, the Commission’s credit and the questions raised
by the Court of Auditors and the internal audit capability
(see Communication from the Commission, ‘The 2002
review of the implementation of activity-based manage-
ment in the Commission, including clarification of the
methodology for the establishment of annual activity
reports’, COM(2003) 28 final of 21 January 2003).

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threshold if they think the context makes this necessary.
In that case the reasons for the choice of a new thresh-
old or other materiality criterion must be documented
in the activity report. Only four directors-general speci-
fied the references adopted.

1.92. All the directors-general stated that they had
obtained reasonable assurance that the resources allo-
cated to them had been used for the specified purposes
and that the internal controls which they had put in
place ensured that the underlying transactions were
legal and regular. For 22 of the 36 declarations there are
reservations limiting the assurance given by the
directors-general. For example, as in the previous year,
the Director-General for Budgets issued two reserva-
tions concerning imperfections in the Commission’s
accounting systems. The reservations concern both the
principles governing them and the IT systems that sup-
port them.

1.92. On the subject of the reservations of the director-
general for the Budget, see the reply in paragraph 1.8.

1.93. The guidelines draw attention to the fact that
the reservations must not make the declarations mean-
ingless and that, in extreme circumstances (50), it may
not be possible for a director-general to give the required
assurance. For 2002 the extent of the noted weaknesses
is, in several instances, difficult to reconcile with the
assurance expressed while, in several cases, it is not pos-
sible to assess the true impact of the reservations
expressed (see paragraphs 5.10, 5.13 and 6.19).

1.94. Reservations become meaningless if they do not
give a clear view of the impact of any material weak-
nesses identified in the activities of the directorate-
general. The reservations must, therefore, be precise in
terms of monetary value or scope. The Court noted sev-
eral cases where these conditions were not satisfied (see
paragraphs 4.19, 5.10, 5.13, 6.19 and 7.39).

1.93-1.94. The guidelines on the 2002 annual activity
report did not specify in which cases reservations would lead
the authorising officer by delegation to no longer be able to
give the required assurance. By definition, reservations expressed
limit such assurance, but the scope and the impact of a res-
ervation have to be cautiously evaluated. For example, it is
important to distinguish between the portion of the budget
administered by a directorate-general that is covered by a res-
ervation and the actual financial impact of that portion, which
is a function of the underlying operations that are affected by
shortcomings. The financial impact cannot always be quanti-
fied in financial terms. Consequently, the Commission consid-
ers that the size of the amounts covered by a reservation is not
in itself grounds for questioning the assurance given in the
declarations by the directors-general. Nevertheless, experience
over the years and further guidance, starting from the guide-
lines for the 2003 annual activity reports, will help the
authorising officers by delegation to assess in an ever more
consistent way the conclusions to be drawn from the weak-
nesses disclosed in their declarations.

(50) For example, where the reservations have a significant

impact on the directorate-general’s budget.

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1.95. Several directors-general stated that they had
obtained reasonable assurance that the control proce-
dures provided them with assurance regarding the legal-
ity and regularity of the underlying transactions, but
also declared that they did not have the requisite infor-
mation regarding the operation of certain management
or supervisory systems. On several occasions they
explained that there were serious weaknesses in these
systems (see paragraphs 4.17, 5.10 to 5.13, 6.19 and
8.36).

1.95. The existence of weaknesses in the control systems can
indeed ‘limit’ the scope of the reasonable assurance without
making it meaningless. It is the aim of the reservations to
document potential weaknesses to take into account in the
context of the assurance expressed in the declaration (See
Commission’s reply at points 1.93-1.94 for further details).
The concept of underlying operations should be refined by
identifying operations performed directly by the Directorates-
General and those carried out at national or local level.

1.96. Many directorates-general have not yet met the
baseline standard for all the internal control standards
that are supposed to guarantee the legality and regular-
ity of the underlying transactions (see table 1.3 and
paragraphs 1.81 to 1.88). The shortcomings highlighted
were the subject sometimes of a reservation, sometimes
of a simple observation or comment, without it being
possible to perceive the extent of the problems encoun-
tered (see paragraphs 4.21, 5.7 and 5.8, 6.13 to 6.16,
7.38 and 7.39, 9.26 and 9.27).

1.96. A shortcoming related to the implementation of the
internal control standards does not necessarily lead to a res-
ervation in the declaration. Its impact on the required assur-
ance can be limited. Moreover, such a weakness can be com-
pensated by other aspects of the control systems put in place.
Similar deficiencies may lead either to a reservation or to a
comment in the body of the report, according to the situation
of each Directorate-General and the appreciation of the autho-
rising officer by delegation. A more uniform approach may be
expected when all actors have gained experience and when the
peer review practice consolidates.

1.97.
For operations under shared management or
decentralised management (see paragraph 1.64) the
directors-general added reservations to their declara-
tions (51). Those reservations concerned the following:

(a)

the fact that the Commission services had not all
completed their analyses of the systems introduced
in the Member States (e.g. Directorate-General for
Employment and Social Affairs, Directorate-
General for Fisheries and Directorate-General for
Regional Policy);

(b) weaknesses in the operation of some management
systems in Member States (Directorate-General for
Agriculture, Directorate-General for Employment
and Social Affairs and Directorate-General for
Regional Policy).

(51) Directorate-General for Agriculture, Directorate-General
for Regional Policy, Directorate-General for Fisheries,
Directorate-General for Employment and Social Affairs
and Directorate-General for Enlargement.

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1.98. The Court’s audits in their turn showed that the
supervisory systems and controls of the different
directorates-general needed to be strengthened or bet-
ter utilised (see paragraphs 4.12(e), 4.50 to 4.52, 5.53
to 5.54, 8.32 to 8.37 and 8.45 to 8.49). Moreover, the
declaration of the Director-General of the Directorate-
General for Agriculture is not based on a review of
transactions relating to 2002 (see paragraph 4.18).

1.98. The 2001 Synthesis action 12 has been achieved and
will be complemented by concrete steps to promote a conver-
gence of audit methodologies and an analysis to identify pos-
sible improvements in terms of shared management respon-
sibilities (2002 Synthesis action 5.3.3.). (See also points
1.44 and 1.47 to 1.49).

The Commission’s Synthesis report for 2002

1.99. The Commission adopted the Synthesis of annual
activity reports 2002 on 9 July 2003 (52). The purpose
of the synthesis is to enable the Commission to:

(a)

take note of the main results achieved by its ser-
vices, focusing on the delivery of the annual policy
strategy for 2002;

(b)

take stock of the reform of its internal control sys-
tem;

(c)

in the light of the progress recorded, propose the
necessary corrective action;

(d)

report to the other institutions.

The observations that follow are confined to matters
relating to financial management in the wider sense of
the term.

1.100. The Commission emphasised that ‘assessment
of the overview from the directorates-general (…) shows
good progress in the implementation of the Reform as
well as improvements regarding issues identified in last
year’s Synthesis. However, a number of teething prob-
lems need to be addressed, and a better anchoring of
the new working methods put in place’ (53). The Court
shares the Commission’s view and considers that imple-
mentation of the internal control standards still requires
close attention.

(52) See COM(2003) 391 of 9 July 2003.
(53) See COM(2003) 391 of 9 July 2003, p. 4.

1.100. The Commission recognises the particular impor-
tance of internal control standards and has made them the
subject of an action under Synthesis 2002 (see section 5.4.5.).
All Commission directorates-general, assisted by the central
services, are making serious efforts to implement the baseline
requirements of the standards by December 2003.

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1.101.
ahead. In fact:

In several cases the Commission is looking

1.101.

(a)

in the context of activity-based management, the
annual reports of the directorates-general do not
yet provide full and comparable information on
their priorities, resources and indicators by activ-
ity. Similarly the audit of the legality and regular-
ity of underlying transactions is not always cov-
ered explicitly (see paragraphs 1.68 to 1.74);

(b)

as regards the accounts, the Commission offers
assurance regarding the consistency of the 2002
data. However, in view of the volume of data that
is recorded in listings, there is still a risk as regards
the completeness of the data appearing in the bal-
ance sheet (see paragraph 1.7).

(a) Although they are as complete as possible, the manage-
ment plans contain aggregated information. They were
not designed with a view to controlling the legality and
regularity of operations. However, the Commission will
look into the possibility of using the management plans
as an operational tool in conjunction with the internal
control systems. In addition, the efforts at clarification
that are currently under way should make it possible to
achieve the comparability sought by the Court. (See
points 1.72 and 1.74 above).

(b) The Commission guarantees the consistency of the 2002
data through an extensive reconciliation process. Addi-
tionally, the situation described by the ECA should be
corrected once and for all as from 2005, when, in accor-
dance with the new financial regulation and the account-
ing modernisation project all financial statements have
to be established by an integrated system in accordance
with the principle of accrual accounting.

1.102.
In order to remedy the shortcomings that were
found, the Commission has introduced a new scheme
comprising 25 actions to supplement the action plans
announced by the directors-general in their annual activ-
ity reports. Areas that call for immediate action include:

(a)

(b)

(c)

(d)

(e)

implementation of baseline internal control stan-
dards by all directorates-general before the end of
2003;

clarification of the respective responsibilities of
the Commission and the Member States in areas
of shared management;

the introduction of flat-rate elements in the calcu-
lation of grants;

evaluation of the devolution process in the area of
external relations;

coordination, as well as the organisation and work-
ing methods followed by the Commission’s vari-
ous internal audit capabilities;

(f)

the inclusion of action plans in the annual man-
agement plans of the directorates-general.

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1.103. There is a timetabling problem as regards many
of these actions, in that there appears to be insufficient
time available between the adoption of the Synthesis
report (July 2003) and the deadlines set in the action
plan. For example the new ‘Internal control standards’
action provides that all directorates-general should have
drawn up an action plan before the end of September
2003 and should aim to achieve compliance with the
baseline requirements before the end of the 2003 year.

1.103. The ambitious timetable for the Synthesis 2002
actions is an indication of the importance and urgency the
Commission attaches to their implementation. The timetable
was drawn up to ensure the implementation of the actions
under the conditions anticipated at the time the Synthesis was
adopted. The same applies to the action planned under Sec-
tion 5.4.5. of the Synthesis, for which the Commission car-
ried out a ‘Readiness assessment’ in September 2003 to iden-
tify specific problems outstanding and to achieve the maximum
possible compliance with the baseline requirements of all 24
Internal Control Standards by the end of 2003. (See points
1.81 and 1.100).

1.104. The overlap between actions advocated by the
2002 synthesis report, actions in Chapter V of the White
Paper, those in the 2001 synthesis report and those
provided for in other Commission decisions (54) makes
it difficult to carry out a specific assessment of the
progress already achieved and the action still to be
undertaken by the Commission (see paragraphs 1.66
and 1.67).

1.104. Regular progress reports on the action plan of the
White Paper have been issued since 2000. The most recent
Reform progress review was produced in January 2003 (see
point 1.67.). Synthesis 2002 also contains a review of the
actions of the previous Synthesis. Actions still ongoing have
been carried over into the new Synthesis, where necessary with
amendments or updates (see sections 5.2 and 5.3 of Synthesis
2002).

The Commission believes that the reference framework referred
to above is appropriate for ensuring coherent monitoring of
these actions. It is, however, prepared to examine the feasibil-
ity and added value of the Court’s suggestion (point 1.108)
of grouping all the action plans in a single document.

1.105. The report does not consider various problems
in sufficient depth. They include:

1.105.

(a)

the general conclusion concerning the assurance
that, taken as a whole, the control procedures that
have been put in place ensure that the underlying
transactions are legal and regular, especially those
that have cross-cutting implications for the Com-
mission and whose importance the internal audi-
tor highlighted in his annual report;

(a) The Commission fully assumes its responsibility under
Article 274 of the EC Treaty. Under the current system
the internal reporting by the authorising officers by del-
egation (annual activity report and declarations of the
Directors-General) and the external assurance as to the
legality and regularity of the underlying operations
(Article 248 of the EC Treaty) contribute to this objec-
tive. The Commission is prepared to consider any poten-
tial improvement in the framework laid down by the leg-
islature.

(54) See ‘Overall assessment of the readiness of the Commis-
sion services for integrating the new Financial Regulation
in their internal control systems’, SEC(2002) 1362 final of
17 December 2002, and ‘Commission action plan pursu-
ant to the recommendations of the Court of Auditors in
its Annual Report relating to the 2001 budgetary year’,
SEC(2002) 1378 final of 20 December 2002.

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(b)

the White Paper actions that are linked to fraud
control, and the specialist group on financial irregu-
larities in particular, ‘the imperviousness of legisla-
tion and contract management to fraud’ and opti-
misation of the early-warning system.

Conclusion

Follow-up of the annual activity reports and the synthesis of them in
the DAS context

1.106. The annual activity reports and declarations of
the directors-general, together with the Commission’s
Synthesis of them, are management representations and
the Court cannot disregard them in the statement of
assurance context. The lodging of these declarations is
thus an advance that will probably affect the Court’s
audit approach. It is therefore important for their scope
to be free of ambiguity as regards the treatment of
material deficiencies at the level of Member States, non-
member countries and final beneficiaries. In addition,
the procedures leading up to the declarations must be
sufficiently transparent to allow an examination of their
validity (55).

1.107.
For the 2002 financial year, the procedure for
preparing the annual activity reports and declarations
was reinforced and the guidelines were improved. There
has nevertheless been an increase in the number of res-
ervations that are due to the risk exposure and the extent
of them, all too often, remains imprecise. As a result, it
is still difficult to form a reasoned judgment of the
Commission’s management as a whole. For that reason
the annual activity reports and declarations of the
directors-general are not yet such that the Court could
consider them to be a cornerstone of its own declara-
tion of assurance.

The ongoing reform of the internal control system

1.106-1.107. The 2002 annual report exercise has been
improved compared to the previous and first exercise for year
2001. For the next exercise, services will be required to always
support their reservations by concrete evidence and to properly
explain their impact on the specific assurances required in the
declaration.

The Commission shares the Court’s objective that the annual
activity reports and the synthesis will form a solid basis for the
Court’s annual statement of assurance.

1.108. With its Synthesis report, the Commission is
continuing the effort towards openness as far as account-
ability for its management is concerned (56). However,
new actions were introduced when the reform of the
internal control system was put into effect in order to
cover issues that had not been taken into consideration
in the White Paper, and some of the actions and

1.108. An up-date of the White Paper action plan imple-
mentation is provided on a regular basis and widely dissemi-
nated (see paragraph 1.67 above). The last reform progress
review has been produced in January 2003 and the 2002
Synthesis adopted on 9 July 2003 present also an overview
of the main reform achievements realised in 2002.

(55) See Annual report concerning the 2001 financial year,

paragraphs 9.53 and 9.71.

(56) See Annual report concerning the 2001 financial year,

paragraph 9.98.

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objectives initially specified were changed. The result-
ant situation is very patchy and follow-up of it has
proved particularly complex. Under these circumstances
it would be much easier to study the progress of the
reform if all the action plans and updates of the White
Paper actions could be consolidated within a single
document and kept up to date.

1.109.
Implementing the reform of the internal con-
trol system will take time. Despite the substantial
progress that has been made in less than two years, the
impact of the reform is only just beginning to be felt. As
regards the actions that concern the regulatory frame-
work (introduction of the new Financial Regulation and
the procedures for implementing it, adoption of vari-
ous communications concerning audit, management
and financial control), the progress achieved can be
considered satisfactory, but problems still persist where
actions require services to change their habits or neces-
sitate the introduction of new activities (e.g. the applica-
tion of internal control standards, the functioning of
the accounting system or management of recoveries of
unduly paid funds). These aspects continue to require a
special effort, as the Commission’s internal auditors
pointed out in their annual report for 2002.

1.110.
In this respect, activity-based management
should be used as a means of monitoring and adjusting
priorities in order to achieve a balance between, on the
one hand, investing resources in supervisory systems
and controls in order to provide reasonable assurance
that the underlying transactions are legal and regular
and, on the other, strengthening the policy-making and
policy-implementation capabilities, policy-making and
implementation being the main function of the Com-
mission.

The Commission believes that the reference framework referred
to above is appropriate for ensuring coherent monitoring of
these actions. It is, however, prepared to examine the feasibil-
ity and added value of the Court’s suggestion of grouping all
the action plans in a single document.

1.109. As recognised in the 2002 Synthesis, the Commis-
sion is conscious that the impact of the reform on its function-
ing is in progress and will further consolidate in the next exer-
cises. As explained under 1.78 above, a great effort is being
deployed to make available the resources needed to thoroughly
implement the reform, in particular through the Annual Policy
Strategy exercises.

1.110. As to the balance in using the limited resources allo-
cated to the Commission to perform all the different tasks
entrusted to it, the ABM instruments (directorates-general
annual management plans — see 1.72 above and the Job
Information System — see 1.73 above) are, and will even
more become, major tools in assessing and monitoring the
achievement of the objectives set according to the Commis-
sion’s priorities and the resources needed to this purpose.

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CHAPTER 2

Budgetary management

TABLE OF CONTENTS

General observations

Introduction

Surplus

Carryover of appropriations

European Union Solidarity Fund

Specific observations

Own resources

Agriculture

Structural measures

Internal policies

External actions

Administrative expenditure

Pre-accession aid

Conclusions and recommendations

Paragraph

2.1-15

2.1-2.5

2.6-2.10

2.11-2.13

2.14-2.15

2.16-2.43

2.16-2.17

2.18-2.20

2.21-2.30

2.31-2.33

2.34-2.35

2.36-2.37

2.38-2.43

2.44-2.48

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GENERAL OBSERVATIONS

Introduction

2.1. The annual budget of the European Union is set by
the budgetary authority (Council and Parliament) on
the basis of proposals presented by the Commission.
The implementation of the budget is the responsibility
of the Commission. The use of more than 80 % of the
available funds depends on requests from Member or
beneficiary States to finance EU programmes.

2.2. The purpose of the Court’s observations is to pro-
vide an overview of the issues at both a general level
and by individual revenue and expenditure areas, to
identify problems and to make recommendations for
improvement.

2.3. More detailed information can be obtained from
the Commission document entitled ‘Report on budget-
ary and financial management — Financial year
2002’ (1). The Commission’s report constitutes a con-
siderable improvement on the analyses prepared in pre-
vious years. It is logically structured, comprehensive
and contains for the most part (2) a consistent and
coherent level of detail.

2.4. The 2002 payments appropriations increased by
2 % compared with 2001, with agriculture and preac-
cession aid receiving the major share of the additional
appropriations. The commitment and payments appro-
priations remained, by respectively 2 204 million euro
and 4 590 million euro, below their financial perspec-
tive ceilings, which set the overall limit for expenditure
for a particular year.

(1) To be published by 30 November 2003 in the Official
Journal of the European Union with the annual accounts of
the European Communities.

(2) There remain some areas where additional analysis and
explanation are needed, for example in the area of exter-
nal actions, and concerning the use of administrative
appropriations in the operatingl part of the budget (the
so-called ‘BA’ lines).

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2.5. Table 2.1 gives an overview of the budgetary out-
turn for the 2002 financial year for both commitments
and payments. This shows an overall implementation
rate of 98 % for commitment appropriations (2001:
97 %) and 86 % for payment appropriations (2001:
82 %). The implementation of commitments for the
year raises no material observations on the part of the
Court, so the remainder of this text is almost exclusively
devoted to payments.

Table 2.1 — Implementation of the 2002 budget by financial perspective heading

Budget

Implementation of the budget

Financial
perspective
ceiling

Initial
appropri-
ations (1)

Final
appropri-
ations (2)

Commit-
ments and
payments
made

Implemen-
tation rate
%

Appropri-
ations car-
ried over to
2003

% of final
appropri-
ations
available

Appro-
priations
cancelled

% of final
appropri-
ations
available

(a)

(b)

(c)

(d)

(e) = (d)/(c)

(f)

(g) = (f)/(c)

(h)

(i) = (h)/(c)

(million euro and %)

Financial perspective heading

Commitment appropriations

1. Common agricultural policy

46 587

44 255,1

44 354,1

43 217,0

97,4

2. Structural operations

32 768

33 838,0

34 017,4

34 011,7

100,0

3. Internal policies

4. External action

5. Administrative expenditure

6. Reserves

6 558

4 873

5 012

676

6 557,8

7 973,7

4 803,0

5 207,3

5 175,6

5 381,5

676,0

510,8

7 614,0

5 085,3

5 272,3

170,5

7. Pre-accession aid

3 328

3 328,0

3 531,9

3 503,9

95,5

97,7

98,0

33,4

99,2

83,9

1,4

213,2

71,4

74,3

8,8

21,9

Total

99 802

98 633,5 100 976,6

98 874,7

97,9

474,9

0,2

0,0

2,7

1,4

1,4

1,7

0,6

0,5

1 053,2

4,2

146,5

50,5

34,9

2,4

0,0

1,8

1,0

0,6

331,5

64,9

6,2

1 627,0

Payment appropriations

1. Common agricultural policy

44 255,1

44 940,0

43 520,6

2. Structural operations

32 129,0

31 603,3

23 499,0

3. Internal policies

4. External action

5. Administrative expenditure

6. Reserves

7. Pre-accession aid

6 157,4

7 956,8

4 665,4

4 969,8

5 175,6

5 856,6

676,0

651,8

6 566,7

4 423,7

5 211,6

170,5

2 595,1

2 600,9

1 752,4

96,8

74,4

82,5

89,0

89,0

26,2

67,4

315,1

3 254,3

749,6

68,3

548,0

8,8

50,5

Total

100 078

95 653,5

98 579,3 (3) 85 144,5

86,4

4 994,5 (3)

0,7

10,3

1 104,4

4 849,9

9,4

1,4

9,4

1,4

1,9

5,1

640,6

477,8

97,0

472,5

798,0

8 440,3

0,2

1,6

2,5

15,3

8,1

9,6

1,7

72,5

30,7

8,6

(1) Budget finally adopted by the European Parliament on 13 December 2001 (OJ L 29, 31.1.2002).
(2) Budget appropriations amended after taking into account supplementary and amending budgets and transfers, and including appropriations carried over from 2001,
appropriations resulting from the contributions by third parties and other revenue corresponding to a defined purpose, and appropriations made available again.

(3) Column total does not agree with sum of individual entries for reasons of rounding.

Source: 2002 revenue and expenditure account.

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Surplus

2.6. As in the previous two years, there was a signifi-
cant, albeit smaller, surplus of revenue over expenditure
(see Table 2.2) (3). For 2002 the surplus amounted to
7 422 million euro, compared with 15 014 million euro
in 2001 and 11 619 million euro in 2000. Surpluses
arise when the Commission is unable to carry out all of
the budgeted expenditure and does not make a corre-
sponding reduction in the revenue for the year (4). This
means that, as the calls for GNP resources from Mem-
ber States are made in accordance with the decision of
the budgetary authority on the level of expenditure
when adopting the budget, more such resources are
called up than are needed to cover the actual level of
expenditure.

2.6. The procedure for the calls for GNP resources from
Member States means that the Commission does not have lee-
way to adjust the calls in line with the level of realised expen-
diture. In principle, an adjustment could be done with a
supplementary and amending budget (SAB), but as discussed
in point 2.10, it is normally not a practical option. Accord-
ingly, the adjustment is done in the year n + 1 with an SAB
regarding the surplus of the previous year. Another possibility
is a letter of amendment at the end of year n reducing the
Member State contributions from 1 January n + 1. The lat-
ter was done in 2003 for an amount of EUR 1 billion.

2.7. As the Treaty does not allow the EU budget to be
in deficit, a small surplus may always be expected, par-
ticularly as it is unlikely that the appropriations will all
be spent for a particular year. Indeed, a surplus may
result from sound management of funds to the extent
that expenditure is only incurred when appropriate
processes and procedures are in place and adequately
prepared projects and programmes have been accepted
for financing. However, there is a need for a policy of
more active management of emerging surpluses and a
faster response when they are identified. The surplus for
2002, while less than previous years, is still very high.

(3) The presentation of the figures leading to the surplus in
Table 2.2 follows a different approach from that of the
Commission. The resulting surplus is the same as that of
the Commission. The Court’s presentation is based on the
budget implementation data in Table 2.1 and Diagrams I
and IV in Annex I. The Commission’s presentation fol-
lows the requirements of Article 15 of Council Regulation
(EC, Euratom) No 1150/2000 of 22 May 2000 implement-
ing Decision 94/728/EC, Euratom on the system of the
Communities’ own resources, and established practice.
(4) A surplus could also be due to the Commission receiving
more revenue than budgeted, due, for example, to higher
than expected yields on traditional own resources. This
was not, however, the major cause of the very high sur-
pluses of recent years.

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2.8. As Table 2.2 shows, the surplus was caused
mainly by lower than expected spending on structural
measures (4 850 million euro), agriculture (1 104 mil-
internal policies (640 million euro), pre-
lion euro),
accession aid (798 million euro) and external actions
(478 million euro). In the case of structural measures
the lack of demand for funds arose mainly from delays
by Member States in making final claims for the 1994
to 1999 programming period, and, to a lesser extent,
continuing (but much reduced) delays in implementing
the 2000 to 2006 programming period. The final dead-
line for the closure of the former programming period
was 31 March 2003 and Member States did not submit
most final claims until shortly before that date. As a
result the Commission carried forward 3 254 million
euro to 2003 to cover the resulting final payments. This
reduced the reported surplus by the same amount. The
Court has significant doubts that the Commission will

2.8. The payment appropriations in the 2003 budget for
pre-2000 Structural Fund programmes,
including the
amounts carried forward from 2002, equal the amounts
Member States forecast they would claim at the closure of
these programmes, less 5 % of the outstanding commitments
(RAL) at the end of 2001, which were entered in the
PDB 2004 to cover payments delayed for legal reasons. At
the time when the Commission decided on the carryover in
mid-February, the gap between the then available forecasts
and budget appropriations for 2003 implied a need for a car-
ryover of EUR 3 254 million.

Due to the late arrival in bulk of closure documents just before
the deadline of 31 March 2003, the mixed quality of these

Revenue

Own resources

Other

Expenditure

Agriculture

Structural measures

Internal policies

External actions

Administration

Reserves

Pre-accession aid

Rounding

Table 2.2 — Composition of surplus 2002 (and 2001)

2002

2001

(million euro)

Budgeted

Collected

80 926

15 126

96 052

79 775

15 659

95 434

Contribution
to surplus

– 1 151

533

– 618

Budgeted

Collected

81 470

12 665

94 135

79 736

14 553

94 289

Contribution
to surplus

– 1 734

1 888

154

Total

Underspending (1)

Less carryover
to 2003 (2)

Underspending (1)

Less carryover
to 2002 (2)

1 419

8 104

1 390

546

645

481

849

1

– 315

– 3 254

– 750

– 68

– 548

– 9

– 51

1 104

4 850

640

478

97

472

798

1

8 440

– 253

– 147

7 422

2 542

10 539

1 182

689

652

669

901

– 1

– 685

0

– 707

– 238

– 534

0

– 24

1 857

10 539

475

451

118

669

877

– 1

17 173

– 2 188

14 985

73

– 198

15 014

Total

13 435

– 4 995

Exchange differences
Other (3)

Total surplus

(1) Includes the cancellation of unused credits brought forward of 309 million euro (1 804 million euro in 2001).
(2) Amount carried over includes 684 million euro in respect of third party revenues for which the usual cancellation rules for carryovers do not apply (550 million

euro in 2001).

(3) Sundry elements mainly related to reused credits carried forward.

Source: 2002 revenue and expenditure account.

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be in a position to use a large part of these appropria-
tions in 2003. See paragraphs 2.25 to 2.26, 5.16 to
5.21, 5.38 to 5.40 and 5.56 for more information.

documents and the need for the Commission to make the
appropriate checks before final payment, more payments will
be delayed into 2004 than those already foreseen in the PDB
2004. The information now available also indicates a sig-
nificant volume of previously unforeseen decommitments.
These will add to the underimplementation in 2003 foreseen
by the Court. The Commission will consider making appro-
priate proposals to the budgetary authority in this regard.

2.9.
If the Commission is to be able to introduce a
supplementary and amending budget (SAB) to reduce
the amount of revenue to nearer the level of forecast
expenditure, and thereby reduce the surplus, it needs to
be aware of the risk of excessive underspending suffi-
ciently in advance of the year end. To help it to plan the
need for, and use of, funds for structural measures the
Commission requests forecasts of spending from Mem-
ber States. In practice these forecasts significantly and
systematically overestimate the need for funds. This also
applies when estimates are revised during the year, even
when performance to date is behind target.

2.9. Despite the fact that, in global terms, Member States’
forecasts have systematically overestimated the need for funds
by a significant amount, they remain the best information on
payment needs the Commission receives from sources closer to
the execution of programmes on the ground. This is the con-
sequence of shared management and there is no real alterna-
tive to the bottom-up approach. The Commission is making
significant efforts to improve the forecasts in cooperation with
the Member States. In view of the inaccurate forecasts received
in the past, the Commission has written to the Member States
several times reminding them how important it is for it to
have high quality implementation forecasts for each pro-
gramme on time.

2.10. During the 2002 budgetary procedure the bud-
getary authority made a joint declaration requiring the
Commission to provide an implementation plan for the
2002 budget. Following an initial plan prepared in June
2002, an updated version was produced in October
2002 based on utilisation to date and revised estimates.
This forecast an overall 11 % underspending of pay-
ment appropriations, mainly arising from the Struc-
tural Funds. Despite this information the Commission
did not take the opportunity to propose a SAB to reduce
the amount of revenue in line with the reduced need for
funds.

The Commission also endeavours to make good use of the
payment appropriations available by carrying out transfers
such as the one to the Cohesion Fund (see point 2.16).

2.10. The forecast underspending was associated with a
considerable degree of uncertainty, particularly relating to the
Structural Funds, and could not therefore be used as such for
an SAB. The Commission, however, acknowledges that the
forecast ultimately overestimated the actual implementation.

The SAB is a rather complicated procedure for reducing rev-
enue as it requires at least one reading in Parliament and the
Council and the acceptance of the Ecofin Council. Because of
the forecasting uncertainty due to the usual concentration of
Member States’ payment claims towards the end of the year,
an SAB procedure completed before mid-November is risky.
If it is adopted after that date, under Article 10(3) of Regula-
tion (EC) No 1150/2000, the readjustments of revenue will
apply starting from January n + 1. However, the Commission

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is prepared to use an earlier SAB when the under-
implementation is sizeable and sufficiently certain to occur.

An alternative solution would be the letter of amendment pro-
cedure at the end of October, used mainly for actual EAGGF
implementation on 15 October, including an estimation of
the balance at the year- end which, after the Council’s second
reading, will be entered as revenue in Article 3 0 0 in the
budget n + 1.

In both cases the reductions are in force only in January n + 1.

Carryover of appropriations

2.11.
In its Opinion (5) on the new Financial Regula-
tion, the Court stated that the carryover procedure,
whereby unused budgetary appropriations are carried
forward for use during the following financial year, con-
stitutes an unnecessary complication to both the bud-
getary process (6) and the accounting system. The
amounts involved are often low and concern obliga-
tions which could be covered by appropriations belong-
ing to the following year, made available, if necessary,
through the SAB procedure.

2.11. The carryover procedure is a part of the regulatory
framework. It provides additional budgetary appropriations
with a fast and fairly simple procedure, compared to an SAB,
provided that certain conditions are fulfilled (mainly that the
budgetary appropriations would otherwise be insufficient to
meet the Commission’s payment obligations). Accordingly,
the Commission does not share the Court’s view on the draw-
backs of the carryover procedure.

2.12.
For 2002 the appropriations brought forward
from 2001 totalled 411 million euro for commitments
and 1 540 million euro for payments (7). In respect of
the commitments, the subsequent utilisation was almost
total, whereas for payments 309 million euro (or 23 %)
was cancelled. The majority (79 %) of the carry-over
related to agriculture and administrative expenditure —
both non-differentiated appropriations subject to auto-
matic carryovers. However, 65 % of the payment appro-
priations cancelled related to carryovers for internal
policies and external action. Both of these areas were

2.12. The carryover decisions have to be made as early as
in mid-February on the basis of a forecast on the overall need
for payment appropriations for the budget headings con-
cerned, in order to cover a possible lack of appropriations.
These forecasts are subject to uncertainties. It should also be
noted that underimplementation in 2001 does not necessar-
ily imply underimplementation in 2002, but the situation
could actually be the reverse, i.e. a need for additional appro-
priations in order to catch up. The reasons for the overall
underutilisation of payment appropriations for internal poli-
cies and external action included unforeseen delays of

(5) Opinion No 2/2001 (OJ C 162, 5.6.2001).
(6) For example, separate allocations are used for carryovers
in the accounting system, and are subject to separate rules
governing their use.

(7) Excluding 648 million euro of earmarked revenue relat-

ing to the research field.

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subject to significant underspending in 2001, and previ-
ously, which should have indicated that a carryover was
probably not necessary.

programme and project approvals, resulting in delayed com-
mitments and, consequently, in lower-than-planned advance
and other payments.

2.13.
For 2002 the amount carried forward to 2003
was reduced to 145 million euro for commitments, but
increased significantly to 4 995 million euro in respect
of payments. The main cause of this increase was the
3 254 million euro carried forward within the Struc-
tural Funds relating to the closure of the 1994 to 1999
programming period, for which the deadline for the
final receipt of claims is March 2003. There is, however,
a strong possibility that these carried-over appropria-
tions will not be used (8) because of the risk of delays in
processing the closure claims.

2.13. The bulk of payment claims for the Structural Funds
was received just before the final deadline for their receipt by
the Commission. The Commission is endeavouring to process
all acceptable payment claims received as soon as possible. As
to the expected under-execution of payment appropriations,
the Commission will consider making appropriate proposals
to the Budgetary Authority (See also the comment to point 2.8)

European Union Solidarity Fund

2.14. As a consequence of the floods in central Europe
in the summer of 2002, a supplementary and amend-
ing budget was adopted in November 2002 establish-
ing a new financial instrument in the internal policies
area: the European Union Solidarity Fund. The Fund is
intended to cover expenditure resulting from unex-
pected disasters and is financed by a new flexibility
mechanism which allows up to 1 000 million euro to
be made available each year above the financial per-
spective ceilings. It covers the Member States and can-
didate countries.

2.15. The amount of 728 million euro granted to Aus-
tria, France, Germany and the Czech Republic in 2002
was financed by a transfer of payment appropriations
from the Structural Funds. The payments were made to
the Member States concerned under budget heading
B2-4 0 0 in internal policies (599 million euro), and to
the Czech Republic under budget heading B7-0 9 0 in
preaccession aid (129 million euro).

(8) The new Financial Regulation requires the Commission to
use the payment appropriations of the year before those
carried forward.

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2.17. As discussed in the Commission’s reply under point
2.6, the Commission does not have leeway to adjust the rev-
enues without a decision by the Budgetary Authority on an
SAB.

SPECIFIC OBSERVATIONS

Own resources

2.16. The amount of traditional own resources (cus-
toms and agricultural duties, and sugar levies) made
available to the Commission — 11 237 million euro —
was 23 % lower than in 2001, mainly due to an increase
from 10 % to 25 % in the amount Member States retain
by way of collection costs. The underlying total of duties
and levies fell by 7,7 %, reflecting both a fall in the value
of imports and a decrease in duty rates for certain types
of import. The change in collection costs, introduced by
a new own resources decision (9) that entered into force
on 1 March 2002, covered all duties and levies estab-
lished from 1 January 2001, with retroactive effect.
Therefore during 2002 the Commission repaid to Mem-
ber States a further amount of 2 023 million euro to
adjust retentions made at the 10 % rate in 2001.

2.17. The GNP resource increased by 32 % compared
with 2001 in order to meet the reduction in customs
and agricultural duties, a decrease in the VAT call-up
rate from 1 % to 0,75 % following the new own resources
decision, and the repayment of 2 023 million euro
relating to the adjustment of the traditional own
resources collection costs referred to in the previous
paragraph. As explained in paragraph 2.10,
in the
absence of action to reduce the surplus by means of a
supplementary and amending budget, the GNP own
resource was up to 7 422 million euro greater than
needed to cover actual expenditure, representing around
16 % of this resource.

(9) Council Decision 2000/597/EC, Euratom of 29 Septem-
ber 2000 on the system of the European Communities’
own resources (OJ L 253, 7.10.2000, p. 42).

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Agriculture

2.18. Agricultural expenditure represents the largest
proportion of the budget by value. For 2002 the budget
provided for expenditure of 44 940 million euro. Final
expenditure was 43 521 million euro representing
almost 97 % of available payment appropriations (10).

2.19. Unused payment appropriations amounted to
1 419 million euro, resulting mainly from a 798 million
euro underuse of ancillary expenditure (veterinary mea-
sures etc.) due to delayed decisions on measures in rela-
tion to foot and mouth disease resulting from the lack
of reliable information provided by the Member States
concerned, and a 345 million euro underuse in rural
development. Both of these types of expenditure are of
a more discretionary nature than the bulk of agricul-
tural expenditure.

2.19.
In the case of rural development, the choice of mea-
sures and the speed of implementation are largely at the dis-
cretion of the Member States, provided they remain within the
expenditure ceilings agreed with the Commission. For this
reason, it is more difficult for the Commission to ascertain
precisely what the outturn will be, and if a margin will remain.

2.20. A new initiative known as modulation was intro-
duced by Council Regulation (EC) No 1259/1999 (11).
Member States may decide to reduce the payments
granted directly to farmers under support schemes
(except rural development) on the understanding that
the funds are to be spent on rural development schemes
within three years. The funds generated can be used as
additional Community aid for those rural development
measures that are co-financed by the EAGGF-Guarantee
section throughout the Community (early retirement,
less favoured areas and areas with environmental restric-
tions, agri-environment and afforestation). A total of
287 million euro has been retained (2002: 169 million
euro; 2001: 118 million euro) and, of this, 260 million
euro awaits expenditure on suitable schemes.

(10) Excluding the monetary reserve intended to cover, if nec-
essary, the impact on agricultural spending of significant
movements in the EUR/USD exchange rate compared to
the rate used in preparing the budget. It is not included
in the agricultural heading of the financial perspective.
The reserve was not used in 2002, the last year of its
operation.

(11) Council Regulation (EC) No 1259/1999 of 17 May 1999
establishing common rules for direct support schemes
under the common agricultural policy (OJ L 160,
26.6.1999, p. 113).

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Structural measures

2.21. Structural measures consist of actions to pro-
mote socioeconomic development in Member States.
The main instruments are the four Structural Funds (12)
and the Cohesion Fund. The payment appropriations
for structural measures payments represented an increase
of 1,8 % compared with 2001. This related mostly to an
increase of one third for Community initiatives (13). The
budgetary authority agreed a lower increase than the
one proposed by the Commission even though the
Commission’s was based on estimates by Member States.
The subsequent payment implementation rate for Com-
munity Initiatives was 25 %, the lowest in the structural
measures area.

2.21. The approval of many Community initiative pro-
grammes was delayed more than originally expected, and sig-
nificantly more than the approval of the mainstream pro-
grammes. But even allowing for that, the actual progress in
implementing the Community initiatives has indeed been
slower than expected. The Commission has already taken this
into consideration in its PDB 2004, where the budget for
payments for the Community initiatives is only 62 % of the
annual instalment of commitments, compared to 80 % for
the mainstream programmes.

2.22. The implementation rate for Structural Fund
payments was 72 % (14) of available appropriations,
which represents an increase on that for 2001 (69 %)
and accounts for the largest proportion (around 65 %)
of the overall surplus. Overall underspending amounted
to 8 104 million euro (see Table 2.2), of which the larg-
est proportion (around 6 100 million euro) related to
delays in the receipt of final claims for the 1994 to 1999
programming period. The balance of the underspend
comprises the continuing, but much reduced, delays in
the implementation of the 2000 to 2006 programming
period.

2.22. The bulk of the underspending in the Structural Funds
was due to significant delays in the receipt of final claims for
the 1994 to 99 programming period. For the new period
(2000 to 2006) the implementation of programmes improved
relative to 2001, even if not as much as initially expected.

2.23.
In contrast to the Structural Funds, payment
appropriations were fully spent for the Cohesion Fund,
covering both the closure of old projects and payments
on new projects. A late transfer of 548 million euro
from the Structural Funds was insufficient to meet the
needs for additional appropriations and 200 million-
euro of claims remained unpaid at the end of the year.
This high implementation rate in 2002 was due to a

2.23. Outstanding commitments (RAL) for the Cohesion
Fund (projects from before 2000) were reduced by 36 % (from
EUR 2 billion to 1,5 billion) and represents six months of
commitment appropriations.

(12) European Regional Development (ERDF), European Social
Fund (ESF), European Agricultural Guidance and Guaran-
tee Fund (EAGGF-Guidance) and the Financial Instrument
for Fisheries Guidance (FIFG). The budget is further divided
into three priority areas known as objectives.

(13) Operations of Community interest carried out at the ini-
tiative of the Commission to supplement those imple-
mented under the priority objectives.

(14) There was a significant variation in underspending
between the various priority objectives. See Diagram IV
of Annex 1.

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diverse mix of circumstances, resulting in many projects
being finalised during the year, and may not reflect the
trend in future periods.

2.24. As explained in paragraph 2.9, underspending
on the Structural Funds largely arises from inaccurate
forecasting by Member States. In 2002 the procedure
was improved with an initial plan prepared by the
Commission in June 2002, and an amended plan issued
in October 2002 based on a revision of the estimates.
The quality of the plan depends on the quality of the
forecasts provided by Member States of their expected
use of funds. These have proved to be significantly, and
consistently inaccurate. For 2002 the average overesti-
mate was 73 %, up from 38 % in 2001. The lowest over-
estimate was one quarter higher than actual needs, and
six Member States overestimated needs by between two
and six times the sums finally needed. The nature of
estimates is that actual performance is likely to differ
from the estimate, either above or below. However, in
all cases the Member States overestimated the funds
required, which indicates a systematic and structural,
rather than random, problem with the procedure.

2.25. As mentioned in paragraph 2.8, the final dead-
line for submitting final claims for the 1994 to 1999
programmes was 31 March 2003. Many Member States
concentrated on meeting this deadline and as a conse-
quence did not submit claims on programmes until after
the end of 2002. In order to cover part of the large
number of payments expected in 2003, 3 254 million
euro was carried forward to 2003.

2.24.
It is true that Member States’ forecasts have consis-
tently shown a significant overestimation bias on average.
They have also been erratic, i.e. the average forecasting error
of each Member State is quite volatile.

Despite their poor quality, they remain the best information
on payment needs the Commission receives from sources closer
to the execution of programmes on the ground.

Thus the Commission is making significant efforts to improve
the forecasts in cooperation with the Member States. So far,
due to their overestimation bias, the forecasts have been of
limited value for budgeting (except in specific circumstances,
such as the ones mentioned in the reply to point 2.9), but the
potential value of the forecasts justifies continued efforts
towards their improvement. The Commission uses its own
analysis besides Member States’ forecasts for budgeting pur-
poses.

In any event, the Commission appraises the forecasts received
from Member States in the light of its own information. For
2004 the amounts in the budget are smaller than those
returned by the Member States in their forecasts.

See also point 2.9.

2.25.
In all Member States a significant cause of the delays
was the time taken to complete the audits of the programmes
required before closure.

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2.26. However, the Commission expects that many of
the claims will be incomplete and will require signifi-
cant and time-consuming intervention before they can
be closed. This, together with the large volume of trans-
actions involved, means that there is a significant risk
that many of the final payments will only be made in
2004. Accordingly, this will have an impact on the
expected use of the payment appropriations carried
over.

2.26. Although the bulk of payment claims was received
just before the final deadline for their receipt by the Commis-
sion, the Commission is endeavouring to process all accept-
able payment claims received as soon as possible, in coopera-
tion with the Member States. As to the expected under-
execution of payment appropriations, the Commission will
consider making appropriate proposals to the budgetary
authority.

2.27. Underimplementation of the 2000 to 2006 pro-
gramming period contributed 1 964 million euro to the
overall surplus. However, this reflects a spending rate of
91 %, which represents a considerable improvement
compared with 2001 (70 %).

2.28. The main risk faced by the Commission is the
future effect of the cumulative significant underspend-
ing encountered at the beginning of the 2000 to 2006
period. As a result, large volumes of funds will need to
be spent at the end of the period in order for the com-
plete budgetary envelope to be implemented. Member
States may have difficulties in absorbing the funds.

2.28. The late adoption of many programmes at the begin-
ning of the period 2000 to 2006 led to a re-budgetisation
of uncommitted amounts totalling EUR 6,152 million to
later years in the programming period, and to a correspond-
ing revision of the financial perspective. The re-budgetisation
has been spread over the period 2002 to 2006 and represents
on average an increase of 4 % of the initial amount provided
for in the financial perspective, which should not present a
specific problem for the absorption of funds.

2.29. One consequence of the accumulated under-
spending is the high level of outstanding commitments.
At 31 December 2002 these totalled 66 731 million
euro, a rise from 56 765 million euro at the end of 2001.
This increase is partly caused by the low level of pay-
ments in 2001 and 2002 referred to above, but is pri-
marily a direct consequence of the new system for com-
mitments and payments in the Structural Funds (see
paragraph 5.3).

2.29. Around one third of the outstanding commitments
for structural measures concerned pre-2000 programmes. The
outstanding commitments for the period 2000 to 2006 rep-
resent less than two years of commitments. The Commission
feels that this amount is not unreasonable for the implemen-
tation of multiannual programmes consisting of heavy invest-
ments and for which the Regulation provides for payment
within two years of commitment.

In 2002, a great effort was devoted to clearing the oldest
RAL. In consequence, the outstanding commitments for the
from
greatly
pre-1994 programmes were
EUR 532 million
to
beginning
EUR 128 million at the end of the year.

reduced,
of 2002,

the

at

Under the rules for the period 2000 to 2006 commitments
are made annually while payments essentially follow the
implementation of the programmes until 2008. Outstand-
ing commitments are expected to increase until 2006,
recently in its
as indicated by the Commission, most

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communication to the European Parliament and to the Coun-
‘Evolution of budget execution of the Structural
cil,
Funds, in particular outstanding commitments (RAL)’
(COM(2002) 528 final).

2.30. See comment on 2.28.

2.30. At the end of 2002 some two thirds of the out-
standing commitments for the Structural Funds con-
cerned the 2000 to 2006 programming period. A new
rule introduced for this programming period requires
any part of a commitment which has not given rise to
a payment claim by the end of the second year follow-
ing its establishment to be cancelled automatically. This
procedure, which imposes on Member States the risk of
losing funds, is intended to encourage implementation
of programmes in line with the financial plans (see para-
graph 5.36).

Internal policies

2.31.
Internal policies are mostly directly managed by
the Commission and are dominated by research and
technological development (RTD) expenditure, which
represented 56 % of the payments made in 2002. The
implementation rate for internal policy expenditure as
a whole remained low, at 82,5 %, which represented a
small increase on the 81,8 % achieved in 2001. The
underspending of payments contributed 640 million
euro to the surplus. The 100 % implementation rate for
the new European Union Solidarity Fund (see para-
graphs 2.14 and 2.15) contributed to the overall increase
in implementation for the area as a whole.

2.31 to 2.33. The underimplementation of payment appro-
priations noted by the Court is explained by the structural
causes described by the Court at point 2.32. For RTD, under-
implementation in 2002, excluding revenue from third par-
ties, came to EUR 854 million minus EUR 684 million (pay-
ment appropriations for revenue from third parties),
i.e.
EUR 170 million. Given the budget of EUR 3 751 million,
the rate of under-implementation in this area of internal poli-
cies has therefore fallen to 4,5 %.

2.32. The 2002 budget showed a 5,2 % increase in
payment appropriations compared with 2001, RTD
expenditure being allocated an additional 3,9 % and
education increasing by 22,3 %, to reflect specific Com-
mission priorities. However underspending in RTD
(854 million euro) and education (110 million euro)
comprised the two main elements (69 % together) of
the gross underspending for the area. In both cases the
procedure in the Financial Regulation concerning ear-
marked third party revenue explains the bulk of the
underspending. When third countries contribute to
amount of
Community programmes,

same

the

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additional appropriations are recorded for both com-
mitments and for payments, even though the need for
the payment appropriations may be spread over several
years. Unused payment appropriations are carried for-
ward automatically to the following years to enable the
actions to which they are earmarked to continue with-
out further calls for funds for the countries concerned.
There is, therefore, a structural surplus of payment
appropriations in areas such as RTD and education.

2.33. The underimplementation occurred largely
(61 %) in shared cost projects for which there are sig-
nificant inherent delays in planning and implemention
of projects once the earmarked revenue has been
received. Further reasons are late or incomplete submis-
sions of claims for payment from contractors and delays
by the Commission in making legal commitments and
organising calls for tender.

External actions

2.34. Expenditure on external actions is in the main
directly managed by the Commission and comprises a
large number of different headings, the largest being
cooperation with the Balkans (17 %). The implementa-
tion rate for payments in 2002 was 89 %, which repre-
sents an increase on the 86 % achieved in 2001. There
were a large number of transfers during the year which
were needed to take into account the changing priori-
ties inherent in this type of expenditure, such as respond-
ing to the situation in Afghanistan.

2.35.
For 2002 the payments appropriations were
increased by 6,7 % (294 million euro) compared with
the 2001 budget in order to take into account specific
priority areas of the Union. Much of this increase was
accounted for by an increase for the Mediterranean third
countries and the Middle East
(225 million euro),
together, other major increases in funds being for devel-
opment aid to Asia (95 million euro), partner countries
in Eastern Europe and Central Asia (81 million euro),
and development aid to Latin America (66 million euro).
The former two achieved near total implementation,
whereas the spending rates for the latter two, which
received increased funds, were 84 % and 78 % respec-
tively.

2.35.
In the case of Eastern Europe and Central Asia, the
increase in payment appropriations was 26 % compared to
2001 and for Latin America the corresponding increase was
18 %. For these two areas the payment appropriations voted
by the budgetary authority greatly exceeded the Commission’s
request.

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Administrative expenditure

2.36. Administrative expenditure mostly comprises
staff and buildings costs. Around two thirds of admin-
istrative expenditure is attributable to the Commission,
one fifth to Parliament, and the balance to the other
institutions and bodies. The appropriations for admin-
istrative expenditure increased by 4,8 % compared with
2001, which reflects both normal inflationary increases
and preparations for enlargement.

2.37. The implementation rate for payments was 89 %,
which is comparable to that for 2001 and is largely con-
sistent across all institutions. Of the overall underimple-
mentation, 369 million euro is attributable to the Com-
mission and mostly concerns decentralised expenditure
on support staff and administration (113 million euro)
and building and equipment costs (92 million euro).
Due to the nature of this expenditure — purchases of
goods and services, and reimbursements of meeting and
mission costs — these areas have a higher level of auto-
matic carryovers, which are needed to finance, for
example, goods and services ordered before the year-
end where the receipt and settlement of invoices occurs
after the year end. The implementation rate on the car-
ryovers (88 % for those brought forward from 2001)
contributes to an effective implementation rate of pay-
ment appropriations for any given year of over 98 % by
the end of the following year.

Preaccession aid

2.38. Preaccession aid comprises amounts paid to
accession and candidate countries to the Union and is a
mixture of direct (Commission) and shared manage-
ment (Commission-beneficiary States) expenditure. The
budget for payments was 494 million euro higher than
in 2001, an increase of 24 %. The increase in the budget
was made despite the severe problems encountered by
beneficiary States in absorbing funds in 2001. For 2002,
payments made totalled 1 752 million euro, represent-
ing 67 % of the available appropriations, up from 61 %
in 2001.

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2.39. Payments in respect of Sapard (15) remained low,
despite an increase compared with 2001. In 2002 the
Commission transferred 124 million euro (31 million
euro in 2001) to administrations in the beneficiary
States, which represents 34 % of the amounts available
(6,5 % in 2001). In turn the administrations transferred
33,5 million euro (16) to final beneficiaries (1 million
euro in 2001). As such, some three years after the start
of the programme only 2 % of available funds have been
transferred to final beneficiaries (0,1 % in 2001).
Although Sapard is an essential instrument to tackle
priority problems in accession States relating to agri-
culture and rural development, the Court notes that the
vast majority of advances so far transferred remain on
the Sapard euro accounts.

2.40.
Financial implementation of Sapard has been
slower than initially anticipated, mainly because it took
longer than expected to set up the management and
control systems in the accession countries. It was only
in the second half of the year that all the conditions
were fulfilled for the Commission to approve the con-
ferral of management of Sapard to three countries, rep-
resenting 70 % of expenditure. However financial imple-
mentation was also slow in those countries which had
received conferral of management in 2001. This is
because some local conditions necessary for implemen-
tation were not fulfilled.

2.39. The 2002 preliminary draft budget was drawn up in
early 2001 on the assumption that all countries would secure
timely conferral of management decisions. However, only two
countries did so, but not including the two largest beneficia-
ries. It was also assumed that the initial payment on account
for Sapard would be paid at the ceiling of 49 % of the first
annual allocation (AFA 2000, about EUR 260 million) in
the relevant legislation. In May 2001 the Commission decided
that initial payments on account would be limited to 50 % of
this ceiling. This policy continued in 2002, reducing pay-
ments by over EUR 100 million. A policy change was con-
sidered but rejected on the grounds that greater priority should
be given to firm management of appropriations rather than
to more complete budget execution. Payments on account are
only made after the approval of the conferral decisions. Con-
sequently, the bulk of these payments in 2002 (EUR 89,1
million) was paid only from July 2002 onwards into the
Sapard euro accounts of the candidate countries.

Payments to final beneficiaries are made only when they have
incurred eligible expenditure, generally several months after
the beneficiary has been selected.

2.40. Two countries, Bulgaria and Estonia, carried out
most of the work to set up their management and control sys-
tems in 2000 or early 2001. Hence, the Commission does
not consider the conferral of management to have been slow
for these two countries. For most of the beneficiary countries
and for a variety of reasons, including ‘local conditions’, it
took longer to set up their management and control systems.

On the issue of implementation, after the conferral of man-
agement there is inevitably an interval between that and pay-
ments being made to final beneficiaries. Even though such
disbursements were limited, the Commission does not consider
that implementation has been slow.

As the Commission has stated in the Sapard annual report for
2001, there is a risk that assessing the instrument on the
basis of disbursement of budget resources may give it a dis-
torted image. The Commission still considers this point to be
valid.

(15) Instrument supporting sustainable agricultural and rural
development in the central and eastern Europe applicant
countries during the preaccession period.

(16) Representing 13,7 million euro charged to the 2002 bud-
get and 19,6 million euro to be charged to the 2003 bud-
get.

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2.41. Most beneficiary countries have indicated that
one of the bottlenecks is that beneficiaries are some-
times unable to prefinance project expenditure due to
difficulties with access to credit, with land reform, or
with the property market. As indicated in the Court’s
annual report for 2001 (17), the Commission should
analyse the reasons for the slow implementation and
ensure that appropriate action is taken, either by the
Commission or the candidate countries.

2.41. The issue of slow implementation is complex and is
related, amongst other things, to access to credit. Even when
credit is available, some beneficiaries are reluctant to take out
mortgages on property, and other matters of unclear title of
ownership, in particular of land, also play a part.

To alleviate problems of financing, the Community does not
require a project to be completed before any aid may be
granted. Aid may be granted in instalments, but — for rea-
sons of sound financial management — based on costs actu-
ally borne by the beneficiary. Despite this, only few benefi-
ciary countries have chosen not to require project completion
before any aid is granted. This action reduces the administra-
tive burden (and risks of the project not being completed) but
places an inevitable burden on beneficiaries in terms of the
prefinancing of expenditure.

The Commission has also encouraged the Sapard agencies to
shorten the interval between eligible expenditures being
incurred and aid being paid.

In order to seek to mitigate problems linked with access to
credit availability, the Commission, with the aid of Phare
funds, is supporting a project to improve access to credit for
SMEs in candidate countries. The Commission is further
examining ways of ensuring that this facility is taken up more
widely.

For ISPA (18) the implementation rate for pay-
2.42.
ments was 79 %, which constitutes a rise from 58 % in
2001. The low implementation results from a concen-
tration of commitments at the year end.

2.42. This increase is a result of the Commission’s efforts
to strengthen the administrative capacity of candidate coun-
tries to implement ISPA projects, in particular in the field of
public procurement. It is true that the concentration of com-
mitments at year end had a negative impact on spending.
Moreover, such projects require a certain lead time for prepa-
ratory work, including tendering, so as to ensure efficient and
proper project implementation. Consequently, it takes some
time until payments can flow, but this flow accelerated between
2001 and 2002, as noted by the Court.

(17) Paragraph 6.30.
(18) Instrument supporting economic and social cohesion in
the applicant countries of central and eastern Europe,
particularly in the fields of environment and transport.

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2.43. During the period the spending rate for
Phare (19) funds (which represent around 60 % of the
preaccession area appropriations) fell from 79 % in
2001 to 69 % in 2002. This was caused by a move away
from traditional infrastructure-type projects towards
support for institution-building. The change in empha-
sis requires significantly different types of projects which,
in turn, need additional preparation and implementa-
tion time.

CONCLUSIONS AND RECOMMENDATIONS

2.44. The Commission’s report on budgetary and
financial management for 2002 is a well prepared and
useful document, and constitutes a considerable
improvement on previous years. The Court recom-
mends that in future it be completed by the inclusion of
a section on own resources. With regard to the admin-
istrative budget headings included in the operating part
of the budget, the introduction from 2004 of activity-
based budgeting will require the report to analyse the
administrative expenditure allocated to the various
policy areas. The findings of the document should be
used in future budget-setting procedures in order to
reduce the risk of similar weaknesses recurring.

2.45.
In some cases underspending was caused by
increases in budgetary appropriations compared with
2001 which the Commission was then unable to imple-
ment (i.e., internal policies and external actions). In
other cases (i.e., preaccession aid, the Community ini-
tiatives of structural measures) the budgetary authority
reduced increases proposed by the Commission, which
had the effect of reducing underspending. The Court
recommends that increases in budgetary appropriations
should only be proposed when there are realistic plans
for their full use. Specific attention is needed when
spending in the previous year has been low.

(19) Instrument to assist applicant countries of central and
eastern Europe in preparing for enlargement, particularly
institution building and convergence of legislation.

2.44.
In future the Commission will include a section on
own resources in the report, starting from Report 2003. The
administrative expenditure allocated to the various policy areas
will be analysed after the introduction from 2004 of activity-
based budgeting.

The Commission shares the view that the analyses of the bud-
get implementation should be used in future budget-setting
procedures.

2.45. The Commission aims at realistic budgeting of pay-
ment appropriations. The best method is a careful assessment
of the need for payment appropriations by budget headings,
taking into account all foreseeable circumstances affecting
budget implementation (e.g. the likely schedules for pro-
gramme and project approvals, progress on the ground in
project implementation as a prior condition for payments,
control procedures and administrative constraints).

Continued emphasis on the budget implementation plan exer-
cise regarding the current budget year, comprising monitor-
ing, reporting and revisions integrated into the budget deci-
sion procedure, can also be expected gradually to improve
budget forecasting for the PDB. This also comprises an assess-
ment of whether low spending in the past implies lower bud-
geting (or the reverse).

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2.46. The large surplus is mostly caused by under-
spending in the expenditure areas, particularly Struc-
tural Funds. Member State forecasts were grossly inac-
funds, and the
curate in their expected use of
Commission took no action to reduce revenue even
when its own estimate showed a significant expected
underimplementation at the year end. The Court rec-
ommends that further measures should be taken, both
to improve the quality of the forecast information pro-
vided by Member States and to undertake the necessary
steps to reduce revenue when significant levels of under-
spending are forecast.

2.46. The Commission has consistently proposed appro-
priations below Member States’ forecasts, based on its best
available knowledge at the time of budgeting. The Commis-
sion shares fully the Court’s concern regarding the importance
of improving the quality of Member States’ forecasts and has
already taken a number of steps to this end. It has conducted
a survey amongst Member States on the procedure and
improved it in the light of the replies received. It now sends the
requests for information to Member States and informs the
programme management authorities at the same time. It has
streamlined the systems used to collect and analyse the data.
It produces annually a widely disseminated report on the qual-
ity of the forecasts. The Commission will continue cooperat-
ing with Member States to improve the quality of the fore-
casts.

As to the Court’s recommendation to undertake necessary
steps to reduce revenue, the Commission is prepared to use an
SAB when the underimplementation is sizeable and suffi-
ciently certain to occur. In other circumstances however, the
Commission prefers to use the surplus SAB procedure in year
n + 1.

The unused revenues remain on special Commission accounts
held by Member States.

2.47.
In itself, underspending does not necessarily con-
stitute weak budget management, indeed it may reflect
firm management of the appropriations. Efforts to
increase utilisation rates simply to use up the funds (and
prevent future cuts) increase the risk of inappropriate or
irregular expenditure. However, the delaying of expen-
diture to the end of the current programming period
for Structural Funds is likely to cause significant absorp-
tion difficulties and commensurate problems in manag-
ing the aid. Furthermore, the low implementation of
preaccession funds means that priority problems are
not being dealt with in a timely manner in the countries
concerned. The Court recommends that sufficient
appropriate action be taken to deal with these problems
in a manner that safeguards the financial interests of the
current and future citizens of Europe but does not com-
promise the delivery of EU grant-aided projects.

2.47.
For the Structural Funds the ‘n + 2’ rule imposes con-
stant financial discipline and is intended to avoid the prob-
lems resulting from underimplementation of the programmes
being concentrated at the end of the period. Regarding ISPA,
the increase in payments between 2001 and 2002 is a result
of combined efforts undertaken by the Commission and can-
didate countries to set up proper implementation structures
and to strengthen the administrative capacity of national
authorities, in particular in the field of public procurement.
Ensuring compliance with Community procurement principles
(transparency, fairness, soundness) is leading in some cases to
delays in the implementation of ISPA projects, but the Com-
mission cannot accelerate implementation to the detriment of
these principles.

Sapard has contributed to the building of systems that are
capable of managing aid to foster structural adaptation of
agriculture in the countries concerned. The Commission con-
siders that adequate control systems have to be in place prior
to any funds being released. After conferral of management,

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2.48. The Court continues to maintain that the use of
carryovers of appropriations unnecessarily complicates
the process of budgetary management and the account-
ing system. They distort the view of overall implemen-
tation, with the 3 254 million euro carryover of pay-
ment appropriations in respect of the Structural Funds
having the effect of reducing the reported surplus by
the same amount. In line with its opinion on the new
Financial Regulation, the Court continues to recom-
mend that this procedure be abolished and any shortfall
in funds met through a more open and transparent
method, such as supplementary and amending budgets.

there is inevitably an interval between that and payments
being made to final beneficiaries.

2.48. The carryover instrument is part of the established
regime for budgetary management. Its main purpose is to
cover insufficient payment appropriations that can already be
foreseen in the beginning of the financial year, provided that
the conditions for a carryover in the Financial Regulations are
met (i.e. forecast of insufficient appropriations for the next
year). It has the advantage of being an instrument that is
procedurally fairly simple and fast compared to amending
budgets. The earmarking in the accounts of appropriations
carried over and the separate rules governing their use are
both justified and technically necessary, as appropriations
carried over can be used only after the ordinary budgetary
appropriations have been exhausted on the budget heading in
question.

The use of an amending budget to cover possible shortfalls of
payment appropriations is mainly intended to cover unfore-
seen additional needs for appropriations during the financial
year that cannot be met with the transfer instrument.

The Commission does not share the Court’s view that the use
of carryovers unnecessarily complicates the process of budget-
ary management and the accounting system. The use of the
instrument has clear advantages and is fully transparent. The
difference between the carryover and the SAB instrument is,
in the Commission’s view, less about transparency and com-
plication than about different decision-making procedures.

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CHAPTER 3

Own resources

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Traditional own resources

Accounting for traditional own resources

Commission supervisory systems and controls

Customs surveillance of arrivals of goods at airports

Conclusions and recommendations

VAT/GNP own resource

Commission supervisory systems and controls

VAT collection in Member States

Annual GNP procedure and the related controls

Conclusions and recommendations

Paragraph

3.1-3.3

3.4-3.57

3.4-3.34

3.4-3.13

3.14-3.17

3.18-3.32

3.33-3.34

3.35-3.57

3.36-3.41

3.42-3.46

3.47-3.54

3.55-3.57

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INTRODUCTION

3.1. The revenue of the budget of the European Union
consists of own resources and other revenue. The own
resources are by far the main source of financing for
budgetary expenditure, as is shown by Table 3.1 as well
as Graph 3.1 and Graph 3.2. There are three categories
of own resources: traditional own resources (agricul-
tural duties, sugar levies and customs duties), own
resources calculated on the basis of value added tax col-
lected by Member States and own resources derived
from the Member States’ gross national product. In the
last three years the share of the other revenue, consist-
ing of the surplus from the previous financial year, has
been much greater than previously (see paragraphs 2.6
to 2.10 of this report).

Table 3.1 — Revenue for the financial years 2001 and 2002

Type of revenue and corresponding budget heading

Actual revenue
in 2001

Development of the 2002
budget

Initial budget

Final budget

Actual revenue
in 2002

% change (2001
to 2002)

(a)

(b)

(c)

(d)

e = [(d) – (a)]/(a)

(million euro)

1. Traditional own resources

— Agricultural duties (Chapter 1 0)
— Sugar and isoglucose levies (Chapter 1 1)
— Customs duties (Chapter 1 2)
— Collection expenses (Chapter 1 9)
— Collection expenses (Chapter 2 0)

2. VAT resources

— VAT resource from the current financial year (Chapter 1 3)
— Balances from previous years (Chapter 3 1)

3. GNP resource

— GNP resource from the current financial year (Chapter 1 4)
— Balances from previous years (Chapter 3 2)

4. Budgetary imbalances

— UK correction (Chapter 1 5)
— Final calculation of UK correction (Chapter 3 5)

5. Other revenue

— Surplus from previous financial year (Chapter 3 0)
— Miscellaneous revenues (Titles 4 to 9)

14 589,2
1 132,9
840,0
14 237,4
– 1 621,0

31 320,3
30 695,4
624,9

34 878,8
34 460,2
418,6

– 70,3
– 72,5
2,2

13 571,2
11 612,7
1 958,5

15 892,7
1 121,7
770,9
15 765,9
– 1 765,9
0,0

36 603,9
36 603,9
0,0

41 147,6
41 147,6
0,0

0,0
0,0
0,0

9 682,2
1 121,7
770,9
13 734,2
– 3 906,7
– 2 037,9

22 601,2
22 601,2
0,0

46 605,0
46 605,0
0,0

0,0
0,0
0,0

9 214,0
1 180,3
864,8
12 917,5
– 3 725,6
– 2 023,0

22 388,2
22 539,0
– 150,8

45 947,6
45 850,3
97,3

148,2
149,0
– 0,8

2 010,6
1 200,0
810,6

17 163,8
15 375,0
1 788,8

17 736,4
15 375,0
2 361,4

Grand total

94 289,3

95 654,8

96 052,0

95 434,4

– 36,8 %
4,2 %
2,9 %
– 9,3 %
129,8 %

– 28,5 %

31,7 %

– 310,8 %

30,7 %
32,4 %
20,6 %

1,2 %

Source: 2002 revenue and expenditure account.

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Graph 3.1 — Breakdown of actual revenue in 2002

(1) Customs and agricultural duties and sugar levies are shown after deduction of the collection costs of 2002 and of the repayment, made in 2002, of collection costs

of 2001 (see paragraph 2.16)

Source: 2002 revenue and expenditure account.

Graph 3.2 — Evolution of sources of actual revenue 1989 to 2002

(1) Contains surplus from previous financial year and miscellaneous revenue.
Source: 2002 revenue and expenditure account.

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3.2.
In the area of traditional own resources, the
Court’s audit concentrated on the systems for record-
ing established duties, and particular attention was paid
to the system of customs surveillance of the arrival of
goods at airports.

3.3.
For the VAT and GNP own resources, the Court’s
audit concentrated on the setting of the budget and its
implementation in respect of these resources, with spe-
cific attention to the balances and adjustments to bal-
ances deriving from these resources and the refunds to
Member States. The audit also covered the collection of
VAT in Member States in respect of the VAT-related
own resource and an examination of the GNP question-
naire procedure, which constitutes the basis for the cal-
culation of the GNP- related own resource.

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Traditional own resources

Accounting for traditional own resources

3.4. The traditional own resources are established by
Member States’ customs authorities or other designated
authorities and are first entered in national accounting
systems. They are allocated (at the latest at the time
when the amounts must be made available) either to the
so-called A account, or, while they remain unpaid and
unsecured, or are secured and are under appeal, to the
so-called B account (1).

Audit work done

3.5. The Court examined the Commission’s accounts
for traditional own resources, analysed the flow of duties
from all Member States, and examined the underlying

(1) Article 6 of Council Regulation (EC, Euratom)
No 1150/2000 of 22 May 2000 implementing Decision
94/728/EC, Euratom on the system of the Communities’
own resources (OJ L 130, 31.5.2000, p. 1).

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national accounting systems in 11 Member States (2)
which together were responsible for 96 % of the import
duties collected in 2002. It also audited a sample of cus-
toms declarations at airports and all major monthly
receipts of own resources established by Member States
and entered in the Commission’s accounts. The Court
must stress that its audit cannot cover imports which
have not been declared or which have escaped customs
surveillance and remained unrecovered.

Reporting amounts to be made available to the Commission

3.6. Commission Decision 97/245/EC (3) sets out the
requirements for completing the statements for the A
and B accounts that Member States send to the Com-
mission to show the amounts of import duty estab-
lished.

3.7. Some Member States (Belgium, Denmark, France,
Netherlands, Finland, Sweden and the United Kingdom)
do not fully conform to the requirements for complet-
ing A- and/or B-account statements, and one (Greece)
frequently fails to submit any A-account statement,
sending only a letter which contains summary informa-
tion. Although this does not affect the amounts made
available, it restricts the Commission’s ability to moni-
tor and analyse the data as they develop during the year.

3.7. During the last three years, the Commission has taken
action to improve Member States’ statements of A and B
accounts. At the Advisory Committee on Own Resources
(ACOR) on 7 December 2000, the Commission addressed
the weaknesses observed in Member States’ statements. Sub-
sequently individual follow-up was made with those Member
States still not complying. As a result, the overall quality of
the statements is improving. The Commission will continue
its monitoring action.

Amounts established but not yet made available to the Commission
(B accounts)

3.8. Established entitlements for which no security was
required, together with those which have been chal-
lenged and might be subject to change, need not be
made available to the Commission if they are instead
entered by the Member States in separate accounts (the
B accounts). Each Member State provides a quarterly
statement of its B accounts to the Commission. The bal-
ances are included in the Communities’ balance sheet
under ‘Amounts owed by Member States’.

(2) Belgium, Denmark, Germany, Spain, France, Italy, Luxem-
bourg, the Netherlands, Austria, Sweden and the United
Kingdom.

(3) As amended by Commission Decision 2002/235/EC of

13 March 2002 (OJ L 79, 22.3.2002, p. 61).

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3.9. At 31 December 2002, the gross balance for the
B accounts standing in the Commission’s books, namely
2 321,2 million euro, was 1,4 % less than the equivalent
figure at 31 December 2001 (2 354,9 million euro) (4).
For the year 2001 the balances in the B accounts had
increased by 2,7 %. The reduction in the total at
31 December 2002 is the result of applying the exchange
rate at the balance-sheet date (5); without the exchange
rate effect, the total of the underlying entries in Member
States’ B accounts increased by 0,4 %.

3.10. The B-account balance includes some long-
standing entries for which full recovery must now be
regarded as very doubtful. In order to take account of
this problem the Commission has entered a value cor-
rection in its balance sheet which reduces the total
B-account balance by 65 %. In paragraph 1.19 of its
2000 Annual Report, the Court commented that no
useful purpose is served by maintaining items in the B
accounts indefinitely if they are not likely to be recov-
ered, and that amendments to the regulation, already
proposed by the Commission (6); should be made
accordingly. As long as the Council does not adopt such
amendments, the B-account balance will contain an
increasing sum made up of amounts which may never
be recovered.

3.11. The B-account totals after deducting collection
costs were 2 119,4 million euro at 31 December 2001
and 1 740,9 million euro at 31 December 2002, a
decrease of 18 %. This reflects the coming into effect of
Council Decision 2000/597/EC, Euratom, on the sys-
tem of the European Communities’ own resources,
under which the collection costs for duties established
after 31 December 2000 were raised from 10 % to 25 %.
The 25 % rate has been applied to the entire outstand-
ing B-account balance, which means that the balance is
understated, since a large part (at least 50 %) of the bal-
ance dates from before 1 January 2001 and should be
subject only to the 10 % deduction.

(4) Figures given are before deduction of collection costs.
(5) For Member States (Denmark, Sweden, the United King-

dom) not using the euro.

(6) Amended proposal for a Council Regulation (EC, Eura-
tom), submitted by the Commission on 3 April 1998,
amending Council Regulation (EEC, Euratom) No 1552/89
implementing Decision 94/728/EC, Euratom on the sys-
tem of the Communities’ own resources (OJ C 150,
16.5.1998, p. 20).

3.10. On 1 July 2003, the Commission tabled a new pro-
posal to amend Regulation (EC, Euratom) No 1150/2000,
incorporating the 1997 proposal for an improved manage-
ment of the amounts entered in the B account (COM(2003)
366 final).

3.11. To ensure a convergent
interpretation of both
Articles 2(3) and 10(2)(c) of the Own Resources Decision
2000/597/EC, Euratom,
the Commission interprets
Article 10(2)(c) as not covering entitlements established before
1 January 2001 that could be credited to the account of the
Commission, in conformity with the Community rules, after
28 February 2001. Consequently the 25 % deduction rate is
applied to all amounts correctly entered into the B account as
they need only be made available after their recovery.

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3.12.
In 2002, as in previous years, problems were
found with the maintenance of the B accounts in sev-
eral Member States. In Germany, which accounts for
26 % of the total B-account figure for the European
Union, it is still impossible to confirm the balance,
because the database used does not provide an analysis
of the individual entries. The Court identified system-
atic mistakes in the procedures applied to maintain the
B accounts in Italy. Furthermore, the reports on the
Commission’s inspections in 2002 (see paragraphs 3.15
to 3.16 below) refer to problems in keeping B accounts
in Greece, where there was inadequate control over the
B accounts at two customs offices and organisational
problems prevented full application of Community rules
on write-offs. These reports also refer to systematic
shortcomings and errors in keeping B accounts in Bel-
gium, Denmark, the Netherlands and the United King-
dom.

3.12. Problems with the maintenance of the B account by
Member States are indeed ongoing. Therefore the Commis-
sion frequently checks this in Member States. The lack of an
audit trail in the German B account was first drawn to the
German authorities’ attention in a Commission report of an
inspection made in 2000. The Commission will be checking
what progress has been made in late 2003 as part of a wide-
ranging check of accounting procedures in Germany. The
Commission has asked the Italian authorities to regularise the
situation regarding belated and potentially incomplete account-
ing for payments obtained for debts in the B account. The
Commission is ensuring the follow-up to the results of its
inspections with the Member States concerned to obtain reme-
dial measures.

3.13. Several anomalies were noted in reporting the B
account balances to the Commission (Denmark, Ire-
land, Italy, the Netherlands, Sweden and the United
Kingdom). For some Member States, the amounts shown
as recovered on the B-account statements did not match
the corresponding figures on the A-account statements
(Germany, Ireland, Italy and the United Kingdom). These
discrepancies, which might indicate that amounts due
to the Commission were not made available or were
made available late, were not systematically analysed.
nor were A- and B-account statements always reviewed
to ensure their completeness.

3.13. As a part of its ongoing risk-assessment-based con-
trol activities, the Commission checks the completeness of A-
and B-account statements and follow-up is given to remedy
anomalies in the reporting requirements (see comments for
point 3.7). As experience has shown that differences between
A- and B-account statements arise almost always from Mem-
ber States’ difficulties in providing accurate B-account data
and not from problems in making recovered amounts avail-
able, the anomalies referred to by the Court had not yet been
followed up at the time of the Court’s audit. The Commission
is currently giving appropriate follow-up to these discrepan-
cies.

Commission supervisory systems and controls

3.14. Under Article 18 of Council Regulation (EC, Eura-
tom) No 1150/2000, the Commission may request that
Member States carry out inspections concerning the
establishment and making available of traditional own
resources, and may also carry out such inspections itself,
either in association with the Member State authorities
inspection reports are
or autonomously. Individual
addressed to the Member States involved and these
reports, together with the replies received, are examined
during meetings of the Advisory Committee on Own

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Resources. An overall report on the functioning of the
inspections is drawn up every three years and presented
to the budgetary authority (7).

3.15. The Court has reviewed the work of the Com-
mission unit that carried out these inspections, includ-
ing the criteria used to select themes for inspection, and
its methodology and documentation. The unit’s meth-
odology is supported by a well established audit manual.
Audit work is increasingly done in the context of a joint
audit initiative that involves functionally independent
internal audit units of customs. The unit visits every
Member State at least once a year. Its choice of themes
to cover reflects a risk analysis process.

3.15. The Commission strongly endorses the joint audit
arrangements. Audits under these arrangements continue to
be successfully performed in Austria, Denmark and the Neth-
erlands. Three further Member States have expressed interest
in joining in the near to medium term. In addition, some
accession States have already similarly expressed interest and
the Commission will actively pursue their participation pro-
vided the necessary conditions are fulfilled.

3.16. The reports issued by the unit are clear and
properly evidenced. In 2002 they covered the operation
of small and medium-sized customs offices, customs
clearance of cereals, and B accounts (see paragraph 3.12).
In the small and medium-sized customs offices the
Commission found that compliance with Community
regulations was generally satisfactory. As regards cere-
als, it was found that in several Member States the pro-
cedures in use were not fully compliant with Commu-
nity regulations. In respect of both themes, a number of
shortcomings in the system for making own resources
available were identified.

It is not the unit’s role to give overall assurance
3.17.
that the accounting is correct and that all duties due are
identified and established. The results of the unit’s work,
however, are taken into account by the Court in reach-
ing its conclusion on the Statement of Assurance.

(7) The latest is document COM(2003) 345 final, fourth
report from the Commission on the operation of the
inspection arrangements for traditional own resources
(2000 to 2002).

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Customs surveillance of arrivals of goods at airports

3.18. Control over goods entering the EU customs ter-
ritory by air transport is based on the following control
(sub-)systems:

(a)

controls of arriving aircraft and unloading of cargo;

(b)

controls over temporary storage or warehousing
of goods (8) awaiting a further customs destina-
tion;

(c)

controls of goods declared for free circulation or
other customs regimes or destinations.

3.19. The Court examined customs clearance through
airports in 11 Member States (see footnote 2) where
import duty collected constitutes a major revenue stream
representing, at national level, between 4 and 30 % of
duty collected. The audit concentrated on an evaluation
of the customs surveillance and control procedures
applied which are intended to ensure that all goods are
declared properly and in good time and that import
duties are correctly established.

Control plans

3.20. Community legislation does not generally pre-
scribe either particular methods or the level of customs
control, this being at the discretion of the Member
States. Control strategies for airports need to minimise
risks to revenue, by ensuring that goods arriving at air-
ports are under continuous customs surveillance until
they are either released for free circulation or a customs-
approved treatment is assigned to them.

(8) A warehouse is a customs regime where, subject to cer-
tain rules, goods can be stored without time limits. Tem-
porary storage provides for the possibility of storing goods
prior to a customs-approved treatment for a maximum
period of 20 days.

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3.21. A particular characteristic of air cargo is the high
volume of parcels and the simplified procedure, where
the manifest (9) is regarded as a summary declaration
on which the status of the goods is indicated either with
a ‘C’ for Community goods or a ‘T’ for third country
goods.

3.22. The above elements should be the basis for decid-
ing on the level and type of control, usually a mix of
physical spot checks of goods, reviews of inventory and
stock records and checks on declarations.

3.23.
In five of the Member States visited (Belgium,
France, Denmark, Netherlands and United Kingdom)
the airport customs had devised specific control plans
taking into account the above mentioned risks and con-
trol activities related to temporary storage and ware-
housing.

Controls on aircraft arrivals and entry of unloaded goods into tem-
porary storage

3.24.
In all Member States visited the system of surveil-
lance of the arrival of goods is largely based on what is
considered to be a self-controlling system by private
operators from the unloading of an aircraft to the dis-
posal of goods. An effective system for reporting on dif-
ferences between cargo items listed on cargo manifests
and entered in temporary storage or a customs ware-
house regime, and for the follow-up to such differences,
constitutes an indispensable element of such a surveil-
lance system.

In France, customs’ information about arrivals
3.25.
is insufficient to enable them to check that all goods are
in fact presented. In Austria, Spain and Sweden there
are no clear procedures for reporting differences.

3.25. The Commission is examining closely the procedures
for presenting goods to customs at French and Spanish air-
ports. Similarly, it is analysing the procedures used in Sweden
and Austria for reporting differences. Appropriate follow-up
is being given by the Commission.

(9) Commercial document listing all cargo carried by aircraft.

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3.27. The anomalies found in the various Members States
concerning temporary storage and warehousing referred to by
the Court are being followed up by the Commission so as to
ensure compliance with the rules. Corrective action will be
taken, where appropriate.

3.26. Only two of the Member States visited (Belgium
and the Netherlands) use traditional customs controls
such as routine reconciliation between the number of
arriving aircraft and the manifests lodged, and supervi-
sion of the unloading of aircraft. The main reason for
this is that only in a few Member States do the customs
authorities have direct access to the computer system
operated by the airport authorities (10).

Temporary storage and warehousing

3.27. Cargo arriving by air can be put in temporary
storage for a maximum of 20 days before it is assigned
to a customs-approved treatment or use. Some Member
States authorise goods to be placed directly under a cus-
toms warehouse regime instead of in temporary stor-
age, which gets round the 20-day deadline and allows
cargo to be stored without any time limits. Apart from
differences in control practices (11), the Court identified
some weaknesses in the control arrangements. In Ger-
many customs relied entirely on an electronic clearance
system and no customs checks on temporary storage
facilities were carried out. In Austria, the frequency and
scope of controls on warehouse operations were insuf-
ficient. In Germany the 20-day period for temporary
storage was frequently exceeded. As appeared from a
built-in control feature in the IT system. In the United
Kingdom, some similar differences were not promptly
followed up.

Control of the status of goods under simplified procedure (transit)

3.28. An airline company may be authorised to use a
manifest as a transit declaration, which uses the identi-
fication ‘T’ for third-country goods and ‘C’ for goods
whose Community status can be demonstrated.

(10) It is noted that in some countries (Netherlands, Italy, Den-
mark and Sweden) the customs only get information
related to third-country flights. However, Community
flights may carry non-Community goods in transit (see
paragraph 3.28).

(11) Certain Member States (for example Spain and Italy) pre-
scribe control frequency and methods at national level;
others (for example the Netherlands and the United King-
dom) establish central guidelines but delegate implemen-
tation decisions to regional or local level.

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3.29. According to Article 445(4) of Commission
Regulation (EEC) No 2454/93 as last amended by Regu-
lation (EC) No 1335/2003, the customs authorities at
the airport of destination should transmit to the cus-
toms at the airport of departure details of manifests for
verification, if considered necessary. Only at three air-
ports visited (Austria, Belgium and Denmark) had such
subsequent verifications been carried out in a consistent
manner. In one control operation it was found that out
of 41 shipments indicating ‘C’, 10 were in fact third-
country goods. At the other airports visited, this check
had either never or rarely been undertaken.

Customs clearance by fast couriers

3.30. Certain airports have granted special facilities to
fast courier companies in order to ensure that the goods
are cleared rapidly. In one Member State (Sweden)
import declarations for high-value goods (>22 euro)
could be handed in up to 11 days after the goods had
left storage, which means that goods can leave storage
without controls and without all the necessary docu-
mentation (for example invoices or preference certifi-
cates) being present.

3.31. Low-value goods (≤ 22 euro) can be considered
a special risk, as no customs duty is charged. Few Mem-
ber States had undertaken special control actions in this
area but those that had done so (Denmark and the
United Kingdom), identified a significant rate of irregu-
larity.

Transfer of goods between airports

3.32. Goods can be moved by road between airports
under a transit system. In one Member State (France),
frequent movements of goods take place without the
customs procedures of the transit system being respected
(absence of customs stamps by office of departure and
arrival and no indication that the goods had been sealed
during transport).

3.29. Under the joint audit initiative Austria, Denmark
and the Netherlands all examined the control of transit move-
ments by air. All found areas of concern. Since those audits
were carried out the regulatory requirements have changed.
The Commission took note of those findings and included
them in its risk analysis when selecting themes for control in
2003. The Court’s comments will also be included in the pro-
cess for 2004.

3.30. The Commission will ensure the follow-up to the
remarks made by the Court and corrective actions will be
taken when appropriate.

3.31. The Commission will consider taking steps to check
whether Member States have adequate control mechanisms to
cover these risks.

3.32. The Commission is examining the point relating to
transit procedure between airports in France. Action will be
taken, if appropriate.

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Conclusions and recommendations

3.34. With regard to special risks at airports, the Commis-
sion will draw the attention of the Member States to these
risks at the next meeting of the Advisory Committee.

3.33. Taking into account the scope of the audit (see
paragraph 3.5) and with the exception of the B accounts
matters noted in paragraph 3.12, the checks and sys-
tems analysis carried out by the Court gave satisfactory
overall results concerning the reliability of the accounts
used for recording traditional own resources.

3.34. The audit work carried out on the systems and
related transactions which underly the accounts has also
given satisfactory overall results as far as the legality and
regularity of the underlying transactions is concerned
(see also indicators in Annexes 1 and 2). However, there
is scope for Member States to improve the national
instructions in respect of the control regime for airports
so that the special risks at airports (e.g. value and status
of goods and differences between cargo declared and
unloaded) are covered. Customs authorities should also
have knowledge of all flight arrivals in advance so they
can better plan the control to be undertaken.

VAT/GNP own resources

3.35.
In contrast to the EU’s revenue from traditional
own resources, the VAT and GNP own resources reflect
macroeconomic statistics whose underlying data can-
not be tested directly. Therefore, the VAT/GNP audit
takes as its starting point, the receipt by the Commis-
sion from the Member States of the macroeconomic
aggregates (either as forecasts or as real figures) and
seeks to assess the Commission’s system for handling
the data until they are ultimately reflected in the final
accounts. The Court looks at the difficult question of
the quality of the macroeconomic data separately in
special reports, such as Special Report No 17/2000 (12).

(12) Special Report No 17/2000 on the Commission’s control
of the reliability and comparability of the Member States’
GNP data (OJ C 336, 27.11.2000).

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Commission supervisory systems and controls

3.36. The Commission’s inspection activities (13), car-
ried out in cooperation with the Member States, con-
stitute an important element of the control system for
VAT/GNP related own resources. The Court has reviewed
the work of the units carrying out these inspections.

3.37.
In respect of the VAT-related own resources, the
Commission’s on-the-spot inspections have proved to
be of great value as they have given rise to many reser-
vations (85 still valid at the end of 2002), several of
which relate to the amount of net VAT collected. These
observations cast doubt on the accuracy and reliability
of the VAT statements produced by Member States (14).

3.38. The preparation and the reporting on these
inspections, which are centred on the Member States’
VAT statements as well as the follow-up of the audit
observations, are of good quality. However, the Court
notes that inspection activities related to the collection
of VAT in Member States have been limited and that the
abovementioned reservations have not yet been quanti-
fied.

3.38. Article 11(1) of Council Regulation (EEC, Euratom)
No 1553/89 of 29 May 1989 on the definitive uniform
arrangements for the collection of own resources accruing from
value added tax requires the Commission to ensure in particu-
lar that operations to centralise the assessment base and to
determine the weighted average rate and the total net VAT
collected have been performed correctly, and also to verify the
data and calculations used for corrections and compensations.
The collection of VAT is explicitly referred to in Article 12 of
the Regulation, which requires the Commission to examine
this matter and to consider possible improvements in a trien-
nial report (1). When reservations concern cases where tax has
not been charged, where no data have been provided or where
the Commission questions data used by a Member State, it is
usually very difficult for the Commission to quantify the
impact on the base at the time when the reservation is made.
Quantification normally requires subsequent discussions with
the Member State concerned.

(13) The inspection visits are based on Council Regulation
(EEC, Euratom) No 1553/89 of 29 May 1989 on the
definitive uniform arrangements for the collection of own
resources accruing from value added tax (OJ L 155,
7.6.1989, p. 9) and Council Regulation (EC, Euratom)
No 1150/2000 of 22 May 2000 implementing Decision
94/728/EC, Euratom on the system of the Communities’
own resources (OJ L 130, 31.5.2000, p. 1).

(14) The VAT statement is a document drawn up by the Mem-
ber States which must contain the data used to determine
the VAT base, which constitute the basis for the calcula-
tion of the VAT own resource and which are required for
the Commission’s control (Articles 7 and 11 of Council
Regulation (EC, Euratom) No 1553/89)
(OJ L 155,
7.6.1989, p. 9).

(1) The 5th such report is now in preparation and will be published

in 2004.

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3.39. Before 31 July the Member States must send the
Commission the so-called VAT statement for the previ-
ous calendar year, which contains all the data necessary
for the calculation of the VAT own resource. Greece
sent its VAT statement for 2001 five months overdue
and Portugal’s VAT statement for 2001 is still outstand-
ing, which is hampering the Commission’s inspection
activities, as outlined above.

3.39. Although Greece’s final VAT statement was indeed
received late, a provisional summary of the forthcoming state-
ment was received before the deadline. The Commission accepts
that Portugal has completely failed to meet its obligations as
regards the transmission of its VAT statement for 2001 and
is preparing legal proceedings against the Member State on
this matter.

3.40. Concerning the GNP-related own resource, the
Court has found that the Commission directs much of
its GNP inspections activities to methodological issues
(ESA 95 inventories (15)). GNP control missions in Mem-
ber States do not generally check whether the output
from the GNP questionnaires (16) corresponds to the
applicable methodology.

3.40. The checks by the Commission are grounded in a
thorough analysis of the procedures used by Member States to
compile their GNP, based on inventories of sources and
methods that are thoroughly analysed by the Commission and
discussed in missions to the countries. These inventories nor-
mally include a numerical illustration for one year (usually
1995) of the transition from basic data to the data included
in the GNP questionnaire for that year.

3.41. Controls on the GNP questionnaires are essen-
tially based on the expertise of the desk officers for the
countries in question and there exist no specific check-
lists to ensure standardised procedures for verifying
GNP data.

3.41. See response to point 3.51.

VAT collection in Member States

3.42.
In addition to the audit work related to the Com-
mission’s accounts for the VAT own resource, the Court
examined the collection of VAT (17) in seven Member
States (18) and reviewed the role of the Commission in
its capacity as authority with management responsibil-
ity for the correct application of EU legislation, con-
cerning the VAT-based own resource.

(15) The inventory is a document produced by each Member
State that lays down the specific methods to calculate the
GNP figures based on the European system of accounts
(ESA 95).

(16) The questionnaire is the document based on a common
model by which the national statistical offices communi-
cate the GNP figures to Eurostat each year.

(17) The collection of VAT in Member States constitutes one
of the key factors in the calculation of the VAT own
resource.

(18) Germany, Belgium, Denmark, Italy, Luxembourg, Austria

and Sweden.

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3.43.
From this work the following conclusions can
be drawn. Calculations of the data and figures underly-
ing the figures presented in part I of the Member States’
VAT statements and the build-up of the net VAT col-
lected figure in this statement sometimes show differ-
ences in respect of presentation and terminology, which
could render the control and comparison of this part of
the VAT statement difficult.

3.43. Community legislation does not provide for a stan-
dard format for annual VAT statements, nor does it confer
implementing powers on the Commission or on the ACOR,
to adopt measures to this end. Where the presentation poses
a problem, the Commission requests suitable changes in future
statements. The move to electronic transmission of statements
and their accompanying data and documentation since 2001
(statements for 2000), together with the publication of the
documents on the Commission’s CIRCA Intranet, as well as
the regular methodological discussions held in the ACOR,
have all encouraged greater standardisation and transparency.
The Commission will continue to examine to what extent fur-
ther standardisation and transparency are achievable.

3.44. Not all Member States’ accounting systems for
VAT receipts show, for a specific fiscal year, the amount
of VAT due to be paid by taxpayers, the amount col-
lected, the amount outstanding, the amount subject to
enforcement procedures and the amount of VAT col-
lected after enforcement. Neither did all Member States’
accounting systems for recording and centralising VAT
payments include an audit trail which allows the track-
ing of (individual) VAT amounts due and the payment
thereof via the centralisation of these amounts to their
inclusion in the amount of net VAT collected that is
mentioned in the Member States’ VAT statements.

3.44. Article 7 (1) of Regulation (EEC, Euratom)
No 1553/89 obliges Member States to send the Commis-
sion a statement of the total amount of the VAT resources
base for a given year, calculated in accordance with Article 3
of the Regulation. Article 3 mentions only the total net rev-
enue collected by a Member State during the year in ques-
tion. It does not refer to the other amounts listed by the Court.
Nevertheless, at the next meeting of the ACOR, the Commis-
sion will ask Member States whether they might provide this
information. The Commission will also encourage Member
States to take all necessary measures to ensure that effective
audit trails exist.

3.45. Although precise and comparable data for all
Member States are not available (19), there exist wide-
ranging differences between Member States’ enforce-
ment procedures which affect the collection of VAT,
and thus the calculations of VAT own resources in
Member States.

3.45. The Commission consistently uses the available instru-
ments to increase awareness of solutions and encourage the
adoption of best practice in the field of enforcement. The Fis-
calis programme and successive reports pursuant to Article 12
of Regulation (EEC, Euratom) No 1553/89 and Article 14
of Council Regulation (EEC) No 218/92 of 27 January 1992
on administrative cooperation in the field of indirect taxation
(VAT) (2) are of particular importance in this respect. Any
actions aimed at achieving greater harmonisation in this area
would have to take account of the principle of subsidiarity. At
the present time the Member States do not generally see a
need for harmonised procedures.

(19) The Sector has requested Member States to produce, for
the years 2000 and 2001, data in respect of the amounts
sent to enforcement and their collection.

(2) OJ L 24, 1.2.1992, p. 1.

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3.46. The problem of reconciliation in Germany was sub-
ject to a Commission reservation for several years. The Ger-
man authorities have explained why the differences arise and
the Commission accepted the figures in the annual statements
despite the apparent discrepancies. The Commission has asked
the German federal authorities to improve their accounting
practices in order to eliminate the divergences. The Commis-
sion maintained a reservation against Italy on the point men-
tioned by the Court, until the Italian authorities produced the
evidence required.

3.46.
From a review of Commission inspections in
Member States (20) carried out in the period 2000 to
2002 (see paragraph 3.37), the following observations
related to the collection of VAT were noted:

— in Germany, the Commission’s auditors accepted,
for the years 1998 and 1999, the figure for net
VAT collected that was shown in the annual VAT
statement though these amounts could not be rec-
onciled with the amounts in the annual accounts
of the German State,

— in Portugal it was not possible to reconcile the net
VAT receipts with the State accounts for the year
1998; the Commission has put a reservation on
this,

— in France, receipts related to fines and default inter-
est for Metropolitan France and the receipts for the
overseas departments for the years 1999 and 2000
were incorrectly entered in the VAT statements and
had to be recalculated,

— in Italy, documentation in support of the amount
of refunds deducted from the gross receipts in the
VAT statement for the year 1998 could not be pro-
duced.

Annual GNP procedure and the related controls

3.47. National GNP questionnaires (containing macro-
economic aggregates) are the main instrument by which
the GNP data are communicated to the Commission.
After their consolidation into a single GNP question-
naire, and once checks have been carried out by the
Commission and an opinion has been given by the GNP
Committee (21), the data are sent to DG Budget for cal-
culating the GNP-related own resource.

(20) These inspections were carried out on the basis of Regula-
tion (EEC, Euratom) No 1553/89, Article 11 on the defini-
tive uniform arrangements for the collection of own
resources accruing from value added tax.

(21) Liaison between the Commission and the Member States
is institutionalised through the GNP committee. The com-
mittee consists of representatives of the Member States
and of the Commission. The chairman of the committee
is a representative of the Commission. The GNP commit-
tee examines Member States’ calculations of their GNP at
market prices and related methodological problems, in
accordance with Council Directive 89/130/EEC, Euratom
of 13 February 1989.

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3.48. The Court examined the role of the Member
States, the Commission and the GNP Committee in the
annual GNP procedure as well as the Commission’s
verification activities in respect of selected figures (22)
within the GNP questionnaire for 2002.

3.49. The Commission’s verification of selected figures
from the GNP questionnaire was tested for six Member
States (23) but several observations apply, in the Court’s
view, to the Commission’s work on all Member States.

3.50. With regard to the procedures for the transmis-
sion of GNP data for own resources purposes, the pro-
cess is, on the whole, sufficiently flexible and robust
and the results of the checks carried out by the Com-
mission are well documented. The checks have pro-
duced results in the form of changes to the GNP figures.

3.51. However, the procedures for checking the data
in the GNP questionnaires are of an ad hoc character,
and the exact nature of the checks carried out beyond
the simple initial arithmetical test is unclear. There are
no specific guidelines for the desk officers to follow,
which could lead to the nature of the checks performed
varying from one country to another. The effectiveness
of the checks carried out thus depends largely on the
expertise of the desk officer concerned.

3.51.
Incoming GNP data are thoroughly checked in two
stages. The first stage is spreadsheet based and comprises a
number of standardised consistency checks and a systematic
revision analysis. The second stage is carried out by the desk
officers who are highly experienced national accountants with
specific knowledge of the countries they are responsible for.
That expertise allows them to target known problem areas
specific to the country. The Commission will make an effort
to further standardise this second stage of checks. Addition-
ally of course the Commission checks that the value of GNP
and its main components corresponds to the equivalent figure
in the regular national accounts publications in the Member
States.

3.52. There is little direct verification by the Commis-
sion of the figures presented in the GNP questionnaire,
e.g. by examining the data used by the National Statisti-
cal Offices (NSO) when producing the questionnaires.

3.52. The Commission does little direct verification of data
in the GNP questionnaires in the sense indicated by the Court.
Some direct verification takes place in the context of the
analysis of Member states inventories. The Commission is
prepared to examine the possibility of doing more direct veri-
fications in the future.

(22) Line 4, taxes on products (identified as D.21 in the ESA

95) in particular VAT (D.211).

(23) Belgium, Spain, Luxembourg, Austria, Sweden and the

United Kingdom.

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3.54. The content and presentation of the inventories do
indeed vary. Often the information is included in another sec-
tion of the inventory. Where this is not the case, the Commis-
sion has requested supplementary information. The Commis-
sion confirms that the absence of inventories for France and
Luxembourg does hinder their verifications of GNP.

3.53. As far as the quality control of GNP is con-
cerned, the Commission directs much of its control
operations towards the methodological issues laid down
in the inventories, the current priority being the
changeover to ESA 95 and the analysis of new invento-
ries.

3.54. Although the Commission has developed both
a standard structure for the new inventories to follow
and an assessment questionnaire to ensure a systematic
and fair analysis of the inventories, the audit showed
that discrepancies between inventories do exist, and that
the standardised structure, although respected by all
countries (who have provided an inventory) in prin-
ciple, differed widely in practice in both content and
presentation. France and Luxembourg have not yet pro-
vided inventories, which means that the Commission
cannot verify the correctness of their GNPs and thus the
calculations of the related own resource.

Conclusions and recommendations

In relation to the scope of the audit, as set out in
3.55.
paragraph 3.35, the Court found that the VAT and GNP
resources were being correctly calculated by the Com-
mission and entered in the Community accounts. How-
ever, the audit of VAT collection in Member States has
identified certain problems related to collection which,
as well as the reservations mentioned in paragraph 3.37,
cast some doubts on the accuracy and reliability of the
VAT statements produced by the Member States and
provided to the Commission.

3.56. To address this situation the Court recommends
that the Commission should take the following actions:

3.56.

(a)

implement a standard layout for the presentation
in the VAT statement of at least the figure of net
VAT collected;

(a) As noted in the reply to point 3.43, Community legisla-
tion does not provide for a standard layout but the Com-
mission will nonetheless continue to encourage greater
standardisation and transparency.

(b)

explore the possibility of including in the VAT
statements the amount of VAT assessed as to be
paid for the year in question;

(b) The Commission will, at the next ACOR meeting, invite

Member States to provide this information.

(c)

request Member States to provide an audit trail for
the collection of VAT;

(c) The Commission will raise with Member States, at the
next ACOR meeting, the need to ensure the best possible
quality of audit trails for the collection of VAT.

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(d)

encourage Member States to use best practice in
respect of enforcement procedures;

(d) The Commission will continue to use the available instru-
ments to increase awareness of solutions and encourage
the adoption of best practice in the field of enforcement.

(e)

expand its control activities on the collection of
VAT by Member States.

3.57.
In respect of the GNP-related own resource, the
Court recommends that the Commission increases its
control activities on the correctness and reliability of
the data given in the GNP questionnaire, in addition to
the important checks which are at present carried out
in respect of the methodology, in order to increase the
reliability of the calculation of the most important own
resource (see also indicators in Annex 2).

(e) The Commission considers that it must strike a balance
between respect for the right of Member States to orga-
nise the collection of VAT, over 95 % of which accrues
to national treasuries, in the most appropriate way, and
the need to ensure that own resources are adequately pro-
tected. It therefore prefers to use the reports required by
Article 12 of Regulation (EEC, Euratom) No 1553/89
to comment on the collection of VAT by Member States
in the context of own resources.

3.57. Detailed responses are given in the points above.

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ANNEX 1

Own resources — Development of key observations

Observations

Measures taken

Measures to be taken

Making available of own resources
Delays in making available of traditional own resources

The Court’s examinations of the accounting and
centralisation procedures for traditional own
resources have from time to time shown that
certain established entitlements were not made
available to the Commission or were made avail-
able with significant delays.

The Commission unit charged with the inspec-
tion activities provided for in the Regulation
(Council
Euratom)
No 1150/2000) acts on all cases of delay, and
Member States are invited to pay default inter-
est when appropriate.

Regulation

(EC,

In the course of its regular inspections the unit
has increased its emphasis on accounting mat-
ters, and systems’ problems have been addressed
when found either by the Court or by the
Commission.

Amounts established but not yet made available
Content of the accounts

Entries in the B accounts contain errors includ-
ing late and duplicated entries,
incorrect
amounts, and entries that should have been
made in the A accounts.

Regulation

The Commission unit charged with the inspec-
tion activities provided for in the Regulation
Euratom)
(Council
No 1150/2000) has devoted considerable
resources to B accounts, and has reported on
the problems found, but in several Member
States systematic problems remain.

(EC,

The Commission’s actions are satisfactory.

Certain Member States need to devote resources
to improving
systems
concerned.

the bookkeeping

ANNEX 2

Supervisory systems and controls

Area: Own resources
System: Traditional own resources and VAT/GNP resources

Aspects of the Commission supervisory
system

Conception

Practical transposition in procedural
stages:
— compliance with standards
— taking into account of experi-

ence

Actual operation:
— compliance with standards
— taking into account of exper-

ience

Results:
— remedial effect
— preventive effect

Overall assessment

Traditional own resources

VAT

GNP

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A Works well, few or minor improvements required.
B Works but improvements necessary: more direct verification of GNP data and standardisation of checks required. It is also noted that there exists a general reserva-

tion for all GNP data for the years since 1995 and that France and Luxembourg have failed to provide inventories.

Notes:
— The supervisory systems predate the Commission’s reform.
— The assessments are based on detailed review of the monitoring units and of their reports.

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CHAPTER 4

The common agricultural policy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Scope of the audit

Certification of paying agencies’ accounts

Operation of IACS checks

The Court’s sample of transactions

Paragraph

4.1-4.4

4.5-4.52

4.5-4.6

4.7-4.8

4.9-4.13

4.14-4.15

Annual activity report and declaration by the Director-General for Agriculture

4.16-4.21

The Court’s assessment of areas of CAP spending

Area aid schemes

Animal premium schemes

Subsidies paid on the basis of quantity produced

Rural development

Other expenditure

Conclusion

Recommendations

Clearance of Accounts

Introduction

Financial clearance decision for 2002

Audit opinions of certifying bodies

Shortcomings in the work of certifying bodies

Compliance with Commission guidance

The Commission’s decision

Conformity decisions taken in 2002

Adequacy of corrections

Time taken to reach conformity decisions

Coverage

Clearance of accounts decisions in recent years

Conclusion on clearance of accounts

4.22-4.48

4.22-4.28

4.29-4.33

4.34-4.37

4.38-4.40

4.41-4.48

4.49

4.50-4.52

4.53-4.72

4.53

4.54-4.58

4.55

4.56

4.57

4.58

4.59-4.67

4.60-4.62

4.63-4.64

4.65-4.67

4.68-4.70

4.71-4.72

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Follow-up to previous observations

Greening the CAP

Main observations of the Court

Actions taken by the Commission

Proposal for mandatory cross-compliance

Reform of the COM for livestock

Reforms of the COMs for fibre flax and dried fodder

Member States’ failure to implement the Nitrate Directive

Enforcement of good farming practices

Performance of environmental evaluations

Conclusion

Community measures for the disposal of butterfat

The Court’s findings

Action taken by the Commission

Conclusion

Principal observations in Special Reports

Subsidies on exports of agricultural products (export refunds)

Introduction

Prefinancing

Fixing of refund rates

Sound financial management of the common organisation of the market in
dried fodder

Introduction

Audit findings

Recommendations

Production aid scheme for cotton

Support for less-favoured areas

Introduction

Main findings

Recommendations

4.73-4.94

4.73-4.89

4.73-4.74

4.75-4.86

4.76-4.77

4.78-4.79

4.80

4.81-4.82

4.83

4.84-4.86

4.87-4.89

4.90-4.94

4.90-4.91

4.92-4.93

4.94

4.95-4.130

4.95-4.102

4.95-4.96

4.97-4.100

4.101-4.102

4.103-4.110

4.103-4.105

4.106-4.109

4.110

4.111-4.122

4.123-4.130

4.123-4.124

4.125-4.129

4.130

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INTRODUCTION

4.1. Expenditure in 2002 on the common agricultural
policy (CAP), i.e. the European Agricultural Guidance
and Guarantee Fund (EAGGF Guarantee Section), totalled
43 521 million euro. Graphs 4.1 and 4.2 show how
the money was spent. Graph 4.1 shows the breakdown
of expenditure by economic category (direct payments,
export refunds, etc.). Graph 4.2 shows the distribution
by main agricultural sector (beef, olive oil, etc.).

4.2. Direct payments to farmers, based on the amount
of land they farm or the number of livestock on their
farms, constitute the greater part (58 %) of CAP spend-
ing. These payments, which have been an important
part of the CAP since its reform in 1992, are primarily
intended to compensate farmers for reductions that
have been made in CAP prices.

4.3. Virtually all CAP expenditure is effected by the
paying agencies of the Member States. For most expen-
diture the process is as follows:

(a)

(b)

farmers present claims to paying agencies in the
year before payment is due, based on areas culti-
vated, number of eligible animals owned during a
specified retention period, etc.;

the paying agencies subject these claims to admin-
istrative checks and, on a sample basis, to on-the-
spot-checks (mainly through the integrated admin-
istration and control system (IACS));

(c)

the Commission pays a cash advance to the pay-
ing agency;

(d)

the paying agency pays claimants, and reports
expenditure made to the Commission;

(e)

(f)

the accounts and payments of the paying agency
are examined by an independent auditor (certify-
ing body) who reports to the Commission in Feb-
ruary of the year following the budget year;

by 30 April of that year, the Commission must
reach a decision (financial clearance) on whether
to accept these accounts and audit reports or to
ask for more work to be performed or informa-
tion provided;

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Graph 4.1. — Breakdown of EAGGF-Guarantee expenditure by economic type — financial year 2002

(1) Other direct aid: production as well as processing or consumption aid paid to producers or organisations of producers or processors.
(2) Intervention: public and private storage, fruits and vegetables withdrawal arrangements, compulsory and voluntary distillation.
NB: This breakdown by economic type was calculated on the basis of gross figures before factoring in negative expenditure (recoveries, clearance and suspension of
advances and milk levies).

Source: The Commission’s annual accounts for 2002 — Volume II — Gross data.

Graph 4.2 — Breakdown of EAGGF-Guarantee expenditure by sector — financial year 2002

Source: The Commission’s annual accounts for 2002 — Volume II.

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(g)

the Commission may then examine payments made
by the paying agencies and if they were irregular,
or if financial controls were weak, may decide that
some expenditure should be borne by the Member
States concerned and not be charged to the EU
budget (in Community jargon, the Commission
‘disallows’ such expenditure as part of the ‘clear-
ance of accounts’ in ‘conformity decisions’). When
it disallows expenditure the Commission reduces
its payments to paying agencies accordingly (see
paragraph 4.59).

4.4. The Commission’s Director-General for Agricul-
ture produces each year an activity report (AAR) on the
Directorate-General’s spending and a declaration on its
legality and regularity.

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Scope of the audit

4.5. The Court:

(a)

reviewed the certified accounts of the paying agen-
cies (see paragraphs 4.7 and 4.8 for conclusions
relevant to the Statement of Assurance);

(b)

evaluated IACS inspection and reporting proce-
dures (see paragraphs 4.9 to 4.13);

(c)

tested transactions directly (see paragraphs 4.14
to 4.15);

(d)

examined the report and declaration by the
Director-General
(see para-
graphs 4.16 to 4.21).

for Agriculture

4.6. Paragraphs 4.22 to 4.48 set out the Court’s assess-
ment of the legality and regularity of expenditure under
the CAP, based mainly on the above sources of evi-
dence. Observations on the reliability of the accounts
are set out in Chapter 1, paragraphs 1.10 to 1.12, 1.14
to 1.16 and 1.30 to 1.31.

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Certification of paying agencies’ accounts

4.7. As explained in paragraph 4.3 above, there is an
annual ‘financial clearance’ decision in which the Com-
mission decides whether to accept the CAP paying
agencies certified accounts for the preceding budgetary
year. Paragraphs 4.54 to 4.58 set out the Court’s detailed
comments on the Commission’s financial clearance deci-
sion for 2002.

4.8. The following observations and conclusions on
the paying agencies certified accounts are of relevance
to the Statement of Assurance:

(a)

(b)

(c)

certifying bodies’ audits cover the accuracy of
financial information provided by the paying agen-
cies to the Commission. They can also provide
assurance that information supplied by farmers,
processors and exporters has been correctly pro-
cessed by the paying agencies;

the certifying bodies have signalled some signifi-
cant problems (described in paragraph 4.55) in the
way transactions are dealt with by the paying agen-
cies. Qualifications by the certifying bodies affect
expenditure of 300 million euro, and the Com-
mission and the Court have identified some other
paying agency accounts which contain a material
level of error not mentioned in the associated cer-
tificates. The Commission has not accepted the
accounts in respect of one quarter of the total
amount declared pending receipt of further infor-
mation or the completion of additional audit work;

on the other hand, the work of the certifying bod-
ies has contributed to improvements in the work
of the paying agencies and provides valuable assur-
ance on the reliability of financial information
supplied by paying agencies to the Commission.
On balance, the Court is able to place significant
reliance on the work of the certifying bodies in
respect of the accuracy of the paying agencies’
accounts;

(d)

the certifying bodies’ audits do not, however, pro-
vide assurance that the information supplied to
paying agencies by claimants under CAP schemes
is correct. For the legality and regularity of pay-
ments to claimants, only limited reliance can thus
be placed upon their work.

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4.10.
In accordance with Article 9a of Council Regulation
(EEC) No 3508/92 (IACS) as amended by Regulation (EC)
No 1593/2000, and although not compulsory until 1 Janu-
ary 2003 at the latest, most Member States ensured in respect
of a whole series of Community aid schemes also during 2002
that their administration and control systems were compat-
ible with IACS. This compatibility related to the computerised
database, the parcel and animal identification systems and
administrative checks.

Operation of IACS checks

4.9. Each Member State is required to have in place an
integrated administration and control system (IACS). It
comprises a computerised database of holdings and aid
applications, systems for identifying parcels of agricul-
tural land and identifying and registering animals, and
an integrated system of administrative controls and
on-the-spot inspections.

4.10. Approximately 58 % of CAP expenditure was
subject to these procedures and systems in 2002. The
aid schemes concerned, principally area and headage
aids paid to farmers, are managed by the Member States’
paying agencies, which are responsible for carrying out
the administrative checks (intended to ensure that claims
are eligible, that payments are made correctly and that
there are no double payments) and on-the-spot inspec-
tions (intended to check the accuracy of claims and thus
their compliance with regulations). In addition, areas
sown with crops subsidised on the basis of the quantity
of production (see paragraphs 4.34 to 4.37) are also
reported through the IACS declarations and subject to
the same checks as cultivated areas.

4.11. The Court last examined the implementation of
IACS in 1999/2000 (1). It has now carried out a further
audit, examining the way in which 15 paying agencies
in 10 Member States dealt with applications which led
to payments in 2002 (2). The audit:

(a)

reviewed the paying agencies’ administrative con-
trol and on-the-spot inspection systems and pro-
cedures;

(b)

re-inspected 90 claims inspected by the paying
agencies;

(c)

assessed the Commission’s monitoring of IACS.

(1) Special Report No 4/2001 (OJ C 214, 31.7.2001).
(2) Fifty-five of the 86 paying agencies are involved in pro-

cessing IACS transactions.

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4.12. The main findings of the Court’s audit are as fol-
lows:

4.12.

(a)

(b)

administrative procedures and checks to ensure
correct payments are generally good or satisfac-
tory;

arrangements for carrying out inspections and for
reporting individual results are also generally good
to satisfactory, though less reliance can be placed
on the results of inspections in respect of animal
premiums than in respect of arable aid payments;

(c) preparation and reliability of statistics necessary
for monitoring overall performance of IACS are
satisfactory in most cases;

(d)

risk analysis and selection procedures for inspec-
tions, important for the surveillance of the legal-
ity and regularity of aid entitlements while meet-
ing the minimum requirements of Community
legislation, are generally the weakest aspect of
Member States’ implementation of IACS, being
mostly just adequate;

(e)

there is scope to continue to improve guidance to
Member States on the application of IACS and the
use of information from the system.

Annex 2 sets out further details of the Court’s findings.

(b) The Court’s remark concerning animal premiums is
agreed, for which reason the Commission services have
laid even more emphasis over several years to scrutinising
inspection statistics supplied by Member States, result-
ing in many clearance of accounts procedures, which in
turn have been verified as soundly based by the Court.

(d) The Commission services have been making recommen-
dations over many years in line with those of the Court,
and amended the IACS legislation accordingly. Indeed,
IACS legislation was improved in respect of risk analysis
in 2001.

(e) Over the years the Commission considers that given the
limited number of staff it has established the correct bal-
ance of resources to adequately cover both aspects raised
by the Court.

The Commission points to the complete recasting dur-
ing 2001 of the IACS Regulation with entry into force
for claim year 2002, followed by a whole series of work-
ing documents and clarifications dedicated to ensuring
correct and uniform implementation by Member States.
Information received from Member States has been and
is used to good effect.

4.13.
For those Member States which have satisfacto-
rily implemented IACS (paragraph 4.17(c)), IACS inspec-
tion results represent an important source of evidence
on the legality and regularity of CAP transactions.

4.13. Even in Member States where improvements in imple-
mentation are needed, the Commission considers IACS inspec-
tion results to provide important information.

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The Court’s sample of transactions

4.14. The Court examined a representative sample of
232 payments drawn from the accounts of 25 paying
agencies (responsible for 70 % of CAP expenditure) in
12 Member States. Each payment was examined at the
level of the paying agency and the final beneficiary.
These tests provide direct evidence on the basis for the
claims made by farmers, of the accuracy of financial
information, and the application of Community legisla-
tion.

4.15. The Court’s audit indicates that, as in previous
years, CAP expenditure was materially affected by
error (3). A large number of the transactions examined
by the Court were subject to errors, most often at the
level of the final beneficiary.

Annual activity report and declaration by the
Director-General for Agriculture

4.16. The activity report for 2002 prepared by the
Commission’s Director-General for Agriculture describes
what the Directorate-General has done during 2002. It
includes a declaration by the Director-General that, sub-
ject to five reservations (three of which are relevant to
the EAGGF Guarantee Section), he has reasonable assur-
ance that:

(a)

(b)

the resources allocated to the activities described
in the report have been used for the intended pur-
poses and in accordance with the principles of
sound financial management; and

the Directorate-General’s internal monitoring and
control procedures are adequate to guarantee the
legality and regularity of the underlying transac-
tions.

(3) As explained in paragraphs 4.22 to 4.48 which draw on
all the sources of evidence available to the Court, differ-
ent areas of the CAP are subject to different degrees of
risk, e.g. expenditure on arable crops appears to be the
lowest risk category of CAP spending.

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4.17. The reservations that are relevant to the EAGGF
Guarantee Section concern:

4.17.

(a)

(b)

a continuing risk of fraud through the re-import
into the Union of subsidised agricultural products;

continuing weaknesses in the management of the
International Olive Oil Council;

(a) and (b) The two reservations concerning risk of ‘carousel’
and the International Olive Oil Council were
carried-over from the Director-General’s declara-
tion for 2001. For both reservations, action plans
were set up in 2002 in order to address the
weaknesses identified. The implementation of
these action plans progressed substantially dur-
ing 2002 and will be completed in 2003.

(c)

insufficient implementation of IACS in Greece.

(c)

The insufficient implementation of the IACS in
Greece has been addressed by the Commission
both through legal proceedings and financial
corrections imposed within the clearance of
accounts procedure. The Commission has in
2003 put in place a particular follow-up of the
implementation of the IACS in Greece to sup-
port the effort made by the Greek paying agency
(Opekepe) to rectify the situation.

4.18.
For EAGGF expenditure whose management is
shared with the Member States (over 99 % of the total)
the basis for the Director-General’s declaration is:

(a)

(b)

financial

the
(not 2002);

clearance decision for 2001

conformity decisions (see paragraph 4.59) taken
during 2002, which do not include corrections in
respect of 2002. (Conformity decisions on expen-
diture in 2002 will be taken in future years.)

In other words, the declaration is relevant to transac-
tions undertaken in years previous to 2002.

4.19.
It is unclear from the annual activity report
whether the Director-General relied on other control
procedures for his declaration. This, coupled with the
failure of the Commission to clarify the scope of the
responsibilities of the authorising officers in the areas
of shared management (action 12 of the Commission’s
action plan), raises further doubts as to the basis of the
Director-General’s declaration.

4.20. The Court is therefore of the opinion that the
contents of the Director-General’s declaration do not
constitute a useful basis for the Court’s Statement of
Assurance in respect of agricultural expenditure in 2002.

4.18 to 4.20. Article 53(5) of the new Financial Regula-
tion provides that ‘in cases of shared or decentralised manage-
ment, in order to ensure that the funds are used in accordance
with the applicable rules, the Commission shall apply clear-
ance of accounts procedures or financial correction mecha-
nisms which enable it to assume final responsibility for the
implementation of the budget in accordance with Article 274
of the EC Treaty and Article 179 of the Euratom Treaty’.

Thus, the assurance on the EAGGF-Guarantee can be based
on the existence of an effective clearance of accounts procedure.
The fact that corrections are decided some years after the year
of the expenditure concerned is an integral part of the clear-
ance procedure. The correction mechanism is completed by the
assurance which can be gained from the accreditation of pay-
ing agencies, the annual certification procedure and the IACS,
which permit a great deal of reliance on the control over the
expenditure declared.

In the Annual Activity Report 2003 DG Agriculture will
present in more detail the functioning of the clearance proce-
dure and of the control systems related to the transactions of
the financial year for which assurance is given

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.21. The Court notes that six of the 24 internal con-
trol standards (ICS) have only been partially imple-
mented in the Directorate-General for Agriculture. Of
particular concern are those related to supervision, to
the recording of exceptions and to the recording and
correction of internal control weaknesses.

4.21.
In the area of financial management the Directorate-
General for Agriculture respected the requirements of the stan-
dards. The Directorate-General for Agriculture received Finan-
cial Control’s annual award 2002 as the authorising officer
of the year. In some non-financial areas the Directorate-
General is still in the process of ensuring full respect of the
standards.

The internal control standards were set up in 2001 in order
to monitor progress in the implementation of all parts of the
internal reforms in the Commission. They require significant
administrative changes within all services, which inevitably
take a certain time.

The Court’s assessment of areas of CAP spending

Area aid schemes

4.22. Expenditure on arable crops paid on an area aid
basis amounted to 18 226 million euro in 2002, 42 %
of CAP expenditure. All of this expenditure is covered
by IACS.

4.23. The IACS inspection results for 2001 (i.e. in
respect of claims paid in 2002) are set out in table 4.1.
These results cover arable crops (81,2 % of the total area
inspected) but also forage areas and crops which are not
subsidised on the basis of the area cultivated. The over-
all rate of error in the 14 Member States which have
implemented IACS (not Greece) was 1,2 %, as compared
with 2,4 % in the previous year. This primarily reflects
the lower rate of error found in Italy. Member States
were not consistent in providing a breakdown of their
results, which affects the comparability of results
between Member States and beween the results of risk-
based and random testing. The overall results cannot
therefore be considered to provide a fair estimate of the
average level of errors.

4.23.
In spite of the inherent difficulties in compiling and
interpreting statistics from 15 Member States, the Commis-
sion believes that the lower error rate is due to the further
implementation of IACS, more effective control and sanction-
ing by Member States, and the audit and clearance of accounts
supervision undertaken by its agricultural audit service.

The Court correctly points out the variable nature of statistics
supplied by some of the Member States, and this is difficult
to overcome in the short term. However, the great majority of
Member States did provide adequate breakdowns for 2001,
and both they and the Commission continued to improve
reporting techniques in 2002 and 2003.

4.24. Overall,
the 14 Member States concerned
checked just under 10 % of claims, representing 11,75 %
of the area for which claims were made. The two Mem-
ber States which checked claims most extensively were
Italy (16,8 % of claims and 25,7 % of the area declared)

4.24. The Court’s remark relates exclusively to on-the-spot
checks. It is emphasised that annually all (i.e. 100 %) aid
applications are checked administratively, incorporating docu-
mentary checks on completeness and coherence of documents
and information, and cross-checks against independent data

108

EN

Official Journal of the European Union

28.11.2003

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28.11.2003

EN

Official Journal of the European Union

109

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

and Portugal (11,3 % of claims and 61,7 % of the area
declared). Both made extensive use of aerial and/or sat-
ellite photography to check declarations. Four Member
States found errors in more than half of the claims
checked, Luxembourg finding an error on nearly 90 %
of the claims checked (with little impact on the amount
claimed). Ireland, Italy and Denmark, however, found
less than 15 % of claims to contain error (see graph 4.3).
Detected errors had the greatest impact on the area
claimed in the Netherlands, where they amounted to
more than 3 % of the area checked (see graph 4.4).

to verify existence of the parcel and claimant, eligibility for aid
and cross-checks on parcels and claimants to avoid undue
multiple payments.

The number of claims checked on the spot represents almost
double the minimum regulatory requirement.

Both administrative and on-the-spot checks are executed prior
to payment, thereby avoiding undue charge on the Fund, which
in any case would have been minimal as only 1,2 % of the
area checked was actually revealed as non-eligible.

The Commission has the permanent and continuous task of
monitoring IACS implementation and does not find it neces-
sary to examine annually and in depth the variations in results
for a particular year. Instead the Commission considers it
more opportune to examine and rectify the underlying reasons
for potential differences and to take the appropriate action
under the clearance of accounts procedure.

4.25.
For some Member States the significant differ-
ence between the average size of claim submitted and
the average size of claim checked may have an impact
on the rates of error revealed. For example, in Portugal
(where the greatest divergence is apparent), an average
claim was for 18 hectares, but the average size of claim
checked was 98 hectares (see table 4.1). Finland and
Germany came closest to representativity on this mea-
sure (average area claimed 29 ha and 42 ha, average area
selected for inspection 30 ha and 44 ha respectively).

4.25.
IACS legislation has always envisaged an element of
representativity, which was further reinforced as from 2002 to
provide that between 20 % and 25 % of on-the-spot checks
must be selected at random.

As concerns Portugal, as the Court mentions in its previous
observation, on-the-spot checks were more than double the
regulatory minimum in number and covered almost 62 % of
declared surfaces.

Irregular expenditure in this area is most likely

4.26.
to arise in the following circumstances:

(a)

farmers claim for more land than they cultivate;

(b)

(c)

farmers claim for a crop receiving a higher pre-
mium when they in fact cultivate a crop which
receives a lower subsidy, or is not subsidised
through an area aid payment;

in exceptional cases, farmers claim for land which
was not cultivated prior to the introduction of area
aid payments in 1992, and is therefore not eligible.

4.26. The Court’s presumed risks to the Community budget
are agreed and form part of the basis for the Commission’s
own risk analysis for its own audit program. However, it
should be emphasised that in a Member State with a properly
performing IACS all appropriate controls are executed pre-
payment and so, ideally, such potential undue payments are
avoided.

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Official Journal of the European Union

28.11.2003

Graph 4.3 — Area aid. Results of IACS field inspections: percentage of applications inspected which were
overstated (1)

(1) 54 542 applications were overstated, i.e. 20,7 % of the total number of applications inspected by Member States. This represents a reduction of nearly 27 % compared

with the year 2000.

(2) Greece: data not sent to the Commission.
Source: DG AGRI — IACS 2001 Statistics relating to claims paid in 2002.

Graph 4.4 — Area aid. Results of IACS field inspections: average overstatement (1) in claims inspected

(1) Total overstatement amounted to 134 440 ha, i.e. 1,2 % of the total area checked by the Member States. This represents a reduction of nearly 50 % compared with

the year 2000. Italy alone explains 78,5 % of this reduction.

(2) Greece: data not sent to the Commission.
Source: DG AGRI — IACS 2001 Statistics relating to claims paid in 2002.

28.11.2003

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Official Journal of the European Union

111

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.27. The Commission believes that error rates are falling,
and generally agrees the causes, but would add to the list the
significantly improved quality of source material (i.e. photo-
graphs, satellite images and maps). Furthermore, the Com-
mission would also claim credit for the generally improved
situation due to its very active guidance of Member States,
especially noticeable since the late 1990s, and the very effec-
tive clearance of accounts procedure that has proved useful as
both a preventive and corrective tool.

4.27. Comparison between the results of the Court’s
audit and the inspections carried out under IACS is dif-
ficult. So far as comparison is possible, the Court’s audit
indicates a somewhat higher rate of error than do the
IACS results. However the Court’s work tends to con-
firm that underlying error rates are falling. Several fac-
tors may explain this:

(a)

administrative checks are becoming more effec-
tive, and make better use of information from
aerial photographs, land registry maps and previ-
ous claims;

(b)

reductions in some subsidies (such as oil seeds)
reduce incentives for farmers to grow one crop,
and claim the subsidy for another;

(c)

an ever increasing share of farmers (particularly
larger farmers) have been the subject of field inspec-
tion in previous years.

4.28. The Court’s audit
included 73 transactions
involving arable crop subsidy payments (in which
17 errors were found), and 41 set-aside payments (for
which 20 errors were found). As in previous years, most
of the errors identified by the Court involved discrepan-
cies between the arable area declared by farmers and the
area found when parcels were measured in the presence
of auditors. Nearly half of the discrepancies were of less
than 3 % of the declared area. A similar number of dis-
crepancies related to errors of between 3 % and 20 % of
the area declared. (4)The audit identified only two pay-
ments where the error exceeded 20 % of the area claimed,
one in France and one in Greece.

Animal premium schemes

4.29. Aid to livestock producers amounted to
7 164 million euro in 2002, 16 % of CAP expenditure.
More than 90 % of this sum subsidises the production
of beef and veal, the remainder subsidising the produc-
tion of sheep and goats. Typically, producers are paid

(4) Under IACS rules, errors of less than 3 % of the declared
area are corrected but not penalised. Errors of between
3 % and 20 % are corrected, and subject to a penalty.
Errors exceeding 20 % of the area declared lead to refusal
of the claim.

112

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Official Journal of the European Union

28.11.2003

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

on the basis of the number of animals kept for a speci-
fied ‘retention period’, subject to the observance of
quota limits and of maximum stocking densities.

4.30.
IACS inspection result statistics for animal pre-
miums, provided by the Member States to the Commis-
sion, show the number of animals missing or disal-
lowed. For the most important scheme, the suckler cow
premium (see table 4.2 and graph 4.5), 6,4 % of ani-
mals selected for on-site inspection in 2001 (i.e. in
respect of claims paid in 2002) were disallowed. Error
rates were high in Portugal (50,2 %) and in Italy (31,2 %)
where inspections covered respectively 22 and 30 % of
aid applications. In the other Member States, the reported
error rate was below 10 % and in 10 Member States it
was below 2 %. While 98 % of claims were inspected
the number of animals missing or disallowed in Greece
was very low (0,9 %). For the special beef premium the
percentage of animals missing or disallowed was 2,9 %
in 2001, for the extensification premium 1,6 %, for the
slaughter premiums 3,1 % and for the sheep and goat
premiums 10,6 %.

4.31.
For all animal premium schemes the overall per-
centage of errors in IACS statistics is to a large extent
influenced by exceptionally high error rates in one or
two Member States where unusually large numbers of
animals have been inspected. In most Member States,
the error rate is below 2 % for all animal premiums.
Overall, the percentage of animals found by IACS inspec-
tions to be missing or ineligible shows considerable
variation from year to year and from Member State to
Member State (see graph 4.5).

4.32. The direct testing performed by the Court
revealed:

(a)

(b)

(c)

over-declarations of livestock (United Kingdom,
Spain and Italy);

an overestimate of the forage area when calculat-
ing the density factor affecting entitlement to the
special beef premium (United Kingdom);

the absence of a farm register with which to check
that the statutory ‘retention’ period had been
observed (Netherlands);

4.30. The figures cited in respect of Greece, Italy and Por-
tugal are known to be insufficiently accurate. For Greece, the
weaknesses in the bovine identification and registration system
renders the figure for ineligible animals especially imprecise,
whilst for Italy and Portugal the suckler cow premium figures
are perhaps confused due to the inclusion of animals excluded
as being in excess of quota. A similar problem has been noted
in respect of the ewe and goat premium schemes.

4.31. Generally any error rates notified by the Member
States are naturally examined in the light of the Commission
agricultural audit service’s own findings established after
documentary audit and re-performance of on-the-spot checks,
which have indeed often cast doubt on the veracity of some
figures presented.

2001 was the first year in which most Member States were
able to fully utilise their bovine databases to detect irregulari-
ties.

4.32. The findings are fairly typical of those established
over several years in these and other Member States by the
Commission’s agricultural audit service.

28.11.2003

EN

Official Journal of the European Union

113

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114

EN

Official Journal of the European Union

28.11.2003

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(d)

(e)

shortcomings in the management of sheep premi-
ums, either because checks were inadequate or
because files took too long to process, resulting in
delays in payment (Italy);

non-observance of the statutory conditions,
in
particular neglect in the keeping of compulsory
registers of animals and in the handling of their
‘passports’ and ear tags.

4.33.
Frequent animal movements and the complex
conditions of the animal premium schemes are the main
reasons why the results of IACS checks in the animal
sector show higher error rates than for arable crops.
Both the results of IACS testing and the direct work of
the Court indicate that there is significant risk in this
area.

4.33. The majority of Member States have a properly func-
tioning bovine identification and registration database, which
in conjunction with properly executed (pre-payment) IACS
checks, mitigates the risk of irregular claims.

If the Commission accepts the Court’s opinion of higher risk
in respect of the animal premium schemes, it has to be stressed
that financial corrections in the context of the clearance-of-
accounts procedure are applied for those Member States whose
deficient systems have caused a risk to the Community budget.

Graph 4.5 — Suckler Cow Premium. Percentage of claims inspected with errors

(1) Germany and Spain: summary table at paying agency level.
(2) France: data for claims rejected include sanctions following both administrative and on-the-spot controls.
(3) United Kingdom: summary table of England, Northern Ireland, Wales and Scotland.

NB 1: Differences in percentage of errors detected may be explained both by differences in the number of inaccurate claims submitted and differences in the efficiency
of detection.

NB 2: A claim is fully rejected when a difference higher than 20 % is found between the number of animals declared and that determined to be eligible or when the
difference is the result of irregularities committed intentionally.

Source: DG AGRI — IACS 2001 Statistics, relating to claims paid in 2002

28.11.2003

EN

Official Journal of the European Union

115

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.34. Each of the schemes referred to by the Court became
compulsorily IACS-compatible as from 1 January 2003,
from which time the Commission expects that control mecha-
nisms will be significantly enhanced.

(a)

In the case of tobacco, the Regulation specifically pro-
vides for a penalty in the event of under-declaration of
the area, precisely to avoid the risk highlighted by the
Court.

Subsidies paid on the basis of quantity produced

4.34. Subsidies for the production of olive oil, cotton,
tobacco and dried fodder (5 316 million euro, 12 % of
CAP expenditure in 2002) are paid on the basis of the
quantity produced rather than the area cultivated. Two
risks are apparent here:

(a) producers often have an incentive to understate
the area cultivated with these crops, and to over-
state the area with crops paid on an area aid basis;

(b)

the system relies on intermediaries (olive pressing
mills, ginning mills, etc.) providing accurate fig-
ures for the quantities produced (this figure is not
directly verifiable at a later date).

4.35. To deal with these risks, Community legislation
provides for a number of control mechanisms. One such
system applies to the olive oil sector, through the checks
performed by specialist agencies. These exist in Greece,
Italy, Portugal and Spain. They are required to perform
checks on individual producers, mills (at least 30 % of
authorised mills) and producer associations. Work per-
formed at the level of mills forms the most significant
element of their work programme: checks made in 2001
(affecting 2002 expenditure) led the agencies to pro-
pose the withdrawal of authorisation from more than
one in eight of the mills examined (see table 4.3).
Checks cover only a small proportion of producers (less
than half a per cent — see table 4.4). Work in 2001
(affecting 2002 expenditure) led the agencies to pro-
pose the reduction or refusal of payments to more than
one in 15 of the producers examined. Both in the case
of authorisation of mills and in the case of the reduc-
tion or refusal of payments to producers there were
marked differences among the Member States con-
cerned. The specialist agency in Italy noted that the total
weight of olives declared by pressing mills exceeded the
production estimates of the Italian statistical agency
(ISTAT) by, on average, 7 % for the period 1984 to 2001,
and by 7,5 % in 2001.

4.36. Discrepancies and control weaknesses noted by
the Court in the area of production-based subsidies paid
in 2002 include:

(a)

a quantity of pressed olives incompatible with the
final production figure for olive oil (Greece);

4.36. With one exception, each of the Court’s observations
relates to the unsatisfactory situation in Greece regarding a
number of Community aid schemes. As concerns the cases
mentioned in respect of the olive oil and cotton sectors, finan-
cial corrections have been proposed annually under the clear-
the
ance of accounts procedure, demonstrating that

116

(b)

(c)

(d)

EN

Official Journal of the European Union

28.11.2003

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

weaknesses referred to by the Court are properly dealt with by
the Commission.

in the same country, in one case it was impossible,
even applying the most favourable yield, for the
farmer to have produced the quantity of cotton
claimed without having used areas declared as
sown with durum wheat and therefore benefiting
from premiums for that crop;

olive grove density declarations were not updated
(Greece);

the nature, frequency and rotation of checks were
generally unreliable in the olive oil sector (Greece
and Spain) and the tobacco sector (Greece).

(d) In the case of tobacco, the Commission has found no evi-
dence of the general unreliability of inspections to which
the Court refers.

Table 4.3 — Olive oil inspection agencies: checks on mills (2000 and 2001), relating to claims paid in 2002

Mills checked

Proposals to withdraw
authorisation

Member State

No. of
mills (1)

Total

in depth

summary

Greece

Spain

Italy

Portugal

No

1 399

1 032

3 020

552

2 264

1 684

5 744

904

Total

10 596

6 003

(1) Total of authorised mills with declared activity.
(2) ACACSA does not carry out summary checks.

%

61,8

61,3

52,6

61,1

56,7

No

939

928

1 811

552

4 230

%

41,5

55,1

31,5

61,1

39,9

No

460

104

1 209
(2)

1 773

%

20,3

6,2

21,0

16,7

Source: Annual reports for 2000 and 2001 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

No

217

59

382

227

885

% of mills
checked

15,5

5,7

12,6

41,1

14,7

Table 4.4 — Olive oil inspection agencies: checks on producers (2000 and 2001), relating to claims paid in 2002

Producers checked

Member State

No. of
producers

Total

in site

using documents (2)

Greece (1)

Spain

Italy

Portugal

No

5 100

1 229

1 787

2 576

874 290

439 097

922 223

138 690

Total

2 374 300

10 692

%

0,6

0,3

0,2

1,9

0,5

No

2 910

708

269

1 678

5 565

%

0,3

0,2

0,0

1,2

0,2

No

2 190

521

1 518

898

5 127

%

0,3

0,1

0,2

0,6

0,2

Aid payments withdrawn or
reduced

No

27

83

17

214

341

% of produc-
ers checked

1,2

15,9

1,1

23,8

6,7

(1) The number of payments withdrawn or reduced does not include 952 crop declarations, which were disallowed.
(2) Controls using documents are performed during relevant field and cross controls.

Source: Annual reports for 2000 and 2001 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

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THE COMMISSION’S REPLIES

4.37. The observation at paragraph 4.36(b) appears to
form part of a general problem. Greek authorities have
told the Commission that up to 8 % of areas actually
planted with cotton had been declared as planted with
another crop, enabling producers also to claim an area
aid subsidy, as did the producer examined by the
Court (5).

4.37. The Commission’s service responsible for the audit of
agricultural expenditure is continuing enquiries in the sectors
concerned in the framework of the clearance of accounts pro-
cedure. Naturally, any weaknesses identified with regard to (in
this case) Greece’s control systems are dealt with under the
clearance of accounts procedure.

Rural development

4.38. Rural development expenditure amounted to
4 349 million euro in 2002, 10 % of CAP schemes. The
most important schemes cover agrienvironmental mea-
sures, the ‘less favoured areas’ (including more than
50 % of the agricultural area of the EU) and forestry.
Other schemes cover investments, support for early
retirement, and for young farmers. Expenditure is based
upon rural development plans drawn up by the Mem-
ber States and approved by the Commission.

4.39. Typically, schemes of this kind have eligibility
conditions which are more complex and difficult to
verify than payments to farmers for arable crops or ani-
mal premiums. Frequent conditions include adherence
to ‘good farming practices’ and minimum standards for
environmental
impact, hygiene and animal welfare.
Member States have significant discretion in the choice
of areas to fund and in the design of appropriate con-
trol systems.

4.39. One of the purposes of Agenda 2000 was to allow
the CAP to better adapt to local circumstances or priorities.
Thus, insofar as rural development measures are concerned,
the criteria for good farming practice (GFP) minimum stan-
dards and areas to be supported are set at national or regional
level. The relevant verifiable indicators are also set at the
appropriate national and regional levels.

The Commission, together with the Member States, has devel-
oped a practical approach when good farming practices and
minimum standards were introduced in 2000. The Commis-
sion is carefully and continuously following up the implemen-
tation of this approach by the Member States.

4.40. As in previous years, certifying bodies expressed
concerns about this expenditure, and the certifying
bodies for the French, Portuguese and Bavarian agen-
cies again qualified their audit opinion.

4.40.
In the framework of the clearance of accounts of
EAGGF-Guarantee, examination is made of the relevant
findings made in the reports of the certifying bodies.

(5) The Commission’s response was to introduce new legisla-
tion (Commission Regulation (EC) No 1486/2002) amend-
ing the stabiliser mechanism for cotton. This Regulation
does not address the risk of excessive expenditure on other
crops.

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THE COMMISSION’S REPLIES

4.42.

1.

2.

3.

For the storage of grape must the Commission considers
this case to be serious and is following it up within the
clearance procedure.

For bananas, the Commission services are well aware of
the non-conformity in the French national legislation.
The subject has been discussed with the French authori-
ties in the framework of the clearance of accounts proce-
dure; a financial correction will be proposed.

For dried grapes, as a result of recent missions, the Com-
mission has made and will continue to propose financial
corrections.

4. While there is a risk that restructuring/conversion may
increase the potential for vine-growing production, it can
be identified only when the vineyard becomes productive,
i.e. many years after replanting and at national level.

Other expenditure

4.41. Other expenditure amounts to 8 466 million
euro, almost 20 % of CAP spending in 2002. This
includes many ‘intervention’ measures to support agri-
cultural markets, such as export refunds, purchase of
agricultural stocks and aid for private storage, as well as
subsidies for the production and disposal of fruit and
vegetables and the restructuring and conversion of vine-
yards.

4.42. The Court finds serious errors in this area. In
2002 errors affected, notably, payments for the storage
of grape must, and subsidies for bananas and dried cur-
rants. Subsidies for replanting vineyards involve par-
ticular risks.

4.43. Some of this expenditure is covered by monitor-
ing systems which operate at Community level. The
most significant examples are:

(a)

a posteriori checks (6), typically that a subsidy paid
is supported and confirmed by commercial docu-
mentation held by a processor, exporter or other
intermediary. These checks are carried out by Mem-
ber States’ authorities and they cover all subsidies
involving the processing and transformation of
agricultural products, consumption aids and export
refunds;

(6) These are provided for by Council Regulation (EEC)

No 4045/89 (OJ L 388, 30.12.1989, p. 18).

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(b) physical and documentary checks that goods ben-
efiting from export refunds are correctly described
on claim forms (7). These are carried out by Mem-
ber States’ customs services at the time of export.
For most products Member States are required by
Community legislation to carry out physical checks
on at least 5 % of subsidised exports unless a risk
analysis is applied.

4.44. The Commission has identified numerous weak-
nesses in the way a posteriori checks are performed and
planned and errors recorded and corrected, notably in
Italy, the Netherlands, Spain and the United Kingdom.

4.45. Based on the audits it has carried out, the Com-
mission considers that, in general, physical and docu-
mentary checks carried out at the time goods are placed
under customs control are of an acceptable standard. It
has, however, noted some deficiencies in the way they
are performed, in Greece, Italy and the United King-
dom. Although it has not followed up these deficien-
cies since 2000 the Commission has carried out numer-
ous audits concerning other key controls over export
refund transactions.

4.46. Given that the Commission identified the weak-
nesses in a posteriori checks in early 2001 and that
there has been no follow-up, the Court cannot base its
assessment of the validity and effectiveness of the checks
on the Commission’s conclusions.

(7) These are provided for by Council Regulation (EEC)

No 386/90 (OJ L 42, 16.2.1990, p. 6).

4.45. The deficiencies mentioned by the Court were found
by the Commission services in a series of follow-up audits car-
ried out in 2000 in those Member States where serious weak-
nesses had been found in previous audits and financial cor-
rections imposed.

In each of the Member States mentioned, major improve-
ments had occurred. The Commission services made recom-
mendations for further improvements.

4.46. As far as a posteriori checks under Regulation (EEC)
No 4045/89 are concerned, it has to be underlined that, by
analysing and giving feedback on reports received from the
national competent services of the Member States, the Com-
mission services monitor the standards of implementation of
the relevant regulation, and contribute to solving the identi-
fied deficiencies and to improving the quality of the controls
carried out. The scope of the audits realised by the Commis-
sion’s services concerning export refunds in general also cover
aspects of the a posteriori checks under regulation (EEC)
No 4045/89.

These elements enable the Commission to reach appropriate
conclusions on the application of the regulation (EEC)
No 4045/89.

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THE COMMISSION’S REPLIES

4.47. Member States are required by regulation to
inform the Commission each year of the number of
export declarations submitted, the number subjected to
physical check and the number of irregularities detected.
However, the Commission is unable to provide infor-
mation on the value of transactions tested, and the value
of irregularities detected, as this is not a legal require-
ment. The Commission does not have complete and
up-to-date management information on the value of
transactions subjected to a posteriori checks and on the
value of irregularities detected.

4.47. Regarding the financial value of irregularities detected,
Member States provide information to the Commission con-
cerning irregularities of more than EUR 4 000; such infor-
mation is part of their annual report pursuant to Article 9a
of Regulation (EC) No 2221/95. This regulation does not
require them to state the value of the transactions tested.

As far as a posteriori checks under Regulation (EEC)
No 4045/89 are concerned, such analysis will be carried out
before the end of 2003.

4.48. The declaration of the Director-General for Agri-
culture states that assurance cannot be given on the
possible impact of
fraud involving the
‘carousel’
re-import of goods whose export is subsidised.

4.48. The Commission has studied the various market sec-
tors to identify possible risks and monitors trade patterns for
any evidence that such risks have materialised. One of the
actions taken in the sugar sector was the withdrawal of refunds
for exports to the Balkans.

Taking into account the reserve in the Director-General’s
report, a compliance audit is being carried out on the origin
rules for export refunds. This addresses the equivalent carousel
risk involving the re-export with subsidy of goods that do not
meet these rules.

Conclusion

4.49. As in previous years, the Court found that CAP
expenditure, viewed as a whole, was materially affected
by error. The Court notes, however, that different degrees
of risk attach to the main categories of CAP spending:

4.49. The Commission has sought to switch support to
direct payments to farmers as, inter alia, such a change in
policy limits the risk to the Fund and helps to protect EU tax-
payers’ interests.

(a)

(b)

in the 14 Member States which have satisfactorily
implemented IACS, expenditure on arable crops
appears to be the lowest risk category of CAP
expenditure, and subject to the most effective con-
trol system;

animal premiums are subject to a generally satis-
factory and operational system of checks, which
results in the rejection or correction of many claims
made by farmers. However, largely because of fre-
quent animal movements,
final expenditure
remains subject to a greater degree of risk than
arable payments;

(c) other categories of expenditure pose greater risks

and are subject to less effective control systems.

(c) For the other categories of expenditure, the Commission
has imposed, wherever appropriate, compatibility with
IACS thus allowing cross-checks. Dissuasive sanction
systems have been introduced in many schemes (fruit and
vegetables, tobacco, dried grapes, etc.).

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THE COMMISSION’S REPLIES

Recommendations

4.50. The Court recommends that the Commission
seek further improvements in the way the results of
supervisory checks are compiled and presented, in par-
ticular:

4.50.

(a)

IACS statistics should provide more detailed infor-
mation about the categories of transactions tested,
for example by beneficiaries or by crop;

(b)

for the olive oil agencies, the Commission should
ensure that inspections and results are classified
on a consistent basis;

(c)

for export refunds and subsidies paid to interme-
diaries the Commission should ensure that statis-
tics on physical, documentary and a posteriori
checks are available on a timely and consistent
basis, and show the value of transactions subject to
checks and the value and incidence of irregulari-
ties detected.

(a) The tables used by the Member States are reviewed and
improved regularly. However, the Commission must also
take account of Member States’ requests for the simpli-
fication and streamlining of procedures. The Commis-
sion considers that the information currently received is
sufficient to fulfil its obligations.

(b) Results on inspections of the olive oil agencies are always
presented in the Annual Financial Report of EAGGF; in
addition, statistics on inspections and the results of
supervisory checks are classified in statistical compara-
tive tables following yearly communications by the agen-
cies or the Member States concerned.

(c) Annual statistics on physical controls (comprising infor-
mation as mentioned in paragraph 4.49) are made
available to the Commission by Member States by 1 May
each year. These statistics are closely monitored by the
responsible services and also give rise to a follow-up
within the clearance-of-accounts procedure in the event,
for instance, minimum control rates established by the
regulation not being respected by Member States. Nev-
ertheless, the Commission is open to suggestions aiming
to improve the quality and consistency of statistics on
physical checks and will consider how best the additional
information requested by the Court could be obtained.
For other schemes, statistics about controls are also a
vital instrument but not systematically compiled by clear-
ance of accounts for all Member States. Indeed, the num-
ber of schemes would not allow such an overall but only
a case to case approach.

4.51. The Court also recommends that the Commis-
sion investigate the reasons why, for IACS checks on
areas, tests performed on a random basis show a higher
rate of error than those selected on the basis of an
analysis of risk.

4.51. The Commission is aware of several reasons for the
situation outlined by the Court, not least being the generally
weak design and evaluation of Member States risk analysis
that, although legally valid and often providing maximum
coverage, do not always identify the greatest risks. Remote
sensing is used extensively and is normally randomly based,
albeit with some element of risk assessment. This makes it dif-
ficult to distinguish clearly between the results of risk- and
randomly- based checks.

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THE COMMISSION’S REPLIES

The Commission will renew its efforts to alert Member States
to the need for annual analysis of risk criteria and results with
a view to enhancing techniques.

4.52. The Court considers that a summary of the
results of these checks should be included in the annual
activity report of the Director-General for Agriculture.

4.52. The Commission considers that the inclusion of sta-
tistics concerning the performance of controls by Member
States would not be consistent with its objective that the
annual activity reports provide only summarised information
for the relevant year.

CLEARANCE OF ACCOUNTS

Introduction

4.53. Clearance of accounts consists of two elements
in the sequence of decisions set out in paragraph 4.3:

(a)

(b)

the annual ‘financial clearance’ decision, in which
the Commission decides whether to accept the
CAP paying agencies’ accounts for the preceding
budgetary year;

‘conformity decisions’ under which the Commis-
sion decides whether to ‘disallow’ expenditure and
make corrections. Such decisions may relate to
several EAGGF years. In most cases, disallowance
takes place because the Commission has identified
weaknesses in Member States’ management sys-
tems, and the Commission applies a scale of flat-
rate corrections based on the seriousness of the
management failure.

Financial clearance decision for 2002

testing were

selected by the Court

4.54. The Court examined in detail the reports pro-
duced by the certifying bodies of the 25 paying agen-
cies (see table 4.5) from which transactions for substan-
tive
(see
paragraph 4.14). In addition, the Court examined any
other reports for which a qualified certificate was given
and those for the new regional paying agencies in Italy.
The Court reviewed the use of statistical sampling as
reported by all of the certifying bodies and the work of
the Commission in preparing the financial clearance
decision.

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Table 4.5 — Paying agencies by expenditure declared in 2002

No

Member State

Paying agency

Amounts declared in
million euro

% of total

qualified accounts

disjoined accounts (1)

1 Italy
2 France
3 Greece
4 United Kingdom
5 Spain
6 Ireland
7 Denmark
8 France
9 France
10 Germany
11 Sweden
12 Spain
13 Portugal
14 Spain
15 Germany
16 Germany
17 United Kingdom
18 Germany
19 Netherlands
20 Belgium
21 Netherlands
22 Spain
23 Netherlands
24 Italy
25 France

26 Austria
27 Germany
28 France
29 Finland
30 Spain
31 France
32 France
33 Belgium
34 Germany
35 Germany
36 Spain
37 Germany
38 Spain
39 France
40 Germany
41 Germany
42 Germany
43 France
44 Germany
45 France
46 United Kingdom
47 Germany
48 Germany
49 United Kingdom
50 Portugal
51 Spain
52 Spain
53 Spain
54 Germany
55 Spain
56 Italy
57 Spain
58 Austria
59 Austria
60 Spain
61 Spain
62 Italy
63 Spain
64 Ireland
65 Luxembourg
66 Spain
67 Netherlands
68 Italy
69 Belgium
70 Spain
71 Italy
72 Netherlands
73 Netherlands
74 Germany
75 United Kingdom
76 Germany
77 Italy
78 Spain
79 Germany
80 Belgium
81 France
82 Germany
83 Spain
84 United Kingdom
85 Germany
86 Germany

AGEA
ONIC
Opekepe
RPA
Andalucia
DAF
EU-direktoratet
Oniol
Ofival
Bayern, Landwirtschaft
SJV
Castilla — La Mancha
INGA
FEGA
Mecklenburg-Vorpommern
BLE
SERAD
Baden-Württemberg
LASER
Min. of Agr.- DG3
PZ
Cataluña
HPA
SAISA (ex DCCC)
Odeadom

5 307,5
4 382,7
2 646,2
2 447,9
1 697,4
1 662,6
1 223,0
1 129,2
1 027,2
1 026,8
820,8
763,0
610,5
602,8
521,4
505,8
458,6
430,0
417,7
378,1
349,2
320,1
300,5
254,7
108,8

subtotal (2)

29 392,5

AMA
Niedersachsen
ACCT/SDE
MMM
Castilla — Léon
CNASEA
ONILAIT
BIRB
Sachsen-Anhalt
Hamburg-Jonas
Extremadura
Sachsen
Aragón
FIRS
Brandenburg
Nordrhein-Westfalen LWK Bonn
Schleswig-Holstein
Onivins
Thüringen
Oniflhor
DARD
Hessen
Rheinland-Pfalz
NAWAD
Ifadap
Canarias
Valencia
Navarra
Nordrhein-Westfalen LWK Münst
Galicia
ENR
Murcia
BMLFUW Präs B10
ZA Salzburg
País Vasco
Asturias
AGREA
Madrid
DCMNR
Ministère de l’Agriculture
La Rioja
DLG
Region Lombardie
Vlaamse Gemeenschap
Cantabria
AVEPA
PT
PVVE
Bayern, Umwelt
FC
Saarland
ARTEA
Baleares
Hamburg
Région Wallonne
Ofimer
Nordrhein-Westfalen LfEJ
FROM
CCW
Bremen
Berlin

969,7
937,3
909,9
838,0
790,9
675,1
556,1
528,3
509,5
501,1
500,1
447,2
443,7
414,3
403,9
336,5
319,5
309,2
277,0
254,9
225,8
212,0
182,2
157,1
148,3
140,5
129,3
118,7
118,2
106,9
89,1
85,0
62,0
58,3
56,2
55,7
52,7
49,1
48,3
38,7
36,0
35,3
33,6
28,9
28,5
28,2
28,1
20,5
19,9
19,4
18,9
18,6
17,0
10,7
9,9
7,8
4,8
3,9
3,0
1,8
1,5

12,39
10,23
6,18
5,72
3,96
3,88
2,86
2,64
2,40
2,40
1,92
1,78
1,43
1,41
1,22
1,18
1,07
1,00
0,98
0,88
0,82
0,75
0,70
0,59
0,25

68,63

2,26
2,19
2,12
1,96
1,85
1,58
1,30
1,23
1,19
1,17
1,17
1,04
1,04
0,97
0,94
0,79
0,75
0,72
0,65
0,60
0,53
0,50
0,43
0,37
0,35
0,33
0,30
0,28
0,28
0,25
0,21
0,20
0,14
0,14
0,13
0,13
0,12
0,11
0,11
0,09
0,08
0,08
0,08
0,07
0,07
0,07
0,07
0,05
0,05
0,05
0,04
0,04
0,04
0,02
0,02
0,02
0,01
0,01
0,01
0,00
0,00

subtotal

13 432,8

TOTAL

42 825,3

31,37

100,00

18 896,3

11 469,8

(1) Accounts disjoined from the financial decision taken on 7 May 2003.
(2) The Court examined the reports and certificates of these 25 paying agencies in respect of which a sample of transactions was selected for testing.

NB: The exchange rates for Member States outside the euro zone: Denmark: 7,4282, Sweden: 9,1458, United Kingdom: 0,6842.

Source: Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2002.

✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
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THE COMMISSION’S REPLIES

Audit opinions of certifying bodies

4.55. For the financial year ending 15 October 2002,
64 paying agencies managing 23 929 million euro
received a clear audit opinion (see table 4.5). The remain-
ing 22 agencies received a qualified or negative opinion
because of:

(a) material levels of error in the accounts of three
(Ifadap (Portugal), Baden-

paying
Württemberg and Bayern Umwelt (Germany));

agencies

(b) breaches of accreditation criteria (which do not
have a direct financial impact) and control weak-
nesses (Opekepe (Greece), Ifadap (Portugal), Flem-
ish Community (Belgium), Bayern Umwelt (Ger-
many), FIRS, ONIC, Odeadom, Onivins (France),
Ministry of Agriculture (Luxembourg), AGEA
(Italy));

(c)

the inability of some certifying bodies to provide
assurance on certain budget headings (amounting
in total to 286 million euro) because of specific
weaknesses in control systems or difficulties in
obtaining information from customs authorities
(SDE, Ofival, Oniflhor, Onilait);

(d)

some certifying bodies’ inability to give an opinion
on the completeness of the debtor’s statement
(Ifadap and Opekepe).

Shortcomings in the work of certifying bodies

4.56. Most certifying bodies tested a sample of pay-
ments made by the paying agencies and then extrapo-
lated the results in order to determine whether there
was a material level of error in the accounts. Material-
ity is defined for these purposes as 1 % of the value of
the population from which the sample is taken. Most of
the expenditure (36,8 billion euro) declared by 69 pay-
ing agencies was subject to statistical sampling (some
23 500 transactions). The Commission concluded that
there was also a material level of error for two paying
agencies (Walloon region and Rioja) whose accounts
had not been qualified. The Commission’s guideline
No 8 provides elements of guidance in, inter alia, calcu-
lating the level of error and treating the (different kinds
of) errors. Furthermore, the Commission’s guideline

4.56. Where the results of the audit work carried out by the
Commission’s services has an impact on the valuation of errors
noted by the certifying body, appropriate action has been
taken, or, in case of audits still ongoing, will be taken.

The Commission has requested additional information in
cases where the information provided by certifying bodies was
deemed insufficient in order to appreciate the work done.

The accounts of one paying agency (Rioja) have been disjoined
because of various problems including insufficient evidence of
the work performed on the valuation of errors. In other cases,
indicates
in
the

certifying

report

body

its

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No 7 provides for a standard model of the certification
report, which should contain sufficient information on
this essential element (8). However, contrary to the Com-
mission’s guideline, for several paying agencies the
reports do not contain sufficient information to verify
the certifying bodies calculations of the level of error,
while some other certifying bodies’ have not treated
errors correctly.

that it will continue to monitor the follow-up of the confor-
mity issue noted by the paying agency concerned. In this case,
the conformity issue will be again reported upon in the 2003
certification report. Should this follow-up be considered inad-
equate, the Commission’s services will take appropriate action
in the framework of the 2003 certification process.

Compliance with Commission guidance

4.57.
In general, the guidance provided by the Com-
mission provides a sound basis for the audit of the pay-
ing agencies and is followed by the certifiying bodies.
However, the Commission could do more to ensure
that this guidance is followed. For example, once again
the certifying body for Opekepe (Greece) was appointed
late in the year (27 November 2002). Consequently it
was unable to attend physical stocktaking checks and
could only visit eight out of 55 administrative regions.

4.57. Despite its late appointment, the work of the certify-
ing body of Opekepe has been considered satisfactory. The cer-
tifying body’s assessment of the procedures and the accounts
of the paying agency also relies on the work performed by the
internal audit department of the agency and its delegated bod-
ies (where this work is reasonably considered reliable).

The agency’s internal audit service also visited a number of
administrative regions, and assisted or took part in the physi-
cal stocktaking checks.

The Commission’s services will continue to underline the
importance of a timely appointment of the certifying body,
but unless its work is insufficient or inadequate, it would be
difficult to take more severe steps, given that Member States
are responsible for such an appointments.

(8) According to these guidelines, the need and method to
extrapolate results depends on the approach adopted in
respect of sampling. In line with the Commission’s guide-
lines, certifying bodies can divide the EAGGF transactions
into several populations: a population for which the mon-
etary unit sampling technique is appropriate and popula-
tion(s) for which this technique is not appropriate. In this
case extrapolation of the findings is only appropriate in
respect of the populations sampled with the monetary
unit sampling technique. Results from the other sampling
techniques should be taken into account by the certifying
bodies in forming their opinion on the populations con-
cerned.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Commission’s decision

4.58. The Commission took its financial clearance
decision on 7 May 2003, after the 30 April deadline
laid down in the Regulation. The Commission accepted
the accounts of the paying agencies, subject to the fol-
lowing exceptions and conditions:

4.58. The Commission has made and will continue to make
every possible effort to respect the regulatory deadline. Sig-
nificant improvements have been recorded in respect of the
clearance decision in comparison to the financial year 2001.
Furthermore the quality of the work carried out was consid-
ered more important than the strict respect of the deadline.

(a)

(b)

(c)

the Commission excluded (disjoined) the accounts
of 17 paying agencies from the decision, account-
ing for 11 470 million euro (27 % of the total
expenditure declared). The accounts of Opekepe
(Greece) and NAWAD (United Kingdom) were not
cleared because they had not yet provided the
Commission with detailed computer data on pay-
ments. For the Balearic Islands and Rioja (Spain),
the Commission requested further information.
The primary reason for disjoining the eight French
paying agencies was that the certifiying body did
not obtain assurance that the Customs department
had adequately applied internal control proce-
dures. Ifadap (Portugal), Baden-Württemberg and
Bayern Umwelt (Germany) were disjoined because
of a material level of error. The reports for Tus-
cany and Lombardy were rejected, respectively
because of failure to comply with the Commis-
sion’s guidelines and because not enough audit
work had been performed;

as a sanction against late payments, overshooting
expenditure ceilings and failure to collect milk
super levy on time, the Commission decided that
the advances paid to Member States in 2002 were
89,5 million euro too high;

the Commission intends to make corrections in
conformity decisions for the Walloon region, Bay-
ern Umwelt and Ifadap and for some other paying
agencies when the Commission receives the neces-
sary data (9).

(9) For example, the Commission requested the certifying
body for Baden-Württemberg to complete its audit work
and report its findings by 30 June 2003.

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127

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Conformity decisions taken in 2002

4.59.
In 2002 the Commission took three conformity
decisions in respect of expenditure in 1996 to 2001 (10),
disallowing 301,4 million euro. The Court has exam-
ined a sample taken from the three decisions covering
273,8 million euro (91 %) and has sought to establish
whether:

(a)

(b)

(c)

the corrections in the conformity decisions are
adequate and well founded;

corrections are made in good time;

all significant areas of the budget are satisfactorily
considered by the Commission when preparing
for conformity decisions.

Adequacy of corrections

4.60. The Court concluded that in respect of 198 mil-
lion euro of disallowed expenditure the Commission’s
procedures were well founded and consistent with its
normal scale of flat-rate corrections (11).

In the following cases the Court took the view
4.61.
that a more rigorous application of the Commission’s
own rules would have been justified:

4.61.

(a) olive oil, Italy: correction of 22,7 million euro. The
Commission found significant weaknesses in the
checks carried out at mills and a lack of rigour in
the performance and follow-up of compatibility
checks (on the quantities of olive oil produced).
The Commission has classified these checks as key
controls. A rate of correction of 5 % would have
been consistent with the Commission’s scale of
flat-rate corrections. However, for this measure the
Commission applied a correction rate of 2 % of
declared expenditure;

(a) Checks on production aid for olive oil are based on sev-
eral complementary key checks. Individually, none of
them can be considered adequate and risk assessment
must look at the inspection system as a whole.

In Italy, weaknesses have been identified as regards checks
on mills and accounting records. However, the risk to the
EAGGF is partially offset by the existence of an olive-oil
register and computerised records.

The correction rate was therefore set at 2 % to take
account of the factors reducing the theoretical risk aris-
ing from the poor application of two of the key checks.

(10) Commission

Decision

(OJ L 170,
29.6.2002, p. 73), Commission Decision 2002/524/EC
(OJ L 170, 29.6.2002, p. 77) and Commission Decision
2002/881/EC (OJ L 306, 8.11.2002, p. 26).

2002/523/EC

(11) The flat rate corrections are applied as follows: 2 % when
key controls are satisfactory but secondary controls are
partly or totally ineffective; 5 % when key controls are
executed but the number, frequency or rigour required by
regulations is not respected, and the risk of loss to the
Fund is significant; 10 % when one or more key controls
do not operate making it impossible to determine the eli-
gibility or regularity of a claim, with, as a result, a high
risk of loss to the Fund.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b) olive oil, Spain: correction of 45,5 million euro.
Since 1994 the Commission has applied a 5 % cor-
rection to expenditure on olive oil declared by
Spain because of inadequacies in the oil register
and files. As for previous years the Court main-
tains its position that a 10 % correction is war-
ranted. This would be in line with the Commis-
sion’s current proposals to apply higher rates of
corrections for recurrent weaknesses (12);

(b) Assessing the risk to the EAGGF takes account of the
fact that all olive oil is sold through mills in Spain,
which reduces the risk posed by the lack of an olive-oil
register and computerised records. That assessment applies
to the years to which the Court refers.

The key checks provided for in the case of production aid
for olive oil are complementary and the risk posed by the
lack of one of them may be at least partially offset by
another. A valid assessment is possible only of the system
as a whole.

The rate of 5 % applied to Spain may therefore be con-
sidered justified.

Increases in the correction rate for recurrent weaknesses
should not be automatic but must be based on an overall
assessment of the financial risk. In this instance, the
other checks which applied may be regarded as adequate
to limit the risk to the EAGGF.

(c)

(d)

rural development, France: The Commission failed
to take account of 3,2 million euro declared retro-
spectively and netted off by France. Retrospective
declaration is not permitted by the relevant regula-
tions. The correction should have been equal to
the gross value of the sums overclaimed;

during 2002 the Commission audited the treat-
ment by 21 paying agencies of advances (e.g.
advance payments of export refunds) and securi-
ties (provided by beneficiaries in order to obtain
advance payments). Common findings in the audits
were that paying agencies did not regularly follow
up outstanding advances or instigate timely recov-
ery procedures. The Commission disallows expen-
diture for specific cases of poor administration
leading to a financial loss but does not make finan-
cial corrections for systems weaknesses.

(c) The Commission agrees with the Court and will apply

this principle in the future.

(d) As explained in the reply to the Court’s Annual Report
for 2001, a system’s weakness could lead to a financial
correction where a link to a specific identified risk to the
Fund can be established.

In some cases, for example, the weakness identified refers
to the fact that guarantees are released with an unjusti-
fied delay, after all the relevant checks have been per-
formed and no irregularities have been reported. In other
cases, the Member State was able to demonstrate the
absence of risk to the Fund because, despite the weak-
ness, all the claims were eligible. Of course, in these cases
a follow-up of the remedial action taken by the paying
agency has been assured.

(12) ‘Communication

on
AGRI/61495/2002-final.

recurrent

shortcomings’,

28.11.2003

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129

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.62. Stricter application of the Commission’s disal-
lowance criteria, on the basis set out above, would have
increased the sum disallowed by 83 million euro.

4.62. The Commission maintains that the rates of financial
correction imposed in the above cases were justified. Account
was taken not only of the existing correction thresholds, but
also of the perceived risks to the Fund.

Time taken to reach conformity decisions

4.63. Owing to some of the corrections mentioned
above, an inordinate amount of time elapsed between
different stages in the procedure for clearance of the
accounts. On average, the clearance procedure, starting
with the audit visit and ending with the sending of the
final letter, takes about two years — or two-and-a-half
years with conciliation (13). These delays are the result
of:

4.63. Delays are still a problem and efforts continue to be
undertaken in order to reduce them. As the Court mentions
itself the high turnover was one of the problems. The proce-
dure itself can still be improved and in 2003 the Commis-
sion has made considerable efforts by launching a project to
computerise audit work (procedure). When that instrument is
operational, it will improve the real-time monitoring of audit
work and so ensure yet stricter supervision.

(a)

(b)

(c)

staff vacancies or high staff turnover;

delays in reply by Member States;

the wish to tackle each stage in the procedure
simultaneously for all the Member States in an
enquiry (this strategy has since been abandoned);

(d) problems within the Commission in coordinating

its inspections;

(e)

the complexity of the cases.

4.64. Two cases corrected in 2002 could have been
made earlier. The rural development case involving
France (paragraph 4.61(c)) and a similar overclaim which
the United Kingdom brought to the attention of the
Commission in August 2001 (10 million euro) could
have been dealt with in conformity decision
No 8 of December 2001 (14).

(c) When an enquiry includes a number of audits on the
same aid scheme in different Member States, it is some-
times imperative, in order to have a complete, clear and
balanced view of the situation regarding this scheme, to
wait for the end of all investigations including the bilat-
eral phase, before finalising the compliance procedure.
This has also been confirmed in the communication to
the Commission regarding action 98 ‘Improvement of
the EAGGF clearance of accounts procedure.’

4.64. The letters from these Member States were received in
August, and in view of the internal procedures it was not pos-
sible to include them in the Decision No 8. The corrections
were therefore applied in Decision No 9.

(13) The conciliation body is responsible for trying to recon-
cile the positions of the Commission and Member States
on any proposed corrections referred to it. The concilia-
tion procedure adds around five months to the overall
length of the procedure.
Decision

(14) Commission

2001/889/EC

(OJ L 329,

14.12.2001, p. 68).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Coverage

4.65. As regards the period 1999 to 2002, most of
the main budget items have been covered in clearance
missions in accordance with the risk level as assessed by
the Commission. Only two items which, according to
the Commission, have a very high risk level have not
given rise to missions: aid for skimmed-milk powder
intended for animal feed (253 million euro) and aid for
the production of casein (193 million euro). The Court
has examined both of these measures in recent years
and the Commission decided accordingly not to cover
the same ground.

4.66.
In addition, there have been no missions by the
Commission to cover a number of budget items with a
risk level considered average by the Commission. The
biggest items of expenditure are for starch and potato
starch (232 million euro) and intervention for sugar
(227 million euro). Lastly, there have been no missions
for a long time in connection with a series of items with
low expenditure and risk levels.

4.65. Until and including 2001 the first priority in the
milk sector was to address the milk quota problems, especially
in Italy. Where the Court established serious weaknesses
regarding other measures, these were thoroughly followed up
by the Commission.

4.66. Risk analysis resulted in more attention being paid to
other sectors in 2002. The focusing of clearance work on
other sectors was also justified by the Court’s audits, which
gave rise to no major comments as regards the starch/potato
starch and sugar sectors. Furthermore, total expenditure in
2002 in the sugar sector totalled EUR 1 395 million, of
which EUR 1 168 million was for export refunds. A specific
audit on sugar was not justified in view of the horizontal
audits on refunds in recent years and those on procedures in
general which also covered sugar refunds.

4.67. Areas of expenditure accounting for about 4 %
of CAP spending in 2002 (1 500 million euro) have not
been subject to clearance missions by the Commission
in the last four years.

4.67. These measures could perhaps be inspected in the light
of a risk analysis.

Clearance of accounts decisions in recent years

4.68. The clearance of accounts takes place over a
period of years (see paragraphs 4.3 and 4.53). Table 4.6
and graphs 4.6 and 4.7 show the results of clearance
decisions over several years.

4.69. Table 4.6 shows the results of the Commission’s
clearance decisions in respect of 1991 and subsequent
years. Clearance has been completed for the years up to
and including 1996 but some conformity decisions
remain to be taken in respect of subsequent years. The
total amounts disallowed represent the Commission’s
view of the amount of expenditure declared by Member
States, which, mainly because of weaknesses in Member
States’ systems for managing and controlling expendi-
ture, should not be borne by the Community budget.

28.11.2003

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Official Journal of the European Union

131

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132

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Official Journal of the European Union

28.11.2003

Graph 4.6 — Corrections in conformity decisions (1999 to 2002) per Member State

Source: Clearance of accounts decisions 1 to 11 taken from 1999 to 2002.

Graph 4.7 — Corrections in conformity decisions (1999 to 2002) per market

Source: Clearance of accounts decisions 1 to 11 taken from 1999 to 2002.

28.11.2003

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Official Journal of the European Union

133

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.70. Graphs 4.6. and 4.7 set out the distribution of
expenditure disallowed in conformity decisions taken
by the Commission during the period 1999 to 2002 (15),
by Member State and market sector. These decisions
relate to items of expenditure from the Community
budget years 1996 to 2001.

Conclusion on clearance of accounts

4.71. Subject to the points discussed in paragraph 4.7
and 4.55, the certifying bodies provide significant assur-
ance on the accuracy of financial information provided
by the paying agencies. The Commission has made
appropriate use of the reports of the certifying bodies
in reaching the financial clearance decision (para-
graph 4.58).

4.72. Most of the amounts disallowed in conformity
decisions in 2002 were calculated on the basis of the
Commission’s normal scale of flat-rate corrections (para-
graph 4.60). In some cases a higher rate of correction
could have been applied (paragraph 4.61). Most budget
headings have been considered under the clearance of
accounts procedure in the period 1999 to 2002 (para-
graph 4.67).

FOLLOW-UP TO PREVIOUS OBSERVATIONS

Greening the CAP

Main observations of the Court

4.73.
In its Special Report No 14/2000 (16) the Court
concluded that the intensification of agricultural pro-
duction had created environmental problems which
gave cause for concern. The Community had not suc-
ceeded in significantly ‘greening’ agricultural policy.

(15) The year 1999 was the first in which the Commission
took conformity decisions under the revised procedure
for clearance of accounts introduced in 1996.

(16) Special Report No 14/2000 on ‘Greening the CAP’

(OJ C 353, 8.12.2000).

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4.74. The Court concluded that:

(a)

(b)

the existing optional
‘ecoconditionality’ rules
should have been mandatory throughout the EU;

the aim of extensifying production was not
achieved in the reform of the common organisa-
tion of the market (COM) for livestock;

(c) Community aid continued to support forms of
agricultural production which have negative envi-
ronmental effects, such as fibre flax and artificially
dried fodder;

(d)

(e)

(f)

the Member States’ application of the Communi-
ty’s Nitrate Directive was unsatisfactory;

because of the absence of adequate ‘codes of good
agricultural practice’, European taxpayers are meet-
ing some costs that should be borne by the farm-
ers. This is contrary to the ‘polluter pays’ principle;

poor coordination between the various Commu-
nity schemes adversely affects environmental per-
formance. To secure better coordination a thor-
ough review of all environmentally relevant
measures which have an impact on agriculture
should be conducted.

The Council recommended that this report be used by
the Commission when designing future reform of the
CAP (17).

Actions taken by the Commission

4.75.
In its reply to the Special Report, the Commis-
sion committed itself to launching several reforms and
to preparing proposals for new legislation which would
increase the integration of environmental concerns into
the CAP.

(17) Council Recommendation on the discharge 1999 (adden-

dum) of 12 March 2001 (SN2089/01).

4.75.
In July 2002 the Commission issued its communica-
tion on mid-term review of the Agenda 2000 CAP reform
which was further elaborated by the legal proposals in Janu-
ary 2003. On 26 June 2003, EU farm ministers adopted a
fundamental reform of the CAP based on these proposals
which will help to further increase the integration of environ-
mental concerns into the CAP.

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Proposal for mandatory cross-compliance

4.76. The Commission committed itself to closely
monitoring the implementation of Article 3 of Regula-
tion (EC) No 1259/1999 (18), which stipulates the Mem-
ber States’ obligations to enforce environmental mea-
sures.

4.76. The Commission services, based on the information
submitted by the Member States in their annual reporting
2002 and 2003, are preparing a synthesis report on the
measures carried out by Member States in relation to Articles 3
and 4 of the common rules Regulation (EC) No 1259/1999.
Based on two years of reporting it will be possible for the
Commission to give an overview of the application of Article 3
of Regulation No 1259/99 by the Member States.

4.77.
In its mid-term review of the CAP, published in
2002 (19), the Commission proposes that receipt of
direct payments should be conditional on respect of
statutory standards based on Community environmen-
tal legislation, for example the codes for good farming
practice under the Nitrate Directive (20) and the designa-
tion of Natura 2000 areas under the Habitat Direc-
tive (21). This is known as cross-compliance.

4.77. With the Agricultural Council conclusions of 26 June
2003, direct payments shall be subject to cross-compliance.
For this purpose a priority list of 18 statutory EU standards
in the field of environment (including the Nitrate Directive
and the designation of Natura 2000 areas under the Habitat
Directive), food safety and animal health and welfare has been
established in view of sanctioning the non-respect of these
standards by cutting direct payments.

Reform of the COM for livestock

In its reply to the Special Report, the Commis-
4.78.
sion claimed that the weaknesses pointed out by the
Court concerning the extensification premiums for live-
stock were rectified in Agenda 2000.

4.78. Agenda 2000 introduced new arrangements as regard
the extensification payment. The conditions concerning both
bovine animals and the forage area to be taken into account
for the determination of the stocking density of the holding
were more strictly defined than in the previous extensification
scheme.

4.79. However, in the mid-term review of the CAP the
Commission concludes that the redesign of the exten-
sification premium under Agenda 2000 has not dis-
couraged intensive production systems as much as

4.79. With the CAP reform a decoupled single farm
payment will enter into force as from 1 January 2005 replac-
ing most of the premiums under different common market
extensification premium.
the
organisations

including

(18) Council Regulation (EC) No 1259/1999 of 17 May 1999
establishing common rules for direct support schemes
under the common agricultural policy (OJ L 160,
26.6.1999, p. 113).

(19) Towards sustainable farming — A mid-term review of the
common agricultural policy (COM(2002) 394 final, p. 19).
(20) Council Directive 91/676/EEC of 12 December 1991 con-
cerning the protection of waters against pollution caused
by nitrates from agricultural sources (OJ L 375, 31.12.1991,
p. 1).

(21) Council Directive 92/43/EEC of 21 May 1992 on the con-
servation of natural habitats and wild fauna and flora
(OJ L 207, 22.7.1992, p. 7).

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intended. The Commission proposes to abolish theex-
tensification scheme. It argues that decoupling of head-
age payments and their replacement with a single income
payment per farm in combination with reinforced cross-
compliance would achieve a better result (22).

Reforms of the COMs for fibre flax and dried fodder

4.80.
In its reply to the Special Report the Commis-
sion pointed out that it had recently tabled a proposal
for a reform of the flax and hemp common market
organisation. Under the mid-term review proposals
there would be no separate flax and hemp regime.
Farmers in receipt of the proposed single payment would
be able to cultivate flax and hemp subject to the cross-
compliance requirements (for dried fodder see para-
graphs 4.103 to 4.110).

However, the implementation can be postponed by Member
States, if justified by specific agricultural conditions, until
1 January 2007.

4.80. The reform of the CMO for flax and hemp grown for
fibres was presented by the Commission in 1999, adopted by
the Council
in 2000 and has been in force since the
2001/2002 marketing year. The reform consisted basically
in two major measures: on the one hand flax and hemp are
now integrated into the arable crop regime and, on the other
hand, a specific aid is granted to processors who obtain the
fibres. Consequently, the provisions resulting from the reform
of the CAP will be applicable to the cultivation of flax and
hemp. In addition, specific provisions are also provided for the
cultivation of hemp.

4.81.
In 2000, guidelines were provided on the relation-
ship between the rural development programmes and EU
environmental legislation (i.e. Natura 2000 and the Nitrates
Directive). With regard to the Nitrates Directive it was required
to insert clear and irrevocable commitments in the program-
ming documents to guarantee consistency with the protection
of vulnerable zones as provided for under the Nitrates Direc-
tive.

Mr. Fischler, on 25 July 2002, in the letter mentioned by the
Court requested information from the Member States:

— on the steps taken to complete designation of nitrate vul-

nerable zones (NVZ),

— on the state of defining mandatory good farming prac-

tices and action programmes in NVZ,

— on still ongoing procedures including the timetable in

comparison with the programme commitments.

In the meantime the replies of all the Member States con-
cerned have been received and are at present being analysed in
a procedure commonly agreed between the Directorate-General
for Environment and the Directorate-General for Agriculture
with a view to possible further steps concerning these com-
mitments.

Member States’ failure to implement the Nitrate Directive

4.81. Since 1994 the Commission has opened 56 legal
cases against Member States for failure to implement
the Nitrate Directive (23). In all 10 cases which have so
far reached judgment, the Court of Justice has ruled in
favour of the Commission (24). The Commission’s syn-
thesis of Member States’ reports on implementation of
the Nitrate Directive in 2000 shows that most Member
States are still involved in at least one infringement
case (25).

(22) Commission’s written answer to the Court’s questionnaire

on 12 November 2002, question No 6.

(23) Report from the Commission on the implementation of
Council Directive 91/676/EEC concerning the protection
of waters against pollution caused by nitrates from agri-
cultural sources. Synthesis of the year 2000 Member
States’ Reports (COM(2002) 407 final, 17 July 2002).
(24) Court Cases: Spain (1 October 1998 and 13 April 2000),
Italy (25 February 1999 and 8 November 2001), United
Kingdom (7 December 2000), France (8 March 2001 and
27 May 2002), Luxembourg (8 March 2001), Germany
(14 March 2002), Netherlands (7 November 2002).
(25) Report from the Commission on the implementation of
Council Directive 91/676/EEC concerning the protection
of waters against pollution caused by nitrates from agri-
cultural sources. Synthesis of the year 2000 Member
States’ Reports (COM(2002) 407 final, 17 July 2002).

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4.82. Several Member States made clear commitments
in their rural development plans (RDP) for the program-
ming period 2000 to 2006, to designate nitrate-
vulnerable zones, but have failed to do so. The Commis-
sion has asked all Member States to submit updated
information on the implementation of the Nitrate Direc-
tive (26). By January 2003, four of the Member States
had still not responded to this request (27).

Enforcement of good farming practices

4.83. The Commission’s mid-term review proposal
would require the enforcement of good farming prac-
tices. Member States would have to define and enforce
standards, following a common framework. The Com-
mission launched the work to establish such a frame-
work at the end of 2002 (28). Much will depend on how
effectively such a code can be implemented in practice.

Performance of environmental evaluations

4.84. The Commission committed itself to preparing a
full evaluation of the forestry policy. This evaluation
report was finalised in March 2001 (29).

4.85. The Commission has also set up external ex post
evaluations on some market policies, which have
included questions on environmental impacts (30). The
results provided in the market evaluation studies have
often been disappointing, because they were compiled
in an ad hoc manner and based on desk research and
summarising of earlier studies from different Member
States which referred to different periods.

In view of the poor experience so far in market
4.86.
evaluations, there is a plan to include specific horizon-
tal studies to evaluate environmental impacts of market
measures in the Directorate-General for Agriculture’s
evaluation programme.

(26) Letter of 27 July 2002 from Mr Fischler, the Commis-
sioner for Agriculture, rural development and fisheries.
(27) Interview with the Director-General for Agriculture on

13 January 2003.

(28) Towards sustainable farming — A mid-term review of the
common agricultural policy. COM(2002) 394 final, p. 19.
(29) Evaluation of the Community aid scheme for forestry
measures in agriculture of Regulation (EEC) No 2080/92,
March 2001.

(30) ‘Evaluation de l’impact des mesures communautaires con-
cernant le gel des terres — Rapport final Janvier 2002’
(Evaluation of the impact of Community set-aside mea-
sures — final report, January 2002); Evaluation of the
common organisation of the markets in the sheep and
goatmeat sector — final report, September 2000.

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4.88. and 4.89. With the Agricultural Council conclu-
sions of 26 June 2003 direct payments shall be subject to
cross-compliance. For this purpose a priority list of 18 statu-
tory EU standards in the field of environment (including the
Nitrate Directive and the designation of Natura 2000 areas
under the Habitat Directive), food safety and animal health
and welfare has been established in view of sanctioning the
non-respect of these standards by cutting direct payments.

Conclusion

4.87. There remains considerable scope for further
improvements in the balance between environmental
and agricultural objectives (31).

4.88. Although the Commission has taken steps to
address the issues, it should continue to ensure the full
implementation of mandatory environmental legisla-
tion, such as the Nitrate Directive, in the Member States.

4.89. The Commission’s proposal in the mid-term
review to introduce mandatory compliance with envi-
ronmental requirements is in line with most of the
Court’s recommendations in Special Report No 14/2000
to use ecoconditionality rules.

Community measures for the disposal of butterfat

The Court’s findings

4.90. The common organisation of the market (COM)
in the milk and milk products sector provides for a
number of aid measures for disposing of butter sur-
pluses on the Community market by encouraging their
use in the manufacture of processed foods (pastry prod-
ucts and ice cream) or stimulating their consumption
by non-profit-making bodies or by recipients of public
assistance. In 2002, the budgetary expenditure devoted
to these measures totalled 459 million euro, i.e. 19,4 %
of the expenditure of the COM concerned (2 360 mil-
lion euro).

In its Special Report No 8/2000 (32), the Court
4.91.
examined the management of measures for the disposal
of butterfat, especially for pastry products and ice cream
(87 % of the expenditure in 1999). The Court came to
the conclusion that:

4.91.

(a)

the existing tendering system does not enable the
lowest possible Community aid level to be attained;
the current tendering procedures should be revised;

(a) The application of the tender system is considered by
Member States and the Commission to be the best
method to manage the aid levels and quantities subsi-
dised under the pastry and ice cream scheme.

The objective is specified in the preamble to the Regula-
tion and the indicator for achievement of the aims set for
quantities and expenditures, is directly measurable by
comparing the quantities actually subsidised with those
forecasted.

(31) Towards sustainable farming — A mid-term review of the
common agricultural policy (COM(2002) 394 final, p. 11).

(32) OJ C 132, 12.5.2000, p. 1.

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The way in which the scheme is managed has, over time,
ensured disposal of important quantities of butter fat (in
total for all measures 555 000 tonnes in 2002 com-
pared with 532 000 tonnes in 1995 or around 30 % of
the total butter consumption) which otherwise, to a great
extent, would have ended up in public intervention for
butter.

The management has enabled the operators to plan regu-
lar supplies and ensure stability to the advantage of all
parties concerned. At the same time, it has, through the
existing tender system, been possible to reduce the aid
under the pastry and ice cream scheme, by 42 % from
146 EUR/100 kg to 85 EUR/100 kg (or from 45 % of
the butter intervention price to 26 % of the IP) since
1995.

(b)

the Commission should consider structural mea-
sures to improve demand for non-subsidised but-
ter or to limit its supply;

(b) The Council Agreement on the reform of the CAP includes
the reduction of the butter intervention price by a total
of 82 EUR/100 kg (or 25 % of the existing IP) over the
next four years starting in 2004. This reduction should
enhance the non-subsidised disposal of butter and will be
reflected in the level of subsidies applied in the milk sec-
tor.

(c)

the Commission should make a comprehensive
evaluation of the disposal measures;

(c)

In 2002, external experts have carried out an evalua-
tion of the common market organisation for milk and
milk products including an examination of the butter
disposal measures, as requested by the European Court of
Auditors.

(d)

aid should be progressively reduced and concen-
trated only on quality non-imported butterfats used
for products where it is likely that additional
demand will in fact be created.

(d) As indicated above, the Commission has, over time,
reduced the aid considerably for all eligible products and
will continue to do so.

The Council (33) and the European Parliament (34) have
supported the Court’s observations and recommended
that the regulations be revised.

The surplus measures are introduced to cope with the
surplus of milk fat on the EU-market, in practice present
in the form of butter. Lower quality butter and imported
butter are not eligible for aid as such, but nevertheless
form part of the overall supply. These products can be
used to produce high quality butter concentrate, which is
eligible for aid under the pastry and ice cream scheme. If
lower quality butter and imported butter remain on the
market, there is a risk of pushing other first quality
EU-produced butter into public intervention and the
exclusion of imported butter could put into question the
EU’s international agreements.

(33) The Council’s conclusion of 28 February 2001.
(34) Resolution of 13 December 2000 on Special Report

No 8/2000 (reference A5-0396/2000).

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At present the Commission is, in the framework of the
Milk Management Committee with the participation of
competent national and EU experts, in the process of
consolidating and simplifying the different butter dis-
posal measures.

Action taken by the Commission

4.92. The only changes the Commission made to the
regulations were technical amendments relating to the
types of tracer and the conditions for approving the
establishments authorised to add tracers.

4.92. As indicated above, the Commission is carrying out
a consolidation and simplification of the different butter dis-
posal measures. See reply to points 4.19 and 4.20.

4.93. Moreover, the Commission had a study carried
out to evaluate the milk and milk products COM and
the milk quotas Regulation; the resultant final report
was sent to it in March 2002. The main recommenda-
tions made in this evaluation report are to:

(a)

(b)

revise the regulations governing disposal of the
products concerned in order to better target the
recipients and the aid;

improve knowledge of the market in butter for
pastry products in order to adapt the forms of aid
so as to improve the effectiveness of the measures;

(c)

optimise the systems for fixing the rates of aid.

Conclusion

4.94. The evaluation report confirmed the Court’s
main conclusions and the discharge authority’s recom-
mendations. The Commission should therefore carry
out an in-depth analysis of the market and propose the
necessary amendments to the regulations to improve
the effectiveness of the butterfat disposal measures.

4.94. At present the Commission is, in the framework of
the Milk Management Committee with the participation of
competent national and EU experts, in the process of consoli-
dating and simplifying the different butter disposal measures.

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PRINCIPAL OBSERVATIONS IN SPECIAL
REPORTS

Subsidies on exports of agricultural products (export
refunds)

Introduction

4.95. The price of agricultural products in the EU is
generally higher than the world market price. The EU
therefore pays subsidies to exporters to compensate
them for the difference between the internal EU and
world prices. The main products involved are bulk sugar
and cereals, skimmed and whole-milk powder, butter,
cheese and beef. In 2001, 3 394 million euro were paid
in the form of export refunds (35).

4.96. The Court has published two reports on this
subject during 2003. The first concerned the payment
of export subsidies several months before goods are
exported — ‘prefinancing of export refunds’ in EU jar-
gon (36). The Court’s audit analysed whether the system
met its initial objectives and whether it could be use-
fully simplified, removed or replaced. The second con-
cerned the mechanics of setting the rates of subsidy (37).
The Court’s audit here set out to establish whether the
Commission fixed refund rates in a sound and transpar-
ent way which reflected the difference between EU and
world prices and on the basis of reliable, up-to-date
market information. The principal findings of the two
reports are summarised below.

Prefinancing

4.97. Prefinancing allows an export refund to be paid
up to 240 days in advance of the physical export. The
system has existed since 1969 and was introduced to
help maintain preference for EU products. Around 11 %
of export refund payments are prefinanced. The system
has proved problematic in the past. The last major
review by the Commission, in 1997, resulted in signifi-
cant amounts being recovered from Member States.

(35) Expenditure amounted to 3 622 million euro in 2002.
(36) Special Report No 1/2003 (OJ C 98, 24.4.2003).
(37) Special Report No 9/2003 (OJ C 211, 5.9.2003).

4.97. The Commission services audit all aspects of EAGGF
expenditure, including export refunds, in a continuous way
and based on a risk analysis. While they have not carried out
an audit of the prefinancing regime per se since 1997, they
have been actively examining matters related to export refunds.
They have also been following the progress of the Court’s
audit, which began in 2000 and has taken an approach simi-
lar to that of the earlier Commission audit. They have taken
account of the Court’s findings in the risk analysis used to
determine its future work programme.

As a result of this central risk analysis, three clearance of
accounts audits were carried out in 2003 to Member States
with material expenditure, presenting the opportunity to fol-
low up the Court’s observations.

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4.98. The system is complicated, time consuming and
expensive to administer and control. Much of this derives
from the complex regulatory framework. This has led
to differences in the way the Member States apply the
system and check payments, which, in turn, makes the
audit of certain aspects of the system difficult.

4.98. The Commission shares the Court’s opinion concern-
ing the complexity of the refund prefinancing arrangements.
The Commission has made an effort to improve the imple-
mentation of physical checks in the Member States, (e.g.
working papers in 1998 and 2002 explaining how physical
checks should be carried out) before setting up a new legal
framework which, inter alia, aims to further harmonise checks
on products subject to prefinancing (see 4.102).

4.99. Where firms process goods under prefinancing
prior to export (for example, grain into flour, beef into
tinned beef) the system becomes more cumbersome
and the records used to monitor the processing were
not reliable. Prefinancing now often plays a role very
different from that foreseen in 1969. It is used to increase
control over beef exports and, in the case of cereals, to
extend the period during which exporters can use export
licences.

4.99. The Commission would agree, regarding prefinancing
of beef, that control procedures for paying agencies are cum-
bersome and costly. The financial guarantee put up by an
exporter cannot be liberated until the paying agency has rec-
onciled the quantity placed under prefinancing with the quan-
tity or quantities exported and placed in free circulation in a
third country. This reconciliation is a routine and integral part
of paying agency procedures. The introduction of database
requirement, plus limitation of number of declarations should
make this much simpler.

4.100. The Court recommended that the system be
reviewed and consideration given to its removal. The
Commission agreed to carry out a review of prefinanc-
ing.

For processed goods the use of standard yields will, from the
1 October 2003, no longer be applied which represent a con-
siderable simplification.

4.100. Having carried out the review promised, the Com-
mission has decided to effectively limit the use of prefinancing
to the beef and cereals sectors and non Annex I goods, where
it is felt that abolition of the regime would oblige the Com-
mission to create other mechanisms that would complicate
matters more. The Commission believes that the new system
will provide a suitable balance between controls on, and sup-
port for, the operators concerned.

The Court’s observations have been addressed by Regulation
(EC) No 444/2003 (horizontal matters) and by Regulations
(EC) No 456/2003,
(EC) No 500/2003 and (EC)
No 740/2003 (specific matters). Key elements of these include
a shortening of the prefinancing period, a new minimum rate
of physical checks, and the provision of suitable information
by Member States.

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4.101. The fixing of the refund rates are supported by
analysis and management checks are part of the standard pro-
cedure. All fixings are prepared in a meeting with the Director-
General and the opinion of a Management Committee is
sought by the Director responsible for the sector concerned.

The improvements in the working methods in the field of fix-
ing export refunds formalised by the Commission on 10 July
2002 correspond to the recommendations made by the Court.

4.102. The Commission has introduced a comprehensive
action plan in response to the Court’s observations. The main
elements include the information used to set refund rates, a
possible increase in the use of tendering (where feasible), and
the documentation of internal procedures.

Fixing of refund rates

4.101. The information used by the Commission for
fixing refund rates was not always complete or up to
date. There were no guidelines or manuals setting out
procedures to be followed nor was there systematic evi-
dence of management checks on the rates set. For some
product sectors the difference between the EU and world
market price quotations calculated by the Commission
could not be systematically linked to the calculation of
refund rates actually set. The Commission stated that it
was not able to ensure that export subsidies for beef did
not exceed the difference between EU and world price
quotations. The Commission’s analyses of skimmed-
milk powder and whole-milk powder price quotations
showed that the subsidy exceeded the difference between
quoted world and EU prices for significant periods cov-
ered by the audit.

4.102. The overall conclusion was that the way the
Commission set refund rates was insufficiently clear,
particularly for beef, milk products and to a lesser extent
cereals. The Court made a number of recommendations
designed to make procedures clearer, to improve docu-
mentation and to facilitate management control. The
Commission has reacted positively and is in the process
of implementing most of these.

Sound financial management of the common organisa-
tion of the market in dried fodder

Introduction

4.103. Dried fodder provides less than 2 % of the EU’s
total crude protein fed to livestock. Nearly all Member
States produce dried fodder but the major producers are
Spain, France and Italy.

4.103. Even if the provided quantity of protein as such is
an important element, the protein composition and other
qualities required by the different animal categories must be
considered as well.

4.104. Aid is paid for dried fodder that leaves the pro-
cessor and which meets the required criteria for protein
and moisture content. Since 1995 there has been a
maximum guaranteed quantity (MGQ) to limit budget-
ary costs.

4.104.
In February 1995, the Council agreed in an overall
compromise on dried fodder for a level of aid within an effec-
tive upper limit on the EU budgetary expenditure by the intro-
duction of MGQ.

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4.105. The objectives of the audit were to examine
whether the rates of aid were determined on a sound
basis and the detailed rules and procedures introduced
ensured effective control. The audit also examined
whether appropriate monitoring had been carried out
and the impact of the measures had been evaluated.

Audit findings

4.106. The rate of aid paid for artificially dried fodder
is almost double that paid for sun-dried fodder. This
encouraged producers to switch from sun-drying and to
produce artificially dried fodder to the maximum extent
possible. EU production has continued to increase since
1995 and the MGQ has been exceeded since 1998/99.
Development of the market has been uneven, with some
Member States able to exceed their MGQ by as much as
60 % whereas others have consistently failed to produce
up to their MGQ.

4.107. Lack of clarity in regulations created opportu-
nities for different interpretations and the introduction
of questionable practices in Member States. In certain
Member States, some checks were not being carried
out, including cross-checking with the IACS system,
reconciliation of financial accounts of processors and
aid claims. Verification of plants entering the drying
process is not required by the regulations. In one Mem-
ber State marketing companies wholly owned and man-
aged by processors had been set up to enable them to
claim that fodder has left their premises, thereby quali-
fying for aid sooner than if they were transferring own-
ership to a real third party.

4.106. Since 1995, due to the budgetary stabiliser system,
an overshoot of the MGQ does not create any additional
expenditure to the Community Budget.

4.107. The Commission too is very concerned by the differ-
ent interpretations of its audits in the clearance of accounts
procedure.

In 1999 it carried out a series of audits of agricultural expen-
diture on dried fodder in the main producer Member States
which revealed weaknesses similar to those noted by the Court.
However, in view of the other elements making up the inspec-
tion systems in the Member States, it considered the financial
risk to the EAGGF was limited, with the exception of a few
cases where financial corrections were applied.

The Commission has taken note of the comments by the Court
concerning the continuation of these weaknesses and will
attend to them in future audits.

With regard to the special case of steps taken to speed up the
collection of aid, the Commission cannot regard them as open
to criticism in themselves. The criterion of leaving the place
of production is intended to ensure the effectiveness of physi-
cal checks and is designed mainly to ensure that dried fodder
does not receive aid twice.

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4.108. There has been no specific evaluation of this
market. Two other major reviews by the Commission,
however, provided an opportunity to examine the mar-
ket and its development. The first was a review of the
options for replacing the processed animal proteins
banned as a result of the BSE epidemic, which con-
cluded that the best option would be to increase imports
of soya rather than pursue more costly alternatives such
as increasing production of dried fodder. Market forces
would come into play, however, and a variety of meth-
ods would be used, including using additional soya.

4.108. The Directorate-General for Agriculture had planned
in 2001 an evaluation of the dried fodder sector but this was
postponed in favour of other market priorities.

An evaluation of the dried fodder scheme is provided for in the
Council Decision and is to be completed in time for the Com-
mission Report to the Council by 30 September 2008. As
the Court indicates, it should be noted that the sector was
included in the analysis presented in the report on protein sup-
ply.

4.109. The second was the mid-term review of the
CAP. This proposed a transfer of aid from processors to
fodder growers as part of the single farm payment
scheme and single lower-rate interim aid system for
processors which would last four marketing years and
then cease. The Council decided in June 2003 to main-
tain a single rate for processors alongside the aid to
growers. It has also asked the Commission to report on
the fodder sector by 30 September 2008 on the basis of
an evaluation.

Recommendations

4.110. The Court recommended that the Commission
take the opportunity of reforming the market organisa-
tion to review the rules to be applied by Member States
to ensure appropriate control.

4.110. The Council Compromise of 26 June 2003, based
on the Commission proposal (1), a long-term policy perspec-
tive for sustainable agriculture, adopted decoupling for the
dried fodder sector and a flat processing aid at the same rate
for both dehydrated and sun-dried fodder, while merging the
MGQ’s.

The Commission will reassess all these checks in the light of
the new reform.

Production aid scheme for cotton

4.111. This report contains the Court’s findings from
a sound financial management audit of the production
aid scheme for cotton. This scheme had previously been
audited in the early 1990s and the findings published in
the Court’s 1992 and 1995 Annual Reports.

(1) COM(2003) 23 final, 21.1.2003.

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4.112. The overall objective of the scheme is to sup-
port the production of cotton and to allow the produc-
ers concerned to earn a fair standard of living. The main
producer Member States are Greece and Spain. A small
amount of production takes place in Portugal.

4.113. The aid is granted to the ginners who have to
pay a minimum price to the producers. It varies in
amount with market prices and on quantities produced.
The mechanism used to determine the aid aims to pro-
vide the ginners with a constant level of income suffi-
cient to cover their operating costs and to allow EU pro-
duced cotton to compete on price with the imported
product. When selling the cotton to the ginners the
producers receive an amount approximately two to
three times greater than the commercial value of the
cotton sold.

4.114. Since the establishment of the scheme in 1981,
annual production of cotton in the EU has increased
from 0,3 million tonnes to 1,7 million tonnes. This
increase reflects the fact that the aid for cotton produc-
tion is three to four times that paid for crops grown as
an alternative. A comparison of the gross margins for
cotton and grain maize indicates a ratio of about 1,5 in
favour of cotton. About a quarter of the increase in pro-
duction is due to the accession of Spain to the EEC in
1986.

4.115.
In 1987 a stabiliser mechanism was introduced
with the objective of reducing the support payable when
production exceeds the guaranteed maximum quantity.

In 2001, a reform of the production aid scheme
4.116.
took place and included a strengthening of the stabiliser
mechanism, the effect of which causes a sharp drop in
the support payable when production exceeds stated
thresholds.

4.117. Higher than expected Greek production in
2001/02 led to an application to have certain produc-
tion eliminated from the scheme. The examination of
this application identified a number of issues regarding
quantities eligible for aid and the quantities which should
be used to determine the penalty for production in
excess of the guaranteed quantities. Amending legisla-
tion followed which sets down criteria for establishing
such quantities because if ineligible cotton produced
goes undetected, all producers are penalised through a
higher penalty imposed by the stabiliser mechanism.
One criterion for eligibility is that aid should only be
paid on quantities coming from areas declared to cot-
ton production under IACS. In practice the national

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authorities in Greece, when deciding on eligible pro-
duction, are constrained by the weaknesses in IACS.
Moreover, the results of checks by the authorities to
determine quantities to be excluded from production
for the purposes of applying the stabiliser mechanism
are inconsistent with the results of checks on individual
producers for the purposes of verifying area declara-
tions. In view of the weaknesses in IACS in Greece, the
ability of the Commission to monitor the correct appli-
cation of the stabiliser mechanism is diminished. The
Commission wished to introduce a reform of the present
scheme to be effective from the marketing year com-
mencing on 1 September 2003. This deadline has not
been met and the Commission intends to submit a pro-
posal for the reform of the aid scheme for cotton to the
Council and to the European Parliament in the autumn
of 2003.

4.118.
In any year when the Community expenditure
does not reach 770 million euro, the regulations pro-
vide for an increase in the amount payable to the pro-
ducers provided certain conditions are met. In three of
the seven years 1995/96 to 2001/02 an increase in sup-
port was paid to the producers under this provision.
Furthermore, this measure mitigates the effect of the
stabiliser mechanism and could be viewed as a bonus
payable to the producers. Budget neutrality cannot be
assured and expenditure in the other four years exceeded
770 million euro.

4.118.
In the context of a deficiency payments scheme, the
expenditure depends by definition, at least partially, on the
world prices and consequently budget neutrality as mentioned
by the Court cannot be assured.

As an integral part of the stabiliser this provision is a reduc-
tion of the penalty in the level of support when the expendi-
ture does not reach EUR 770 million.

4.119. Within the Commission there is a lack of infor-
mation on the negative impact cotton production can
have on the environment and there is no continuous
monitoring of the environmental situation in the regions
within the Member States where cotton is produced.

4.119. Since 2001, on the basis of Council Regulation
(EC) No 1051/2002, Member States have taken environ-
mental national provisions, which have been examined by the
Commission services.

The follow-up of these national measures and a subsequent
report to be submitted by Member States before the end of
2004 should give the Commission additional information on
the environmental situation in the cotton sector.

4.120. The Commission is unaware of the effective-
ness of the incentive given to the ginners to improve the
quality of the cotton produced. The amount paid appears
to represent unnecessary expenditure and to be a source
of additional revenue as it duplicates the revenue
obtained from the market place when better quality and
the
increased yields are produced.

In addition,

4.120. The Commission considers that the fact that the
yields in ginned cotton are usually higher than the standard
32 % is an indicator of the effectiveness of the provisions
related to the improvement of the quality.

The quality premiums on the world market prices for ginned
cotton are relatively modest and, considering the level of

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Commission has not reviewed the operating costs
incurred by the ginners and is thus unaware of whether
the potential exists to reduce Community expenditure
by altering the amount of aid paid to the ginners.

the world prices for ginned cotton, might not be a source of
significant additional revenue for the ginners.

The Commission has in the past tried to review the operating
costs incurred by the ginners but the discussions with the
Member States were inconclusive due to the high variability
of the results. Consequently, in the context of the 1995 reform,
the Council decided to determine the calculation of the world
price of unginned cotton on the basis of the historical ratio
between the world price for ginned cotton and that calculated
for unginned cotton, which took the ginning costs into account.

4.121. While the audit in Spain did not give rise to
material observations, serious weaknesses were observed
in the checks undertaken by the Greek national authori-
ties in relation to the area declarations submitted by the
producers. The effects of these weaknesses are com-
pounded by the lack of progress in implementing IACS
in Greece. For the marketing year 2001/02 the Greek
authorities have estimated that about 10 % of the land
planted with cotton was either not declared under IACS
or was declared as cultivated with another crop. In such
circumstances and if not detected, producers receive aid
twice for the same parcels of land, once on the basis of
the arable crop declaration and again on the basis of the
actual production of cotton.

4.121. The Commission is well aware of the problems aris-
ing from the shortcomings of the IACS in Greece, particularly
the system for identifying parcels and inspections there and
pays particular attention to both area and other forms of aid
during the clearance of accounts procedure.

The same is true of the under-declaration of areas sown to cot-
ton in Greece. In addition to the problems of the IACS in
Greece, this phenomenon relates to the recent introduction of
national environmental rules, the desire of certain producers
to avoid them and their under-estimation of the importance
of the link between quantities produced (the objects of the aid)
and the areas where they are grown.

4.122. The Court recommended that the Commission
should take the opportunity of the proposed reform to
address weaknesses in the present regime (absence of
budget neutrality, the attractiveness of the aid rate on
quantities produced and the impact of cotton produc-
tion on the environment). In addition, and with regard
to the present scheme, the Court recommended that the
Commission review the financial arrangements of the
ginners and examine the effectiveness of the incentive
given to improve quality.

4.122. The Commission will take the weaknesses men-
tioned by the Court into consideration when formulating the
reform proposals. In addition, it will also take account of the
fact that the present regime is highly complicated and not in
line with the recent evolution of the CAP.

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Support for less favoured areas

Introduction

4.123. Under the aid scheme to support less favoured
areas, compensatory aid is granted to 55,8 % of the
Community’s farms. The annual cost of this aid is around
2 000 million euro, almost half of which is financed by
Community funds.

4.124. The Court’s audit aimed to establish whether
this aid scheme is being implemented in a legal and
regular manner, it is being suitably monitored, relevant
information is available on its impact, and measures are
being taken in due course to remedy any shortcom-
ings (38).

Main findings

4.125. The Commission does not have sufficient evi-
dence at its disposal to corroborate the validity of the
classification of less favoured areas. Following the obser-
vations made by the Court in 1990, the Commission
undertook a review of the existing classification, but it
never came to anything, partly because of the opposi-
tion of some Member States. Subsequently, even though
some statistical
indicators tend to show that some
regions underwent considerable economic and social
development and there was a possibility that some clas-
sifications were no longer valid, the Commission did
not propose any amendments to the existing regula-
tions.

4.126. The Member States apply a wide variety of
indicators to determine whether or not an area is less
favoured, and this may lead to disparities in the way aid
recipients are treated.

4.125. The bulk of the work on designating ‘less favoured
areas’ (LFA) was completed during the previous programming
period (1994 to 1999) on the basis of the information pro-
vided by the Member States. Under the new rules for the cur-
rent programming period 2000 to 2006, the classification
has remained stable.

4.126. The use by Member States of different indicators
within the general criteria established by the Regulation to
determine LFA designation reflects the less favoured character
in relation to the productive agricultural areas within the
Member State or region concerned (and not in comparison
with other Member States).

4.127. The Commission does not have sufficient valid
information on the impact of the aid scheme and, in
particular, on the validity of the level of compensation,
thus making overcompensation possible.

4.127. During the process of approving the rural develop-
ment programs, the Commission examines the system and
level of aid proposed.

(38) Special Report No 4/2003 on rural development: support

for less favoured areas (OJ C 151, 27.6.2003).

Several elements of Council Regulation (EC) No 1257/1999
minimise the risk of overcompensation. The total envelope a
Member State has for its rural development program is fixed
for the programming period. This envelope has to be allocated
to all the rural development measures the Member State
wishes to apply. The Regulation also puts a ceiling of EUR
200/ha on the compensatory amount. When exceeding this
limit, the Commission requires supplementary information.

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Because of the decentralised way in which the measure oper-
ates, the Member States are best placed to prevent risks of
over-compensation.

4.128. The notion of ‘good farming practices’ is from
now on an important eligibility criterion. However, in
the absence of definitions that are clear, verifiable and
consistently applied, observance of this basic criterion
is difficult to ascertain and the checks made in this
respect were found to be insufficiently effective.

4.128. The definition of good farming practice (GFP) exists
in every rural development program. Under Agenda 2000, it
was a deliberate policy to define GFP at the level of each
Member State/Region in order to deal with real local condi-
tions. In view of the very different environmental situations
from region to region, a common code of GFP defined at
Community level is not appropriate.

When approving the RDPs the Commission insisted on clear
indications on how the respect of GFP is controlled and veri-
fied by the national and/or regional authorities.

The Commission is aware of the complexity of the concept of
good farming practices (GFP), which depends on complex
rules governing a variety of sectors. That is why in 2000 a
practical approach was proposed to the Member States through
guidelines. The effective implementation of the management,
control and sanction mechanisms by the Member States is
assessed during the audits carried out by the Commission.

4.129. A Community synthesis of the ex-post evaluations
is to be completed by the end of 2003. Furthermore, the
evaluation methodology for rural development, including LFA,
has been reinforced for the current programming period in
cooperation with the Member States.

In accordance with the Regulation (EC) No 1257/1999,
Member States quantify, where possible, for the various mea-
sures (including LFA measures) objectives which allow progress
in implementing the monitoring process to be measured, and
which provide a benchmark for the evaluations.

4.129. After 30 years of implementation, there has
still not been an overall assessment of this aid scheme
making it possible to judge its effectiveness.

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Recommendations

4.130. On the basis of these observations, the Court
recommended that:

4.130.

(a)

a comprehensive, thorough overhaul should be
made of the current classification of all the less
favoured areas;

(b)

the Commission, working closely together with
the Member States, should define a more suitable
set of indicators for identifying the less favoured
areas;

(c)

relevant information on the impact of the aid
scheme in question should be available; any cases
of systematic overcompensation should be identi-
fied and the necessary corrective measures taken;

(a) The evaluation of the results of the previous programs
will provide information on the need for a review of the
classification for the next programming period (post
2006). The monitoring and evaluation system put in
place for the current programming period has improved
the availability of relevant information.

(b) The use of various indicators by the Member State is in

conformity with the Regulation.

The new evaluation system introduced by Regulation
(EC) No 1257/1999 will provide the information
required for a possible review of the classification criteria.

(c) An overall synthesis of the previous programming period

will be available before the end of 2003.

Practical guidelines on how to execute the controls of
rural development measures (including LFA measures)
have been worked out with the Member State. These
guidelines were updated in 2002. The Member States’
control systems will continue to be audited.

(d)

‘good farming practices’ should be exactly and
verifiably defined or, failing this, support for less-
favoured areas should be based on a clearer con-
cept;

(d) When approving the rural development plans contain-
ing the definition of GFP, the Commission also insisted
on clear indications on how compliance is monitored and
verified by the national and regional authorities via the
verifiable standards to be included in the program.

(e)

an overall assessment of the aid scheme should be
made and relevant indicators should be defined for
monitoring the latter.

(e) For the period 1994 to 1999, a synthesis will be avail-
able by the end of 2003. The monitoring and evalua-
tion system put in place for the current programming
period has been improved so that more detailed informa-
tion will be available. Some of the monitoring indica-
tors may need to be adjusted as more experience is gained
in their application.

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28.11.2003

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CHAPTER 5

Structural measures

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the statement of assurance

Scope and nature of the audit

Evaluation of supervisory and control systems

Systems at the Commission

Risk analyses carried out by the Commission

The implementation of the internal control standards

Follow-up to the 2001 action plan

Paragraph

5.1-5.3

5.4-5.54

5.4

5.5-5.32

5.6-5.25

5.6

5.7-5.8

5.9

Annual activity reports and declarations of the Directors-General

5.10-5.14

Closures from periods prior to 1994 to 1999

Closures relating to the period 1994 to 1999

Implementation by the Commission of the programming period 2000 to
2006

Systems in the Member States: implementation of Regulation (EC)
No 438/2001

Results of substantive testing at the Commission

Commitments and payments

Outstanding commitments

Repayment of unused advances

Closures from the period 1994 to 1999

Results of substantive testing in the Member States

Interim payments 2000 to 2006

Cohesion Fund closures 1994 to 1999

Follow-up to previous observations on ineligible expenditure

1998 and 1999 Statements of Assurance

2000 Statement of Assurance

Conclusions

Evaluation of supervisory and control systems

Commission’s assurance on the legality and regularity of operations

5.15

5.16-5.21

5.22-5.25

5.26-5.32

5.33-5.38

5.33

5.34

5.35

5.36-5.38

5.39-5.43

5.40-5.41

5.42-5.43

5.44-5.52

5.45-5.47

5.48-5.52

5.53-5.54

5.53

5.54

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Follow-up to previous observations

Special Report No 15/2000 on the Cohesion Fund

Introduction

Project applications

Coordination with the ERDF

Amending Decisions

Closure of Cohesion Fund projects

Follow-up to the anomalies identified

Impact evaluation

A substantial increase in the number of Commission audits

Principal observations in Special Reports

Special Report No 7/2003 on the implementation of assistance programming
for the period 2000 to 2006 within the framework of the Structural Funds

5.55-5.65

5.55-5.65

5.55-5.56

5.57

5.58

5.59-5.60

5.61-5.62

5.63

5.64

5.65

5.66-5.70

5.66-5.70

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THE COMMISSION’S REPLIES

INTRODUCTION

5.1. Structural measures concern the implementation
of the Cohesion Fund and of the four Structural Funds
(SFs): the European Regional Development Fund (ERDF),
the European Social Fund (ESF), the European Agricul-
tural Guidance and Guarantee Fund, Guidance Section,
(EAGGF-Guidance) and the Financial Instrument for
Fisheries Guidance (FIFG). The Structural Funds finance
socioeconomic development programmes
in the
15 Member States and the Cohesion Fund finances
projects to improve the environment and develop trans-
port infrastructure in Member States whose per capita
GNP is less than 90 % of the Union average (1).

5.2. The structural measures are listed under heading
2 of the financial perspective. For the period 2000 to
2006, this heading accounts for appropriations total-
ling 230 032 million euro (2). Graphs 5.1 and 5.2 give
the commitments and payments
a breakdown of
for 2002. Most of the expenditure is directed towards
three priority objectives:

— Objective 1: promoting the development and struc-
tural adjustment of regions whose development is
lagging behind,

— Objective 2: supporting the economic and social

conversion of areas facing structural difficulties,

— Objective 3: supporting the adaptation and mod-
ernisation of policies and systems of education,
training and employment.

Community initiatives account for 2 % of structural
measures expenditure in 2002. These are operations of
Community interest carried out at the initiative of the
Commission to supplement those implemented under
the main programmes. Other expenditure includes spe-
cific actions such as the cost of checks on the applica-
tion of agricultural legislation and participation in fish-
eries surveillance measures operated by the Member
States.

(1) Greece, Spain, Ireland and Portugal.
(2) 211 039 million euro for the Structural Funds and 18 993
million euro for the Cohesion Fund (2002 prices).

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Graph 5.1 — Breakdown of commitments by budgetary area in 2002

Source: 2002 revenue and expenditure accounts.

NB: For more detailed information see Diagrams III and IV of Annex I.

Graph 5.2 — Breakdown of payments by budgetary area in 2002

Source: 2002 revenue and expenditure accounts.

NB: For more detailed information see Diagrams III and IV of Annex I.

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THE COMMISSION’S REPLIES

5.3. Structural measures are managed by four
Directorates-General of the Commission on the basis of
multi-annual programmes. The Directorate-General for
Regional policy manages the ERDF and Cohesion Fund,
the Directorate-General for Employment and Social
Affairs manages the ESF, the Directorate-General for
Agriculture manages EAGGF-Guidance
and the
Directorate-General for Fisheries manages the FIFG. Each
intervention (3) is accompanied by an indicative financ-
ing plan which specifies the amount of Community aid
and the Member State’s contribution. For the 1994 to
1999 and previous programming periods, contribu-
tions for structural measures were committed in instal-
ments and were paid in the form of advances and final
payments, the latter constituting the ‘closure’ of the
period. Community financing in the programming
period 2000 to 2006 takes the form of commitments
according to the financial plan, followed by an initial
payment, the periodic reimbursement of expenditure
declared by the Member States and final payments.
These reimbursements are called ‘interim payments’. In
2002, 34 012 million euro was committed and
23 499 million euro was paid (4).

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Scope and nature of the audit

5.4. The Court’s 2002 audit of structural measures
concentrated on the evaluation of supervisory and con-
trol systems at the Commission and in the Member
States including substantive testing at both these lev-
els (5) and the follow-up to previous observations on
ineligible expenditure.

(3) Project in the case of the Cohesion Fund and operational
programme or single programming document (SPD) in
the case of the Structural Funds.

(4) See table 2.1 of this report.
(5) Since only a very small number of forms of assistance
were closed during 2002, the audits in the Member States
concerned two closures (Cohesion Fund) and 15 interim
payments of the period 2000 to 2006. ‘Forms of assis-
tance’
is a general term to describe operational pro-
grammes, single programming documents and Commu-
nity initiatives.

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5.5. The Commission refers to its replies given in Annex 1
opposite the Court’s observations. The Commission would
point out that substantial progress has been made in imple-
menting the internal control standards within the Commis-
sion and in its opinion the management and control systems
in the Member States have improved.

5.6. The declarations made for 2002 by the Directors-
General responsible for the Structural Funds contain a reason-
able assurance, even though this is accompanied by reserves
and depends on the progress made by the Directorate-General
concerned in examining the management and control systems
of the Member States (see replies to points 5.10 to 5.13).

In 2002, the Commission continued to devote a major part
of its auditing resources to checking the systems put in place
by the Member States for the 2000-2006 programming
period, It is pursuing this work in 2003 alongside that for the
closure of the programmes implemented over the 1994 to
1999 period.

5.7. The Commission undertook to implement the Internal
Control standard (ICSs) as soon as possible and, as shown in
the table annexed to Chapter 1, the implementation of those
still outstanding is under way. The Commission will ensure
that they are implemented.

Evaluation of supervisory and control systems

5.5. The previous audits of the Court concerning the
supervisory and control systems for structural measures
have revealed weaknesses both in the Commission and
in the Member States. These weaknesses have again
contributed to the declaration of ineligible expenditure
and the making of undue payments. Annex 1 sum-
marises developments in the main issues arising from
the Court’s recent audits affecting the legality and regu-
larity of operations.

Systems at the Commission

Risk analyses carried out by the Commission

5.6. The main risks to the legality and regularity of
the expenditure on structural measures arise because
management is shared between the Commission and
the Member States, because the supervisory and control
systems span a large number of different bodies and
authorities and because each programming period is
spread over a number of years. The Court’s examina-
tion of the risk analyses carried out by the Directorates-
General responsible for managing the structural mea-
sures did not give rise to any observations. As in previous
years, the Commission recognises the risk that it is
unable to provide adequate assurance that operations
carried out in Member States for the programming
period 2000 to 2006 are legal and regular. In 2002, the
Commission concentrated on improving its internal
control systems and continued carrying out analyses of
the systems descriptions sent by Member States’. How-
ever, the checks on Member States’ internal controls
have not been completed.

The implementation of the internal control standards

standards

5.7. An examination of the activity reports of the
Directorates-General managing the structural measures
indicates that adequate implementation of the internal
still ongoing at
(ICSs) (6) was
control
31 December 2002. The Directorate-General
for
Regional Policy had implemented at least the minimum
requirements (7) for all of the 24 ICSs. The Directorate-
General for Employment and Social Affairs and the
Directorate-General for Fisheries had implemented the
minimum requirements for 15 ICSs. In the Directorate-
General for Agriculture this was the case for 18 ICSs.
The ICSs not yet implemented to the minimum require-
ments were, mostly, in the ‘performance and risk man-
agement’ and ‘control activities’ categories.

(6) See paragraphs 1.89 to 1.96.
(7) See paragraph 1.89.

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5.8. The Commission considers that any remaining defi-
ciencies identified do not seriously put in doubt the quality of
its internal control systems. It refers to its responses given to
the relevant points.

5.9. Under action 4 the Commission has been checking
that the management and control systems in Member States
meet the required standards, is intensifying the coordination
of audit work, and is pursuing an initiative whereby Member
States will enter into a ‘contract of confidence’ which will
enable the Commission to rely more directly on national audit
work.

The package of measures to simplify implementation of Coun-
cil Regulation (EC) No 1260/1999, without amending it,
was adopted in April 2003 (‘Communication on the simpli-
fication, clarification, coordination and flexible management
of the structural policies’ — C(2003) 1255). The measures
concern audit and controls, the mid-term review and pro-
gramme amendments, indicators, the performance reserve,
annual meetings and monitoring committees, reporting and
financial management. The communication indicates that the
Member States should also streamline their internal proce-
dures, which can be a source of complication. The Commis-
sion took account of the requirements of sound financial man-
agement in adopting the measures.

In application of action 12 of the action plan, a communica-
tion was drafted with the departments concerned in order to
clarify the role of directors-general in shared management,
within the relevant legal context and within the limits of their
responsibilities [C(2003) 1830].

Under the action plan based on the summary report on the
annual declarations for 2002, the Commission will further
analyse the scope of responsibilities within shared manage-
ment with a view to issuing a communication, including pos-
sible recommendations, by March 2004.

5.8.
ICS 17 required all Directorates-General to put
systems in place which would allow them to exercise
adequate supervision and control over the activities for
which they are responsible. The structural measures
Directorates-General
implemented the systems as
required by this ICS, but the Court observed weaknesses
in the operation of the systems which put in doubt the
ability of the Commission to give adequate assurance
on legality and regularity. These weaknesses concern
the closure of programmes from before 1994 and the
programming period 1994 to 1999 (see paragraphs 5.15
to 5.21), the systems for making interim payments on
the programming period 2000 to 2006 (see para-
graphs 5.22 to 5.25) and repayment of unused advances
(see paragraph 5.35).

Follow-up to the 2001 action plan

5.9. The structural measures Directorates-General
began to meet the requirements of the action plan
introduced by the Commission to remedy weaknesses
identified in 2001 (8). However, further progress is
needed to complete implementation of actions 4 and
12 of the plan relating to shared management. Action
4 of this plan led the Commission to propose measures
on the simplification of the management of the struc-
tural measures to the Member States. The proposals
were made to take account of the request by Member
States that procedures should be simplified, at the same
time allowing the Commission to manage the Commu-
nity budget properly. In its Annual Report for 2001
(paragraphs 3.12, 3.31 and 3.32) the Court pointed out
that delays in the implementation of structural mea-
sures were in part due to the complexity of the manage-
ment procedures. The Court also stressed, in its Special
Report No 7/2003 (9), that the proposed simplification
process should be compatible with good management
of the structural measures in terms of legality, regular-
ity and sound financial management.

(8) This action plan contains 18 actions. For example: action
4: With the Council, define the responsibility of the Com-
mission for achieving the objectives in the shared man-
agement of the structural measures and the presentation
of proposals defining the role of the Commission in the
supervision and control of operations; Action 12: Analy-
sis of the problems arising from shared management, pre-
sentation of a proposal to the Commission concerning
the extent of the authorising officer in each domain of
shared management and the preparation of a base allow-
ing the directors-general to take appropriate action in
cases of uncertainty or where difficulties are revealed.
(9) Special Report No 7/2003 on the implementation of assis-
tance programming for the period 2000 to 2006 within
the framework of the Structural Funds.

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Annual activity reports and declarations of the Directors-General

5.10. The Court notes an improvement in the 2002
annual activity reports prepared by the Structural Mea-
sures Directorates-General compared to those of
2001 (10). However, while all of the Directors-General
declare that they have reasonable assurance that the
systems guarantee the legality and regularity of the
underlying transactions, the declarations contain reser-
vations which highlight serious difficulties, although
without any attempt at quantification. Moreover, the
assurance given by the structural measures Directors-
General is mainly limited to the internal systems, which
means that little assurance is given concerning most of
the systems operated by the Member States. This reduces
the value of the assurance given in the declaration.

5.10. The scope of the assurance given and of the reserva-
tions entered in the declarations of the Structural Fund
Directorates-General for 2002 depended to a large extent on
the progress they had made in checking the compliance of the
Member States’ management and control systems for 2000-06
programmes and on the results of these controls. On the basis
of the verifications carried out under Article 6 of Regulation
(EC) No 438/2001 the Regional Policy and Fisheries
Directorates-General were able to give an assurance, with cer-
tain reservations, based on both their internal systems and the
results of the assessment of the systems put in place by the
Member States.

The Employment and Social Affairs Directorate-General’s
assurance was limited to its internal systems.

Given the nature of the reservations for 2002 and in particu-
lar the continuing dialogue with Member States, quantifica-
tion was not always appropriate. The Commission also refers
to its reply at point 1.101.

5.11. The Director-General for Regional Policy excludes
all management and control systems relating to the
Cohesion Fund for the post-2000 period, and also gives
a reservation on important aspects of the pre-2000
period. For the ERDF post-2000, the Director-General
for Regional Policy gives reservations on two Member
States (which it had audited in 2001 and 2002) and one
region, due to persistent structural weaknesses in the
management systems (11). Reservations are also given
on three regions for which systems descriptions had not
yet been received (12). For the other regions and Mem-
ber States which receive finance in the 2000 to 2006
programming period, the Director-General for Regional
Policy concluded that he has reasonable assurance based
on desk reviews of systems descriptions and systems
audits in the Member States but in the absence of checks
on projects. Finally, the Director-General for Regional
Policy does not include the Community Initiatives in his
declaration of reasonable assurance because desk reviews
of the documentation received from the Member States
have not been completed.

(10) See paragraphs 9.80 and 9.81 of the Court’s 2001 Annual

Report.

(11) Greece, Spain and Calabria (Italy).
(12) Piemonte, Emilia-Romagna and Friuli-Venezia Giulia.

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5.12. The reservation given by the Director-General
for Employment and Social Affairs is based on its audits
of management and control systems set up by the
Member States relating to the 2000 to 2006 program-
ming period and states that the Directorate-General for
Employment and Social Affairs does not have reason-
able assurance that these systems guarantee the legality
and regularity of the underlying transactions at the
national or local level. Expenditure related to those sys-
tems covers 98 % of all the ESF payments in 2002.
Despite this, the Director-General declares that she has
reasonable assurance that the control procedures estab-
lished offer the necessary guarantees regarding the legal-
ity and regularity of the underlying transactions.

5.13. The reservations of the Director-General’s dec-
laration concerning EAGGF-Guidance cover all of the
expenditure on the programming period 2000 to 2006
under the EAGGF-Guidance section, although the
amount involved represents only 3,5 % of the total
expenditure implemented during the year by the
Directorate-General. The reservations stated in the dec-
laration of the Director-General of the Directorate-
General for Fisheries are not quantified, but taking into
account the systems related to forms of assistance still
not verified in the Member States, they can be estimated
to cover about 40 % of the FIFG expenditure for 2000
to 2006.

5.14. The Court also notes for all the Directorates-
General that for the period 1994 to 1999, the Directors-
General do not make reservations for the four Struc-
tural Funds. This is not consistent with the observations
of the Court (see paragraphs 5.16 to 5.21) and con-
firmed by the Commission (13), which indicate numer-
ous systems weaknesses relating to the period 1994 to
1999.

5.12. The Commission confirms that the Directorate-
General for Employment and Social Affairs was able to pro-
vide reasonable assurance only regarding its own internal con-
trol systems and that it had reserves concerning the national,
regional and/or local systems responsible for guaranteeing the
legality and regularity of all the underlying transactions.

On the basis of the audit work carried out, the Directorate-
General concluded that it could no have assurance that all
payments in 2002 were made within a system that guaran-
teed at national/local level the legality and the regularity of
the operations, which does not mean that the whole ESF bud-
get was implemented outside such a framework.

5.13. By the end of 2002 the Fisheries Directorate-General
had verified in the Member States the systems for 8 of the 16
programmes for which it is lead department representing some
60 % of the Financial Instrument for Fisheries Guidance
(FIFG) budget for 2000 to 2006. In addition the systems
description of one programme representing 5 % had been
examined. In its annual activity report the reservations only
concern the Member States or programmes where the analysis
of system descriptions had not yet been completed.

5.14. The reasons why the Structural Funds Directorates-
General did not enter reservations in their 2002 annual activ-
ity reports for 1994 to 1999 programmes were, firstly, the
small amount of payments made for pre-2000 programmes
in 2002 and, secondly, the process of pre-payment checks and
post-payment audits in place designed to ensure that final
payments are regular. Moreover, the Structural Fund Director-
ates General continued in 2002 their audits of Member States’
control systems for 1994 to 1999 programmes, which pro-
vided evidence that the Member States visited were taking
steps to remedy weaknesses in the systems.

(13) Commission reply to paragraph 3.57 of the Court’s Annual
Report concerning the 2001 financial year (OJ C 295,
28.11.2002).

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Closures from periods prior to 1994 to 1999

5.15. At 31 December 2002, 29 million euro (exclu-
sively ESF) remained committed for projects from
before 1989 which were not closed. This figure is virtu-
ally unchanged from the amount remaining at the end
of 2001. Also at the end of 2002, 31 programmes from
the programming period 1989 to 1993 remained open,
representing almost 100 million euro. More than half of
this amount relates to ESF cases, which are now at about
50 % of the value of ESF cases which remained at the
end of 2001.

5.15. At the end of 2002, 222 ESF projects involving a
total of EUR 28,8 million were still open from before 1989.
In 2003, the situation improved: when this reply was drafted
(June 2003), 35 projects involving a total of EUR 4,7 mil-
lion had been closed and 24 projects involving a total of EUR
1,4 million were in the process of being closed. For the ERDF
the outstanding commitments on pre-1994 programmes were
reduced by the end of 2002 to EUR 20,2 million from the
EUR 398,0 million outstanding at the end of 2001.

A considerable proportion of the pre-1994 files concerned are
the subject of legal procedures or are suspected to contain
irregularities, which justifies the fact that they have not yet
been closed (see Commission’ reply to points 3.27 and 3.28
of the Court’s report for 2001).

The Commission is continuing to give close attention to these
cases in the framework of its action plan on the RAL adopted
in 2002.

Closures relating to the period 1994 to 1999

5.16. Regulation (EC) No 2064/97 (14), introduced fol-
lowing the observations made by the Court and the
budgetary authority, sets out the supervisory and con-
trol systems applicable to 1994 to 1999 programmes
and aims to improve the quality of the financial man-
agement of the structural measures. It requires that
Member States verify the effectiveness of the manage-
ment and control systems in place and check the expen-
diture declarations made at the various levels. The checks
are to cover at least 5 % of the total eligible expenditure
in respect of each form of assistance and be representa-
tive and at the same time risk based. Article 8 requires
that, no later than at the time of the request for final
payment and the final declaration of expenditure in
respect of each form of assistance, an independent body
presents to the Commission a closure statement sum-
marising the conclusions of these checks and provid

(14) Commission Regulation (EC) No 2064/97 of 15 October
1997 establishing detailed arrangements for the imple-
mentation of Council Regulation (EEC) No 4253/88 as
regards the financial control by Member States of opera-
tions co-financed by the Structural Funds (OJ L 290,
23.10.1997, p. 1).

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THE COMMISSION’S REPLIES

5.17.
In its reply to the Special Report the Commission
indicated the considerable efforts it had made to provide guid-
ance to the Member States from the date of adoption of Regu-
lation (EC) No 2064/97 onward and referred in particular to
the detailed explanations provided in the appendices to the
Structural Funds Audit Manual. The Commission has also
replied to questions of interpretation of the Regulation raised
by Member States.

5.18. The Commission carried out a significant number of
audits on the application of Regulation (EC) No 2064/97 in
2001 well before the due date for final declarations of expen-
diture (see Commission reply to point 3.57 of Annual Report
2001). It carried out further checks in 2002 in preparation
for the closure process. The follow-up by the Commission of
its audits from 2001 indicated that improvements had been
made in the Member States visited to take account of recom-
mendations made. The Commission uses the results of its
audit work in examining closure documents and in particular
takes account of the weaknesses which had been identified (see
reply to point 5.38).

The Commission in any event carried out audits of expendi-
ture in Member States during the programming period before
the closure process began and brought the results to the Mem-
ber States’ attention.

ing an overall conclusion as to the validity of the request
for final payment and the legality and regularity of the
operations underlying the final declaration of expendi-
ture. The Commission has to ensure compliance of the
systems in the Member States with the Regulation. To
this end, the Commission coordinates its programme
and methods for its checks in the Member States (15)
and cooperates with the Member States in order to
the objectives of Regulation (EC)
guarantee that
No 2064/97 are met (16).

In its Special Report No 10/2001, the Court
5.17.
pointed out that Regulation (EC) No 2064/97 was not
sufficiently clear and that adequate guidance was not
made available early enough to Member States (17). In
the same report the results of the Court’s audit indi-
cated that substantial progress was still necessary for
the successful implementation of the Regulation. The
Court also reported that the Commission’s evaluation
of Member States’ implementation of the Regulation
was limited (18).

5.18. During 2002, the Commission continued to
carry out checks on systems under Regulation (EC)
No 2064/97. Although improvements were noted, cases
of serious systems weaknesses were found at the stage
where the final declarations of expenditure were already
due. Given this fact, the Commission should satisfy itself
as to the legality and regularity of the underlying expen-
diture. In cases of significant doubt, checks have to be
carried out on the spot.

(15) Article 6 of Regulation (EC) No 2064/97.
(16) Article 10 of Regulation (EC) No 2064/97.
(17) Paragraphs 20, 26, 75 to 78, 81 and 83 of Special Report

No 10/2001 (OJ C 314, 8.11.2001).

(18) Court of Auditors, Annual Report concerning the finan-
cial year 2001, paragraph 3.56 and paragraphs 29 to 34
of Special Report No 10/2001.

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5.19. The Commission only made available guidelines
on the closure of programmes under Article 8 of Regu-
lation (EC) No 2064/97 in May 2002 (19), which was
too late given that the regulatory deadline for the Mem-
ber States to send final payment claims to the Commis-
sion was 30 June 2002. Moreover, the guidelines were
not always clear. For example, the need to provide data
separately by fund when submitting closure statements
for multi-fund programmes was not clarified.

5.20. Thus, for a multi-fund programme examined by
the Court, the need for annexes to the closure statement
to be detailed by fund was dealt with in a coordinated
manner by the three Directorates-General concerned,
but it took five months to address a request to this effect
to the Member State (20). In another case (21), the Court
observed that a technical problem affecting the conver-
sion of national currencies to euro was not solved until
the end of 2002, although the Commission had been
aware of the problem since 2001. Instructions on finan-
cial corrections for the ESF were only provided to the
Member States at the end of 2002 concerning final pay-
ment requests introduced during 2001 (22). The Com-
mission’s internal procedures provide for the extension
in certain cases of the deadline for paying Member States
following receipt of the payment claim (a maximum of
two months). However, one Member State audited, to
whom this procedure was applied, considered that it
had not been adequately informed of the deadlines aris-
ing from this procedure, given that the guidelines issued
by the Commission in September 1999 (23) do not cover
this aspect. In the absence of such guidance, it was not
clear how the extension would be applied or for how
long (24).

5.19. An information note on the application of Article 8
of Regulation (EC) No 2064/97 was discussed at a technical
meeting with Member States in September 2001. A more
detailed guidance document on the closure statement was dis-
cussed with Member States at a technical meeting in Febru-
ary 2002 and the document was finalised in May that year.
Closure was also discussed at all the annual bilateral meet-
ings with the Member States’ financial control authorities in
2001 and 2002. The guidance was not too late because for
virtually all programmes, the bodies concerned had not yet
started the preparation of the declarations and the effective
deadline was 31 March 2003, as fixed by Article 52(5) of
Regulation (EC) No 1260/1999. The contacts with control
bodies have not indicated that the guidance is unclear.

5.20.
In cases where coordination of positions between
Directorates-General is necessary it is inevitable that the clo-
sure process will take longer.

The instructions ensured that the Spanish files were dealt with
in the same way as those of the other Member States.

The Commission may interrupt the payment period where ele-
ments necessary for the closure process must be completed by
the Member State. The Member State is formally notified in
such cases. The Member States were informed of this at the
meetings on closure referred to in the reply at point 5.19 and
by a note presented to the Structural Fund committees in Sep-
tember 2002.

(19) Commission document CDRR-02-0026-00.
(20) 1994 to 1999 Valle d’Aosta Objective 5b (ESF).
(21) Ten programmes 1994 to 1999 Germany Objective 3

(ESF).

(22) Eleven programmes 1994 to 1999 Spain Objective 3

(ESF).

(23) SEC(1999) 1316 final.
(24) Three programmes in Portugal: PPDR, Pediza, Norte

(ERDF).

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5.21. The Commission has frequently replied to the
Court’s observations with the statement that adequate
checks would be carried out at the closure of the forms
of assistance, when the payments relating to the six-
year period become definitive. However, the Court’s
audit revealed that the Commission plans to carry out
checks on underlying expenditure only after the final
payments have been made. Recoveries will be made after
closure if ineligible expenditure is found. Only in excep-
tional cases will the Commission make checks of the
expenditure declared in the Member States before final
payment.

5.21. The Commission is following a three-phase audit
approach to gain assurance with regard to the correctness of
the final expenditure that is part-financed. The first phase was
the systems audits that have been carried out on the applica-
tion of Regulation (EC) No 2064/97. The second phase is
the desk checking of the closure statements under Article 8 of
Regulation (EC) No 2064/97 in the framework of the closure
process, which includes any open audit findings and reported
irregularities. The third phase is on-the-spot audits of a
sample of programmes, on the basis of the Article 8 state-
ments and other closure documentation, to verify the reliabil-
ity of the closure procedures in the Member States. The Com-
mission considers that this is a sound strategy that avoids the
serious delays that would result from undertaking wide-
ranging audits of expenditure declared before final payment.
During closure the Commission also examines the final imple-
mentation reports.

Implementation by the Commission of the programming period
2000 to 2006

5.22. Commission Regulation (EC) No 438/2001 (25)
lays down detailed rules for the management and con-
trol systems to be set up for the programming period
2000 to 2006. The Court’s audit examined to what
extent the requirements of the Regulation had been met
by the end of 2002 at the Commission.

5.23. The Commission did not adopt Regulation (EC)
No 438/2001 on setting up the management and con-
trol systems until March 2001, by which time most of
the forms of assistance had already been approved. As
a result, systems were set up late and many of the com-
munications to inform the Commission of the organi-
sation of the managing authorities (26), the paying
authorities (27) and the intermediate bodies (28), of the
management and control systems established and of the
improvements planned, required by the Regulation were
not sent by the deadline set.

(25) Commission Regulation (EC) No 438/2001 of 2 March
2001 laying down detailed rules for the implementation
of Council Regulation (EC) No 1260/1999 as regards the
management and control systems for assistance granted
under the Structural Funds (OJ L 63, 3.3.2001, p. 21).
(26) Managing authority: authority or body designated by the
Member State to manage assistance; responsible for the
efficiency and regularity of the management.

(27) Paying authority: authority or body designated by the
Member State for the purposes of drawing up and sub-
mitting payment applications and receiving payments
from the Commission.

(28) Intermediate body: any body which acts on behalf of a
managing authority or a paying authority or which car-
ries out tasks on their behalf.

5.23. Part of the requirements to be met by management
and control systems, those concerning independent audit, were
already known to Member States from Regulation (EC)
No 2064/97 and systems had already largely been put in
place. The other provisions of Regulations (EC) No 438/2001
and (EC) No 448/2001 were discussed with Member States
in the Structural Fund committees between February and
November 2000 and were finalised in December of that year,
although the Regulations were only formally adopted on
2 March 2001. These, too, were thus known to Member
States reasonably early in the programming period. Most
Member States sent the system descriptions before the end of
2001, although in most cases further information had to be
requested. The Commission would refer to its reply to Special
Report No 7/2003, point 55.

In some cases, the establishment of the new management and
control systems took time because of the degree of reorganisa-
tion this involved (see reply to Special Report No 7/2003,
point 56) and because the Member States were preoccupied
with closure of the 1994 to 1999 programmes.

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5.24. The Commission’s response to the requirement
of the Regulation that it should carry out regular reviews
of the operation of the management and control sys-
tems in the Member States has been variable between
Directorates-General. In some cases, the Commission
carried out desk reviews of this information, but did
not always make comments, or they were not timely,
and has not carried out checks on the system in the
Member States. In one case the Commission sent its
comments and a request for additional information to
the Member State almost two years after receipt of the
description sent by the Member State (29). Given the
systems’ weaknesses detected by the Court (see para-
graphs 5.26 to 5.32), the Commission should accord
the highest priority to completing these systems checks
as soon as possible, applying, as the case may be, the
regulatory provisions requesting the interruption of
payments in cases of serious irregularities (30), or when
serious failings in the management or control systems
are found which could lead to systemic irregularities (31).

5.24. Articles 5 and 6 of the Regulation required a first
assessment of the Member States’ systems for the sound
financial management of Structural Funds on the basis of the
descriptions of the systems submitted after the enactment of
the Regulation.

This has been largely completed for ERDF and FIFG except
Community Initiative programmes. For ESF, the Directorate-
General for Employment and Social Affairs carried out 30
system audits in all Member States in 2002. These audits
were based on the system descriptions received and analysed
and they included conformity testing. For ERDF,
the
Directorate-General for Regional Policy has produced a report
which details the work done in its enquiry into the manage-
ment and control systems for 2000 to 2006. As the report
shows, on-the-spot systems audits were carried out in all the
Member States, though without substantive testing. As
Article 6 requires, this first assessment will be regularly
reviewed.

The desk checks of systems descriptions were delayed in some
cases owing to the sheer volume of material submitted espe-
cially from Member States with a federal or regionalised
structure such as Germany. The Commission intends to con-
tinue its system audits in future years, with substantive test-
ing of the effectiveness of the systems in practice. The Com-
mission interrupts or suspends payments in appropriate cases.

5.25.
For the ERDF the Commission was completely
satisfied with the descriptions of the management and
control systems in only three Member States. When not
satisfied, the Commission’s reaction was not always
consistent. For one multi-fund programme, it stopped
payments on one form of assistance because the sys-
tems were considered too weak (32). However, it did not
take the same action in a similar case for the ESF (33)
where the Directorate-General’s audit and control unit
recommended the interruption of payment in applica-
tion of the relevant regulatory provisions (34).

(29) 2000 to 2006 South of Scotland Objective 2 (ERDF).
(30) Article 38(5) of Regulation (EC) No 1260/1999 (OJ L 161,

26.6.1999, p. 1).

(31) Article 39(2) of Regulation (EC) No 1260/1999.
(32) 2000 to 2006 Calabria Objective 1 (ERDF and EAGGF-

Guidance).

(33) 2000 to 2006 West Wales and the Valleys Objective 1

(ESF).

(34) Article 38(5) and Article 39(2) of Council Regulation

1260/1999.

5.25.
For the systems for ERDF in most Member States the
Commission was able to conclude that it had a basis for rea-
sonable assurance subject to the confirmation of certain
improvements that had been found necessary on the basis of
the desk checks of the information provided and of on-the-
spot audits.

In the ESF case referred to, for which an on-the-spot systems
audit was carried out, the conclusions of the audit report had
not been finalised when payment was made. Given the general
obligation of paying within two months and the still prelimi-
for
nary nature of the findings, the Directorate-General
Employment and Social Affairs went ahead with the second
interim payment. In the meantime, in response to a letter
from this Directorate-General flagging the issues raised by the
audit mission, the Welsh authorities indicated that they would
introduce improvements to their management and control sys-
tems. These will be the subject of a follow-up audit before the
end of 2003.

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Systems in the Member States: implementation of Regu-
lation (EC) No 438/2001

5.26. The Court examined the management and con-
trol systems (35) operated by the Member States by
auditing 15 interim payments (in Belgium, Germany,
Greece, Spain, France, Austria, Portugal and the United
Kingdom) on forms of assistance for the programming
period 2000 to 2006 (36). In addition, 149 of the projects
funded by these 15 interim payments selected were also
audited in order to corroborate the results found in the
audit of the systems. Annex 2 provides an overview of
the results of the Court’s examination.

5.27. Member States did not always distribute adequate
guidance to managing authorities, paying authorities
and intermediate bodies on the provision of the neces-
sary management and control systems until the end
of 2002. At the end of the third year of implementation
of the programming period, some of the procedures
had still not been either formalised or applied (see para-
graphs 5.28 to 5.29) by the managing and paying
authorities and intermediate bodies.

5.28. The Regulation states that management and con-
trol systems should include procedures to verify, at least
on a sample basis, the delivery of the products and ser-
vices co-financed and the reality of expenditure claimed.
In two forms of assistance audited (37) the procedures
provide for at least one visit by the managing authori-
ties (or intermediate bodies) during the life of each
project. However, in other cases the procedures are not
fully in line with the requirement of the Regulation (38).

5.27. The dissemination by Member States of guidance on
the requirements for management and control systems has
been a key aspect of the Commission’s review of the national
systems. It has made appropriate recommendations whenever
deficiencies have been found.

5.28. On-site monitoring of projects during implementa-
tion and checking of declared expenditure have been a major
issue in the Commission’s reviews of systems. It, too, has
found this to be one of the main weaknesses in the systems as
initially described and audited.

(35) For its 2001 Statement of Assurance the Court audited
13 interim payments, see paragraph 3.59 of Court of
Auditors Annual Report concerning the financial year
2001.

(36) Six ERDF, six ESF, two EAGGF-Guidance and one FIFG.
(37) 2000 to 2006 Upper Austria Objective 2 (ERDF), 2000
to 2006 Roads, Ports, Urban Development Objective 1 in
Greece (ERDF).

(38) The failure to respect Article 4 of Commission Regulation
(EC) No 438/2001: 2000 to 2006 Castille-La Mancha
Objective 1 (ERDF), 2000 to 2006 Roads, Ports, Urban
Development Objective 1 in Greece (ERDF), 2000 to 2006
Baden-Württemberg Objective 2 (ERDF) and 2000 to
2006 South of Scotland Objective 2 (ERDF).

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5.29. The Commission’s audits have also discovered a num-
ber of shortcomings in the audit trail, in the recovery proce-
dures and in the separation of functions inside the manage-
ment and payment authorities. The Commission has required
changes in such cases. The existence of a debtors’ ledger has
been verified and corrective action is being required where
appropriate in the Commission’s recent enquiry into irregular-
ity reporting and follow-up, on which it will report in late
2003.

In the two ESF cases referred to, Belgium and France (foot-
note 40), even though the procedures had not yet been for-
malised, they were nevertheless in place.

As regards the French ESF cases (footnote 42), the organisa-
tion put in place complies with the rules. In addition, the
Commission obtained from the French authorities the creation
in the regions of a certification unit separate from the manag-
ing units.

As regards the other cases, the Commission is in the process
of examining the Court’s observations and the replies from the
national authorities. It will take the necessary measures,
including, where appropriate, on-the-spot audits.

5.30. The Commission, too, has identified the late start of
independent sample checks as one of the main faults in the
management and control systems for 2000 to 2006 and has
impressed on Member States the urgent need to catch up on
this work. However, the Commission considers that the delays
will not be as serious as those encountered for 1994 to 1999
programmes, as the requirements are now well known and the
audit resources in place in most instances. The Commission
refers to the guidance note on sample checks that will be
included in the updated Audit Manuals for the Structural
Funds and the Cohesion Fund (doc. CDRR/03/0034/00).

For the cases concerning the separation of checks, the Com-
mission will take steps to verify the information provided by
the Member States that adequate separation now exists.

5.29. The Court identified a number of weaknesses,
for example, an incomplete audit trail (39), the lack of a
procedures manual (40) and the absence of an account
for amounts recoverable at the managing or paying
authority (41). In several cases the internal separation of
duties between certifying expenditure declared and
authorising payment of claims (Article 9(1) of Regula-
tion (EC) No 438/2001) was obscured by the fact that
the certificates were signed by the authorising
officer (42). In other cases the paying authority had not
carried out sufficient checks (as specified in the Regula-
tion) before certifying statements of expenditure (43).

5.30. The Regulation requires Member States to orga-
nise checks on operations, which should cover at
least 5 % of the total eligible expenditure and be based
on a representative sample of the operations approved.
By the end of 2002 for the programmes concerned in

(39) The failure to respect Article 7 of Commission Regulation
(EC) No 438/2001: 2000 to 2006 France outside Objec-
tive 1 (FIFG), 2000 to 2006 West Wales and the Valleys
Objective 1 (ESF) and 2000 to 2006 Murcia Objective 1
(ESF).

(40) 2000 to 2006 Nord-Pas-de-Calais Objective 1 (ESF); 2000

to 2006 Flanders Objective 3 (ESF).

(41) The failure to respect Article 8 of Commission Regulation
(EC) No 438/2001: 2000 to 2006 Saxony-Anhalt Objec-
tive 1 (ESF).

(42) 2000 to 2006 Nord-Pas-de-Calais Objective 1 (ESF); 2000
to 2006 West Wales and the Valleys Objective 1 (ESF),
2000 to 2006 Flanders Objective 3 (ESF) and 2000 to
2006 France outside Objective 1 (FIFG).

(43) The failure to respect Article 9(2)(b)(ii) of Commission
Regulation (EC) No 438/2001. For 2002 this observation
relates to the 2000 to 2006 South of Scotland Objec-
tive 2 (ERDF), the 2000 to 2006 Roads, Ports, Urban
Development Objective 1 (ERDF) in Greece, 2000 to 2006
France outside Objective 1 (FIFG) and 2000 to 2006
Valencia Objective 1 (EAGGF-Guidance).

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the Court’s audit, the Member States had either not yet
started carrying out these checks, or were carrying them
out at a level well below 5 %. This means that similar
problems of late implementation of the checks reported
for the previous programming period (see para-
graphs 5.16 to 5.21) are likely to recur for the program-
ming period 2000 to 2006. The Regulation stipulates
that Member States should ensure that these checks are
separate from implementation or payment procedures
concerning operations. Two cases were found where
this requirement was not met (44). For four of the
15 operational programmes audited, Member States had
not checked the systems set up to implement the Regu-
lation (45).

5.31. A majority of Member States had not informed
the Commission by 30 June 2002 of the application
in 2001 of the checks described in the preceding para-
graph and of any changes to the management and con-
trol systems (46), and four of these (47) had still not sent
a complete report by March 2003. The Commission
had not issued a standard structure for the reports and
had not reminded the Member States concerned of the
missed deadline.

5.32.
In conclusion, numerous weaknesses were
detected by the Court’s audit of a sample of Member
States’ supervisory and control systems established to
meet the requirements of Regulation (EC) No 438/2001.
Only in one Member State were all the requirements of
the Regulation found to have been applied for the form
of assistance examined (48). The management and con-
trol systems examined do not all yet satisfy the regula-
tory requirements, although the programming period
2000 to 2006 is already into its fourth year of opera-
tion. The Commission has already made many interim
payments (about 15 % of total expenditure for the period
2000 to 2006) without having sufficient assurance that
the national supervisory and control systems are

(44) 2000 to 2006 South of Scotland Objective 2 (ERDF);
2000 to 2006 Baden-Württemberg Objective 2 (ERDF).
(45) 2000 to 2006 Upper Austria Objective 2 (ERDF); 2000
to 2006 Roads, Ports, Urban Development Objective 1 in
Greece (ERDF), 2000 to 2006 Castile-La Mancha Objec-
tive 1 (ERDF) and 2000 to 2006 South of Scotland Objec-
tive 2 (ERDF).

(46) Article 13 of Commission Regulation (EC) No 438/2001.
(47) Spain, Ireland, Italy and the United Kingdom.
(48) 2000 to 2006 Upper Austria Objective 2 (ERDF).

5.31. Seven Member States submitted their annual finan-
cial control reports to the Commission by or around the dead-
line. A further seven Member States sent reports by the end
of 2002, but in three cases the transmissions were incomplete.
In one case the whole report only arrived in the first part of
2003. The Commission reminded Member States that had
not sent their reports of this requirement informally during
the preparation of the annual financial control coordination
meetings in the autumn of 2003. A standard structure of
report was presented at the annual financial control coordina-
tion meetings with Member States.

5.32. The provisions for reviewing Member States’ man-
agement and control systems under Articles 5 and 6 of Regu-
lation (EC) No 438/2001 do not require the process to be
completed before any interim payments are made.

The Commission has also identified weaknesses in its desk
checks and on-the-spot audits. There are certainly further
improvements to be made, and the Commission has not yet
been able to complete its checks of all systems or to verify the
effective functioning of the systems. The Commission refers to
its replies to the observations of the Court at points 3.66 to
3.72 of its Annual Report for 2001.

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functioning as required. The findings reported in para-
graphs 5.40 and 5.41 confirm that this affects the legal-
ity and regularity of operations.

Results of substantive testing at the Commission

Commitments and payments

5.33. The Court audited a random sample of 57 com-
mitments and 57 payments. There were few observa-
tions and none of these were material (see also para-
graphs 5.26 and 5.40).

Outstanding commitments

5.34. The Court audited a random sample of 88 com-
mitments that were still open at the end of 2002, and a
single error (49) was identified (see also paragraphs 5.15,
5.19, 5.20, 5.36 and 5.37).

Repayment of unused advances

5.35. Regulation (EC) No 1260/1999 requires (50) that
all or part of a payment on account, depending on
progress towards implementation of the assistance, shall
be repaid to the Commission if no payment application
is sent to the Commission within 18 months of its deci-
sion to grant a contribution from the Funds. The rule
was not applied during 2002 although for 62 pro-
grammes (totalling 946 million euro (51)) no expendi-
ture declaration was received by the eighteen-month
deadline. For 38 of these programmes (866 million
euro), a declaration was nevertheless received in 2002.
For the other 24 programmes (80 million euro), there
remained no declaration at the end of 2002. The Com-
mission considers that in the case of multi-fund pro-
grammes, if a payment claim has been received for any
one of the funds, that is sufficient for the rule not to be
applied to the other funds. This is a loose interpretation
of the Regulation, and does not encourage balanced
implementation of different parts of programmes.

(49) ESF, Portugal Objective 1, OP 904001P1.
(50) Article 32, paragraph 2.
(51) 572 million euro ERDF, 349 million euro ESF, 21 million

euro EAGGF-Guidance and 4 million euro FIFG.

5.35. The Commission’s interpretation of Article 32(2)
referred to by the Court keeps to the letter of the Regulation,
which requires only the submission of a ‘payment application’
for an ‘intervention’ (and not for each Fund). The Commis-
sion confirmed this in its communication to the Member
States on simplification of the management of the Structural
Funds (C(2003) 1255 of 25 April 2003).

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Closures from the period 1994 to 1999

5.36. During 2002, 10 operational programmes (OPs)
out of 605 and 26 Community Initiatives out of 499
from the programming period 1994 to 1999 were closed
and decommitted. A further four final payments on
Objective 1 OPs were made although the decommit-
ments had not yet been made, as there was the possibil-
ity that they would be contested by the Member State.

the 650 closure statements
5.37. Around 200 of
received by the Commission were not accepted, for
example where it could not be determined whether all
the issues raised in previous checks had been addressed
or where the information provided did not contain suf-
ficient details on the checks carried out. In other cases,
the closure statements were rejected because of doubts
about the independence of the auditors carrying out
checks, or of the provider of the closure statement (52).
Other reasons for not making the final payments arose
from the failure of Member States to provide adequate
and clear closure statements (53) or to gain the approval
of the Monitoring Committee before submitting final
reports to the Commission (54).

5.38. Thirty-five 1994 to 1996 Objective 2 OPs were
also closed in 2002. The Court audited the 14 1994 to
1999 OPs and eight of the 1994 to 1996 Objective 2
OPs closed during 2002. The Court’s audit revealed
cases where payments were made although the Com-
mission’s own checks gave rise to doubts (55). In other
cases, the information in the final report was not
adequate, yet the final balance was paid and in those
cases where indicators were established, they were in
many cases not quantified (56). A final payment was
also found to have been made where the checks carried
out to meet the requirements of Article 3(2) of Regula-
tion (EC) No 2064/97 had not always been made by
bodies independent of the management of the pro-
grammes concerned (57). Other cases were noted where
the content of these checks was not sufficiently explicit

(52) EAGGF Guidance programmes in Germany.
(53) FIFG programmes in Denmark and Ireland, ERDF.
(54) Several Spanish programmes (ESF) and 1994 to 1999

Madeira Objective 1.

(55) 1997 to 1999 Schleswig-Holstein Objective 2 (ESF) and
1994 to 1999 Ireland Transport Objective 1 (ERDF).
(56) Several Objective 1 and Objective 2 programmes (ERDF).
(57) 1994 to 1999 Ireland Transport Objective 1 (ERDF).

5.38. The Commission is carrying out its examination of
the closure statements on the basis of detailed checklists. The
analysis is based on the requirements of the Regulation and
takes account of the guidance given notably in the document
of 7 May 2002. It covers both the formal aspects and the
substantive elements and results in a conclusion as to whether
the closure statement provides an adequate basis for payment
of the final balance. Where other sources of information are
available, such as audits of the Commission, these are taken
into account also. It is possible therefore, and in the Commis-
sion’s view justifiable, that a deficiency with regard to one ele-
ment does not automatically give rise to the rejection of the
statement, where there is sufficient assurance from other infor-
mation available that this did not have a material effect on
the conclusions drawn.

With regard to the particular cases cited:

For the Irish OP ‘Transport’ the closure statement refers to the
additional work undertaken on behalf of the independent body
by the Financial Control Unit in Ireland which established
that measures had been taken to correct earlier weaknesses.
The independent body qualified its opinion by referring to the
lack of functional independence of certain bodies carrying out

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or the sample was not selected on the basis of a risk
analysis or where the sample was considered adequate
despite the absence of checks by the body providing the
closure statement (58), or the final expenditure state-
ment did not contain enough detail (59).

control and the lack of application of risk analysis. However,
the body goes on to say that these issues were not so signifi-
cant as to impugn the quality of the verification work under-
taken. This opinion, for which adequate evidence was pro-
vided, was accepted by the Commission. It should also be
noted that there is no express requirement in the Regulation
for functional independence of the control bodies.

As regards the Irish Tallaght Hospital programme the review
of the control work done by the Financial Control Unit revealed
that a random selection had taken place ensuring representa-
tivity in the sample. The Commission accepted that since more
than 5 % of expenditure was checked and a random selection
had been carried out, the control work done provided a suf-
ficient basis for the conclusions of the independent body.

With the Reform of the financial circuits, the Directorate-
General for Employment and Social Affairs decided that
Article 8 declarations have to be treated by the geographical
units which have the responsibility to decide on their accept-
ability. In the case of Germany (footnote 55, Schleswig-
Holstein, Objective 2 ESF), following the audit carried out by
the Commission, the geographical unit obtained additional
information from the Member State concerning the Article 8
declaration, which allowed it to deal with the file.

Results of substantive testing in the Member States

5.39. Most payments made by the structural measures
Directorates-General in 2002 related to the program-
ming period 2000 to 2006. As noted by the Court in
its 2001 Annual Report (60), the implementation of the
management and control arrangements for the period
2000 to 2006 has been marked by delay. Regulation
(EC) No 438/2001 was not adopted in time to ensure
that all structures were operational and that indepen-
dent auditing of the operations was carried out during
2002. The same types of errors observed by the Court
during its 2001 audit were again observed in 2002.

5.39. The Commission refers to it replies to points 5.23
and 5.30.

Regulation (EC) No 438/2001 was adopted at the begin-
ning of 2001 and took over many of the existing provisions
of Regulation (EC) No 2064/97. Delays in sample checks by
Member States were mainly due to the need to complete checks
for 1994 to 1999.

(58) 1994 to 1999 Tallaght hospital Ireland Objective 1 (ERDF);
1994 to 1999 Ireland Transport Objective 1 (ERDF); 1994
to 1999 Global subsidy in Sepri, Italy, Objective 1 (ERDF).
(59) 1994 to 1999 Tallaght hospital Ireland Objective 1 (ERDF).
(60) Paragraph 3.82.

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5.40. Given that the Commission has not been able to
complete its examination of all the replies of the Member
States, it will carry out the necessary analysis and make cor-
rections where appropriate.

Interim payments 2000 to 2006

5.40. The Court carried out substantive tests in order
to corroborate the results of the systems audits reported
in paragraphs 5.26 to 5.32. In its audit of 15 interim
payments in eight Member States both at the Commis-
sion and at Member State level (for which 149 projects
were audited), the Court noted a large number of errors
at the final beneficiaries’ level. The weaknesses in the
management and control systems described in para-
graphs 5.26 to 5.32 allowed the persistence of a level
of errors similar to those found in previous years and
programming periods. The most frequent errors affect-
ing the eligibility of expenditure were the inclusion of
actions or persons unrelated to the programmes con-
cerned (61), failure to take account of revenue generated
or other income when calculating the net cost of
projects (62), the same expenditure being declared more
than once (63), expenditure without supporting docu-
ments (64), the use of arbitrary cost allocation rates (65),
calculation errors (66) and several other failures to respect
Community rules (67).

(61) 2000 to 2006 Roads, Ports and Urban Development in
Greece Objective 1 (ERDF); 2000 to 2006 Castile-La Man-
cha Objective 1 (ERDF); 2000 to 2006 Nord-Pas-de-Calais
Objective 1 (ESF); 2000 to 2006 South of Scotland Objec-
tive 2 (ERDF).

(62) 2000 to 2006 Castile-La Mancha Objective 1 (ERDF);
2000 to 2006 Nord-Pas-de-Calais Objective 1 (ESF); 2000
to 2006 South of Scotland Objective 2 (ERDF) and 2000
to 2006 Flanders Objective 3 (ESF).

(63) 2000 to 2006 Castile-La Mancha Objective 1 (ERDF);
2000 to 2006 Nord-Pas-de-Calais Objective 1 (ESF).
(64) 2000 to 2006 Roads, Ports and Urban Development in
Greece Objective 1 (ERDF); 2000 to 2006 Castile-La Man-
cha Objective 1 (ERDF); 2000 to 2006 Lisbon and Tagus
Valley Objective 1 (ESF); 2000 to 2006 Nord-Pas-de-
Calais Objective 1 (ESF); 2000 to 2006 Flanders Objec-
tive 3 (ESF); 2000 to 2006 South of Scotland Objective 2
(ERDF); 2000 to 2006 West Wales and the Valleys Objec-
tive 1 (ESF) and 2000 to 2006 Saxony-Anhalt Objective
1 (ESF).

(65) 2000 to 2006 Flanders Objective 3 (ESF).
(66) 2000 to 2006 France outside Objective 1 (FIFG) and 2000

to 2006 Flanders Objective 3 (ESF).

(67) 2000 to 2006 Roads, Ports and Urban Development in
Greece Objective 1 (ERDF); 2000 to 2006 Castile-La Man-
cha Objective 1 (ERDF); 2000 to 2006 France outside
Objective 1 (FIFG); 2000 to 2006 South of Scotland
Objective 2 (ERDF); 2000 to 2006 Baden-Württemberg
Objective 2 (ERDF) and 2000 to 2006 Valencia Objective
1 (EAGGF-Guidance); 2000 to 2006 Flanders Objective 3
(ESF) and 2000 to 2006 Nord-Pas-de-Calais Objective 1
(ESF).

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5.41. The errors of a formal nature are also similar to
those of previous years, namely failure to conserve
underlying evidence (68), co-financing of expenditure
not yet defrayed (69) or minor failures to respect Com-
munity rules (70).

Cohesion Fund closures 1994 to 1999

5.41. The replies of the Member States to formal errors will
be analysed and necessary follow up undertaken.

5.42. The Court audited two Cohesion Fund projects
closed in 2002. In one project it was found that expen-
diture had been co-financed without adequate evidence
of the reality of this expenditure (71).

5.42. The issue raised by the Court relates to fees for techni-
cal assistance provided by a public organisation. The Com-
mission considers that, having regard to the nature of the ser-
vices provided, a flat-rate fee was justified.

5.43. The Commission considered, following examination
of the complaint, that the Greek authorities had complied
with Community rules in the award of the main contract.

The project description in the decision and the subsequent
quantification were considered adequate to meet the standards
prevailing at the time (1996). Since then, however, there have
been substantial improvements made to funding decisions,
including in particular specific cost estimates for each item of
works as well as the physical quantities for each item.

5.43.
For another Cohesion Fund project (72) weak-
nesses were noted in the tendering procedures for the
selection of the bidder to construct and participate in
the operation and ownership of the project. The proce-
dure of awarding the contract lasted more than four
years and certain decisions made by the Evaluation
Committee were disputed by one of the tender par-
ties (73). In addition, the part of the project which quali-
fied for Community support was not sufficiently
described or quantified in the project application, the
Commission decision approving the project or the pay-
ment claim.

Follow-up to previous observations on ineligible expen-
diture

5.44. As in previous years, the Court audited the action
taken by the Commission concerning the substantive
errors reported by the Court. Although improvements
were noted in the follow-up procedure, there remain a
number of cases from the 1998, 1999 and 2000 State-
ments of Assurance for which follow-up has not been
timely, appropriate or complete.

(68) 2000 to 2006 Murcia Objective 1 (ESF); 2000 to 2006
South of Scotland Objective 2 (ERDF); 2000 to 2006
Baden-Württemberg Objective 2 (ERDF) and 2000 to
2006 Flanders Objective 3 (ESF).

(69) 2000 to 2006 South of Scotland Objective 2 (ERDF);
2000 to 2006 Baden-Württemberg Objective 2 (ERDF)
and 2000 to 2006 Saxony-Anhalt Objective 1 (ESF).
(70) 2000 to 2006 Roads, Ports, Urban Development Objec-
tive 1 (ERDF) in Greece; 2000 to 2006 South of Scotland
Objective 2 (ERDF) and 2000 to 2006 West Wales and
the Valleys Objective 1 (ESF).

(71) Portugal Cohesion Fund Project No 96/10/61/001-012.
(72) The new Athens International airport at Spata, Cohesion

Fund project 95/09/65/040.

(73) This was due mainly to the changes in the selection cri-
teria and contract terms, and the way the negotiation pro-
cess with the two last bidders was handled.

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1998 and 1999 Statements of Assurance

5.45.
For a number of cases examined by the Court,
the Commission had already followed up the errors
reported in 2000 or 2001. In some cases, no evidence
was available to demonstrate that the expenditure con-
cerned had been reimbursed or excluded from the final
declaration of expenditure (74). In other cases, the Com-
mission initiated follow-up action, but once it had
received information from the Member States con-
cerned, it did not continue to take action (75). In other
cases, the Commission could not continue its follow-up
action because the Member States concerned did not
send the necessary information (76). In the case of one
closed programme (77), the Commission communicated
its final position on the case to the Member State
in 2002, but no recovery order has yet been established.

5.45.
For the three cases from 1998 cited in footnote 79,
the Commission has in the meantime recovered the funds from
the Member State in question.

Concerning the Irish Tourism OP 1989 to 1993 the Com-
mission adopted a correction decision on 3 April 2003 fol-
lowing the same approach as suggested by the Court of Audi-
tors, whereby it extrapolated the result of errors in projects
selected at
correction applied was
total
EUR 4 926 067,72.

random. The

The cases for which the Commission could not yet complete
the follow-up due to lack of information from the Member
States relate to programmes from the 1994 to 1999 period
which are now being closed. The Commission will take appro-
priate follow up action at the closure of these two programmes.

As regards the closed programme referred to by the Court, fol-
lowing further exchanges with the Member State a correction
decision is currently being established.

(74) 1994 to 1999 Bavaria Objective 5b (ERDF); 1989 to 1993
Martinique Objective 1 (ERDF), 1992 to 1993 Pays de la
Loire Objective 1 (ERDF), 1989 to 1992 PIM PACA Objec-
tive 1 (ERDF).

(75) 1989 to 1993 Tourism Ireland Objective 1 (ERDF; 1992
to 1993 North Rhine-Westphalia Objective 2 (ERDF).
(76) 1994 to 1999 Greece Industry (ERDF) (the Court audited
this OP again in 2000 and noted that the error had not
been corrected and continued to affect the eligibility of
expenditure); 1994 to 1999 POP Campania Objective 1
(ERDF).

(77) 1989 to 1991 Fife Objective 2 (ERDF). This case was
referred to in the Court’s Annual Report 2001, para-
graph 3.101.

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5.46.
In two other cases (78), the Commission did not
accept the errors reported by the Court, but the Court
is not convinced by the Commission’s arguments and
considers that the Commission should make a recovery
on the project (79).

5.46.
For the ERDF case mentioned (OP Macedonia Greece),
the Commission considers that its decision not to carry out a
recovery for the project was adequately justified.

The Court and the Commission disagree over the ESF case
referred to. The Commission refers to its reply to point 3.103
of the Annual Report for 2001.

It is a matter of concern that so many cases have
5.47.
not been properly followed up so long after they were
first reported to the Commission and the Member States
concerned and despite the fact that the Court has already
followed up these cases in its 2000 and 2001 Annual
Reports.

5.47. The Commission considers that there are now only six
cases from the 1998 and 1999 reports whose follow-up has
not been completed.

The fact that the cases take longer than desired to be resolved
does not necessarily mean they are not being properly
followed-up by the Commission services. Account has to be
taken of the fact that the follow-up of the cases often involves
further exchanges of information with the national authori-
ties and the recipients of the funds concerned in the Member
States.

2000 Statement of Assurance

5.48.
For some cases, no follow-up action has been
taken, as agreement was not reached between the Court
and the Commission or between the Commission and
the Member States concerned. For one OP, the Member
State did not agree with the Court’s observations that
the Community financing rate did not take account of
the expected income to be generated by the project (80).
Although the Commission requested the Member State
to substantiate its position, no evidence has yet been
provided.

(78) 1994 to 1999 Central Macedonia Objective 1 (ERDF) and

5.48. The Commission takes, as a general rule, action as
regards the cases reported by the Court, even in case of dis-
agreement of the Member State. When significant discrepan-
cies arise between the facts reported by the Court and by the
Member State, the Commission requests the Member States
to substantiate their position before deciding on the course of
action.

For the case referred to by the Court, the Member State was
requested to substantiate its position before deciding on the
follow-up action to take. The Commission has received, fur-
ther to the Court’s work, information from the Member State.
These elements will be examined and the Commission will
take appropriate action at the closure of the programme, which
will take place shortly.

1997 to 1999 United Kingdom Objective 3 (ESF).

(79) The error in Greece concerned the failure to carry out an
environmental impact study before approving the project.
The Commission based its rejection on an opinion deliv-
ered by the Directorate-General for the Environment. The
Court does not agree with the Commission’s argument
that it was not necessary to carry out a study as it con-
cerned the modernisation and extension of an existing
road rather than the construction of a new road. The
error in the United Kingdom concerns a project in the
context of the ‘equality of opportunity between men and
women’ measure. The Court maintains that the expendi-
ture on this project, totalling 1,16 million euro, is not eli-
gible because, contrary to the objectives of the measure,
the promoter did not organise specific courses but financed
participants attending various general courses without
documenting the relevant selection criteria.

(80) 1994 to 1999 Eastern Macedonia and Thrace Objective 1

(ERDF).

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5.49.
In another case (81), the Court observed that the
equipping of vehicles was eligible, but not their pur-
chase. The Commission disagreed with this point of
view and has not followed up the case. The Court, how-
ever, maintains that the rules do not allow for the pur-
chase of vehicles which may have multiple uses, and
that if the Commission had been willing to make an
exception to this, the rules should have been modified
accordingly.

5.50. The Court’s observation related to the
co-financing of the construction of a radio cable between
an area eligible for co-financing and an area not eligible.
The Court concluded that only 50 % of the project
should have been co-financed. The Commission dis-
agreed with this conclusion, but the Court continues to
consider that the justification provided was not adequate.

5.51.
In two other cases, although the Commission
agreed with most of the Court’s observations, follow-up
remains insufficient. In the first case (82) recovery of
expenditure that was not in accordance with the tender
and the initial contract had not been initiated and there
was no follow-up to the Commission decision that suf-
ficient account had not been taken of the revenue gen-
erated. In the second case (83), the Commission waited
until the end of 2002 before contacting the Member
State concerned.

5.52. As in the past, it was found that the Commis-
sion rarely extends its investigations beyond the samples
examined by the Court (see Annex 1).

Conclusions

Evaluation of supervisory and control systems

5.53. The structural measures Directorates-General
made considerable efforts to improve the systems of
supervision and control during 2002. Progress is notable
in the systems internal to the Commission. However,
the systems of fundamental importance in ensuring the
supervision and control over the implementation of the
Community budget are those governing the areas of
shared management with the Member States. The Court’s
audit again revealed numerous weaknesses in these sys-
tems which must be addressed urgently. The declara-
tions of the directors-general do not yet enable the
Court to take assurance from them.

(81) 1997 to 1999 ‘Sicurezza per lo sviluppo del Mezzogiorno

Objective 1’ (ERDF).

(82) Cohesion Fund ‘Chalkida’ project in Greece (ERDF).
(83) 1994 to 1996 Piedmont Objective 2 (ERDF).

5.49. The Commission considers that the current rules
applicable to the European Regional Development Fund do
not prohibit the part-financing of the purchase of vehicles,
provided that this is justified in the context of a particular
eligible action to be part-financed. The Commission concluded
that the vehicles in question were not of a multiple-use nature,
as they were police patrol vehicles to be equipped with advanced
communication instruments.

5.50. The main reason for accepting the part-financing of
the totality of the project was that, in spite of the fact that part
of the project was physically located outside the eligible area,
the benefit of the action was wholly for the eligible area.

5.51. The Commission is following up these cases but on
the first case considers that the revenues generated have been
sufficiently taken into account.

5.52.
In clear cases of systemic problems, the Commission
does extend the follow-up action, for example in relation to
public procurement in Spain. Furthermore, the Commission
takes account of findings of the Court as far as possible in its
own audit planning.

5.53.
From the substantial work that has been carried out
for the 2000 to 2006 period, the Commission has been able
to conclude that Member States have in general made signifi-
cant steps in improving their systems. However, there are cer-
tainly further improvements required, and the effective func-
tioning of the systems needs to be regularly verified. The
Commission will pursue its audit strategy to achieve this aim
in order to provide a basis for assurance as to payments made
by the Funds.

The Commission refers to the Action Plan to strengthen
monitoring and control of the implementation of the Com-
munity budget within the framework of shared management
(actions 4 and 12) and to its reply to point 5.9.

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Commission’s assurance on the legality and regularity of
operations

5.54. Little progress has been made in closing inter-
ventions either from the periods before 1994 or from
the programming period 1994 to 1999. The implemen-
tation of Regulation (EC) No 2064/97 for the program-
ming period 1994 to 1999 has encountered problems
such as guidelines being issued too late resulting in mis-
understandings by Member States or failure to set up
systems early enough for them to be effective before the
date for the closure of the programmes. The Commis-
sion increased the number of checks made in the Mem-
ber States, but the results of these checks do not add to
the Commission’s assurance on the legality and regular-
ity of operations from the programming period 1994
introduction of Regulation (EC)
to 1999. The
No 438/2001 provided a framework for improved sys-
tems for the programming period 2000 to 2006. How-
ever, the results of the Court’s audit have revealed the
continued existence of the same type and level of errors
as in previous years. Therefore, the Commission should
carry out checks of the systems put into place and of
the legality and regularity of the underlying operations
as soon as possible.

5.54. Progress has been achieved in closing pre-1994 assis-
tance (see reply to point 5.15) and assistance from the period
1994 to1999 (see replies to points 5.17 and 5.18).

Since Regulation (EC) No 2064/97 was adopted, the Com-
mission has provided detailed guidelines on its key provisions.
For the closure of assistance from the 1994 to 1999 period,
general instructions were issued in September 1999 and these
were clarified by a whole series of documents sent to the
Member States in 2001 and 2002. The Commission refers
to its reply to point 5.19.

Member States have in general made serious steps to ensure
effective implementation of Regulation (EC) No 2064/97
and have taken action in response to recommendations from
the Commission as a result of its audit work. The Commis-
sion continued its audits of the implementation of Regula-
tion (EC) No 2064/97 in 2002.

The Commission is obtaining assurance on the regularity of
expenditure declared at closure of interventions from its audit
work already completed and from the desk checks being under-
taken on the closure statements. It will verify the reliability of
the closure process in Member States by audits of a sample of
programmes and will draw the necessary financial conse-
quences where appropriate with recoveries from Member States.

With regard to the 2000 to 2006 programming period, the
Commission refers to its replies at point 5.23 with particular
reference to its audit work at point 5.24. The Commission’s
audit strategy for the 2000 to 2006 period is moving towards
a form of integrated audit and is based on increased and effec-
tive cooperation with the national inspection authorities in
order to obtain a reasonable assurance regarding the very large
number of management and control systems in the 15 Mem-
ber States.

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FOLLOW-UP TO PREVIOUS OBSERVATIONS

Special Report No 15/2000 on the Cohesion Fund (84)

Introduction

5.55. The report covered both the Commission’s man-
agement of the Cohesion Fund (CF) and its implementa-
tion in the Member States. The main conclusions were
aimed at improving the following issues:

(a)

(b)

(c)

(d)

(e)

(f)

project applications either did not contain essen-
tial information or the information presented was
unreliable. In particular, the cost-benefit analyses
were not always prepared with sufficient rigour
and the revenue-generating potential of the projects
was not always taken into account adequately;

lack of coordination between the Cohesion Fund
and the ERDF;

the Commission intervened mainly in the initial
and final stages of the project cycle. The interme-
diate stages would merit a greater level of involve-
ment. Projects were often amended without thor-
ough examination by the Commission;

there were a number of anomalies in respect of eli-
gibility and accounting for expenditure and also in
the closure of projects;

the limited evaluation of the macroeconomic
impact of projects;

the Commission devoted insufficient resources to
on-the-spot checks in order to detect weaknesses
in the management systems.

5.56. The Court examined changes and improvements
made to the Commission’s management based on the
recommendations in the Special Report, which the
Council supported. The Court’s work also included an
examination of the application of recent changes in the
regulatory framework.

(84) OJ C 279, 2.10.2000.

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Project applications

5.57. A general improvement has been noted in the
quantity and quality of the information provided in the
project applications. However, some weaknesses still
need to be addressed:

— the Commission is required to assess whether the
projects comply with the criteria laid down in the
Regulation. There was not always sufficient evi-
dence to show that the necessary detailed assess-
ments had been carried out,

— one of the main factors contributing to the fre-
quent requests for amending decisions is the incom-
plete or non-existent technical studies at the project
approval stage. These studies are the basis for esti-
mating a project’s cost, but little evidence was
found that they had been thoroughly examined by
the Commission. In addition, in some cases the
project applications did not provide a detailed
analysis of the works to be carried out or the
related cost,

— the treatment and calculation of the socioeco-
nomic variables used in the analysis differ from
project to project. The Commission has still not
drawn up sufficiently precise guidelines to encour-
age a harmonisation of the methods applied and
make the analyses more comparable,

— in the case of revenue-generating projects, the Com-
mission has not been able to agree on a common
methodology for calculating future net revenues
and their effect on co-financing rates. The projects
examined showed that there continues to be a gen-
eral lack of justification of the grounds on which
the co-financing rates are awarded. The lack of a
clear and transparent set of rules on the basis of
which co-financing rates may be determined results
in different treatment of Member States (85) and as
such the Commission cannot assure that the best
use is made of the available financial resources.

5.57. The staff of the Directorate-General for Regional
Policy use a detailed manual of procedures, which is regularly
updated. The manual draws attention to all the requirements
of the regulations and to the need to document work done.
The Commission is constantly striving for improvements in
these areas.

The Commission attaches the utmost importance to the exist-
ence and the quality of the technical studies. It now asks the
final recipients to certify that such studies have been com-
pleted before the invitation to tender for work. It cannot, how-
ever, scrutinise the studies for each part-financed project itself.
This is part of the management and control system at national
level, which the Commission is examining under Regulation
(EC) No 1386/2002. The descriptions of the physical works
in Cohesion Fund applications have steadily improved. This
is particularly true for Greece where, since 2000, applications
and decisions have been very detailed with a full description
of the work by category and costs estimates.

The Commission is endeavouring to standardise cost-benefit
analyses and in December 2002 updated the Guide to cost-
benefit analysis in ERDF, Cohesion Fund and ISPA projects.
It has held several meetings with national authorities to
improve the methodology of cost/benefit analyses.

The Commission has now issued further guidance in order to
standardise the methods for taking account of revenue in the
part-financing rates of Cohesion Fund projects. The new
Guide to cost-benefit analysis referred to in the answer to the
previous indent sets out the principles to be applied in the
financial analyses that serve as a basis for determining the
part-financing rate, including revenue, residual value and dis-
count rates. In April 2003 the Commission wrote to the
Member States to remind them of these principles and setting
certain parameters for the calculation of the part-financing
rates. The aim of the Cohesion Fund is to provide a strong
stimulus to economic development. Net revenue is one of a
number of factors that are taken into account in determining
the part-financing rate of projects, but the Regulation only
requires this when the net revenue is substantial. In practice,
the differences in the part-financing rates of similar projects
in different Member States are rarely significant and the Com-
mission generally attempts to set part-financing rates as low
as possible in the circumstances in order to make maximum
use of the resources available.

(85) In Spain, the methodology applied results in generally

higher Community co-financing rates.

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Coordination with the ERDF

5.58. Reference frameworks have been drawn up for
the transport and environment sectors in the Member
States which provide an overall guideline for project
selection and increase the synergy with ERDF interven-
tions. In addition, the coordination of the two funds has
been further enhanced following the transfer of respon-
sibility for the Cohesion Fund to the respective geo-
graphical units in the Directorate-General for Regional
policy.

Amending decisions

5.59. Many of the amending decisions continue to
breach the deadline set in the Regulation. Furthermore,
the reasons for an amending decision are often the
inclusion of new elements which were not directly linked
to the project. In such cases a new application should
be submitted.

5.59. The reasons why the three-month deadline is not
always observed for amending decisions are the same as for
initial decisions. The main reasons are technical complexity
and poor presentation. The Commission agrees that a new
application should be made for the inclusion of new elements
not directly linked to the initial project.

5.61. The standard of information provided at closure has
steadily improved. The Commission considers that the descrip-
tion of the works in the final reports for the projects referred
to by the Court was adequate. Modification of the works
originally approved is accepted only where justified.

5.60.
In July 2002, the Commission issued guidelines
for the modification of Cohesion Fund project decisions
so as to limit the number of amending decisions that
may be issued for a project. The overall objective is to
ensure that the Member States improve their prepara-
tion of the project applications, as amending decisions
are frequently the result of applications based on weak
preliminary studies.

Closure of Cohesion Fund projects

5.61.
In the new Regulation on the Cohesion Fund, a
number of elements should be included in a project
final report (86). These include a clear description of the
works carried out and an initial assessment as to whether
the expected results are likely to be achieved. In the
majority of the final reports examined, these elements
were either omitted or were not adequately addressed.
In some cases, the works carried out as described in the
final report differed from the works set out in the
approving decision.

(86) Annex II, Article F, to Council Regulation (EC) No 1164/94
establishing a Cohesion Fund, as amended by Article (1)6
of Council Regulation (EC) No 1265/1999 of 21 June
1999 (OJ L 161, 26.6.1999, p. 62).

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5.62. A declaration, drawn up by a person or depart-
ment independent of the authority managing the project,
has to be submitted when a project is closed (87). The
declaration should summarise the results of checks car-
ried out and conclude on the validity of the application
for payment of the final balance. In the cases of the
closed projects audited, no such declaration was sub-
mitted. The Commission has decided to apply this
requirement to projects approved during the period
2000 to 2006 only, although no such transitional mea-
sures were included in the Regulation.

5.62. The closure procedures for projects granted assistance
before 1 January 2000 were set out in Annex III to the grant
decision based on Regulation (EC) No 1164/94 as it existed
when the grants were awarded. In Commission Regulation
(EC) No 1386/2002 (Article 13 in conjunction with
Article 1) the Commission has taken the view that it could
not require Member States to provide declarations under
Article 12(f) of Regulation (EC) No 1164/94, as amended,
and had to apply the legal requirements prevailing when the
grant decision was made.

5.63. The cases raise complex issues of which the follow-up
necessarily takes a certain time to bring to a conclusion. The
Commission’s follow-up has progressed in all four cases referred
to by the Court. In the case last mentioned, the national
authorities are still investigating the Court’s findings. The
Commission is following the matter closely and will draw
appropriate conclusions from the results.

Follow-up to the anomalies identified

5.63. The Court examined whether the Commission
had adequately followed up the specific cases mentioned
in the report. Of the five cases where follow-up action
should have been taken, the Commission provided a
satisfactory explanation of its action in only one case.
In the remaining four cases, either no action was taken
or the action taken was not prompt. In two of these
cases the Commission decided to wait for the closure of
the projects to resolve the problems identified. In one
of these two cases, a new project application from an
implementing body was approved even though the
Court’s audit had revealed serious concerns regarding
ineligible expenditure and the quality of that implement-
ing body’s work on a previous project, which remain
unresolved.

Impact evaluation

5.64. Regarding the methods for evaluating the mac-
roeconomic impact of Cohesion Fund projects, the Com-
mission stated in its reply to the Special Report that it
would ‘endeavour to improve the evaluation tools in the
light of experience’, following the recommendation of
the Court. However, the further use and development
of evaluation tools has been abandoned by the Com-
mission.

5.64. The Court refers to a specific model for evaluating
macroeconomic impact that was developed by consultants
under a contract with the Commission. The Commission
decided not to use this model because the regulation now
requires cost-benefit analysis to be used. The Commission has
issued new guidance on cost-benefit analysis (see answer at
point 5.57). The impact of projects is investigated as part of
this analysis.

(87) Council Regulation (EC) No 1164/94 establishing a Cohe-
sion Fund, as amended by Article 1(10)(f) of Council
Regulation (EC) No 1264/1999 of 21 June 1999 (OJ L 161,
26.6.1999, p. 57).

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A substantial increase in the number of Commission
audits

5.65. A unit dedicated to auditing Cohesion Fund
projects, was set up in the Directorate-General for
Regional policy in 2001. This has resulted in a signifi-
cant increase in the number of audits carried out in
2002, which is welcomed by the Court. The results of
these audits have confirmed the Court’s findings.

PRINCIPAL OBSERVATIONS IN SPECIAL
REPORTS

Special Report No 7/2003 on the implementation of
assistance programming for the period 2000 to 2006
within the framework of the Structural Funds

5.66. The aim of the Community’s structural policy is
to reinforce the structural factors that promote the har-
monious development of the Community as a whole. In
this respect, the Structural Funds programming periods
1989 to 1993 and 1994 to 1999 have already made a
substantial contribution towards reinforcing the EU’s
policy of social and economic cohesion. The Berlin
European Council (24 and 25 March 1999) confirmed
that efforts in favour of this priority area of Community
policy were to continue and decided to earmark 195 000
million euro for operations under the Structural Funds
for the period 2000 to 2006.

5.67.
In the interests of simplification and improved
effectiveness, structural assistance programming for the
new period has laid the emphasis on more decentralisa-
tion, a clearer division of responsibilities and further
expansion of the management, payment, monitoring
and control functions. The effectiveness of the Commis-
sion’s efforts to encourage regional policy can be seen
in the quality and consistency of the programming.

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5.68. Although some improvements have been made
by comparison with the preceding programming period,
the implementation of structural assistance is still
affected by a number of persistent weaknesses and inad-
equacies. These are as follows:

5.68.

(a)

as regards the selection of eligible areas within the
framework of Structural Fund programming for
2000 to 2006, it appears that:

(a) For Objective 1, the Regulation provides for no mecha-
nism for adjustments on the basis of more recent data,
since the regions whose development is lagging behind
require long-term assistance.

— the Objective 1 eligible areas were determined
in accordance with the Regulation. However,
the statistics used were unable to take account
of all the most recent socioeconomic effects.
This was necessary if the principle of focus-
ing on the least favoured regions was to be
scrupulously respected,

— the criteria taken as the basis for determining
Structural Fund eligible areas for Objective 2
were insufficiently objective and left too much
room for manoeuvre in the bilateral negotia-
tions between Member States and the Com-
mission; furthermore, national criteria have
gained in importance as compared to the
objective Community criteria referred to in
the Structural Fund rules,

— the areas eligible for State aid do not always
coincide with those eligible for Structural
Fund assistance. Regional policy is not suffi-
ciently consistent with competition policy;

(b)

in comparison to the previous programming period
there has been significant progress in the quanti-
fication of objectives and in programming quality.
However, the process of approving structural pro-
grammes was found to contain significant delays
and inefficiencies. In particular, Community and
national responsibilities in relation to the new pro-
gramme complement procedure have not been
sufficiently clarified and the procedure itself has
ultimately proved to be an additional process which
heightens delays and generates difficulties of inter-
pretation that contradict the aim of simplification
referred to in the Structural Funds Regulation. Fur-
thermore, the programme complements do not
always provide the relevant information required;

In view of the differing situations of the regions undergo-
ing socioeconomic change, the Regulation allowed half
the population covered to be in areas meeting objective
and justified qualitative criteria based on national stat-
istics. For these areas, Member States submitted their
proposals along with comparative tables also giving data
for other regions or for the whole Member State. The
other 50 % had to be industrial or rural areas fully
meeting Community criteria.

The Member States made use of the freedom that the
Regulation allowed them, given the narrow economic
gap between those regions ‘assisted’ under Article 87(3)(c)
and other ‘non-assisted’ regions also experiencing prob-
lems of restructuring. In addition, for regions meeting
the Objective 2 criteria, the status of assisted region
allowing aid to be granted not only to SMEs but also to
large undertakings is not of great importance. Neverthe-
less, the two maps are now more similar than before.

(b) The Commission shares the Court’s opinion on the
progress achieved in these fields, the inefficiency of the
procedures laid down by the Regulation and the conse-
quent difficulty in meeting the deadlines. It clarified the
division of responsibilities as regards the programming
complement in 2001. The gaps in the information con-
tained in the complements were sometimes due to the
information being divided between two documents. It
would however be useful to assess the advantages of the
system of programming complements in the light of
experience over the whole period.

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(c)

(d)

(e)

(f)

the Commission’s working documents are still too
imprecise to serve as a methodological framework
for programmes. This has repercussions on the
techniques of policy analysis that are applied to
ensure that, on the one hand, the Community sup-
port frameworks (CSFs) are consistent with the
measures adopted and that, on the other hand, the
choices governing the use of resources are the
optimum ones in terms of the specific needs of
regions. On the evidence of the programmes exam-
ined, the Court considers that ex ante evaluation
has not played a decisive role and that it has added
little to the selection of strategies on the basis of
anticipated results and impacts. Various weaknesses
have been found in the application of methods and
techniques of analysis, evaluation and program-
ming. In particular, the indicators are still insuffi-
ciently quantified and relevant, despite the progress
identified by the Court;

as regards the internal and external consistency of
the structural measures approved, analysis of the
various programmes has enabled several weak-
nesses in this area to be revealed (lack of agree-
ment between objectives on the one hand, and
between objectives and resources on the other, lack
of any clear synergy between Funds or operations,
insufficient supporting information, etc.). The
negotiations between the Commission and the
Member States have not always resulted in mea-
sures being as consistent as possible before their
approval, largely because information on national
and regional policies has not been available;

(c) The Commission’s working papers contain guidance to
the Member States on evaluation, but do not aim to
cover every specific situation, as the selection of an appro-
priate methodology for the ex ante evaluation is the
responsibility of the Member State. Working Paper No 2
recommended that the ex ante evaluation should dem-
onstrate the sound foundation of the strategy and the
proposed financial allocations. The Commission believes
that the majority of ex ante evaluations were construc-
tively critical and informed the choice of strategies. In a
few cases where it was not satisfied with the quality or it
desired additional inputs, the Commission contracted its
own experts to give an alternative view. It is true that in
some cases the quantification of objectives has been inad-
equate. Nevertheless, here too, the Commission believes
that significant improvements have taken place since the
last programming period.

(d) The conclusion of the Commission’s communication of
5 July 2001 on the results of the programming of Struc-
tural Funds for 2000 to 2006 was that the quality of
the strategies adopted in the programming documents for
the current programming period has improved. The ex
ante evaluation made an important contribution in this
respect — particularly in developing the SWOT
(strengths, weaknesses, opportunities, threats) analysis
approach and in the quantification of objectives.

the budgetary allocations for Community support
frameworks and assistance programmes are based
more on earlier rates of consumption of appro-
priations in respect of certain measures, experi-
ments in implementation and the need to guaran-
tee optimum take-up of funds within each Member
State, rather than on a well-established develop-
ment strategy;

(e) The Commission is of the opinion that progress has been
made on Structural Fund programming that will ensure
implementation in accordance with a well-established
development strategy and that the take-up of funds has
not taken priority over effectiveness. The calculation of
the resources required to achieve given goals is not always
easy without reference to the take-up of appropriations
for previous measures of the same type.

the fixing of criteria or indicators, and their estab-
lishment as concrete objectives to be achieved at
mid-term with a view to the distribution of the
performance reserve, is to all intents and purposes
left to the discretion of the Member States. This can
lead to inconsistencies and ineffectiveness;

(f) The selection of indicators for the performance reserve
was not left solely to the Member States. There are three
types of indicators, relating to management, finance and
effectiveness. Although Member States could choose,
management and finance indicators are in most cases
those proposed by the Commission. Effectiveness indica-
tors must vary by programme and Member State since
they are output and result indicators from the pro-
grammes. The Commission is monitoring the situation
closely.

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(g) management, payment, supervisory systems and
controls in the Member States still show weak-
nesses as regards compliance with deadlines (par-
ticularly in relation to the introduction of control
structures and the organisation of controls), the
separation of functions, certification of expendi-
ture, electronic data exchange or the preparation
of annual implementation reports;

(h)

the eligibility rules for the period 2000 to 2006
are still incomplete and imprecise and this may
result in unjustifiable differences of treatment
between beneficiary Member States. Certain eligi-
bility principles which were applicable to the period
1994 to 1999 but have been cancelled in respect
of the new period fall into this category. Similarly,
certain eligibility concepts taken up again in the
new rules have had their content modified or
reduced by those rules and this allows the final
beneficiaries a great deal of latitude as regards
limitations or differing interpretations. Finally, the
procedures for implementing the additional con-
cepts are not always sufficiently detailed;

(i)

the project selection criteria submitted in the pro-
gramme complements are often too broad and do
not do enough to enhance the benefit of structural
measures in terms of optimising objectives and pri-
orities.

5.69. The aim of simplification has not always been
achieved and its effects have sometimes been the oppo-
site of what was originally intended. This applies par-
ticularly to the procedures for adopting programmes,
consistency in programming, the setting-up of decen-
tralised management procedures and eligibility rules.
The process of simplification has also suffered as a result
of the very slow start of programmes, the overlapping
of two programming periods and an underimplementa-
tion of the budget in 2000/2001 and 2002.

(g) The Commission considers that the Member States have-
made and are continuing to make substantial progress
in all these areas. The Commission is continuing to carry
out audits covering the various aspects of the new sys-
tems and in May 2003 circulated to the institutions and
the Member States a report on its findings as far as the
ERDF is concerned.

(h) The Commission takes the view that the rules are suf-
ficiently precise and complete given the aim of regulat-
ing no more than the necessary minimum at Community
level, leaving any provisions beyond these basic common
provisions to the Member States. It endeavours to pro-
vide clarification whenever there is any doubt. The Com-
mission’s approach in adopting Regulation (EC)
No 1685/2000 was to leave out those rules previously
contained in the eligibility datasheets that were redun-
dant or unnecessary, to learn from the experience of
applying the datasheets by being less restrictive where
this was justified and to present the rules adopted more
clearly and concisely in the form of a regulation. For its
replies to specific observations of the Court, the Commis-
sion refers to the Special Report.

(i) The Commission has encouraged the establishment of
relevant selection criteria and insists on their systematic
application. It is well aware of the crucial importance of
project selection for the impact of assistance and acknowl-
edges that in certain cases improvements are still pos-
sible.

5.69. The Commission acknowledges that the objective of
simplification has not always been achieved, principally because
of the time needed by Member States and the Commission to
familiarise themselves with the new provisions and sort out
difficulties. Programming was complicated by the additional
requirements intended to ensure that assistance complies with
the rules and to improve the quality of assistance. The estab-
lishment of new decentralised management structures and
familiarisation with the amended eligibility rules also took
time. It is equally true that the closure of 1994 to 1999
programmes, for which the requirements on Member States
were more stringent than before, delayed the launch of the new
programmes and contributed to the underutilisation of the
budget in 2000 to 2001 and 2002.

The Commission has already taken steps to simplify or clarify
the application of certain rules for the current period and will
bear the experiences of the previous programming round in
mind in its reflections for the new period.

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THE COMMISSION’S REPLIES

5.70. The Court recommends that:

5.70.

(a)

(b)

(c)

the Commission take account of all reliable and
up-to-date information available in order to con-
centrate the Structural Funds in the most seriously
affected areas and at the most suitable geographi-
cal level. As regards Objective 2, the Commission
should be careful to ensure that the criteria for
selecting eligible areas are objective, so that their
application to Member States is consistent and
homogeneous;

there is a clearer definition of responsibilities, par-
ticularly as regards the programme complement
and the duties of the bodies involved in the man-
agement of interventions at Member State level;

the Commission and the Member States introduce
the procedures and provisions needed for the cor-
rect implementation of the later phases of the pro-
gramming for 2000 to 2006 (mid-term review,
performance reserve and ex post evaluation based,
in particular, on more satisfactory indicators) and
for a consistent and well-founded allocation of
performance reserves;

(a) The Commission will take account of the Court’s com-
ments in the programming of the Structural Funds after
2006.

(b) This question is being studied in the current review of the

rules for the period after 2006.

(c) The Commission has already taken steps to organise the
mid-term review and the allocation of the performance
reserve in a correct and efficient manner and will do like-
wise when the time comes for the ex post evaluations.

(d)

regarding management, the Commission gathers
sufficient necessary information for it to be able to
carry out the relevant analysis in order to guaran-
tee the consistency of the structural programmes
adopted;

(d) The central database for the Structural Funds is already
the main source of financial information and it should
gradually take over more and more of the monitoring
information that is currently collected on other data-
bases.

(e)

the Commission defines the eligibility rules more
precisely and ensures that adequate selection cri-
teria are developed;

(f)

the Commission pursues its efforts to make the
current simplification more effective, whilst guar-
anteeing the high quality of the structural mea-
sures in terms of legality, regularity and sound
financial management. The primary aim of pro-
gramming, programme revision and management
should be the effectiveness of the programmes and
not simply the optimum take-up of funds.

(e) The regulations lay down certain rules that need to be
applied in the same way throughout the EU and leave
the remainder to national legislation. The experience of
the Commission is that to attempt to cover eligibility
questions would lead to increased complexity or rules
that were not appropriate for many specific situations.

(f) The Commission has already made efforts to simplify the
application of provisions wherever possible and will con-
tinue its efforts in this direction. It is not sacrificing the
impact of programmes to the concern for rapid absorp-
tion of funds.

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EN

Official Journal of the European Union

191

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28.11.2003

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CHAPTER 6

Internal policies, including research

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Audit objectives and scope of the audit

Assessment of the Commission’s supervisory systems and controls

Paragraph

6.1-6.2

6.3-6.60

6.3-6.4

6.5-6.21

Follow-up of the reservations made in the Annual Activity Reports for 2001

6.5-6.8

Annual Activity Reports and Declarations by selected directorates-general for
2002

Results of the audit tests

6.9-6.19

6.20-6.21

Extension and continuation of the systems analysis of the TEN-T programme

6.22-6.42

Scope of the audit and audit approach

Drafting of Commission decisions granting aid

Operation of controls

Legality and regularity of payments

Legal and control framework of the TEN-T programme

Analysis of audits carried out by the Commission in internal policies

Number of audits carried out by the Commission

Target for the audit of participants in RTD framework programmes

Supervision and follow-up of ex post audits

6.22-6.24

6.25-6.27

6.28-6.32

6.33-6.36

6.37-6.42

6.43-6.53

6.43

6.44-6.46

6.47-6.53

Conclusions and recommendations in the context of the Statement of Assurance 6.54-6.60

Follow-up of previous observations

Corrective action taken by the Commission in following up the audits carried
out by the Court

Summary of Special Report No 11/2003 concerning LIFE

6.61-6.64

6.61-6.64

6.65-6.72

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

6.1. The European Union’s internal policies focus in
particular on the implementation and development of
the single market and cover four complete subsections
of the budget plus several headings in another subsec-
tion:

(a) education, vocational training and youth (subsec-

tion B3);

(b) energy, Euratom nuclear safeguards and the envi-

ronment (subsection B4);

(c) consumer protection, the internal market, industry
and trans-European networks (subsection B5);

(d)

research and technological development (subsec-
tion B6);

(e) other agricultural operations, other regional opera-
tions, transport as well as other measures concern-
ing fisheries and the sea (titles B2-5 to B2-9 of sub-
section B2), and Article B1-3 8 2 (enhancing public
awareness of the common agricultural policy).

Graphs 6.1 and 6.2 show how the funds were spent in
2002.

6.2. The responsibility for implementing the Internal
policies and managing the corresponding budget is
spread across 13 directorates-general, the principal ones
— in terms of the appropriations managed — being the
Directorate-General for Research (RTD), the Directorate-
General for Energy and Transport (TREN) and the
Directorate-General for the Information Society (INFSO).

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Audit objectives and scope of the audit

6.3. The objectives of the audit were to contribute to
the Court’s Statement of Assurance on the general bud-
get through a specific assessment based on the collec-
tion of audit evidence, for the internal policies area as a
whole. The reliability of the accounts and the legality
and regularity of the underlying transactions were exam-
ined.

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Graph 6.1 — Breakdown of commitments by budgetary area in 2002

Source: 2002 revenue and expenditure accounts.

NB: For more detailed information see Diagrams III and IV of Annex I.

Graph 6.2 — Breakdown of payments by budgetary area in 2002

Source: 2002 revenue and expenditure accounts.

NB: For more detailed information see Diagrams III and IV of Annex I.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.4. The Court

— examined whether the Commission’s internal con-
trol system operated effectively to ensure the legal-
ity and regularity of the underlying transactions;
and in particular it reviewed the Annual Activity
Reports and Declarations by the relevant Directors-
General,

— tested a sample of commitments and payments
made in 2002, as an independent check on their
legality and regularity,

— followed up its investigation last year of the con-
trol system for the trans-European Network —
Transport (TEN-T) programme (part of the second
largest category of internal policies spending) with
tests of the legality and regularity of individual
transactions, including at final beneficiary level,

— investigated, primarily for research and technologi-
cal development (RTD) expenditure (more than
half of internal policies), whether the Commis-
sion’s ex post audits allowed it to assess the legality
and regularity of transactions.

Assessment of the Commission’s supervisory systems
and controls

Follow-up of the reservations made in the Annual Activ-
ity Reports for 2001

6.5. The objective of the audit was to review whether
the Directorates-General for Energy and Transport,
Research and Justice and Home Affairs have taken cor-
rective action to remedy the weaknesses detected and
reported on in their Annual Activity Reports (AARs) for
2001.

6.6. The AARs for 2001 of the Directorates-General for
Research and for Energy and Transport together con-
tained nine reservations. Unlike the other Directorates-
General (for Energy and Transport, the Information
Society and Enterprise) operating the RTD framework
programmes, the Directorate-General for Research did
not make a reservation in 2001 concerning the capac-
ity of internal controls to reduce the risk of overpay-
ments in the research area, even though the Directorate-
for Research manages by far the largest
General

6.6.
In 2002 the Commission increased the degree of har-
monisation of the process of drafting the directors-general’s
annual reports and declarations provided the situations were
comparable.

In its 2001 report, the Directorate-General for Justice and
Home Affairs described the difficulties encountered in estab-
lishing certain internal control standards but did not include
a corresponding reservation.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

proportion of funds in this area. In 2001 the Director-
General of the Directorate-General for Justice and Home
Affairs did not raise any formal reservations in his
report, although it was mentioned in the body of the
text of the report that the non-implementation of inter-
nal controls may cause potential weaknesses in the
Directorate-General’s management.

Given more detailed instructions
resulting from the
Commission-wide harmonisation process, the Directorate-
General for Justice and Home Affairs did include in 2002
reservations in the declaration of its Director-General for the
non-implementation of two ICS and the management of the
European Refugee Fund (ERF) (see paragraphs 6.15 and
6.19).

6.7. A substantial amount of work has been carried out
throughout 2002 in accordance with these action plans. Some
plans will take more than a year to implement.

6.7. The Annual Activity Reports for 2001 also
included preliminary plans to solve identified weak-
nesses. More detailed action plans were presented by
the directorates-general that were examined by the Court
after they had issued their Annual Activity Reports. By
the end of 2002 the implementation of these plans had
in most cases started. Most of the reservations were
repeated in the Annual Activity Reports for 2002, which
shows the difficulty of overcoming the identified weak-
nesses.

6.8. To overcome certain common problems of the
RTD framework programme noted by the directorates-
generals concerned, the synthesis of the Annual Activ-
ity Reports for 2001 (1) issued by the Commission con-
tained a specific action. This action envisages
improvements in the financial and contract manage-
ment systems for indirect research actions, an increase
in the effectiveness of controls and the intensification of
measures for the protection of the financial interests of
the Community (2). The resulting action plan drawn up
by the directorates-general was adopted by the Com-
mission in January 2003.

Annual Activity Reports and Declarations by selected
directorates-general for 2002

General observations on the annual activity reports for 2002

6.9. The objective of the audit task was to assess the
annual activity reports (AARs) for 2002 drawn up by

(1) Communication from the Commission to the European
Parliament and the Council: Synthesis of the Annual Activ-
ity Reports and Declarations of the Directors-General and
Heads of Service (COM(2002) 426 final, 24 July 2002).
(2) See Action 1, page 8 of the Synthesis of the Annual Activ-
ity Reports and Declarations of the Directors-General and
Heads of Service (COM(2002) 426 final, 24 July 2002).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

four Directorates-General (for Research, the Informa-
tion Society, Energy and Transport and Justice and Home
Affairs (3)) and to examine whether internal control has
improved in the Commission services concerned since
2001. In addition, an appraisal of the implementation
of the Internal Control Standards (ICS, see Annex 2A)
had been performed at the Directorates-General for
Research, Energy and Transport and Justice and Home
Affairs covering seven ICS (4).

6.10. All the directorates-general had described the
procedures for the preparation of the AARs and Decla-
rations for 2002. They generally followed the Commis-
sion’s guidelines on the structure and content. The
coordination responsibilities between the directorates-
general in the preparation process have been clarified
since 2001. The AARs for 2002 are more standardised
than in 2001.

Overview of the observations and reservations for 2002

6.11. All the Directors-General concerned claimed to
have reasonable assurance that the funds for which they
were responsible had been legally and regularly spent.
On the other hand, they expressed significant reserva-
tions. The number of reservations for 2002 was similar
to the 2001 figure. The directorates-general raised 12
reservations, of which seven were repeated from 2001.
The Directorates-General for Research, Energy and
Transport and the Information Society included reser-
vations concerning the frequency of errors in the area
of contracts for indirect RTD actions (5). All the reserva
tions were covered by action plans. However, the

6.11. The Annual Activity Reports 2002 of the Commis-
sion’s Research Directorates-General contain information on
the level and frequency of errors detected through ex post
financial audits. This explains the declarations of assurance of
the directors-general concerned.

for the year 2002 of

(3) Annual Activity Report

the
Directorate-General for the Information Society and Dec-
laration of the Director-General (signed 15 April 2003).
Directorate-General for Justice and Home Affairs: Annual
Activity Report for 2002 and Declaration of Assurance
(signed 14 April 2003).
Directorate-General for Research: Annual Activity Report
for 2002 and Declaration of the authorising officer by
delegation (signed 14 April 2003).
Directorate-General for Energy and Transport: Annual
Activity Report for 2002 and Declaration of the authoris-
ing officer by delegation (signed 11 April 2003).
(4)
Internal control standards 7, 11, 15, 17, 20, 21 and 22.
(5) Management of multiannual programmes (Directorate-
General for the Information Society), control of the regu-
larity of payments (Directorate-General for Energy and
Transport), errors in the area of research contracts
(Directorate-General for Research).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

directorates-general did not quantify in all cases the
monetary or financial impact of their reservations. The
Directorate-General for Research also reported weak-
nesses in the form of observations in addition to reser-
vations.

6.12. As noted in the previous paragraph, for 2002 all
the directorates-general operating the RTD framework
programmes introduced similar reservations as regards
the regularity of payments for indirect RTD actions,
mainly due to final beneficiaries not complying with
the contractual provisions (6). These reservations cor-
roborate the corresponding findings by the Court.

The information on the implementation of the Internal Control
Standards in the AARs for 2002

6.13. Each Annual Activity Report that was examined
contained information and the mandatory Annex about
the implementation of the Internal Control Standards
(ICS). The assessment and the Annex were prepared in
accordance with the Commission’s guidelines.

6.14. The directorates-general proceeded with the
evaluation of the Internal Control Standards (7), apply-
ing the following four categories: standard not imple-
mented (one case), implementation of minimum stan-
dard in progress (27 cases), minimum standard
implemented (32 cases) and more than minimum stan-
dard implemented (36 cases). The actual meaning of the
category ‘implementation of minimum standard in
progress’ remains unclear and, in particular, does not
indicate whether certain standards have been imple-
mented within the specified deadlines.

6.15. The Directorate-General for Research made one
observation regarding the implementation of two stan-
dards (ICS 3 and 15). The Directorate-General for the
Information Society reported that one standard (ICS 5)
had not been implemented and that the implementa-
tion of the minimum standard was in progress for 11
standards. The Directorate-General for Justice and Home
Affairs has issued a reservation regarding the non-
implementation of two standards (ICS 16 and 17). The
ways in which difficulties in the implementation of the
ICS were reported by the directorates-general in their
AARs and Declarations differed between directorates-
general.

(6) Court of Auditors Annual Report concerning the finan-
cial year 2001 (OJ C 295, 28.11.2002), paragraphs 4.41
to 4.46.

(7) Communication on the clarification of the responsibili-
ties of key players in the field of internal audit and inter-
nal control at the Commission (SEC(2003) 59 final).

6.14. The Commission points out that the category ‘imple-
mentation of minimum standard in progress’ means that for
the internal control standard in question one of the baseline
requirements had either not been implemented (where another
baseline requirement had been implemented for the same
standard) or had been only partly implemented.

The internal audit capabilities of the directorates-general in
the frame of their audit activities ensure regular review of
implementation of internal control.

6.15. Throughout the period of evaluation of the imple-
mentation of internal control standards, the Commission has
done its best to provide advice and guidance on best practice
to the directorates-general in an attempt to bring a degree of
consistency and uniformity to the annual activity reports.

The task of implementing internal control standards lies with
each individual directorate-general.

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6.16. The Directorate-General for Research did not
report the delay in implementing the supervisory
arrangements (ICS 17) in the AAR. Even though the
Directorate-General for Energy and Transport reported
that the minimum standard concerning ICS 17 had been
implemented, the Court found deficiencies in the way
in which the supervisory arrangements were being car-
ried out. The Directorate-General for the Information
Society did not make a reservation concerning the Inter-
nal Control Standards, even though implementation of
more than half of the standards was still in progress at
the end of 2002. The Directorate-General for Justice
and Home Affairs, the Directorate-General for Research
and the Directorate-General for the Information Society
reported that the full implementation of the documen-
tation of procedures (ICS 15) was delayed, especially
concerning procedures for the management of indirect
research programmes.

6.17. The comments and figures provided by the
Directorates-General for Research and the Information
Society on their ex post financial audits in the research
field are incomplete. For example, neither directorate-
general indicates the amounts of adjustments paid to or
recovered from the beneficiaries as a result of the
follow-up action taken on the external ex post financial
audits carried out on behalf of the Commission, which
were concluded in 2002.

6.16. As regards the Directorate-General for Research and
control standard 17 on supervision, while it is true that the
supervision plans were adopted late, since the plans relate to
ex post checks they cannot be applied until the financial year
in question has elapsed. The results of the controls for the first
half of 2002 and some for the second half of 2002 have in
fact been taken into account in the annual activity report.
Consequently, and contrary to what is said in Annex 2B, the
Directorate-General for Research considers that standard 17
has actually been implemented beyond the minimum stan-
dard.

The Court’s observation about deficiencies found as to how
the supervisory arrangements are being carried out at the
Directorate-General for Energy and Transport is based mainly
on findings linked to the audit of interim payments made by
the Commission for TEN-T projects. This fails to take into
consideration the important controls that take place only at
the end stage of the project (in-depth internal verification of
the final cost statements, on-the-spot financial and technical
controls and on-the-spot ex post financial audits).

Delays with the completion or the renewal of a number of
actions at the Directorate-General for the Information Society
was not considered to have caused any significant control risk
which might have required the entry of a reservation.

The delay affecting control standard 15 (documentation of
procedures) in the Directorates-General for Research, the Infor-
mation Society and Justice and Home Affairs is the result pri-
marily of the introduction of a new framework programme
and the recasting of the Financial Regulation.

6.17. The AARs of the Directorates-General for the Infor-
mation Society and Research contain a lot of relevant, but not
necessarily exhaustive information on financial ex post audits.
The implementation of audit results is followed up closely.

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6.18. The adjustments in favour of the Commission
(grants received unduly by the beneficiaries) are higher
than those in favour of the beneficiaries. No net adjust-
ment of errors in costs declared should be made when
indicating a general trend in the underlying error rate of
a management and control system. Off-setting both
types of adjustments is, however, a useful indicator for
the budgetary impact of the Commission’s financial
ex post audits.

Conclusion

6.19. The directorates-general examined by the Court
all included in their Annual Activity Reports reserva-
tions covering a large part of the internal policies area,
such as on the regularity of payments for the multian-
nual research programmes (the Directorates-General for
Research, the Information Society, Energy and Trans-
port) and the non-implementation of the Internal Con-
trol Standards (the Directorate-General for Justice and
Home Affairs). The reservations raised in the research
area, which represents more than half of the internal
policies expenditure, mean that the control procedures
put in place cannot guarantee the legality and regular-
ity of the underlying transactions. As a result, the weak-
nesses reported in the reservations are not consistent
with the reasonable assurance given in the Declarations
of the Directors-General.

6.19. The reservations regarding shared-cost research con-
tracts relate to the errors in the declarations of expenditure
submitted by the beneficiaries. Their importance and financial
impact of the errors are studied in the annual activity reports
of the directors-general concerned, which explains their state-
ments of assurance. These statements, accompanied by the
reservations, are thus highly significant.

As regards the Directorate-General for Justice and Home
Affairs, the Commission does not feel that the reservation
regarding the non-implementation of two standards (16 and
17) and the administration of the European Refugee Fund,
and their importance and financial impact, conflict with the
Director-General’s statement of assurance.

Results of the audit tests

6.20. The objective of the audit tests was to verify the
legality and regularity of the underlying transactions
and to contribute to an assessment of the Commission’s
control activities covering the whole budgetary area of
internal policies. A sample of 54 payments, 16 commit-
ments and six old open commitments were selected.

6.21. The audit was limited to the Commission
directorates-general. No material errors were found at
that level. This reflects the fact that the checks carried
out by the Commission cannot assess whether the under-
lying transactions are legal and regular. At the Commis-
sion level it is only possible to check such matters as
whether the expenditure declared was incurred within
the eligible period, and whether the costs declared by
the final beneficiary as incurred are plausible within the
terms of the contract or Commission decision and the

6.21. The Commission agrees with the Court’s analysis that
the funding mechanism as set up by the legal bases for the
Community research programmes has limitations as far as
desk controls are concerned. The exactitude of cost as declared
by beneficiaries and their conformity with the provisions of the
research contracts, cannot completely and accurately be veri-
fied by the Commission as part of its normal checks carried
out prior to authorisation of payments. Only full financial
audits can determine with certainty and exactitude the cor-
rectness of the costs claimed. It is for that reason that the

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agreed budget contained therein. One of the main inher-
ent risks in the internal policies area is, however, that
the final beneficiaries may over-declare their costs to
the Commission. This was also confirmed by the results
of the audits carried out by or on behalf of the Com-
mission at the final beneficiary level.

Commission has substantially reinforced, since the launch of
the fifth framework programme its audits on the level of ben-
eficiaries. For the sixth framework programme cost claims by
beneficiaries will need to be certified by independent auditors.

Extension and continuation of the systems analysis of
the TEN-T programme

Scope of the audit and audit approach

6.22.
In the context of the 2002 Statement of Assur-
ance, the Court continued and extended its analysis of
the management and control system of the TEN-T pro-
gramme operated by the Directorate-General for Energy
and Transport. The main objective of this year’s audit
was to assess the legality and regularity of the underly-
ing transactions at final beneficiary level, taking into
consideration the qualitative assessment of the strengths
and weaknesses of internal controls at the Commission
identified in last year’s Annual Report (8).

6.23.
In total, a sample of 38 TEN-T actions with com-
mitments and/or payments authorised in 2002 were
audited. Tests were carried out at the Commission for
all actions sampled, while 14 actions with cost-claim-
based payments (six interim and eight final payments)
were also audited at the final beneficiary level. The
transactions audited, involving payments amounting to
286,1 million euro and commitments of 274 million
euro, represent 49 % of the 2002 TEN-T commitment
and payment appropriations respectively.

6.24. The sample covered all transport modes (rail,
road, air and maritime transport) and the three main
intervention mechanisms (studies, direct grants for
investments and interest rebates). It included actions
based only on Commission decisions (adopted in 2002
or before) and actions based on Commission decisions
complemented by a contract.

(8) Court of Auditors Annual Report concerning the finan-

cial year 2001.

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Drafting of Commission decisions granting aid

6.25. The audit of TEN-T actions in 2002 found that
most of the Commission decisions continued to be
incomplete and/or incorrect, corroborating last year’s
audit findings (9):

— the identification of the recipient of aid, the ben-
eficiary of aid and the authority responsible for
implementation in the Commission decisions to
grant aid continues to be often incorrect or incom-
plete. Also, changes to company structures, legal
status or legal names are not reflected in the Com-
mission decisions,

— the date of receipt of the application, set out in the
text of the Commission decision, which indicates
the starting date of the eligibility period, does not
always match the date on which the Commission
in fact received the application. In these cases the
date in the Commission decision is prior to the
actual date of receipt so that the period in which
costs are eligible is unduly extended,

— beneficiaries continued to be notified inadequately.
The definitions of work and eligibility of costs and
fixed end dates are still not included in the deci-
sions.

These weaknesses confirm the Court’s previous posi-
tion that the legal framework of the TEN-T programme
should be strengthened by drawing up contracts between
the Commission and the beneficiary after the Commis-
sion decisions granting aid.

6.25.
Further to the recommendations made by the Court
last year, the Commission took immediate steps to improve
the standard text of the 2002 decisions. Improvements are
acknowledged by the Court in point 6.26 and 6.37 of this
report. As most of the payment transactions audited by the
Court in 2002 concern decisions from 2001 and earlier, it is
clear that these improvements are not reflected in the decision
texts prepared at the time.

Improvement of the standard text includes, in particular, the
technical annex developed to give more details concerning the
activities covered by the funding, the estimated breakdown of
costs of the activities and fixed rather than indicative time-
tables.

Further improvements continue to be developed within the
new version of the Commission decision 2003 for the mul-
tiannual indicative programme (MIP). In particular distribu-
tion of responsibilities will be better identified (1) as well as
level
the obligations of these partners at the operational
(description of activities, report, follow-up, request of pay-
ment, control etc.).

The Commission has strengthened the rules for the deadline
for receipt of proposals and will emphasise the specific control
of the correct transfer of the eligible date into the decisions in
all future cases. The update of the Manual of procedures of the
Directorate-General for Energy and Transport includes a more
detailed selection process from 2003.

The question of a proposal received after the deadline for non
MIP is duly taken into account in the 2003 process. Such
cases have been rejected.

Further to the recommendations made by the Court last year,
the Commission took immediate steps to improve the stan-
dard text of the 2002 decisions, in particular, the technical
annex, as mentioned above. From 2003 onwards the final
beneficiaries also will be informed by the Commission of
improvements
the financial decisions awarded. Further

(9) Court of Auditors Annual Report concerning the finan-
cial year 2001, paragraphs 4.18 to 4.20 and 4.31.

(1) The body with final responsibility for the financial contribution
(mainly the Member State concerned), the entity responsible for
receiving the funds, the entity responsible for the implementa-
tion of the project and for management of the funds.

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continue to be developed within the new version of the Com-
mission decision 2003 for the multiannual indicative pro-
gramme (MIP): and mainly the clarification of each partner
involved in the implementation of the project and in the using
of funds.

In particular, it will include notification to each beneficiary
and organisation executing the project.

The comments regarding definition and eligibility of activities
and fixed end dates and the steps taken by the Commission
in this regard are covered above.

The Commission maintains its position that contracts are not
always necessary on top of decisions for TEN-T projects.

6.26.
Improvements for a standardised cost claim have been
considered and, within the new version of the Commission
decision 2003, an appendix will be used as a first model for
a standardised structure of statements of expenditure.

In the framework of the review in 2003 of the TEN proce-
dures, a TEN-T handbook for Member States and beneficia-
ries, a first version of which will be prepared by the end of
2003, will further develop the idea and clarity of model cost
statements. The handbook will also cover the clear definition
of studies and works and include detailed requirements with
regard to the publicity obligation for the Member States and
beneficiaries in line with structural funds practice.

6.27.
In addition to comments on 6.26, the guidelines for
description of activities, the structure of technical reports and
cost statements as well as definitions of eligible costs will be
developed and contained in the TEN-T handbook already
mentioned.

6.26. The audit identified improvements regarding
these provisions in the model TEN-T Commission deci-
sion used from 2002 onwards. Although suggested in
last year’s Annual Report (10), the new model text still
does not include a clear definition of the different forms
of aid, in particular for studies and direct grants. More-
over, a standardised cost claim form is not included and
the requirement that publicity should be given to Com-
munity aid is no longer specifically mentioned in the
text.

6.27. The new model Commission decision text
includes guidelines neither for the description of activi-
ties covered by the Commission decision nor for the
structure of statements of expenditure to be used by
applicants to support their cost claims. The provisions
relating to the eligibility of costs, as defined in the TEN
Financial Assistance Committee Glossary, are very gen-
eral and need to be reviewed. In the Court’s opinion
these provisions for beneficiaries of TEN-T actions
should be defined in a manual and sent to them. Such a
manual could be based on the example of the Cohesion
Fund Manual.

(10) Court of Auditors Annual Report concerning the finan-
cial year 2001, paragraphs 4.18 and 4.19 and the Com-
mission’s replies.

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Operation of controls

Basic condition for Community aid

6.28. According to Article 5 of Council Regulation
(EC) No 2236/95 specifying the conditions for Com-
munity financing, aid shall only be granted if the achieve-
ment of a project is encountering financial obstacles.
This basic condition for TEN-T financial aid was not sat-
isfied in 10 out of 36 applicable cases audited represent-
ing a total amount of 113,8 million euro of TEN-T
financial assistance. In most of these cases, beneficiaries
indicated in their detailed application form that the
action would ‘go ahead as planned’ even if TEN-T finan-
cial assistance was not awarded.

6.28. The question raised refers to article 5.1 of TENs
Financial Regulation which states that aid shall be granted ‘in
principle, only if achievement […].’

For TEN-T the promoter is normally a public organisation or
a public company therefore the question of financial obstacles
for public investment is a matter of choices between options
for public expenses. The Community funds are a catalyst, par-
ticularly in the study and start-up phases when Member States
do not otherwise attach the necessary priority to TEN’s projects.

Specific preconditions for interim and final payment

6.29. The audit found that interim and final payments
were authorised by the Commission without the spe-
cific preconditions stipulated in the financial implement-
ing provisions being satisfied:

— the statements of expenditure submitted by ben-
eficiaries on the basis of which the Commission
authorised payments were in most cases unclear,
inconsistent and incomplete and did not enable
the eligibility of the costs declared to be assessed.
The activities for which costs were claimed were
not always specified and therefore it was not pos-
sible to verify from the documents submitted by
the beneficiary whether these activities were cov-
ered by the relevant Commission decision. In addi-
tion, beneficiaries did not sufficiently differentiate
between costs relating to studies and those related
to works. This is a significant weakness because
the rates for financial support for studies and works
differ. Similarly, the audit found that costs declared
did not relate to the correct Commission decision,

— insufficient guidance on the structure and content
of financial and technical progress reports resulted
in the content of the latter reports often being not
specific enough to verify whether the project activi-
ties were carried out as described in the Commis-
sion decision,

6.29. Where initial information received by the Commis-
sion was incomplete or unclear, adequate steps were taken to
obtain clarification of such issues prior to proceeding with
final payment. In addition the Commission takes into account
the principle of ensuring continuity of the action under public
support where more than one decision covers the same project.
Where absence of distinction between studies and works for
some costs declared was noticed, adequate measures will be
taken as appropriate.

Studies may include works as technical support measures when
this is necessary for these studies. Works may include techni-
cal studies carried out during implementation phase provided
that the subject of the study is directly linked to the works, in
agreement with normal practice acknowledged by the Com-
mittee of Member States.

Improvements are considered especially through the TEN-T
handbook to be developed (see paragraph 6.27).

It is true that in two cases considered as irregular payments
by the Court, the executive summaries were not submitted
before the final payment. In one of these, the project consists
of consecutive decisions concerning the same study. The study
activities were carried out according to the decision concerned
although a formal executive summary would only be pre-
sented upon completion of the last decision linked to the study
phase.

The Commission will no longer make final payments in the
absence of executive summaries.

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— in addition, executive summaries of studies, which
should be provided together with the application
for final payment, were missing in two out of the
three studies audited. These summaries are essen-
tial for the Commission staff to be able to assess
project execution, as the full study reports are often
very long and complex documents.

Controls of cost statements

6.30. On-the-spot audits by the Court found that the
checks carried out at Commission level had failed to
detect and correct claims for ineligible costs. As noted
in paragraph 6.19, on-the-spot checks at the final ben-
eficiary level need to be carried out to detect most errors
of legality and regularity in the transactions. Even when
the Commission had carried out on-the-spot checks,
the Court found that some expenditure that had been
cleared for reimbursement was not regular. Failure to
detect irregular expenditure at both Commission level
and on the spot led in some cases to undue interim pay-
ments or overpayments:

— one beneficiary reallocated Community funds to
other project subactivities which had not been the
subject of an application, evaluation, selection and
Commission decision. The final cost statement for
this project was accepted and paid by the Commis-
sion even though this misallocation was evident
from the documents supporting the payment claim.
Moreover, the project subactivities thus co-financed
by the Commission had already been fully financed
from regional or national funds, making the activ-
ity ineligible for TEN-T financial assistance,

— costs directly relating to works were charged and
authorised in study projects benefiting from a
higher funding rate of 50 %. In one case about
90 % of the amount paid for a study consisted of
costs related to the supervision of works,

— costs outside the eligibility period, costs for activi-
ties not covered by the Commission decisions or
costs which are explicitly excluded (such as value

6.30. On-the-spot controls, where made, were appropriate
in the specific cases to determine the eligibility or otherwise of
costs in the context of the Council regulation and project
descriptions contained in the decisions. In the one particular
case where a misallocation of funds was mentioned by the
Court, no on-the-spot control had been made. In this case, a
financial and technical audit will be carried out and adequate
measures will be implemented.

The more detailed description of activities requested with the
2002 decisions and further developed in the 2003 decisions
should reduce the risk of funding of non-eligible activities. In
addition, in the context of the TEN Regulation, the new 2003
text underlines and strengthens the responsibility of Member
States in the implementation and follow up of financial aid,
in particular, their competences in the fields of financial con-
trol, appraisal, monitoring and evaluation of projects.

As mentioned above, a financial and technical audit will be
performed and adequate measures implemented as necessary.

As explained in point 6.26, definitions of works and studies
will be further developed in the TEN-T handbook.

The ‘costs outside the eligibility period’ refer to a case where
the same project is covered by two decisions (lack of available
funds to allocate all in one year) and the same eligibility cri-
teria applies to both decisions in order to respect the principle
of continuity of the action and the support:

— activities such as environmental measures are inextricably

linked to the project measures,

— VAT is not accepted. In case of erroneous declarations,

corrective action will be taken,

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added tax and contributions in kind) were claimed
and accepted by the Commission,

— any correction to contribution in kind would be made at

the stage of the final payment at the latest.

— in many cases where the eligibility of costs should
have been questioned by the Commission, the costs
concerned were accepted without further inquiry
as to their nature,

— the requirement to ensure suitable publicity for the
Community financing granted, as defined in the
Council regulation and the relevant Commission
decisions, was not respected in four out of 16 cases
where it was applicable.

6.31. Although in most cases the authorisation of a
final payment is preceded by an on-the-spot control
carried out by the Commission, no ex post financial
audits for TEN-T actions were carried out in 2002,
despite the Commission having indicated that they
would be in its reply to a previous observation made by
the Court (11).

In general the Commission carries out on-the-spot missions
(technical and financial) before proceeding with the final pay-
ments and requests more details in case of doubt.

The Commission checks when it goes on an on-the-spot mis-
sion that this element is covered. Of course the check cannot
be continuous and on every part of the project.

6.31. The fact that no ex post financial audits on TEN
projects have taken place in 2002 is due to the fact that since
the merger of the Directorate-General for Energy and Trans-
port, the emphasis has been put on the reduction of the RAL,
and thus the closure of old contracts has used a lot of the
Directorate-General
for Energy and Transport’s human
resources available in the financial sector. To compensate the
lack of sufficient resources to undertake ex post audits by
outsourcing a number of financial audits, the Directorate-
General for Energy and Transport is preparing a framework
contract with an external audit company; this contract is
expected to be operational by the end of the year 2003 and
will allow the Directorate-General for Energy and Transport
to increase the number of ex post audits undertaken on TEN
projects considerably.

The financial audit cell of the Directorate-General for Energy
and Transport has already accompanied the Court of Audi-
tors in a limited number of financial audits in 2003 as
observer, and will itself undertake a number of ex post audits
of TEN projects in the months to come. For 2004, and apart
from the audits that will be undertaken by the external audit
company, the Directorate-General for Energy and Transport’s
financial audit cell will, as well, undertake an increased num-
ber of ex post audits. To this end, the team will be reinforced.

Finally it should be mentioned that the in-depth internal
financial controls carried out on all final payments and the
on-the-spot financial controls undertaken for almost all works-
projects, allow the verification of eligibility of costs declared,
and reduce the risk of overcharging considerably.

(11) Court of Auditors Annual Report concerning the finan-

cial year 2001, paragraph 4.33.

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Documentation of controls carried out

6.32.
In several cases audited, project files were incom-
plete, mainly due to the Directorate-General for Energy
and Transport’s internal reorganisation, but also due to
the frequent staff turnover. In general, the audit found
that project files did not contain checklists or detailed
reports from the desk or financial officer with informa-
tion on the nature and results of controls carried out,
except in those cases where an on-the-spot control has
been carried out. In some cases, cost categories which
are eligible (such as indirect costs) were rejected, while
cost categories whose eligibility is questionable were
accepted without any justification being provided. In
most cases only additional information provided by the
beneficiary on the spot made it possible for the Court
to verify the eligibility of all the costs declared and paid
by the Commission.

Legality and regularity of payments

6.33. Although the commitments were legal and regu-
lar, proposals were not always submitted within the
deadlines set by the Commission and the evaluation
process was not sufficiently documented.

6.34. Owing to inadequate controls, payments were
made for a project which had not been the subject of a
Commission decision, for costs considered as ineligible
(such as value added tax and contributions in kind), for
activities which are ineligible as studies or which had
already been financed under another Commission deci-
sion.

6.35. Cases of undue interim payment or overpay-
ment were found in two out of three studies and in
three out of 11 works audited. As for works, the risk of
overpayments is limited because of the overall restric-
tion of the EU contribution to 10 % of the total invest-
ment costs and the fact that actual investment costs are
higher than budgeted costs.

6.32. The Commission will develop and implement check-
lists to cover particular funding programmes.

6.33. The Commission has strengthened the rules for the
deadline for receipt of proposals, and will emphasise the spe-
cific control of the correct transfer of the eligible date into the
decisions in all future cases. The update of the Manual of pro-
cedures of the Directorate-General for Energy and Transport
includes a more detailed selection process than that of 2003.

The question of a proposal received after the deadline for non
MIP is duly taken into account in the 2003 process. Such
cases have been rejected.

6.35. On the basis of information available and internal
controls performed the preconditions for interim payments
were met. At the level of final payment more detailed controls
are made. Difference of interpretation for eligibility of costs
remains.

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6.36.
In addition, as noted in paragraph 6.29, some
final payments were irregular as the specific precondi-
tions required by the financial implementing provisions
had not been satisfied at the time of payment.

6.36. The Commission explained in point 6.30 why, in
one of the two cases concerned, it considers the payment to
have been regular.

For the future, the Commission undertakes not to make any
final payments if the executive summaries are missing.

Legal and control framework of the TEN-T programme

6.37. The TEN-T legal framework should be further
strengthened. The new model Commission decision text
is an improvement but still lacks certain key elements:

— although the Commission committed itself to
improving the clarity of the definition of works,
there is still no separate technical Annex in the
new model Commission decision (12),

— the recommendation by the Court to include a
standardised cost statement form in the new model
Commission decision text has not been followed
although this would allow controls to be carried
out more efficiently,

— on-the-spot audits have shown the need to rein-
clude the publicity provision in the model Com-
mission text, and to define in more detail the
requirement to ensure suitable publicity for actions
to which Community assistance has been granted.

it

these rules among beneficiaries,

6.38.
In order to ensure coherent and consistent inter-
pretation and application of the different rules appli-
cable to TEN-T and to increase awareness and compre-
hension of
is
recommended that a specific TEN-T manual for benefi-
ciaries be drawn up in cooperation with the Member
States. This manual should, amongst other things,
address the need for guidance on the interpretation of
cost eligibility rules, define the scope of the different
forms of aid and specify minimum rules and, prefer-
ably, formats for technical and financial reporting. It
should also include guidelines regarding the verification
of the legal and financial viability of beneficiaries which
are not public entities.

6.37. The Commission will go on improving the clarity of
the definition of works as indicated above.

The Commission currently uses the Annex ‘presentation of the
project’ as a technical Annex. The Commission will go on
improving the clarity of the definition of works by introduc-
ing, as from 2003, a separate technical Annex for works and
studies in the Commission Decisions.

The Commission will introduce the use of standardised cost
statements within the new version of the 2003 Commission
Decision, as well as within the 2003 review of the TEN-T
procedures, which will result in a TEN-T handbook by the end
of 2003.

The Commission will further develop relevant publicity obli-
gations for the Member States and the beneficiaries.

6.38. Different measures will contribute to improvements
and hence respond to the observations made by the Court:

— the new version of the 2003 Commission decision will
identify the role and the responsibilities of each partner
involved in using this financial contribution,

— the 2003 review of the TEN procedures,

— the forthcoming TEN-T handbook.

(12) Court of Auditors Annual Report concerning the finan-

cial year 2001, paragraph 4.18.

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6.39. Control will be improved considerably by the intro-
duction of the changes already mentioned in the previous
paragraphs.

6.40. The Commission is introducing improvements in these
areas; notably in the implementation of checklists and in
informing Member States of the outcome of controls.

6.41. As mentioned under point 6.31, the Directorate-
General for Energy and Transport is preparing a framework
contract with an external audit company; this contract is
expected to be operational by the end of 2003, and will allow
the Directorate-General for Energy and Transport to increase
the number of ex post audits undertaken on TEN projects
considerably. It is clear that guidelines for these audits will be
established and communicated to Member States and benefi-
ciaries. The audits that the Directorate-General for Energy
and Transport’s financial audit cell has undertaken in 2003
together with the Court of Auditors, and the audits that this
cell intends to undertake during the following months, will
contribute to their preparation.

6.42. The Commission has continued its efforts to include
the TEN-T in its IT system, which should be done before the
end of 2003.

6.39.
It is also recommended that the Commission
should apply the provisions in the Council regulations
and in the relevant Commission decisions more rigor-
ously. This concerns, in particular, eligibility for TEN-T
assistance, the preconditions for interim and final pay-
ments, the modification of Commission decisions, the
conclusion of grant agreements and publicity.

6.40.
In addition, checks should be more effective and
better documented. The checklists and control reports
which are used in the control process should be dated
and signed by the responsible officials. The results of
these controls should be communicated to the Member
States and the beneficiaries.

6.41. As recommended previously, ex post financial
and technical audits should complement on-the-spot
checks performed by technical and financial officers
prior to the final payment. Guidelines for these audits
should be established and communicated to Member
States and beneficiaries.

6.42. The Commission is reminded of its commit-
ment to integrate TEN-T into the central IT project
management system at the Directorate-General for
Energy and Transport, the first integration phase of
which should have been operational by the end of 2002.

Analysis of audits carried out by the Commission in
internal policies

Number of audits carried out by the Commission

6.43. Compared with 2001, the 13 directorates-general
involved in internal policies increased the number of
completed audits from 393 to 516 (see Table 1), despite
the decrease in the number of contracts audited from
892 to 840. Unlike all
the other Commission
directorates-general operating in internal policies, the
Directorate-General for Justice and Home Affairs had
not carried out any ex post audits at the end of 2002.

28.11.2003

EN

Official Journal of the European Union

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212

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Target for the audit of participants in RTD framework
programmes

6.44.
In the research area, the Commission has inten-
sified its audit activities since 1999, defining an overall
audit target of 10 % of contractors during an RTD
framework programme (13). In total, 376 audits relating
to 572 contracts for indirect RTD actions were closed
during 2002 by the five Directorates-General (Research,
the Information Society, Energy and Transport, Enter-
prise and Fisheries) involved in the management of the
RTD framework programmes (see Tables 6.2 and 6.3).
As in the previous year, the Directorate-General for
Research performed most of the audits, finalising 237
audits covering 297 contracts.

6.45. 84 % of the audits concerning indirect RTD
actions were carried out by external audit firms man-
dated by the Commission. The cost of an audit that is
contracted out is, to a certain extent, independent of the
number of contracts audited (14).

6.46. According to the information provided by the
Commission, the number of audits completed in 2002
by the Directorate-General for Research represents 4,8 %
of the auditable population of contractors as defined by
the Commission. This compares with 9,2 % and 8,5 %
for the years 2000 and 2001 respectively. Moreover,
41 % of the 378 audits closed during 2002 concerned
indirect RTD actions related to the fifth framework pro-
gramme (FP5) for research and technological develop-
ment activities. This confirms the concerns expressed in
the Court’s Annual Report for 2001 that the target will
be difficult to achieve for FP5 (15).

6.45. The price to be paid for an audit of a single contrac-
tor is indifferent, whether one, two or three contracts are sub-
ject of the audit. In general, the Commission is seeking to
make effective use of these price conditions. The method of
calculating the price paid for the audits is laid down in the
terms of the contract with the outside firm and was part of the
information already set out in the call for tenders prior to the
contract.

6.46. The Research Directorates-General have stepped up
their audit activities since 1999, defining an overall audit tar-
get of 10 % of contractors to be audited during the lifetime of
the FP5 contracts. The Commission still considers that overall
this target will be reached for FP5.

(13) Written Commission reply to the questionnaire of the
Budgetary Control Committee of the European Parlia-
ment, paragraph 4.3, dated 21 December 2001. See also
the Court of Auditors Annual Report concerning the
financial year 1999, and the reply by the Commission to
paragraph 4.23.

(14) For a lump sum of 15 000 euro and the obligation to
deliver the final audit report within six months, up to
three contracts per auditee can be requested from the
external audit companies.

(15) Court of Auditors Annual Report concerning the finan-
cial year 2001, the Commission’s reply to paragraph 4.60.

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213

Table 6.2 — Summary table of audits closed during 2002 — Research DGs

RTD-related audits closed in 2002

Directorate-General in charge

Total number of audits closed

Total number of contracts audited

Ratio contracts /audit

DG RTD

DG INFSO (1)

DG TREN

DG ENTR (2)

DG FISH

Internal
External
Total DG

Internal
External
Total DG

Internal
External
Total DG

Internal
External
Total DG

Internal
External
Total DG

Total Internal

Total External

Total 2002

27
210
237

7
46
53

5
44
49

0
16
16

21
0
21

60

316

376

11,39 %
88,61 %
100,00 %

13,21 %
86,79 %
100,00 %

10,20 %
89,80 %
100,00 %

0,00 %
100,00 %
100,00 %

100,00 %
0,00 %
100,00 %

15,96 %

84,04 %

100,00 %

31
266
297

7
100
107

12
97
109

0
22
22

37
0
37

87

485

572

10,44 %
89,56 %
100,00 %

6,54 %
93,46 %
100,00 %

11,01 %
88,99 %
100,00 %

0,00 %
100,00 %
100,00 %

100,00 %
0,00 %
100,00 %

15,21 %

84,79 %

100,00 %

1,15
1,27
1,25

1,00
2,17
2,02

2,40
2,20
2,22

n.appl.
1,38
1,38

1,76
n.appl.
1,76

1,45

1,53

1,52

(1) The number of audits closed by DG INFSO includes four audits carried out by the Court of Auditors, where representatives from the Commission participated

or where follow-up work has been carried out.

(2) Two audits initially closed by DG TREN, but subsequently re-opened by the Commission’s departments, have not been taken into account for the calculation.

Source: Commission DGs.

Table 6.3 — DG Research (RTD): Statistics on audit reports examined and time-to-audit analysis

2001

Type

Number of audit
reports examined

Period from audit start to date of
report (in months)

Period from date of report to final
assessment (in months)

Total period from audit start to final
assessment (in months)

Information avail-
able for number
of audits

Average (months)

Information avail-
able for number
of audits

Average (months)

Information avail-
able for number
of audits

Average (months)

Internal (1)
External (2)

13
219

Total

232 (3)

8
217

225

2,3
3,8

3,7

11
218

229

2002

1,7
0,9

1,0

9
217

226

5,2
4,7

4,7

Type

Number of audit
reports examined

Period from audit start to date of
report (in months)

Period from date of report to final
assessment (in months)

Total period from audit start to final
assessment (in months)

Information avail-
able for number
of audits

Average (months)

Information avail-
able for number
of audits

Average (months)

Information avail-
able for number
of audits

Average (months)

Internal (1)
External (2)

Total

27
210

237

23
201

224

1,1
4,9

4,5

25
203

228

0,0
1,3

1,2

24
200

224

1,5
6,3

5,8

(1) Executed by DG Research departments.
(2) Executed by external audit firms.
(3) Total number of audit reports.

Source: Analyses made by the Court based on the Commission’s information.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Supervision and follow-up of ex post audits

6.47. Differences were found in the way in which the
five directorates-general operating the RTD framework
programmes manage and coordinate the ex post audits
as well as in the procedures applied to the selection of
contractors to be audited.

6.47. The Research DGs use different sampling methods for
selecting contracts and contractors for on-the-spot audits,
which they consider to be just as valid.

This is not the case for the management and coordination of
external audit firms, however. On the contrary, the Commis-
sion wants to underline that the way in which the five Research
Directorates-General manage and coordinate the external audit
firms is harmonised. The same external audit firm is used by
all directorates-general and instructions to the audit firm and
handbooks are provided by the Commission’s services in a
coordinated manner. At monthly progress meetings the qual-
ity of the external audit firm is monitored and directly dis-
cussed between Commission representatives of all directorates-
general concerned and the central management team of the
external audit firm.

6.48. Generally speaking, audit reports are used as an early
warning for the operational units. However, the Commission
recalls that the scope for generalisation of such audit results is
limited. The Commission considers with a view to the appli-
cable legal provisions each case must be considered on its mer-
its and cannot be subject to general extrapolation without the
necessary evidence.

6.48. The results of the audits carried out by the
Directorates-General for Research, the Information Soci-
ety and Energy and Transport are systematically com-
municated to the other directorates-general in order to
enable them to take action where appropriate. How-
ever, at the Directorates-General for Research and the
Information Society, although there are specific proce-
dures for the communication of the findings of their
own audits to the operational units and for the assess-
ment of the need to take corrective action, these proce-
dures were not applied to the audits carried out by the
other directorates-general. In no case did the Commis-
sion present evidence that corrective action had been
taken following an audit report originally mandated by
a different directorate-general.

6.49. The supervision by the Commission of the work
performed by the external audit firm is of great impor-
tance for ensuring that their findings and conclusions
are supported by reliable audit evidence, and can be
relied upon. In most cases, the Commission’s different
ex post audit functions applied a coherent and consis-
tent approach to the review of the results reported by
the external audit firm. This review is mainly based on
plausibility checks of the audit findings reported in the
agreed audit report against the specific contractual pro-
visions developed under the different RTD framework
programmes. Despite the Commission’s guidelines on
the minimum scope of audit work, the re-performance

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

by the Court of one of the audits carried out by the
external audit firm identified a number of problems.

6.50. As regards the follow-up given to the findings
reported by the external audit firm to the Commission,
the Court analysed the audit reports on audits of con-
tractors participating in indirect RTD actions on behalf
of the Directorate-General for Energy and Transport
and completed in 2002 (16). These audits, 19 of which
started in 2001, covered 44 different participants in
indirect RTD actions involved in 97 research contracts.
One of these 97 contracts was related to FP3 indirect
RTD actions, 81 and 15 related to FP4 and FP5 respec-
tively.

6.51. Out of 44 participants audited, eight revealed a
high level of irregularities. Nearly all of the audit reports
included in the Court’s sample identified errors at final
beneficiary level, mainly related to costs wrongly
declared. In cases of over-declaration, funds that have
been unduly paid should be recovered or, in the case of
FP5 audits, the amount over-declared should be off-set
against payments related to other contracts.

6.51. Many of the Commission’s audit observations relate
to recommendations for system improvement, formal issues or
interpretation of the participation rules without financial
impact. In some cases the financial adjustments resulting from
the audit were also in favour of the beneficiary.

6.52 and 6.53. Since the merger of the former Directorates-
General for Transport and Energy, a lot of effort has been put
on the reduction of the RAL by closing a high number of very
old contracts. Together with the efforts required to implement
the annual commitment and payment of appropriations in
the most efficient way, this has mobilised all human resources
available in the financial sector of the Directorate-General for
Energy and Transport. Now that the reduction of old contracts
has already been realised to a large extent, the Directorate-
General for Energy and Transport’s Director General has given
clear instructions to give top priority to the implementation
of the results of the financial audits. It is planned to make up
the backlog in this area before the end 2003. This includes of
course the provisional registration of estimated receivables and
the launching of the necessary recovery orders.

6.52. As at April 2003, for 45 of the contracts where
over-declarations had been detected by the external
audit firm, no action at all has yet been taken by the
Commission. There is an opportunity cost associated
with interest receivable on outstanding recoveries. The
Commission should therefore ensure timely recovery of
funds unduly paid.

6.53.
Information on the potential amounts to be
recovered by the Commission is available at the date on
which the final report is submitted by the auditors and
accepted by the Directorate-General for Energy and
Transport. In line with the Financial Regulation, the
definite amounts are entered in the accounts only when
the Commission issues a formal recovery letter, but not
at all if the overpaid funds are off-set against subsequent
payments to the audited contractor. According to the

(16) The Directorate-General for Energy and Transport consid-
ers an audit terminated on the date on which the audit
service establishes an Audit Summary Sheet on the basis
of the audit report to be submitted for follow-up to the
operational units.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Financial Regulation, provisional registration of esti-
mated receivables should have been made earlier (17).
Procedures for launching a recovery note sometimes
took a considerable time.

Conclusions and recommendations in the context of the
Statement of Assurance

6.54. The follow-up of the weaknesses stated in the
Annual Activity Reports for 2001 in the audited
directorates-general was adequate and led to action plans
being drawn up. The implementation of those action
plans is still in progress. At the end of 2002 it was not
possible for the Court to give an opinion as to their
impact on the legality and regularity of the underlying
transactions of the directorates-general concerned (see
paragraphs 6.6 to 6.7).

6.54. The annual activity reports are the responsibility of
the directors-general. They draft their declarations, accompa-
nied where appropriate by reservations, on the basis of the
information set out in the annual reports, in particular the
financial impact of these reservations where necessary. The
action plans introduced as a result of the reservations expressed
may cover several years.

6.55. The audit revealed weaknesses in the Commis-
sion’s reporting on the implementation status of the
Internal Control Standards (ICS) (see paragraphs 6.14 to
6.16).

6.55. The implementation of the 24 ICS is progressing in
all three Commission directorates-general audited by the Court
(see paragraphs 6.14 to 6.16).

6.56. The procedures for drawing up the Annual Activ-
ity Reports for 2002, as well as the clarity of presenta-
tion, improved significantly compared to 2001. Several
reservations from the 2001 declarations were repeated
in the declarations relating to 2002, given that the cor-
rective measures had not yet overcome the underlying
constraints and weaknesses. Some reservations were
still not quantified as regards their financial or mon-
etary impact (see paragraph 6.11). The Declarations of
the Directors-General do not yet enable the Court to
derive assurance from them.

6.57. The extension and continuation of the systems
analysis of TEN-T actions operated by the Directorate-
General for Energy and Transport still gave rise to a
large number of audit observations relating to payments
for studies and for works (see paragraphs 6.31 to 6.34).
Completed TEN-T actions have not yet been subject to
external audits (see paragraph 6.39).

6.56. The information contained in the annual activity
reports form a basis for the assessment by the directors-general
of the importance of any reservations and consequently for
their declarations on the legality and regularity of the transac-
tions.

6.57. Ex post audits will complement on-the-spot checks
already performed by technical and financial officers prior to
the final payment For that purpose, a framework contract
with an external audit company will allow the Directorate-
General for Energy and Transport to increase the number of
ex post audits undertaken on TEN projects considerably. In
the meantime the financial audit cell of the Directorate-
General for Energy and Transport has already accompanied
the Court of Auditors on a limited number of financial audits
in 2003 as observer, and will undertake itself a number of ex
-post audits of TEN projects in the months to come. For
2004, and apart from the audits that will be undertaken by
the external audit company, the Directorate-General for Energy
and Transport’s financial audit cell will as well undertake an
increased number of ex post audits.

(17) Article 28 of the Financial Regulation.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.58. An analysis of the audits in the field of internal
policies, where research represents more than half of
the budget, again shows a considerable incidence of
errors. These audits, carried out by or on behalf of the
Commission, revealed a large number of excessive dec-
larations of costs by final beneficiaries for indirect RTD
actions. The follow-up of the audit findings is not rigor-
ous enough, and the recovery procedures for the Com-
munity’s financial contribution already paid were found
to be slow (see paragraph 6.50).

6.58.
Internal policies are very varied and the situation can
differ substantially from one DG to another. In the case of
research, the audits carried out by the Commission revealed a
high incidence of errors in the declarations of expenditure sub-
mitted by the beneficiaries.

The Research Directorates General will improve and harmo-
nise the follow-up of audit findings, including the recovery of
undue paid contributions.

6.59. The level of errors detected by the Commission’s
own audits in the research field (see paragraph 6.48)
corroborates the Court’s audits during the last few years.
These errors are to a great extent due to the existing
rules governing the RTD framework programmes. Modi-
fying these rules is a condition sine qua non for reduc-
ing the extent of irregularities in this area.

6.59. Problems similar to those detected by the Court have
been noted in the area of research, where these are problems
with the way in which beneficiaries apply the terms of their
contract when presenting their cost statements. An action
plan following on from action 1 of the Report summarising
the annual activity reports for 2001 came into force on
1 January 2003. This plan also covers actions administered
under both the fifth and the sixth RTD framework pro-
grammes.

Generally speaking, the rules for the management of frame-
work research programmes are established by the legislature
(Parliament and the Council).

The synthesis of the annual activity reports and declarations
of the directors-general for 2002 provides for a ‘co-financing’
measure to examine the possibility of introducing flat-rate
grants with a view, in particular, to concentrating control
efforts on the situations of highest risk. This measure also
provides for the development of common standards applicable
to risk management and the assessment of the costs and ben-
efits of control activities.

6.60. The Commission is continuing its efforts to reform its
internal control systems. In addition, a ‘readiness assessment’
will be carried out by all the directorates-general before the
end of September 2003 to examine the extent to which they
have implemented the baseline requirements of the internal
control standards. The readiness assessment will make it pos-
sible to identify the measures to be taken and the additional
support to be given to the directorates-general so that as many
baseline requirements of the internal control standards as pos-
sible can be met by all DGs by the end of 2003.

The Commission is also making a considerable effort to find
ways of improving the consistency of the annual activity
reports (see sections 4.2 and 4.3 of the 2002 synthesis
report), including the ‘peer review’ of the 2002 reports —
bearing in mind that the annual declaration remains the

6.60. The Commission is recommended to:

— continue its efforts in implementing the reform
concerning the Commission’s internal control sys-
tems,

— harmonise the reporting in the Annual Activity
Reports and the Declarations of the Directors-
General for the same or similar underlying defi-
ciencies,

— give follow-up to the Court’s recommendations

concerning the TEN-T programme (18),

(18) Court of Auditors Annual Report concerning the finan-

cial year 2001, paragraphs 4.31 to 4.36.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— strengthen and increase the external audit func-
tions of the directorates-general operating the RTD
framework programmes and achieve at least their
own targets in this respect (19),

— reinforce its procedures for ensuring that the exter-
nal audit firms perform the audits on the Commis-
sion’s behalf to the highest professional standards,

— ensure adequate follow-up of the Commission’s

own audit findings.

responsibility of the directors-general, which inevitably implies
a margin for discretion and a reflection of the special situa-
tion of each department.

As mentioned above, the Commission has taken into account
remarks from the Court and will make further improvements
in the decisions and through a TEN-T handbook that will be
established by the end of 2003.

Controls are being stepped up. The Research DGs have more-
over made specific mention of the fact in their action plan on
action 1 of the synthesis annual activity report 2001.

The Commission is continuing to monitor the quality of audits
carried out by outside firms.

It is making every effort to ensure that action is taken on these
audits as quickly as possible.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Corrective action taken by the Commission in following
up the audits carried out by the Court

6.61. The Court examined the follow-up by the
directorates-general of previous audit findings on the
financial audits of 28 contracts for FP5 indirect RTD
actions audited at beneficiary level, all of which were
reported by May 2002 at the latest, and assessed the
appropriateness of the corrective action taken as at the
end of March 2003.

(19) Written Commission reply to the questionnaire of the
Budgetary Control Committee of the European Parlia-
ment, paragraph 4.3, dated 21 December 2001.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.62.
For all but one of the contracts for FP5 indirect
RTD actions audited at beneficiary level, a recovery of
funds unduly paid to the contractor (or compensation
through the reduction of subsequent payments) was
deemed necessary as a result of the Court’s audit. The
directorates-general have accepted the audit findings in
almost half of the cases, and agreed in part to the other
findings reported, agreeing to some of the audit find-
ings or to the factual situation but disagreeing on the
financial implications. In five cases, the Commission
contested the findings reported. In four cases the Com-
mission had not yet replied officially to the Court’s audit
findings.

6.62. This analysis of the Court’s findings might take a
long time (see paragraph 6.63) and it has not been possible
up to now to conclude all these cases.

When a decision is taken on financial adjustments, particu-
larly recoveries, such operations are monitored regularly.

6.63. As at the end of August 2003, only in 17 cases
has corrective action been initiated by the Commission.
The time needed by the directorates-general to take cor-
rective action was excessively long, varying from one
and a half to 20 months. The average period from the
notification of the Court’s audit findings to the Com-
mission until the closure of the audit by the directorates-
general (or the date of the corrective action) was seven
months.

6.63 and 6.64. The Commission is committed to respond
to the audit findings of the Court as soon as possible. The
Commission underpins the numerous steps necessary for the
preparation of its follow-up, in particular the thorough analy-
sis of the Court’s findings, the execution of a contradictory
procedure with the audited beneficiary and proper coordina-
tion between the different services concerned. Financial adjust-
ments are applied as and where stated. The Commission
accepts that improvement is necessary to shorten the delay.

6.64. The follow-up of 11 of the audits carried out by
the Court is still not complete, thus building up an aver-
age delay of more than one year from the notification
of the audit findings. In nine of these audits, at least one
further cost-claim-based payment has been authorised
since the audit findings were transmitted to the Com-
mission. These payments could already have included
corrective action by means of adjustment to the accepted
eligible costs for the subsequent period.

6.64. The Commission is making every effort to close the
outstanding audits. Before an audit report is drawn up, it is
legitimate to follow up payments.

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SUMMARY OF SPECIAL REPORT No 11/2003
CONCERNING LIFE

6.65. The Court examined the management of the
Financial Instrument for the Environment (LIFE), which
is managed directly by the Commission and is being
implemented in phases. The programme consists of
three strands: LIFE Nature, LIFE Environment and
LIFE Third Countries, plus accompanying measures. The
audit focused in particular on the second phase (1996
to 1999, LIFE II).

6.66. The general objective of LIFE, which is to con-
tribute to the development and, if need be, the imple-
mentation of Community policy and legislation in the
environmental field, is very broad and has not been
defined in sufficient detail. By contrast, with regard to
the individual strands, LIFE Nature is more precisely
defined, in as much as its actions depend on the imple-
mentation of two directives concerning the conserva-
tion of natural habitats and of wild flora and fauna and
the conservation of wild birds.

6.67. LIFE is the largest programme among the special
measures under the ‘Environment’ title of the budget.
Of the Community participation of 450 million euro
for the second phase (LIFE II), 435 million euro were
used during the period for which it was allocated.

6.68. The Commission evaluates proposals according
to different criteria for each strand of the programme
and only calls on independent experts for LIFE Environ-
ment and LIFE Third Countries. Some of the evaluation
documents drawn up by these experts have not been
kept.

6.65. The Commission takes note of the Court’s observa-
tions, in particular concerning LIFE-II.

6.66. The Commission accepts that there is still room for
further improvements in terms of the objectives and scope of
the Regulation and will therefore continue its efforts to specify
the objectives of LIFE Environment in the framework of Com-
munity environmental policy and legislation.

6.68. The Commission has taken steps to ensure that all
evaluation documents are systematically kept.

6.69. The complementarity of environmental projects
financed by LIFE with those funded by other Commu-
nity sources (Structural Funds, research) is still poor,
and the interdepartmental consultation procedure does
not wholly eliminate the risk of double funding.

6.69. The Commission makes every effort to reduce the risk
of double funding mentioned by the Court, but, since it is
aware of this problem and in the light of the Court’s remark,
it will examine whether other steps might be considered in
order to obviate this risk even more.

The complementarity between LIFE and other Community
sources is proven in many cases. The scope for improving this
complementarity will be the subject of in-depth reflection.

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6.70. The Court identified many difficulties affecting
the implementation of the second phase of LIFE (LIFE II).
The main points revealed by an on-the-spot audit of a
sample of projects were:

6.70. The Commission considers that under LIFE III it has
made the improvements suggested by the Court following its
findings concerning LIFE II projects.

(a)

staff expenditure was borne which had not been
backed up by reliable records and which included
the salaries of civil servants usually already covered
by public budgets;

b)

a large number of Commission payments were
affected by considerable delays;

(c)

there were shortcomings in the financial arrange-
ments for the projects, and the beneficiaries failed
to keep sufficiently transparent and detailed
accounts to enable all the financial movements to
be traced;

(d) expenditure on the purchase of land for the LIFE
Nature measures was substantial and there were
insufficient guarantees that this land would con-
tinue to be used for nature conservation purposes
once the implementation period for the measures
was over.

6.71. With regard to the monitoring and control of
projects, the Commission increased the number of
on-the-spot visits and the findings showed several types
of error at beneficiary level. The tasks of the Technical
Assistance Offices (TAOs), which act as the external
project-monitoring teams, were not well defined and
the monitoring of the actions suffered as a result.

The following improvements have been made for LIFE III:

(a) as of LIFE III, the Commission has made it obligatory
for staff to keep a record of the amount of time they have
spent on LIFE projects (time sheets). The Commission
will examine the question of taking account of officials
salaries;

(b) since the restructuring of the management of the LIFE
programme, the number of delayed payments has gradu-
ally been reduced;

(c) an effort has been made in the context of LIFE III to
ensure better financial arrangements for projects;

(d) the Commission is prepared to review the terms and con-
ditions regarding land purchased by non-public benefi-
ciaries (9 %).

6.71. The Commission has defined and provided a frame-
work for the tasks and responsibilities of the technical and
administrative assistance offices (TAOs) for LIFE III.

6.72. The efforts made to tackle the shortcomings in
the management of the LIFE programme must be kept
up. To this end, the Court recommends that:

6.72. The Commission considers that the management of
the LIFE programme has substantially improved since its
restructuring.

(a)

the role of LIFE should be better clarified in the
context of the multiannual environmental action
programmes and its aims better defined and, if pos-
sible, quantified;

(b)

the Commission should examine whether it would
be expedient to separate the management of the
‘Nature’ and ‘Environment’ strands;

(a) The Commission intends to clarify the role of LIFE Envi-
ronment in relation to the sixth environmental action
programme (6th EAP).

(b) The Commission takes the view that since centralised
management has been introduced the programme is bet-
ter managed and sectoral results are starting to be
achieved.

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(c)

the evaluation of project proposals should be car-
ried out by outside experts, selected by a public
call-for-proposals procedure, for all the strands of
the programme;

(c) Whenever the Commission has considered necessary to
use external experts, it applied a tender procedure.

(d)

the administrative provisions concerning the imple-
mentation of the actions should be reviewed in
order to better define eligible costs, in particular as
regards the accounting structure of projects, staff
expenditure, depreciation and land purchases for
LIFE Nature projects;

(d) The Commission considers that the recently adapted
standard administrative provisions (SAP) fully comply
with the new Financial Regulation and are adequate.
The Commission is nevertheless ready to study the Court’s
recommendations in a future revision of the SAP.

(e)

the Commission’s on-the-spot checks should be
stepped up, if need be by employing outside audi-
tors;

(e) Apart from regular technical and financial monitoring
visits (by technical/financial desks and external teams)
as well as financial audits by DG Environment’s Finan-
cial Unit, an external audit of the final statement of
expenditure is obligatory for all projects funded under
LIFE III.

(f)

the results of the projects should be disseminated.

(f) The communication strategy is being implemented and

has already led to tangible results.

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Internal policies and research — Evaluation of key aspects observed in the internal policies

ANNEX 1

Observations

Action taken in 2002

Action to be implemented

1. Monitoring and control systems — Insufficient ex post audits of final beneficiaries

In 1998 the research directorates-general jointly for-
mulated an audit strategy for the RTD framework pro-
grammes. These audits are to a large extent carried out
by an external audit firm on behalf of the Commission.

The Court found that the target defined by the five
research directorates-general of auditing 10 % of the
contractors during the fifth research framework pro-
gramme would be difficult to achieve despite the sig-
nificant increase in the audits performed. It should also
be noted that the definition of ‘auditable population’
used by the Commission results in significantly less
than 10 % of indirect RTD actions or cost statements
being audited.

While regular on-the-spot checks are already performed
by the Commission officials in charge of monitoring
TEN-T actions, these controls are not complemented
by expost financial and technical audits (where appro-
priate, carried out by the Directorate-General for Energy
and Transport or external experts).

Insufficient corrective actions in the Directorate-General
for Energy and Transport for audits of indirect research
contracts.

Implementation of the new audit
strategy.

Achievement of 10 % target in 2003, and for FP5 indi-
rect RTD actions as a whole.

Adoption of audit strategy to sixth framework pro-
gramme for RTD.

Ensuring continuation of Commission’s audit activity
after expiry of current framework contract with exter-
nal audit firm in 2003.

Inclusion of TEN-T actions in the
Directorate-General for Energy
and Transport’s
audit pro-
gramme for the years 2002 to
2003.

Effective implementation of audit programme.

With the entry into force in early 2002 of a framework
contract covering technical assistance activities, includ-
ing particular provisions for audits on TEN-T projects,
more use of external resources is likely to be made.

2. TEN-T system: Verification of the eligibility of costs

As from 2002, the standard text
of the TEN-T Commission deci-
sion has been substantially
revised; it was inspired by the
Cohesion Fund decision and pro-
vides more details of eligible costs
and takes on board the Court ’s
observations.

The revised text will be applicable from the Commis-
sion’s 2002 financing decisions.

The Commission is committed to improving the clar-
ity of the definitions of eligible costs and the definition
of activities covered by a decision. A more precise defi-
nition of eligible and non-eligible costs should lead to
more precise cost declarations and better controls by
the Commission.

In the framework of the general review of the TEN-T
procedures, the Directorate-General for Energy and
Transport will examine the possibility of drawing up a
more detailed standardised cost statement form, based
on the existing payment claim form.

The definition of eligible and ineligible costs provided
for in the legal basis and the Commission decisions is
insufficiently specific to establish the actual costs
incurred by the beneficiary.

The definition of eligible costs for TEN-T actions dif-
fers from the definition applied to similar infrastructure
projects co-financed through structural measures, and
the use of different funding rates carries the risk that
beneficiaries may maximise funding by wrongly allo-
cating costs to studies.

Studies and direct grants to investments co-financed
through TEN-T often relate to larger-scale infrastruc-
ture measures similar to those funded by structural
measures. However, these programmes have a much
more detailed definition of the eligibility of costs. In
addition, cost categories not eligible for co-financing
under structural measures (such as entertainment costs,
interest charges or personnel costs for national civil
servants) are considered eligible under TEN-T.

In particular, the definition of eligible costs should also
include a clear delimitation of which costs are eligible
for studies and for works.

The absence of standardised cost statement forms fur-
ther complicates the review and evaluation of cost
claims.

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Summary of the implementation of the Internal Control Standards in directorates-general according to the AARs for 2002

ANNEX 2A

Directorate-General

Standard not
implemented

Implementation of
minimum standard
in progress

Minimum standard
implemented

More than minimum
standard
implemented

Reservation on the
implementation of
ICS Yes/No

Observation on the
implementation of
ICS

and

Transport
Energy

Research

Information Society

Justice and Home
Affairs

Total

1

1

2

2

11

12

27

10

10

5

7

32

12

12

7

5

36

No

No

No

Yes (2)

2

No

Yes (1)

No

No

1

(1) As at 31 December2002 the operational manual of the Directorate-General for Research was still incomplete, with the exception of financial circuits.
(2) At the Directorate-General for Justice and Home Affairs, the documents describing the financial procedures were not yet formally adopted in January 2003.

Summary of the Court’s assessment of the implementation of the selected Internal Control Standards in three directorates-general
at the end of 2002

ANNEX 2B

Standard

Directorate-General for Transport
and Energy

Directorate-General for Research

Directorate-General for Justice and
Home Affairs

Objective setting (ICS 7)

Implemented (minimum
standard)

Implemented (minimum
standard)

Implemented (more than
minimum standard)

Risk analysis and management (ICS 11)

Implemented (more than
minimum standard)

Implemented (more than
minimum standard)

Implemented (minimum
standard)

Documentation of procedures (ICS 15)

Implemented

Supervision (ICS 17)

Recording and correction of internal
control weaknesses (ICS 20)

Audit reports (ICS 21)

Implemented (3)

Implemented

In progress (1)

In progress (4)

Implemented

In progress (2)

In progress (5)

In progress

Implemented (minimum
standard)

Implemented (minimum
standard)

Implemented (minimum
standard)

Internal audit capability (ICS 22)

Implemented (more than
minimum standard)

Implemented (more than
minimum standard)

Implemented (more than
minimum standard)

(1) As at 31 December 2002 the operational manual of the Directorate-General for Research was still incomplete, with the exception of financial circuits.
(2) At the Directorate-General for Justice and Home Affairs, the documents describing the financial procedures were not yet formally adopted in January 2003.
(3) Even though the Directorate-General for Transport and Energy reported in the AAR that the minimum standard had been implemented, the Court found deficien-

cies in the operation of controls.

(4) At the Directorate-General for Research the supervision plans were approved only in January 2003, which meant that the results of checks were not available in

time for the AAR 2002.

(5) While the Directorate-General for Justice and Home Affairs failed to implement ICS 17, the Director-General made a reservation in his declaration concerning

supervisory arrangements.

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ANNEX 3

Monitoring systems and controls

Area: internal policies and research
System: TEN-T monitoring systems

Aspects of the introduction of the monitoring system

Commission

Overall assessment

Conception

Practical transposition in procedural stages
— compliance with standards
— taking into account of experience

Actual operation:
— compliance with standards
— taking into account of experience

Results:
— remedial effect
— preventive effect

Overall assessment

A: ‘Works well, few or minor improvements required’.
B: ‘Works, but improvements necessary’.

A

A

B

B

B

A

A

B

B

B

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CHAPTER 7

External actions

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Scope and nature of the audit

Supervisory systems and controls

Internal control standards

Audits as an element of supervisory systems and controls

Internal Audit Capability as an element of supervisory systems

Supervisory systems and controls at the level of the Delegations

The Commonwealth of Independent States and the western Balkans

Asia, Latin America and Mediterranean countries (MEDA)

Delegations

Project implementing organisations

European Agency for Reconstruction in Kosovo

Analysis of Annual Activity Reports and the declarations of the Authorising
Officers by delegation

Conclusions

Recommendations

Follow-up to previous observations

Tacis Cross-Border Cooperation Programme

Programme to Supply Agricultural Products to the Russian Federation

Principal observations in special reports

Paragraph

7.1

7.2-7.45

7.2-7.3

7.4-7.33

7.4-7.7

7.8-7.12

7.13

7.14-7.33

7.15-7.20

7.21-7.33

7.21-7.30

7.31-7.33

7.34

7.35-7.39

7.40-7.43

7.44-7.45

7.46-7.66

7.46-7.59

7.60-7.66

7.67-7.78

Special Report No 2/2003 on the implementation of the food security policy in
developing countries

7.67-7.71

Special Report No 10/2003 on the Commission’s management of development
assistance to India

7.72-7.78

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INTRODUCTION

7.1. This chapter deals with the external aid financed
from the general budget. The main areas of interest are
food aid/food security, humanitarian aid, NGO cofinanc-
ing and financial and technical cooperation with Asia,
Latin America, the Mediterranean countries, the west-
ern Balkans, the New Independent States and Mongolia.
The Directorates-General for External Relations and
Development are responsible for formulating policies
for development cooperation and for formulating
country/regional strategies and multiannual program-
ming, whereas the EuropeAid Cooperation Office (Euro-
peAid), is responsible for the implementation of devel-
opment cooperation. The Humanitarian Aid Office
(ECHO) is fully responsible for humanitarian aid. The
aid that is provided through the European Develop-
ment Funds (1) appears only as a token entry in the gen-
eral budget, as it is financed separately. Graphs 7.1 and
7.2 show how the funds were spent in 2002 for finan-
cial perspective heading 4 (see paragraphs 2.36 to 2.37
for observations on budgetary management).

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Scope and nature of the audit

7.2. The overall objective of the specific assessment
was to provide a conclusion as to the legality and regu-
larity of transactions in the External Actions field (Head-
ing 4 of the general budget financial perspective). The
audit comprised a review of the supervisory systems
and controls which are supposed to ensure the legality
and regularity of transactions, supported by tests of
transactions and a review of the Annual Activity Reports
of the Director General of the EuropeAid Cooperation
Office and the Director of the Humanitarian Aid Office.
This audit was carried out at the Commission head-
quarters, at six Delegations and at 22 implementing
organisations. The areas mentioned in the previous
paragraph were reviewed and tested. Reconstruction aid
for Kosovo and Serbia and Montenegro is
the
subject of a separate annual audit of the European

(1) See separate report on the EDFs.

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Graph 7.1 — Breakdown of commitments by budgetary area in 2002

NB: for more detailed information see Diagrams III and IV of Annex I.
Source: 2002 revenue and expenditure accounts.

Graph 7.2 — Breakdown of payments by budgetary area in 2002

NB: for more detailed information see Diagrams III and IV of Annex I.
Source: 2002 revenue and expenditure accounts.

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7.3. The major improvements in procedures and structures,
which began in 2001, continued in 2002 and 2003.

Agency for Reconstruction. The results of this audit
have been taken into consideration for the specific
assessment of heading 4. Furthermore, the assessment
includes the results of the audit of a limited number of
transactions under the International Fisheries Agree-
ments.

7.3. The creation of the EuropeAid Cooperation Office
at the beginning of 2001 involved a complex reorgani-
sation of the Commission’s services dealing with exter-
nal relations. This process involved the redistribution of
tasks and functions between Directorates-General, as
well as between the Commission’s headquarters and its
Delegations, combined with reorganisation of supervi-
sory systems and controls. This is a lengthy process and
2002 must be considered to be a transitional year: most
of the changes of procedures and structures relating to
supervisory systems and controls which were started in
2001 were in place by the end of 2002, but not all were
operational throughout the year (in particular, the use
of questionnaires and internal reporting on financial
management).

Supervisory systems and controls

Internal control standards

7.4. Both the EuropeAid Cooperation Office and the
Humanitarian Aid Office completed the framework for
the implementation of the internal control standards
(ICS) as defined by the Commission on 13 Decem-
ber 2000 (2). These comprise the definition of the func-
tions and tasks of the various departments and units,
the management of human resources, rules and instruc-
tions concerning the delegation of authorising powers,
planning and programming, risk analysis, information
structures, monitoring and control, as well as audit and
evaluation. The introduction of these standards has
been supported by issuing or updating instructions and
guidelines and extensive training programmes, in par-
ticular on the administrative and financial procedures
(such as the authorising of financial transactions and
tendering).

(2) SEC(2000) 2203.

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7.5. At the Humanitarian Aid Office most of the pro-
cedures were operational throughout most of 2002.
Although overall supervision and reporting at manage-
ment level took the form of weekly management meet-
ings of the Director and all heads of unit, certain aspects
of its system were not used in practice; in particular,
there was little evidence of written reports on devia-
tions from standard rules in cases where circumstances
would justify it, or of reporting of internal control
weaknesses. In its risk assessment as presented in its
Annual Activity Report, the Humanitarian Aid Office
concluded that the most important risks arose from the
characteristics of implementing partners’ administrative
and reporting systems. In that context, the existing
Framework Partnership Agreements are being reviewed
and a new system for auditing implementing partners
has been introduced (see paragraph 7.9). In general, the
Humanitarian Aid Office’s strengthening of the internal
control standards was based on its 2001 assessment of
general risks. In 2002 the Humanitarian Aid Office car-
ried out an Internal Control Risk Self-Assessment.

7.6. During 2002 the EuropeAid Cooperation Office
carried out an Internal Control Risk Self-Assessment
and started work on a more general Risk Assessment in
the context of action 2 of the action plan related to the
synthesis of the 2001 Annual Activity Report (see para-
graph 7.35). The administrative and financial proce-
dures are in place at the EuropeAid Cooperation Office,
but whether and to what extent they are followed by
staff responsible for authorising commitments and pay-
ments during 2002 was not sufficiently evidenced. This
related in particular to the use of questionnaires, report-
ing on recovery orders and reporting on insufficiencies
of internal controls. A reporting system was set up in
2002 for all directorates at the EuropeAid Cooperation
Office and for the devolved Delegations to provide
information on a regular basis to be used for the pur-
pose, among others, of establishing the Annual Activ-
ity Report of the Director General.

7.5.
Formal written reports do not exist, but management
is informed of the deviation from the rules through the com-
ments made on the control documents that accompany the
files. Accumulations of these comments are discussed in the
management meeting and have given rise to guidance notes
to remedy the problems noted.

The above remark does not detract from the conclusion noted
by the Court which comes from Humanitarian Aid Office’s
risk analysis that the administrative reporting system of the
implementing partners is a source of risk. This risk is being
addressed and managed by the review of the Framework Part-
nership Agreement and by an increase in the number of
implementing partners being audited.

7.6. Various elements show that staff responsible for com-
mitments and payments follows the procedures. The comput-
erised workflow system in CRIS indicates each stage of autho-
risation and provides an indication of problems which may
arise. Without being the only information/monitoring tool,
the reports of the sub-delegated authorising officers cover the
extent to which the procedures are followed; for instance, dero-
gations are notified and the reasons for the derogation are set
out, figures are given for the number of invoices paid within
the regulatory period, etc.

Moreover, these reports also cover the implementation of
Internal Control Standards, as well as issues related to the
effective exercise of the responsibilities foreseen under the
Charter Authorising officers by subdelegation.

Reports produced by EuropeAid Cooperation Office’s Internal
Audit Capability provide a review of controls and their imple-
mentation.

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7.7. The Court audited a random sample of 50 pay-
ments at the Commission’s headquarters spread over
the different areas. Apart from a limited number of for-
mal errors (in particular on the timeliness of payments)
no material errors were found. Of the selected pay-
ments, 30 were advance payments on recently con-
cluded contracts, and 20 payments were mainly reim-
bursements of expenditure for projects programmes
launched in previous years on the basis of financial
statements produced by the implementing organisa-
tions. On the basis of these documents, the Commis-
sion’s headquarters can only check that the reimburse-
ment claim is plausible within the terms of the contract
or financing agreement and the budget contained
therein. At this level, it is not possible to assess whether
the underlying transactions carried out by the imple-
menting organisations are legal and regular in sub-
stance, unless the claims are accompanied by a report
by an external auditor certifying the expenditure in
question or have been the subject of an ex ante field
audit by staff of the Commission.

7.7. Under the new standard contract applied from June
2003, the beneficiary is required to send an original version
of the accounts after they have been audited by the external
auditor nominated in the contract. Any request for intermedi-
ate and final payments under these contracts must be accom-
panied by duly audited accounts. Without these the payment
request is not valid. (Some beneficiaries still present a com-
plete set of supporting documents and in these cases they are
checked.)

In the field of grants, the Commission’s standard grant con-
tract provides for two sets of control measures, in order to
assure that transactions carried out by implementing organi-
sations are legal and regular.

The audit requirements have been made stricter in the revised
Practical Guide .The grant beneficiary must provide an audit
report together with the request for final payment when the
grant is of more than EUR 100 000, as well as with requests
for interim payments when the cumulated prefinancing exceeds
EUR 750 000. These audit reports must certify the expenses
incurred in conformity with the contract requirements (see
Article 15(6) of the General Conditions).

The Humanitarian Aid Office’s transactions are checked at
least three different stages:

— the Technical Assistants in the field monitor the opera-
tions and report if they have been carried out and if the
objectives have been reached,

— the desk officers at headquarters, both in the operational
unit and financial unit, scrutinise the narrative report
and the cost declaration. Where necessary samples of
supporting documents will be requested,

— finally audits are conducted on a systematic basis of sys-
tems of internal control and of the documentation sup-
porting the costs reimbursed by the implementing organi-
sations. These audits are cyclical.

The combination of these controls gives the authorising officer
the reasonable assurance concerning the legality and regular-
ity of the transactions.

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Audits as an element of supervisory systems and
controls

7.8. Both the EuropeAid Cooperation Office and the
Humanitarian Aid Office used audits of projects or pro-
grammes (often carried out by private audit firms) as a
supervisory instrument for many years, in particular for
deciding on the release of payments.

7.9.
In 2002 the Humanitarian Aid Office started the
implementation of a more comprehensive audit
approach, under which the implementing partners
(mostly NGOs) are systematically audited. In 2002 some
50 NGOs were audited or were in the process of being
audited, covering about 330 projects. Financial verifica-
tions of operations managed by members of the UN
‘family’ (e.g. Unicef, UNHCR, WFP) were not carried out
during 2002 pending the signing on 29 April 2003 of
a new Financial and Administrative Framework Agree-
ment between the European Community and the United
Nations.

7.10. The EuropeAid Cooperation Office increased the
number of audits carried out in 2002 in the general
budget field to some 240, but this was a modest num-
ber in comparison with the approximately 3 500 pro-
grammes and projects currently being implemented.
These audits were carried out by private sector audit
firms on behalf of the Community, and included both
those launched by Commission’s headquarters and Del-
egations under framework contracts, and those launched
by intermediaries to fulfil obligations in contracts with
the Community. A serious weakness was the absence of
an overall approach to the use of audits. In particular
no clear guidelines existed on when audits should be
carried out or how frequently, and whether release of
payments should be based on regular annual audits or
on ad hoc audits. There was no clear indication of the
way in which the different audits carried out by, or on
behalf of the Community, should complement each
other as part of an overall strategy. Given the modest
number of audits and the limited information available
at senior management level on the use of audit results,
it is difficult to see how the system of contracted audits
could provide sufficient evidence to the Commission as
to the legality and regularity of the underlying transac-
tions at the level of implementing organisations.

7.11. The operational Directorates are responsible for
the auditing of the programmes and projects they are in
charge of. In 2002 the external audit unit at the

7.9.
In the course of the negotiations that lead to the EC-UN
Financial and Administrative Framework Agreement (FAFA),
the Commission services considered and reviewed the opera-
tion of the verification clause. Since the agreement was signed
with the UN Headquarters, work is underway to coordinate
the adherence of the autonomous agencies of the UN ‘family’
to the FAFA. In anticipation of this the UN ‘family’ has been
included in the 2003 work programme and verification mis-
sions have already been undertaken.

7.10. The Commission agrees that external audits are one
important tool in assessing the legality and regularity of
financial transactions and is taking steps to strengthen and
clarify the strategy for their use in external assistance manage-
ment. In December 2002 the Office adopted the annual
external audit programme 2003, details of which are given
in the reply to point 7.12. This includes the development of
an audit strategy.

The introduction of a computerised system for registering
information on the audit work on external programmes (CRIS
Audit) should, in time, improve the monitoring of audits and
eventually the ability of Management to take action on the
results of the audits, particularly as regards audit activities in
delegations. The benefits of this application, which is now
being field tested, will only be visible in 2004.

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7.12. The annual external audit plan for 2003, aims at the
development and implementation of a methodology for ‘audit
of external operations’ and work was set in hand to develop a
coherent and comprehensive audit strategy.

It is composed of two parts: a first that focuses on the support
function of the ‘external audit’ unit of the Office and a second
that lays down a list of projects and programmes to be audited.

The horizontal actions by the ‘external audit’ unit include the
development of a methodology for external audits and the set-
ting up of a training programme for officials at headquarters
and in delegations. These actions include the development of
a comprehensive and coherent audit strategy.

The implementation of the 2003 audit programme should
address many of the concerns expressed by the Court.

EuropeAid Cooperation Office had primarily a coordi-
nating role in developing the audit methodology, estab-
lishing guidelines, providing support and advise, and to
improve the overall quality of audits and their follow-
up.

7.12.
In December 2002 the EuropeAid Cooperation
Office adopted a comprehensive ‘external audit pro-
gramme’ which essentially lays down what audits the
operating Directorates and Delegations plan to carry
out during 2003, and defines certain measures to be
taken to develop an audit strategy and methodology.

Internal Audit Capability as an element of supervisory
systems

7.13. The Internal Audit Capability (IAC) set up in 2001
became operational in early 2002 and has performed a
considerable amount of work in the short period of its
existence. The IAC is responsible for the internal audit
function at both the EuropeAid Cooperation Office and
the Humanitarian Aid Office. The service established its
mission statement, an audit manual and work pro-
grammes for 2002 and for 2003. In 2002 the IAC
mainly focused on the assessment of the EuropeAid
Cooperation Office’s internal control standards and on
an assessment of the Humanitarian Aid Office’s work-
load. The IAC’s findings were consistent with the Court’s
findings in establishing that the implementation of the
EuropeAid Cooperation Office’s internal control stan-
dards had not yet been completed in 2002 (see para-
graph 7.6). However, its work programmes did not yet
include evaluation and testing of the systems put in
place to ensure the legality and regularity of transac-
tions at central level and at the level of the Delegations.

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Supervisory systems and controls at the level of the
Delegations

7.14. The Court visited six Delegations and seven coun-
tries (Nicaragua/Honduras, Egypt, Tunisia, Bangladesh,
the Russian Federation, and Bosnia and Herzegovina) to
assess the supervisory systems and controls and to audit
a number of transactions for which the EuropeAid
Cooperation Office was the Authorising Officer by del-
egation.

The Commonwealth of Independent States and the western Balkans

7.15. The management of projects/programmes was
devolved to the Delegation in the Federation of Russia
in February 2002. It is the largest Delegation respon-
sible for the management of the Tacis programme. The
Delegation in Bosnia and Herzegovina, where devolu-
tion was already introduced in 1999 before the Com-
mission adopted a global policy of devolution, is the
largest Delegation responsible for the management of
the Community Assistance for Reconstruction, Devel-
opment and Stabilisation (CARDS) programme.

7.16.
In both Delegations the supervisory systems and
controls pertaining to the legality of contracting and
payments processed at the level of the Delegations were
found to be generally satisfactory.

7.17. The Court examined as part of the assessment of
the supervisory systems and controls a sample of 30 pay-
ments and 10 tendering procedures for each of the Del-
egations. No significant errors were found. The main
difficulty identified was long delays in tendering con-
tracts and sometimes in making payments.

7.18.
In Russia, where projects are implemented mainly
through service contracts, the main risk identified con-
cerned the system introduced by the EuropeAid Coop-
eration Office in September 2002 of having payment
claims checked exclusively by external auditors, instead
of by the Delegation itself. The auditors are not con-
tracted by the Delegation but by the implementing firms
employed under service contracts. While the Commis-
sion through its Delegation has the right to reject the
choice of contractor, in practice it does not have clear
criteria for taking this decision, nor does it have suffi-
cient information to take the decision. Moreover, no
standard terms of reference have been developed by the
Commission for these audits.

7.17. The Commission accepts that, while there have been
significant improvements in a number of areas, there are still
delays in tendering and payments procedures. While these are
sometimes for reasons beyond the Commission’s control, fur-
ther efforts to improve and streamline procedures should help
address these problems. In addition as the Court has recogn-
ised, it will still be some time before the new administrative
systems — particularly deconcentration — settle down and
deliver the full benefits.

7.18. Audit certificates that have to be introduced together
with payment claims give supplementary assurance. They do
not intend, however, to entirely replace controls to be carried
out by the Commission. It is envisaged that the Commission
will in the future (either directly or through contracted audi-
tors) verify the correctness using a risk-based sample of the
claims certified by auditors.

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7.19.
In Bosnia, an effective system has been built up
over several years to monitor the integrated refugee
return programme, the largest and most complex area
of CARDS support to Bosnia. This monitoring is car-
ried out by external consultants and covers both the
operational aspects of the programmes and the verifica-
tion of the legality and regularity of payment claims
through site visits.

7.20.
In Bosnia, the use of external auditors for clo-
sure audits is at the discretion of the Delegation. In
2002, 35 contracted audits were carried out. One of the
four audit reports reviewed by the Court identified sub-
stantial errors (about 1 million euro). These errors are
being followed up by the Delegation.

7.20.
In the case referred to by the Court a supplementary
audit was required in light of the substantial amounts involved
and therefore the need to operate a full audit (the first audit
took place during the project life). The final payment has been
suspended pending final audit findings.

Asia, Latin America and Mediterranean countries (MEDA)

Delegations

of

the

four Delegations

7.21. Three
audited
(Nicaragua/Honduras, Egypt and Tunisia) were devolved
in 2002 and the prescribed supervisory systems and
controls in place throughout the year. In Bangladesh the
Delegation was devolved in 2003.

In each country visited by the Court, between
7.22.
four and six transactions were audited, 24 in total, of
which 22 related to projects and two to Delegations
imprest accounts. At the level of the Delegations no sig-
nificant irregularities in payments were found. On the
basis of a selection of payments made to the projects by
the Commission, a more detailed sample of about
270 payments at project level was audited. In addition
to the audit at the level of the Commission’s headquar-
ters and of the Delegations, the supervisory systems
and controls of the implementing organisations were
assessed (see paragraphs 7.31 to 7.33).

7.23. The review of the supervisory systems and con-
trols at Delegation level indicated that the procedures
carried out by the devolved Delegations resembled those
which had previously been carried out in Brussels. Inter-
nal questionnaires ensure that individual staff members
are aware and take responsibility for the checks they are
expected to carry out, but in Nicaragua/Honduras this
procedure was not operational throughout the year.

7.23.
In Nicaragua/Honduras checklists were not used in
the initial devolution period (transitional period) but their
subsequent widespread use was attested by the last on-the spot
visit by headquarters staff.

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7.24.
In the countries visited by the Court eight exter-
nal audits of EuropeAid’s implementing organisations
were reviewed. Furthermore, a sample of 19 audits was
selected from all audits completed in 2002 in Asia, Latin
American and MEDA countries (see Annex 1, table (b),
for a summary of the Court’s assessment of these exter-
nal audits). The audit reports were generally of a good
quality. However, standardised terms of reference were
not always used, in some cases because they were drawn
up by the implementing organisations rather than by
the Commission. Only in two audits out of eight
reviewed during audit missions were transparent pro-
cedures followed for the selection of the auditors. In five
cases there were no proper terms of reference. The
audits did not usually include a review of the contract-
ing procedures as this is not part of the standardised
terms of reference, even though this is an area with a
high risk of error.

7.24. The Commission’s replies to points 7.24 to 7.31 also
cover Annex 1, table (b).

With the revision in 2003 of the Practical Guide to EC Exter-
nal Aid contract procedures and of the standard service con-
tract, including their annexes, two major improvements have
been made in relation to certification audits:

— auditors have to be members of an internationally rec-
ognised supervisory body for statutory auditing, and

— the extent of the audit to be carried out is defined by (a)
the reference to International Audit Standards and (b)
the prescribed form of the certificate itself.

These elements are designed to provide guarantees as to the
quality and comparability of audit services rendered and the
level of reliance Commission services may have in the regular-
ity of payment claims and their underlying documentation.

In connection with the further definition of an overall control
and audit strategy, the approach relating to certification audits
will be developed further as well. Instructions on quality review
of certification audits and on their use within a risk-based
selection of audits supervised by Commission staff will be
established in order to create a comprehensive control model.
The model would efficiently and effectively combine easy and
workable controls built into the projects with risk-oriented
controls carried out by Commission staff.

The training programme for present and future audit task
managers will improve the application of the Terms of Refer-
ence. Moreover, the EuropeAid Cooperation Office works on
improving the standard Terms of Reference. However, an audit
should always be designed in function of its objectives taking
into account the particularities of the programme or project to
be audited. In this context audit task managers will have to
adapt standard Terms of Reference in a way that they consider
most suitable for the specific needs.

7.25. There was no overall policy for external audits
at any of the Delegations visited. The use of and proce-
dures for the appointment of external auditors are pro-
vided for in the project financial agreements. Such pro-
visions
leaving the
implementing organisations with a wide scope for tak-
ing a variety of approaches to the selection and remu-
neration of external auditors.

are often worded vaguely,

7.25. As announced in the External Audit Programme
2003, the Commission is working on the development, adop-
tion and implementation of a methodology for ‘audit of exter-
nal operations’. Once adopted, it will provide for a compre-
hensive and coherent
organisational and
source
methodological guidance for all actors involved in ‘audit of
external operations’ at the Office’s headquarters and the del-
egations.

of

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7.26.
In the case of one project managed by interna-
tional organisations, no external auditors were required
by the contract. In another project, also involving an
international organisation, the Delegation did not ensure
that the findings of the audit reports were acted upon.
The international organisations concerned relied on
government organisations for the implementation of
the projects, without carrying out any detailed reviews
themselves, although they operate in an environment
known to have a high risk of corruption.

7.27. Most audits did not find ineligible costs. How-
ever, the auditors definition of ineligibility was not
always clear, which may demonstrate a weakness in the
terms of reference. One audit report showed expenses
considered to be ineligible, but no explanation was
given nor was this specifically commented upon in the
audit report. In another audit, items were classified as
ineligible because they did not follow certain require-
ments of the national public administration, although
this would not necessarily make them ineligible for the
purposes of the project cofinanced by the Community.

7.28. Most audits did not comment specifically on the
underlying accounting systems. Only in a limited num-
ber of cases, for example one in Bangladesh, did the
auditor state that the accounting system was sufficient
to process and generate the required information.

7.29.
Funds provided to projects by the national gov-
ernment were also often excluded from the scope of the
audit or led to a qualification in the audit report because
it was not possible to determine the value of contribu-
tions in kind.

7.26. The implementation of a project co-financed by an
international organisation is undertaken as per the general
agreement between the European Commission and interna-
tional organisations. The Commission stresses that, contrary
to other types of contracts, no external audits are required in
the case of international organisations to which the provisions
of the verification clause included in the EC-UN and EC-World
Bank Framework agreements apply.

7.27. The Commission accepts the Court’s observation con-
cerning the uneven quality of the audits examined. With a
view to ensuring the quality of the final audit reports, the
Commission intends to issue by the end of the year improved
standardised Terms of Reference for so-called ‘certification
audits’, though it can never be excluded that some audit firms
may not prove fully adequate to the task. The Commission
has started a training programme in the area of external audit
that will improve the knowledge of the officials in Delegation
in dealing with audits.

7.28. The audits examined by the Court were certification
audits, not system audits. The opinion covers the presenta-
tion of financial statements. However, most auditors would
comment on the systems if serious weaknesses were identified.
Being certification audits these comments would normally be
given to the auditee, and not necessary to the Commission.

7.30. There is a lack of evidence of follow-up by the
Commission of findings in audit reports. When there
was evidence of follow-up, this was not always satisfac-
tory.

7.30. The Commission is taking measures to ensure adequate
follow-up to the audit recommendations. With the devolution
process to the Delegations, this is considered as an important
component of the monitoring of project implementation.

Project implementing organisations

7.31. On the basis of the projects audited at the level
of EuropeAid’s project implementing organisations, the
Court observed weaknesses in their internal controls,
including a lack of segregation of duties and a failure to
detect irregular transactions.

7.31. Measures have been taken to address the concerns of
the Court in particular through the adoption in 2003 of
standard contracts and the strengthening and clarification of
the system of contracted audits (see point 7.7). Moreover a
new audit programme has been established to provide more
information on the working methods of intermediaries.

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7.32. The Commission is aware of the need to ensure imple-
menting organisations understand and follow contract provi-
sions accurately. The transfer of management responsibilities
to delegations should allow better monitoring of implementa-
tion on the ground.

7.32. A significant number of errors was found in the
transactions examined at the level of the projects. The
most frequent type of error (eight out of 22) consisted
of the non-respect of contractual requirements, such as
the need to follow a specific tender procedure or the
application of a specific method for translating local
expenditure into euro. Further disclosure in the imple-
menting organisations reporting, for example detailing
the exchange rate calculations, would assist the Com-
mission in detecting these problems, which are mainly
due to a lack of understanding of the contractual require-
ments on the part of the implementing organisations.

7.33. Other types of irregularity were less common
but nevertheless significant. In five projects out of the
22 audited, some of the transactions checked were not
backed by adequate supporting documentation. In a
further five projects, examples of ineligible expenditure
were noted. In one case transfers between project bank
accounts were included in the financial report as expen-
diture for the purpose of accelerating the flow of funds
and in another case the implementing organisation paid
for services which were never rendered.

European Agency for Reconstruction in Kosovo

7.34. The Court has carried out its annual audit of the
European Agency for Reconstruction in Kosovo, the
results of which are laid down in a separate Specific
Annual Report (3). The main findings are that in 2002
the Agency strengthened its system of internal control
with the introduction of accounting system used by the
Commission, and that the audit of transactions revealed
a limited number of formal errors only.

Analysis of Annual Activity Reports and the declara-
tions of the Authorising Officers by delegation

7.35. The Court reviewed the Annual Activity Reports
and the declarations by the Director-General of the
EuropeAid Cooperation Office and the Director of the
Humanitarian Aid Office. This review concentrated on
the parts of the reports which dealt with the Commis-
sion’s follow-up to recommendations given by the Court
of Auditors, the Commission’s internal auditors, and
the Financial Controller, and of the actions formulated

(3) Specific Annual Report in the process of being published.

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in the Commission’s action plan (attached to its annual
report on 2001 (4)) as well as on the internal control
standards. The Court examined whether and to what
extent the declarations regarding the control procedures
set up to ensure the legality and regularity of underly-
ing transactions made by the Director-General and the
Director were justified and based on sufficient evidence.

It was found that the information presented in
7.36.
the reports was accurate and that it was a fair reflection
of the activities carried out on the follow-up and on the
internal control standards.

7.37. Action 2 of the Commission’s action plan stipu-
lated that the external relations services should examine
the possibilities for organisational synergy between them
and carry out an analysis of risks related to their activi-
ties, in particular concerning direct budget aid. As men-
tioned in the Commission synthesis of the Annual Activ-
ity Report of 2002, the competent Commissioners have
decided to keep the current organisation as it is in order
to give more time to the reform of external aid. The
assessment of risks associated to external aid and in par-
ticular budget support, has been the object of an analy-
sis carried out by EuropeAid Cooperation Office in
2002. This will be completed jointly with the other
members of the External Relations family during 2003
to ensure a coherent approach.

7.38. On the internal control standards, it is stated cor-
rectly by both the Humanitarian Aid Office and the
EuropeAid Cooperation Office that in 2002 many sys-
tems have been set up or improved, including the cre-
ation of an important number of manuals and guide-
lines. The reports also indicate which systems are to be
completed in 2003.

For both the Humanitarian Aid Office and the
7.39.
EuropeAid Cooperation Office the respective Director
and Director-General declared that they had obtained
reasonable assurance as to the quality of the supervi-
sory systems and controls set up to ensure the legality
and regularity of the underlying transactions without
expressing any reservations. However, in the case of the
EuropeAid Cooperation Office, it seems questionable
whether the information available to the Director-
General was sufficient in this context because:

(4) Synthesis of annual activity reports and declarations of
Directors-General and Heads of services; communication
to the European Parliament and Council (COM(2002) 426
final, 24.7.2002.

7.39. Based on the various instruments and tools available
or to be developed for the purpose, the formulation of reserva-
tions in the declaration of the Director-General relies on his
best judgement. The definition of a Commission-wide concept
for ‘materiality’, applicable to the deficiencies detected, is also
part of the framework within which the Director-General for-
mulates his judgement on potential reservations.

The flow of information between headquarters and the del-
egations takes many forms and is not confined to informa-
tion systems and reports by delegations to Brussels. This also
applies to supervision of their work. All this ensures the
authorising officer by delegation has sufficient information to
form an opinion.

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(a)

(b)

the system of contracted audits was not yet capable
in 2002 of providing sufficient assurance on the
legality and regularity in substance of underlying
transactions at the level of implementing organisa-
tions (see paragraph 7.10); and

the reports provided by the Directorates and Del-
egations contained very limited information on the
legality and regularity of underlying transactions at
the level of implementing organisations.

Conclusions

7.40. Administrative procedures and organisational
structures have been adjusted appropriately by both the
EuropeAid Cooperation Office and the Humanitarian
Aid Office to cater for the introduction of the new
Financial Regulation which entered into force on 1 Janu-
ary 2003. New ex ante and ex post checks on budget-
ary transactions were introduced at various levels within
the Commission in 2002, before the function of a cen-
tralised financial controller was abandoned at the end
of the year. However, a balanced combination of checks,
reviews, inspections, audits by external firms and inter-
nal audits had not yet been established by EuropeAid
Cooperation Office in 2002 as part of a coherent over-
all strategy to ensure control over the legality and regu-
larity of operations financed by the Community at the
level of implementing organisations (see paragraph 7.10).

7.41. Not all supervisory systems and controls func-
tioned fully satisfactorily during 2002 at the central
level of the Commission or at the level of the Delega-
tions (see Annex 1, table (a), for a summary of the
Court’s assessment).

7.42. The Court’s audit revealed few errors affecting
the transactions at the level of the Commission’s head-
quarters and at the level of its Delegations (see para-
graphs 7.7, 7.17and 7.22). However, the Court’s audit
revealed weaknesses in the internal controls, and a rela-
tively high number of irregularities, at the level of Euro-
peAid’s project implementing organisations (see para-
graphs 7.31 to 7.33).

At the time of signing the declaration, the Director-General
considered that the information in his possession was suffi-
cient to enable him to have reasonable assurance as to the
legality and regularity of transactions effected by EuropeAid
in 2002, including the actual implementation of projects and
programmes.

7.40. The Commission accepts the need for a clearer strat-
egy on audits and has taken steps in this direction. In par-
ticular the strategy on audits carried out under the direct
supervision of headquarters or delegations requires further
development taking into account audits to be carried out at
the initiative of the project or the programme and usually in
view of a payment to be made. The standard (grant and ser-
vice) contracts used for these audits contain provisions govern-
ing their obligation, regularity and content. The model financ-
ing agreement with beneficiary countries contains similar
provisions. The new approach on audit complements the new
ex ante and ex post checks on budgetary transactions (see also
reply to point 7.25).

7.41. The major improvements in procedures and struc-
tures, which began in 2001, continued in 2002, and 2003.

7.42. Measures have been taken to address the concerns of
the Court in particular through the adoption of standard con-
tracts and the strengthening and clarification of the system of
contracted audits (see point 7.7). Moreover a new audit pro-
gramme has been established to provide more information on
the working methods of intermediaries.

The most frequent types of errors the Court refers to concern
the non-respect of contractual requirements, such as the need
to follow a specific tender procedure or the application of a
specific method of translating local expenditure into euro.

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7.43. Expenditure on external actions is geographic-
ally highly dispersed and mainly executed by a wide
range of projects implementing organisations. The Com-
mission’s supervisory systems and controls were not yet
sufficiently developed to provide it with assurance as to
the legality and regularity of the underlying transactions
at the level of EuropeAid’s projects implementing organi-
sations (see paragraph 7.40).

Recommendations

7.44. The Commission should develop a common
approach for the use of independent external auditors.
This should be designed to provide Commission man-
agement with an assurance that expenditure at the level
of implementing organisations is legal and regular. The
Commission or its Delegations, and not the implement-
ing organisations, should have the final say in selecting
the external auditors and should provide them with
detailed terms of reference and reporting requirements
for the assignments. The auditors should be required to
assess the internal controls of the implementing organi-
sations and if appropriate make recommendations for
improvements. Audit reports should be available in time
for such improvements to be made without delay, and
for Delegations to take appropriate actions regarding
any findings.

7.43. All the necessary supervisory and control systems were
in place in 2002 to give reasonable assurance as to the legal-
ity and regularity of transactions effected by EuropeAid in
2002.

7.44. The Commission is using independent auditors at
two distinct levels.

‘Certification audits’ provide assurance that expenditure, at the
level of implementing organisations, is legal and regular.
Some improvements have been made to increase their value
(see point 7.18) Further improvements to the system are being
made in particular to improve the quality control in relation
to such audits.

The use of external auditors for audits under the supervision
of the EuropeAid Cooperation Office or of the delegations
already fulfils the requirements defined by the Court. These
audits, where applicable, should also provide evidence as to
the reliability of audit certificates and the effectiveness of the
audits relating thereto.

Both instruments should be considered as complementary.

Without prejudice to the need and the value of systems audits
in view of issuing an audit certificate, the timing for an audit
on the functioning of internal control systems is different to
the timing of a certification audit. Usually such an audit
should be launched in an early phase of the project’s lifecycle
in order to formulate recommendations to be implemented in
time.

The EuropeAid Cooperation Office will, however, consider the
Court’s recommendation on the occasion of the development
of its methodological framework.

It should be noted that the EuropeAid Cooperation Office’s
new framework contracts for the mobilisation of external
auditors by headquarters or delegations actually provide a dis-
tinct part for systems.

The Commission welcomes the Court’s suggestion and will
examine ways to develop this common approach based on
shared principles that still allow each service the flexibility to
meet its operational needs. It will also review the possibilities
and practicalities or having the external auditors assess the
internal controls of implementing organisations that do not
fall into the scope of framework partnerships as determined by
Article 163 of the implementing rules.

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7.45. The Commission will take the necessary steps to
implement this recommendation.

7.45. The reports of Directorates and Delegations
should include a specific section highlighting key ele-
ments which could contribute to the judgement of the
Director General as to whether the control procedures
have ensured the legality and regularity of underlying
transactions, particularly at the level of implementing
organisations (including, for instance, information about
the coverage achieved by external audits carried out on
behalf of the Community, the findings in audit reports
and the follow-up to such findings).

FOLLOW-UP TO PREVIOUS OBSERVATIONS

Tacis Cross-Border Cooperation Programme

7.46.
In 2001 the Court adopted Special Report
No 11/2001 (5) concerning the implementation and
impact of the Tacis Cross-Border Cooperation pro-
gramme over the period 1996 to 2000. The programme
funds projects in Russia, Ukraine, Belarus and Moldova
which have a cross-border impact with neighbouring
Member States (6) and candidate countries (7). The main
recommendations were that:

(a) coordination mechanisms between the Tacis CBC
programme, the Interreg programme and the Phare
programme should be significantly strengthened
(see paragraphs 7.50 to 7.51);

(b) consideration should be given to increasing the
budget of the Tacis CBC programme and funding
made available for bordering regions in Phare coun-
tries to finance linked cross-border projects (see
paragraphs 7.52-7.53);

(c) greater emphasis should be placed on infrastruc-
ture and investment support (see paragraph 7.54);

(d)

the programme should give more priority to
projects which increase the living standards in the
eligible regions (see paragraph 7.56);

(e) a higher proportion of funds should be allocated to
the Small Project Facility and its management should
be decentralised (see paragraph 7.57).

(5) OJ C 329, 23.11.2001.
(6) Finland.
(7) Estonia, Latvia, Lithuania, Poland, Slovakia, Hungary and

Romania.

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7.47.
In its conclusions on the report, the Council
re-emphasised the importance of regional and cross-
border cooperation, particularly in view of the enlarge-
ment of the European Union, and called for all parties
concerned to improve the effectiveness of the pro-
gramme, particularly through strengthening coordina-
tion between Tacis CBC, Interreg and Phare.

7.48. The Court’s follow-up review was carried out
through interviews and file reviews in the Directorates-
General for External Relations and Regional Policy and
the EuropeAid Cooperation Office and visits to Russia
(Moscow, the St Petersburg region and Kaliningrad) and
Finland. The main conclusions on how far the Commis-
sion has implemented these recommendations are
described in the following paragraphs.

7.49. The Commission has taken significant steps to
increase coordination between Tacis CBC and Interreg:

(a) a guide ‘Bringing Interreg and Tacis Funding
Together’ was jointly issued by the Directorate Gen-
erals for Regional Policy and External Relations in
April 2001 and a seminar on the subject was held
for beneficiary countries (Belarus, Moldova, Russia,
Ukraine);

(b)

(c)

(d)

the link with Interreg projects is now one of the
selection criteria used by the Commission when
evaluating Tacis project proposals, and DG REGIO
participates in the evaluation process; the number
of Tacis projects funded from the Small Project
Facility (SPF) with Interreg links rose from two out
of 18 (11 %) for the 1999 call for proposals to 26
out of 43 (60 %) for the combined 2000/2001 call
for proposals (see also paragraph 7.57);

representatives of Russian regions systematically
attend Interreg steering and monitoring commit-
tees and are able to vote on which Interreg projects
should be selected;

the representation of the Commission at Interreg
Steering Committees is coordinated between the
Directorate General for Regional Policy and the
EuropeAid Cooperation Office.

7.50. Nevertheless, the creation of joint projects is
prevented by the different legal bases which restrict the
utilisation of Interreg funds to areas eligible for Interreg,

7.49. The Commission agrees with the Court’s conclusions
that over the past years there have been significant improve-
ments in the coordination between Tacis and Interreg. It also
considers that in 2003 coordination between Tacis and Phare
has been improved. The measures suggested in the communi-
cation ‘Paving the way for the new neighbourhood Instru-
ment’ (hereafter the NNI communication) adopted on 1 July
2003 will bring this coordination much further by introduc-
ing of neighbourhood programmes on the external borders of
the EU. All the remaining concerns raised by the Court
regarding joint programming documents and joint structures
will be addressed through these programmes.

7.50. The concerns on the lack of coordination which the
Court raised in its Special Report on the Tacis CBC pro-
contributed to
gramme

in 2001 have

significantly

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and Tacis CBC funds to areas eligible for Tacis CBC. In
addition, while the Interreg budget for the Finnish bor-
der regions is approximately 25 million euro a year the
Tacis CBC budget for equivalent size projects in Russia
is only in the order of 5 million euro.

7.51. Little progress has been made in improving coor-
dination between Tacis CBC and the Phare programme.
In particular, the Phare CBC programme has not been
extended to the regions of candidate countries border-
ing on Tacis CBC beneficiary States. As a result, no
common structures exist between Phare and Tacis coun-
tries for coordinating Phare and Tacis CBC expenditure
(see also follow-up report on the Phare CBC pro-
gramme (8)). This lack of established coordinating struc-
tures is likely to have a negative effect on the forthcom-
ing Interreg programmes in the regions of the new
Member States that border on the Tacis CBC beneficiary
countries.

the Commission’s work on these issues since then, which has
lead to the adoption of the NNI communication.

7.51. One of the priorities for the Tacis CBC Small Project
Facility (SPF) has been to support projects, which have a clear
link to an Intereg, or a Phare project. The NNI communica-
tion suggests that this coordination should be taken forward
and strengthened in the form of 12 Neighbourhood Pro-
grammes, which will from 2004 onwards cover the whole
border between the EU/candidate countries and the new inde-
pendant States (NIS) countries. The legal basis for these pro-
grammes will be Interreg, and in the case of the remaining
candidate countries, it will be the Phare CBC regulation which
will be revised later this year to cover the external borders of
candidate countries.

Setting up coordinating structures on the current Phare-Tacis
borders at an earlier stage would certainly have made the
introduction of Interreg and the Neighbourhood Programmes
on the new external border easier. However, the preparation
of the new programmes is progressing well, and accession
countries are drawing on their experience of participating in
Interreg programmes on their other borders to help develop
their external programmes.

7.52. Up until 2003 the Tacis CBC budget remained
below its original 1996 budget of 30 million euro. How-
ever, in 2003 the budget was increased to 35 million
euro. This and any further increases in the budget need
to be accompanied by corresponding efforts to improve
the limited absorption capacity which exists in most eli-
gible border regions. The Commission has so far taken
only modest steps to do this, mainly through a regional
capacity building project. Whereas in Russia Tacis-
funded local support offices in the regions also make at
least a small contribution to addressing this problem,
no such offices exist in Ukraine where project prepara-
tion is particularly weak.

7.52.
In the indicative program 2000 to 2003, EUR 31
million was provided for TACIS CBC activities on the 2003
budget. For the action plan 2003, this amount was increased
to EUR 43 million, of which EUR 35 million for typical
CBC-activities and EUR 8 million for the Baltic Sea Coopera-
tion. neighbourhood programme In 2004 to 2006, the Tacis
allocation to the Neighbourhood Programme will amount to
EUR 75 million (EUR 20 million in 2004, EUR 25 mil-
lion in 2005 and EUR 30 million in 2006).

A capacity-building project with a budget of EUR 1,8 mil-
lion is planned from the Action Programme 2003. This
project is expected to enhance the regional absorption capac-
ity in Russia for the Tacis CBC SPF.

It will be coordinated with the various other on-going activi-
ties in this field, notably actions funded by the Nordic Council
of Ministers.

(8) Chapter 8, paragraphs 8.54 to 8.60.

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7.53. No matching funding has been provided by the
Phare CBC funding. However, this has been partially
tackled by candidate countries, notably Poland, allocat-
ing funds from their Phare national programmes to
projects in their eastern regions which have an impact
across their borders with Tacis countries.

7.53.
In order to tackle that issue, the Commission intro-
duced the External Borders Initiative 2003, funded with
approximatively EUR 30 million. This initiative will follow
two different approaches: in the accession countries, the focus
is put on future Interreg programmes to be implemented upon
accession whilst in the candidate countries, the aim is to pre-
pare 2004 to 2006 Phare CBC programmes at external bor-
ders.

7.54. Because of the limited funding, Tacis CBC infra-
structure and investment support has continued to be
largely restricted to border crossing projects. The two
border crossings on the Russian-Finnish border (Salla
and Svetogorsk) funded from the 1996 programme
were finally opened in mid-2002 after significant cost
overruns and delays in the supply of equipment. The
capacity of the Svetogorsk border crossing was approxi-
mately twice as large as the number of trucks using it.

7.54. When designing a new border post, the capacity is
based on the estimated future use of the border post. Assump-
tions are made on the projected traffic in the next 15 years. It
is therefore too early to make a final judgement on that aspect.
The Commission acknowledges that there were significant
delays with these projects, largely because of problems with
working with the Russian partners and tendering difficulties.
The Commission considers that the Svetogorsk border cross-
ing has considerable scope for expansion regarding traffic
numbers and views the increase in capacity at the crossing as
a positive element.

7.55. While most other border crossing projects have
been implemented more smoothly, two border cross-
ing projects in the Russian region of Kaliningrad have
been subject to major delays. At a further key border
crossing, Brest-Terespol on the Belarus-Polish border,
which did not receive funding until the 2000 budget,
works had yet to begin at the end of 2002, while wait-
ing times for trucks during the period September to
December 2002 averaged between 10 and 30 hours.

7.56. More attention has been given to economic
development projects designed to improve living stan-
dards but the limited scale of Tacis CBC funding again
means that only one or two large projects can be funded
in this area each year.

7.57. The Commission has increased the proportion
of Tacis CBC funding allocated to the SPF from approxi-
mately 15 % in the early years of the programme to
almost 25 % in 2002. On the other hand, the Commis-
sion’s management of the SPF, in contrast to most Tacis
projects, has become more centralised in Brussels, and
technical assistance offices in St Petersburg and Lvov
(Ukraine) to assist in SPF project preparation and imple-
mentation closed down.

7.55. The delays occurring in the implementation of those
projects are entirely due to the beneficiaries (State customs)
who did not fulfil their obligations with regard to land avail-
ability and preparation of the project design. Those difficul-
ties have now been resolved and works tenders dossiers are
almost completed.

7.57.
From 2004 onwards the SPF will cease to exist and
the funding from its successor Neighbourhood Project Facility
NPF will be allocated directly to the Neighbourhood Pro-
grammes.

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7.58.
In view of the forthcoming enlargement, which
will make the Tacis CBC beneficiary countries the main
part of the European Union’s external land border, there
is a need to give higher priority to the Tacis CBC and its
coordination with the Interreg programmes of the new
Member States. The current programming and imple-
mentation procedures should be reviewed and consid-
eration given to establishing a specific Tacis CBC Regu-
lation based on the Phare CBC Regulation, which made
an effective contribution to promoting cooperation with
Interreg. The Court therefore recommends that:

7.58. The concerns expressed by the Court of Auditors have
to a large extent been addressed by actions envisaged in the
NNI communication.

The communication concludes that due to legal and budget-
ary constraints it would not be advisable to set up any new
regulation at the short-term perspective. As far as the period
after 2006 is concerned, the communication sets out three
different legal options to be examined in the continuation.
These options range from strengthening the coordination on
present legal basis to creating a single new instrument capable
of operating on both sides of the border.

(a)

(b)

the Tacis CBC budget should be divided up and
allocated to each of the Tacis border regions which
is associated with an Interreg programme in Fin-
land and the new Member States (9);

(a) Following the NNI communication the Tacis Neighbour-
hood Project Facility will be divided up and allocated to
the Neighbourhood Programmes.

for each of these Tacis border regions, joint coop-
eration committees should be established, made up
of national and regional representatives from both
the Tacis country and the neighbouring Member
State;

(b) The bordering NIS regions will be participating fully in
the joint management structures of the Neighbourhood
Programmes.

(c) as well as selecting and monitoring projects these
committees should establish joint cross-border pro-
gramming documents, including common devel-
opment strategies and priorities for the regions on
either side of the border.

(c) This will be done, as foreseen in the NNI communica-

tion.

In addition, a higher priority should be given to
7.59.
regional capacity building in the regions eligible for
Tacis CBC.

7.59. This will be done (see reply to point 7.53).

Programme to Supply Agricultural Products to the Rus-
sian Federation

7.60. The objective of the Court’s follow-up review was
to establish how far issues raised in its Special Report
No 18/2000 (10) had now been tackled by the Commis-
sion, as the food supply programme had not been for-
mally closed at the time the Court’s audit was com-
pleted. The programme represented the largest single

(9)

In the case of Moldova and southern Ukraine, allocations
should be for cross-border cooperation with Romania,
which will continue to be eligible for the Phare CBC pro-
gramme.

(10) OJ C 25, 25.1.2001.

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food aid operation ever undertaken by the Commis-
sion. In response to a request from the Russian Govern-
ment in November 1998, the Council adopted Regula-
tion (EC) No 2802/98 (11) for the supply of agricultural
products to the most needy regions of the Russian Fed-
eration. The programme delivered a total of 1,67 mil-
lion tonnes of food (wheat, rye, rice, beef, pork and
milk powder) with a value of approximately 400 mil-
lion euro during the period March 1999 to April 2000.
Counterpart funds arising from the sale of products
were to be paid into a ‘Special Account’ and to be used
to finance pensions and other social expenditure.

7.61. The main conclusions of the Court’s report were:

— the Commission had not deployed sufficient staff
to manage such a complex programme and
decision-making was too centralised at Commis-
sion headquarters,

— the justification for the programme was question-

able,

— the programme was not sufficiently targeted on
the neediest regions and it was not always possible
to establish whether the food was processed and
consumed in the regions it was delivered to,

— there were significant payment arrears and it was
doubtful whether the Commission would be able
to ensure that the revenue arising from the sale of
the produce would be paid into the Special Account.

7.62. The European Parliament doubted the appropri-
ateness of the programme and regretted that the Com-
mission was unable to enforce its policy with the Rus-
sian authorities. The Council
largely shared the
conclusions of the Court while also noting the difficult
conditions in which the Commission had to implement
the programme (12).

(11) OJ L 349, 24.12.1998, p. 12.
(12) European Parliament, A5-0113/2001; Council 5766/02

add 1.

7.62. As pointed out in its reply to the Court’s report, the
programme, the largest ever food delivery programme under-
taken by the EU, had achieved some very positive results. The
combined effect of both the EU and American programmes
made as significant contribution to the stabilisation of market
prices and to the issue of affordability by the use of counter
part funds to clear pension arrears and to enable significant
pension increase to be made (Article 4, Council Regulation
(EC) No 2802/98).

In fulfilling its mandate, the Commission had minimised the
risks attached to the programme whilst ensuring the success-
ful delivery of foodstuffs to the regions as requested by the
Government of the Russian Federation. Through contribu-
tions to pension funds and social activities, the proceeds from
the sale of the food products have helped the vulnerable sec-
tions in Russian society.

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The Commission recognised that more could have been done
had resources been liberally available. The Commission also
pointed out that it continued to press the Government of the
Russian Federation to resolve all outstanding problems satis-
factorily and in full compliance with the Memorandum of
Understanding and the Operational Memorandum of Under-
standing.

7.63. The Commission nevertheless wishes to stress that an
independent evaluations of this Programme concluded that
the Programme had met the twin objective of addressing issues
related to availability of food as well as its affordability.

7.63.
In August 2002 a final report on the programme
was issued by the external auditors contracted by the
Commission in accordance with the Regulation (13).
While recognising the achievement of the Commission
in mobilising and delivering such a vast volume of pro-
duce, the report also largely confirmed the Court’s find-
ings.

7.64. The Court notes that the Commission has sub-
sequently taken steps to improve its management of aid
programmes to Russia by giving its Delegation in Mos-
cow significantly more staff resources and decision-
making powers. However, this food aid programme has
not yet been closed because the payments to the Special
Account continue to be in arrears.

7.64. The Commission notes with satisfaction that the Court
acknowledges the efforts made in order to improve the man-
agement of the aid programmes to Russia. Within this con-
text, it became possible to allocate more resources to follow up
the issue of the arrears of the special account linked to the
programme.

7.65. The arrears are made up of two elements:

7.65.

(a) under the terms of the programme’s Operational
Memorandum of Understanding, the Government
of the Russian Federation was in the first place to
pay into the Special Account the estimated pro-
ceeds, as agreed between the Commission and the
Russian authorities, of the produce supplied. The
amount of arrears relating to this initial deposit
was 445 million roubles (13,9 million euro) at
31 December 2002. This corresponds to approxi-
mately 8 % of the originally estimated proceeds;

(13) The audit took 652 man-weeks at a cost of 1,76 million
euro over an 18-month period. Volume of work, length
and cost are quite substantial, given the availability of the
results of the Court’s audit.

(a) The Commission from the outset and throughout the life
of the programme always made it clear that an opera-
tion of this size and complexity was not without risk.
This was particularly true in relation to the management
by Russian authorities of revenue from the sale of EU
products which was to be paid into the Special Account.
The risk element involved was recognised by the Council
of Ministers when
(EC)
No 2802/98. Despite the recognition of risk the Com-
mission has taken a consistently tough line over the
respect of the Programme principles as laid down by the
Council.

adopting Regulation

The Commission has, at many meetings of the Joint
Working Group and in bilateral contacts at political and
senior official level, pressed the Government of the Rus-
sian Federation to honour its legal responsibilities when
dealing with the issue of the management of the Special
Account, especially when it comes to payment of arrears.
Although the application of available sanctions could be
said to have been insufficient, the Commission through
its firm approach minimised the distinct possibility that
arrears could have been greater than the current level of
8 %. The Commission continues to exert pressure on the
Russian authorities to finalise this Programme in accor-
dance with the legal framework in which it was estab-
lished.

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(b) The figure estimated by the auditors which were con-
tracted by the Commission is not supported by a clear
calculation method. While the Commission agrees that
there has been some ‘price rigidity’ and slowness in mak-
ing price adjustments, which in principle increase the
amount of arrears.

This amount involved is difficult to determine precisely.

(b)

the Memorandum also stipulated that,
in cases
where the actual sales proceeds proved to be larger
than the total estimated proceeds, the Russian Fed-
eration was to deposit the difference to the Special
Account. This has not been done. To establish the
actual sales proceeds the Commission relied on ex
post checks by its auditors (see paragraph 7.63).
However, the Court’s Special Report questioned
both whether the Commission’s auditors would be
able to do this and whether the Commission would
be able to insist that additional proceeds identified
be paid into the Special Account. The auditors were
indeed unable to establish actual sales proceeds but
instead used surveys of market prices to estimate
that actual proceeds were 1 320 million roubles
(approximately 41,4 million euro) more than esti-
mated proceeds. The Commission has criticised the
methodology used by the auditors but has never-
theless indicated to the Russian authorities that the
sums involved represent several hundred million
roubles in additional arrears to the Special Account.

to

the

arrears

arrears

recover

described

concerning

7.66. The Commission has gone to considerable
lengths
in
the
paragraph 7.65(a). Since December 2000 this has
included making further disbursements from the Spe-
cial Account conditional on a reduction in the arrears
as well as making representations at political level. Its
in
stance
paragraph 7.65(b) has been less clear. For their part the
Russian authorities have taken the position that the
beneficiary regions are responsible for the payment of
the counterpart funds into the Special Account, a posi-
tion that is in contradiction with the terms of the
Memorandum. The legal framework established for
implementing this programme does not lay down pro-
cedures to govern the settlement of disputes. The Com-
mission should, however, continue its efforts to ensure
the remaining arrears are paid.

described

7.66. The Commission’s efforts have insisted that the Rus-
sian authorities comply with their legal obligations as far as
arrears to the Special Account are concerned. It has also
sought advice on possible legal actions by the Commission to
have the Memorandum of Understanding enforced by the
Russian Government. The Commission Legal Service’s con-
in the absence of a dispute settlement
clusion was that,
mechanism in the Agreements signed between the European
Commission and the Russian Federation, there was no basis
for legal action, either at the Community level or at the inter-
national level. Moreover, it was concluded that there was also
no possibility for the Commission to bring the case before a
Russian civil court and that, if the action were taken to a
criminal court the Commission would not be in a position to
provide sufficient evidence.

Nevertheless, the efforts made by the Commission will be pur-
sued.

PRINCIPAL OBSERVATIONS IN SPECIAL
REPORTS

Special Report No 2/2003 on the implementation of
the food security policy in developing countries

7.67. The Court’s audit of the implementation of the
food security policy in developing countries in the

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period 1997 to 2001 focused on the steps taken by all
parties involved to achieve the food security objectives
set out in Council Regulation (EC) No 1292/96, i.e. the
formulation of country strategies, the management of
actions, the adequacy of information and coordination
with other donors.

7.68. Regulation (EC) No 1292/96 introduced a long-
term development approach on food security, thus mov-
ing away from short-term food aid. However, as the
causes of food insecurity are many, this problem can
only be dealt with effectively in the context of an overall
comprehensive development policy. The food security
strategies in a number of recipient countries were not
integrated in coherent national development strategies,
and programmes on food security were executed as
development programmes separate from the main-
stream programmes. It was also found that the Com-
mission’s structure complicates coordination between
its services in respect of food security operations.

7.68. The Commission put forward a communication in
2001 which provides an improved framework for the integra-
tion of food security issues into overall poverty reduction and
development strategies. Moreover, the Commission has sought
to ensure a better linkage between relief, rehabilitation and
development aid.

In the latest programming exercise, food security issues have
been taken into account much more systematically by recipi-
ent countries as part of their overall poverty reduction and
development strategies.

The Commission’s structure and toolbox are to be improved
in terms of programming, appraisal and implementation of
food security operations of highly complex nature. This will be
the subject of the evaluation in 2004. Nevertheless, informa-
tion on needs, problems and the state of implementation is
received regularly through reporting, reviews, evaluations and
missions.

7.69. Reliable baseline information on the situation of
food security was not available at the level of the ben-
eficiary countries visited by the Court, and the statistics
produced by the national services were mostly inad-
equate. The local population was rarely involved in pro-
posing and selecting projects and very few structures
existed to support local communities in managing
projects.

7.69. The Commission has made efforts to assist develop-
ing countries to build capacity and establish the necessary sys-
tems.

The central institutions in the beneficiary countries are often
very fragile and their capacity for formal intervention is lim-
ited. Nevertheless, the Court has found that many of the
projects were technically well executed and useful for the popu-
lation concerned.

a

Commission

7.70. On the basis of an external evaluation report
presented to the Commission in December 2000,
Communication
adopted
the
(COM(2001) 473) to be submitted to the European Par-
liament and to the Council in September 2001. Although
the Commission found it too early to assess fully the
impact of the Regulation, this Communication and the
relevant Council Conclusions 15390/01 are to be con-
sidered as further steps towards the integration of food
security policy objectives and instruments into the Com-
mission’s overall development policy and cooperation.
A new evaluation will be carried out in 2004.

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7.71. The following recommendations were made by
the Court:

7.71.

(a)

the concept of food security should be fully inte-
grated in the Commission’s overall development
policy, and single overall strategies and programmes
should be developed for and by the recipient coun-
tries;

(b) consideration should be given, in the context of the
new evaluation of food security support, to discon-
tinuing Regulation (EC) No 1292/96 in its present
form and to integrating all development actions,
including those on food security, in a limited num-
ber of comprehensive Regulations. Consequently,
the structure of the budget headings for food aid
and humanitarian aid under B-7 (external actions)
should be modified;

(c)

the Commission should consider supporting devel-
oping countries to ensure that reliable baseline infor-
mation is produced on socioeconomic household
situations. Indicators on food security should be
developed with other donors;

(a)

In the latest programming exercise, food security issues
have been taken into account much more systematically
by recipient countries as part of their overall poverty-
reduction and development strategies.

(b) The Commission does not share the Court’s conclusion to
‘discontinue Regulation (EC) No 1292/96 in its present
form’ at this point in time.

Communication COM(2001) 473 and Council Conclu-
sions 15390/01:

— acknowledge that Regulation (EC) No 1292/96
has a distinct role (see comments under section 33)
and should be maintained at this point in time,

— propose to carry out a second more in-depth evalu-
ation in 2004 to look at the broader conceptual and
strategic development framework in which Commis-
sion’s support to food aid and food security is pro-
vided.

The Commission takes note of the Court’s recommenda-
tion. Consideration is given to that issue is the context of
the in-depth evaluation, which will be finalised by the
beginning of 2004.

(c) Financing of information systems for the Commission’s
food aid strategy continues to be a priority. Ownership
by government is still a tricky problem. In some coun-
tries financing is provided by national budgets.

There is a pressing need to enhance, in a sustainable
manner, developing countries’ capacity for poverty and
food security analysis as the first step to formulate com-
prehensive national development strategies.

The Commission has made efforts to assist developing
countries to build capacity and establish the necessary
systems.

(d)

the Commission should continue to focus its efforts
on capacity-building and institutional support to
beneficiary country’s central and local services.

(d) The Commission shares the Court’s analysis and the
main thrust of its recommendations, which in fact form
part of the Community’s guiding principles for develop-
ment cooperation. We must, however, recognise that the
political, social and economic environment in develop-
ing countries determines the limits of what can be
achieved.

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Special Report No 10/2003 on the Commission’s man-
agement of development assistance to India

7.72. Some 480 million euro of Community financial
assistance, disbursed over the period 1990 to 2001, was
provided for development cooperation activities in India.
These activities included a large number of agricultural
and rural development projects, as well as two sector
support programmes for education and health.

7.72.
In 30 years of development cooperation with India
the Commission’s strategy has evolved from a support financed
through counterpart funds (e.g. Operation Flood) and rural
development projects to sector programmes in health and edu-
cation which support the Government’s reform agenda, good
governance and improved service delivery. The decision to
move away from the classical rural development projects was
based on the experience that individual projects, although
often achieving the objectives, tended to have limited and
localised impact, with little influence over policy.

EC cooperation with India has therefore benefited from a
dynamic learning exercise, whereby experiences from ongoing
projects have fed into the development of new strategies.

7.73. The Court examined in particular how the inter-
ventions targeted the poorer sections of the population,
the chances that the benefits would be sustained beyond
the end of the Community-financed activity, and the
extent to which donor coordination activities have taken
place.

7.74. The Court found that the Commission’s man-
agement was reasonably successful in targeting the poor
and in addressing sustainability for the majority of the
eight projects/programmes audited in India. However,
in a number of interventions these aspects were only
taken up in the course of the project implementation.
More systematic attention to these issues from the begin-
ning of and throughout the whole project/programme
life cycle could have further improved the results.

7.74. The Commission takes note of the Court’s observa-
tions concerning the objectives of targeting the poorest sec-
tions of the population and sustainability.

Since 1992 the Commission uses the ‘Methodological Guide’
and other project cycle tools such as the logical framework
approach. It is therefore now standard practice to build sus-
tainability aspects (including exit strategies) into Community
development projects and programmes.

In the Community’s cooperation activities
7.75.
towards India, there has been a move to a sector pro-
gramme approach for the health and education sectors.
Such an approach can offer certain advantages over a
project-based approach. These include more closely har-
monised, coherent policies and strategies, wider impact,
and better chances of sustainability. It also requires that
donors have sufficient confidence in the capacity of the

7.75. Commission-managed programmes in health and
education aim, inter alia, to encourage the Indian authorities
to move towards a sector-wide approach in addressing social
development issues. In this framework, efforts are made to
enhance donor coordination to reduce transaction costs and to
increase aid effectiveness. A key to progress in this area is
increased Government ownership, which can be built up
through capacity-building and dialogue. The Commission’s

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beneficiary’s administration to manage sector-wide pro-
grammes and to account for their implementation,
results and costs. However, only the Community has so
far been prepared to support a sector programme
approach in India, while other donors operate through
a project-based approach. As a result, it has not been
possible to establish common accountability and report-
ing arrangements, necessary to enable adequate super-
vision and control, in the nationwide programmes on
health and education.

guidelines on sector support programmes adopted in Febru-
ary 2003 attach particular importance to donor coordina-
tion. The intensification of this coordination will be a key task
for the newly devolved Delegation of the Commission in India.

In the case of the Sector Programme of Support for District
Primary Education Programme (DPEP), and the Support to
Health and Family Welfare Support Program (HFWSP),
arrangements in relation to reporting accounting and audit-
ing are carried out in accordance with the Financing Agree-
ment signed between the Commission and the Indian Govern-
ment.

Widening these arrangements towards a common framework
incorporating all donors in the sector is part of the ongoing
dialogue. The establishment of such a framework will be
facilitated, notably in the health sector, by a move by other key
donors from a project to a sector-wide approach.

7.76.
For the above reasons opportunities to create
synergy and efficiency through a truly coordinated
sector-wide approach have not materialised, apart from
a well appreciated system of joint reviews in the educa-
tion sector programme.

7.77. The Community’s new country strategy for
cooperation with India does not fully apply the approach
outlined in the Commission’s recent communication on
fighting rural poverty as it limits Community interven-
tion to the health and education sectors, leaving aside
other key sectors (agriculture, natural resources man-
agement) identified in that communication as needing
to be addressed if rural poverty is to be tackled success-
fully.

7.77.
Inadequate health and education facilities are key
aspects of rural poverty and it is now generally agreed by all
donors in India that by strengthening these two sectors a
maximum impact on poverty reduction can be achieved. By
selecting these two sectors as priority areas of its new strategy
(which received strong support from the EU Member States),
the Commission aims to achieve maximum impact without
diluting its efforts in too many different sectors or approaches.
Moreover, important synergies are expected to be created with
the ongoing sector programmes in health and education in the
future partner States.

The Commission’s development communication identifies six
key sectors for poverty reduction but this does not mean that
all six need to be taken on board for each new programme.
The policy gives the Commission the possibility, in dialogue
with the recipient country, to agree on the sectors that are
most appropriate for the country in question.

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7.78. The following recommendations were made:

— ‘targeting the poor’ as well as ‘sustainability’ should
be given more systematic attention throughout the
life of a project/programme;

— when considering contributing to a sector pro-
gramme through budget support, the Commission
should ensure that the direction on public finance
taken by the country concerned is satisfactory. If
improvements are not realised, the Commission
should consider other forms of support;

— the Commission could make its new Community
country strategy more comprehensive by also
addressing, important issues like agriculture and
natural resources management.

7.78. The Commission takes note of the Court’s recommen-
dations concerning the objectives of targeting the poorest sec-
tions of the population and sustainability.

Since 1992 the Commission uses the ‘Methodological Guide’
and other project cycle tools such as the logical framework
approach. It is therefore now standard practice to build sus-
tainability aspects (including exit strategies) into EC develop-
ment projects and programmes.

The Commission agrees with the Court’s recommendation,
which is being implemented under the guidelines for Commu-
nity support to sector programmes adopted in February 2003.

The Commission considers that there are strong reasons for
concentrating its resources on the Health and Education Sec-
tors. In addition, the future State Partnerships that the Com-
mission intends to develop should provide a holistic reform
package which could add a rural and natural resources dimen-
sion to the education and health activities.

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ANNEX 1

(a) Court’s assessment of supervisory systems and controls in 2002

Overall concept

Procedures and manuals

Functioning in practice

Internal audits

Management reporting

Humanitarian Aid
Office

EuropeAid Cooper-
ation Office

Delegations

A

A

A

B (2)

A

B

A

B (1)

B (2)

B

—

A

B (1)

B (2)

B

(1) Most elements function, but certain important ones remain to be improved.
(2) The internal audit unit focused on system analysis and did not yet test systems.

(b) Court’s assessment of external audits at the level of EuropeAid implementing organisations

Quality of audits

Quantity of audits

Definition of terms of reference

Commission’s involvement in appointing auditors

Inclusion of contracting in the audits

Review of accounting system

Evidence of follow-up

Key to indicators

Rating of supervisory systems and controls

Works well. Few or minor improvements necessary

Works, but improvements necessary

Does not work as intended

A

B

B

B

C

C

B

A

B

C

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(c) Key areas for follow-up by the Court of Auditors

Humanitarian
Aid Office

EuropeAid
Cooperation
Office

Delegations

Implementing
organisations

Execution risk analysis

Reporting systems

Concept external audits and controls

Execution external audits and follow-up

‘X’ means ‘to be followed up’.

X

X

X

X

X

X

X

X

—

X

—

X

—

X

—

X

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CHAPTER 8

Preaccession aid

TABLE OF CONTENTS

Introduction

Specific Assessment in the context of the Statement of Assurance

Scope and nature of the audit

Supervisory systems and controls

Phare

The Instrument for Structural Policies for Preaccession (ISPA)

Sapard

Annual Activity Reports

The Directorate-General for Enlargement

The Directorate-General for Regional Policy

The Directorate-General for Agriculture

Audit of contracting and tendering procedures for Phare and ISPA

Audit of payments (Phare, ISPA and Sapard)

Conclusions

Recommendations

Follow-up to Special Report No 5/1999 concerning the Phare cross-border
ooperation (CBC) programme

Principal observations in Special Reports

Phare and ISPA funding of environmental projects in candidate countries

Paragraph

8.1

8.2-8.50

8.2

8.3-8.31

8.3-8.13

8.14-8.22

8.23-8.31

8.32-8.37

8.32-8.35

8.36

8.37

8.38-8.43

8.44

8.45-8.49

8.50

8.51-8.57

8.58-8.71

8.59-8.64

Twinning as the main instrument to support institution-building in candidate
countries

8.65-8.71

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INTRODUCTION

8.1. This chapter deals with the instruments for coun-
tries preparing for accession to the European Union. A
specific assessment in the context of the Statement of
Assurance is introduced for the first time for heading 7
of the financial perspective. This heading contains the
appropriations for the preaccession instruments for the
central and eastern European candidate countries (1)
(Phare, ISPA and Sapard). It does not contain those in
favour of the Mediterranean candidate countries (2),
which remain under heading 4. The Phare programme,
implemented by the Directorate-General for Enlarge-
ment, provides support for institution-building and
investment. ISPA,
implemented by the Directorate-
General for Regional Policy, has been set up to facilitate
accession in the fields of environment and transport
while Sapard, implemented by The Directorate-General
for Agriculture, has a similar objective in the field of
agriculture and rural development. Graphs 8.1 and 8.2
show a breakdown of the funds committed and spent
in 2002 (see paragraphs 2.38 to 2.43 for observations
on budgetary management).

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Scope and nature of the audit

8.2. The overall objective of the specific assessment of
preaccession aid for the year 2002 was to contribute to
the establishment of the Court’s Statement of Assur-
ance through a conclusion on the legality and regular-
ity of the transactions recorded under heading 7 of the
financial perspective. The audit comprised an appraisal
of the supervisory systems and controls pertaining to
the legality and regularity of the payments and commit-
ments, supported by tests of transactions, an evaluation
of the work of other auditors and a review of the annual
activity reports of the Directors-General for Enlarge-
ment (Phare), for Regional Policy (ISPA) and for Agri-
culture (Sapard). The audit was carried out at the Com-
mission’s central services in Brussels and at Commission
delegations and national authorities in the 10 candidate
countries involved.

(1) Bulgaria, the Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Romania, Slovakia and Slovenia.

(2) Cyprus, Malta and Turkey.

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Graph 8.1 — Breakdown of commitments by budgetary area in 2002

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2002 revenue and expenditure accounts.

Graph 8.2 — Breakdown of payments by budgetary area in 2002

NB: Sapard 2002 payments were mainly to candidate countries. For more detailed information see Diagrams III and IV of Annex I.
Source: 2002 revenue and expenditure accounts.

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Supervisory systems and controls

Phare

The management and control systems

8.3. The bulk of the Phare funds is disbursed in the
candidate countries on a decentralised basis, whereby
contracts are concluded by the implementing agencies
in candidate countries following ex ante control by the
delegations, and payments are made by the implement-
ing agencies without such controls. Ex post controls by
the Commission over such payments are carried out
during the closure audits (see paragraphs 8.7 to 8.9).
Some contracts are also concluded and managed directly
by The Directorate-General for Enlargement in Brussels
(centralised) and some contracts are concluded and
managed by the Commission delegations in the candi-
date countries (devolved).

In December 2001 the Commission commenced
8.4.
the introduction of a fully decentralised implementa-
tion system for Phare and ISPA — known as the extended
decentralised implementation system (EDIS). Under EDIS
the Commission will waive the ex ante control of con-
tracts and replace it with an ex post control. The Com-
mission will decide on full decentralisation on an agency
by agency basis following an analysis of the capacity of
the implementing agencies. The EDIS process has been
delayed, and by the end of 2002 only five candidate
countries (Estonia, Hungary, Lithuania, Romania and
the Slovak Republic) had completed the gap assess-
ment (3) (see also paragraph 8.14).

8.5. The Commission delegations in the candidate
countries endorse the requests from the national
funds (4) for transfers of funds before these requests are
sent to the Directorate-General for Enlargement. This
implies that the delegations should check the payment
requests. However, as most delegations do not use

(3) There are four stages leading to EDIS: (i) gap assessment;
(ii) gap plugging; (iii) gap compliance assessment; and (iv)
preparation for a Commission decision. The first three
steps are the responsibility of the national authorities.
The Commission will carry out its own verification of the
system during stage iv.

(4) National funds were set up in 1998 in all candidate coun-
tries to channel the flow of all three preaccession instru-
ments. Each one is headed by a national authorising
officer and it is the sole entity dealing with the request for
and the receipt of funds from the Commission, the dis-
tribution of funds to the implementing agencies and finan-
cial reporting to the Commission.

8.4. The move to the extended decentralised implementa-
tion system (EDIS) is not an obligation under Council
Regulation (EC) No 1266/1999 and progress depends almost
entirely upon the efforts of the national authorities. The road-
map for EDIS for Phare and ISPA was presented to candidate
countries in the first half of 2001 and many other initiatives
followed to assist them in this effort.

8.5. A document detailing those aspects that are to be
checked is being drafted to ensure that in future the delega-
tions deal with payment applications in a more systematic
and unified manner.

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checklists for the approval of payments, as recom-
mended by the Directorate-General for Enlargement, or
document their work in any other way, it was not clear
for 2002 what elements had been checked as part of the
endorsement procedure.

The Commission’s audits

In 1998, the decentralised system of management
8.6.
was introduced in the candidate countries without any
system audits at that time. In order to rectify this, a pro-
gramme of systems assessments was launched. In 2002
The Directorate-General for Enlargement’s audit unit
carried out audits of management and control systems
in four (5) candidate countries. The limited number of
candidate countries covered did not permit the Com-
mission to draw an overall conclusion regarding assur-
ance as to legality and regularity in respect of these sys-
tems. The missions made in 2002 by the financial
planning and execution unit of the Directorate-General
for Enlargement to nine candidate countries to see how
management and control procedures concerning Phare
were working, were not intended to provide such assur-
ance. They did lead to recommendations for improving
the role of some national funds and the monitoring of
national co-financing and for setting up of audit plans
by local authorities.

In 2001, the Directorate-General for Enlargement
8.7.
adopted a strategy to contract external auditors to carry
out closure audits covering some 60 % of the value of
the Phare programmes on a risk-based sample.

8.8. By the end of 2002, closure audits covering pro-
grammes amounting to a total of 1 876 million euro
had been launched. This amount corresponds to approxi-
mately 45 % of the total value of the Phare programmes
up to and including the programming year 1998. The
finalisation of closure audits, however, takes consider-
able time. By the end of 2002 only four out of 41 final

(5) Cyprus, Malta, Poland and Romania.

8.6. The reasons for the relatively limited number of can-
didate countries covered are:

(a)

(b)

the relatively short time since the programme was
launched; and

the fact that the candidate countries have been undergo-
ing their own extensive systems reviews in preparation
for EDIS.

8.7. The 60 % objective was set by the Commission for
itself without having any significant experience of what such
audits would show. It related only to the programmes for
1997 and earlier. It did not cover 1998 programmes and was
in any case expected to take at least two years to achieve. In
2001 some delegations launched some closure audits and,
following the establishment of a central framework contract in
April 2002, a programme of audits was launched by the
Directorate-General for Enlargement’s central audit unit in
May 2002. At the end of December 2002 the plan only
anticipated that audits covering about half of the objective
would have been launched.

8.8. The Court’s figures in relation to the evaluation of
audits launched shown here are correct, as of December 2002
but they cannot properly be compared with the targets of the
strategy which had a different base as described in the reply
to point 8.7.

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closure audit reports had been approved by the
Directorate-General for Enlargement. The follow-up pro-
cess is only at a very early stage.

As of August 2003, 73 final closure audit reports had been
approved by the directorate-General for Enlargement (includ-
ing those approved by the delegations as mentioned in the
reply to point 8.7).

8.9. The closure audits discovered some irregularities,
such as payments including VAT, payments made after
the disbursement deadline and shortcomings in the
procedures for awarding contracts. In some cases origi-
nal supporting documents could not be found. Although
the number of reports available is still very small, the
results tend to corroborate the results of the Court’s
audit of payments which did not reveal material errors
(see paragraph 8.45).

Co-financing of Phare programmes

8.10. The Phare Guidelines (SEC(1999) 1596) for the
implementation of the Phare programme lay down a
minimum of 25 % co-financing from national funds for
investment projects committed from 2000 onwards (6).
However, until the end of 2002 the Commission had
limited control over whether this requirement was com-
plied with.

8.10. Because it is only late in the cycle of projects that con-
trols over part-financing can be fully exercised. 2000 Phare
programmes are implemented during 2001, 2002 and 2003.
This being the case, for the 2000 programmes, contracting
only finished at the end of 2002, and in some cases may still
be ongoing. Therefore, it was only during 2002 that the issue
of control became pertinent and the Commission could address
the question.

8.11. The Commission took measures in the autumn
of 2002 to improve control. The national funds have to
report
from 1 January 2003 onwards on the
co-financing situation each time they send a request for
money to the Directorate-General for Enlargement. In
addition, the auditors performing closure audits are
now required to ask the national authorising officers to
specify the national co-financing provided. However,
the risk remains
regarding national
that errors
co-financing will remain undiscovered because the audi-
tors are not required by their terms of reference to check
the declared national co-financing against supporting
documents.

8.11. Auditors contracted for closure audits were instructed,
where projects have been jointly part-financed, to check not
only Phare funds in the first instance but also national part-
financing on contracts selected for testing. Where projects had
been financed by parallel part-financing, the auditors were
instructed to obtain a certified (signed) declaration of the
details of part-financing by the auditee or the government
concerned. For the latter the auditors are requested to assess
the information given but not necessarily to verify it against
supporting documents. These instructions reflect a risk assess-
ment within the auditors tasks. On the basis of this assess-
ment further verification may be undertaken as facilitated by
the framework contract terms of reference.

(6) These guidelines are binding since they are referred to in
Article 8 of Council Regulation (EC) No 3906/89 (OJ L 375,
23.12.1989, p. 11) and are part of the Financing Memo-
randum concluded between the Commission and the can-
didate country concerned.

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8.12. During missions to a number of national funds in
2002, the national authorities were reminded of the need to
report on planned audits and to summarise audit findings. In
2003, there has been a more active follow-up to the audit
reporting obligations and some delegations suspended pro-
cessing of requests for payment of funds pending compliance.

Audits by candidate countries

8.12. According to the Memoranda of Understanding
between the Commission and the national fund in each
candidate country, the national funds have an annual
obligation to report on planned audits and to sum-
marise audit findings. These Memoranda of Understand-
ing had in most cases already been signed at the end of
1998, but in most candidate countries the national
funds did not fulfil this reporting obligation until the
financial year 2002. Moreover, the majority of the few
plans which were submitted included only a list of
planned audits, without any explanation or strategy.
The Commission delegations have not been active in
requesting these reports.

8.13. Auditors in the candidate countries mainly com-
prise internal audit departments at the national funds,
the implementing agencies and the ministries of finance.
In general, these internal audit departments have been
established only recently and are not yet fully opera-
tional. Therefore the Commission could not draw assur-
ance from their work.

The Instrument for Structural Policies for Preaccession
(ISPA)

The Commission’s audits of management and control systems

of Council Regulation

8.14. Article 9(1)
(EC)
No 1267/1999 (7) prescribes that candidate countries
should have established, by no later than 1 January
2002, an adequate management and control system (8).
There is a considerable similarity between the manage-
ment and control system requirements of Article 9 of
the ISPA Regulation and those of Phare/ISPA EDIS (see
paragraph 8.4).

8.15. The Directorate-General for Regional Policy car-
ried out two cycles of audits in all 10 candidate coun-
tries in 2001/2002 and 2002/2003. The main objec-
tive of the audits was to assess to what extent the 10
candidate countries had established management and
control systems complying with the requirements.

(7) Council Regulation establishing an Instrument for Struc-
tural Policies for Preaccession (OJ L 161, 26.6.1999, p. 73).
(8) As Community Regulations are not directly applicable in
candidate countries these requirements were included in
Annex III to the Financing Memorandum. A Financing
Memorandum is signed for each project following the
Commission Decision.

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8.16. The Court examined the extent to which the
Directorate-General for Regional Policy has carried out
its work in an effective manner. The files of 10 audits
carried out in 2001 and 2002 were reviewed. In gen-
eral, the Directorate-General for Regional policy audits
provide a sufficient basis for concluding whether the
management and control systems in the candidate coun-
tries have respected the requirements of Article 9(1) of
Regulation (EC) No 1267/1999. The Court’s work
though, revealed the following.

Planning of audits

8.17. The risk assessment carried out for the second
cycle of audits was not detailed enough to permit spe-
cific risk areas to be identified, which could have affected
the selection of the most appropriate audit approach.

8.17.
For the second cycle of audits, the identification of
specific areas to be covered in the implementation systems for
ISPA and for individual countries was based on a risk assess-
ment, which was considered adequate for the purpose.

8.18. Although certain information on the systems
was gathered prior to the audit visits, there is no evi-
dence to show that this information was analysed in
detail to permit specific internal control areas to be
selected for testing prior to the visits.

8.18. The level of information, and the date of its avail-
ability, varied from country to country. The information
received in time was examined before each audit mission. The
main purpose of the first cycle of audits was not to carry out
testing, and generally the state of progress on implementa-
tion was not sufficiently advanced. Testing was carried as part
of the second cycle where interim payments had been made.

8.19. The audit questionnaires developed for use dur-
ing the audit visits did not cover all the systems and
bodies involved in ISPA assistance (for instance final
beneficiaries in the transport sector). In addition, they
often did not provide adequate guidance as to whether
any testing was necessary, or on the extent of any such
testing. A complete and sufficiently descriptive audit
programme which would have clearly defined the work
to be carried out, as well as facilitated reviewing it, was
not prepared.

8.19. The questionnaires covered the national fund and the
implementing agencies, and in addition for the second cycle,
final beneficiaries in the environment sector, and included the
key aspects of financial management and control which came
within the scope of the audit. In the transport sector, a sepa-
rate questionnaire was not considered necessary for the road
and rail agencies, which are generally closely linked to, if not
the same as, the implementing agency. The work to be carried
out was described in the audit planning documentation. For
subsequent audit work for which testing will be systematically
carried out, the questionnaires will be further elaborated in
line with the suggestion of the Court and the work to be car-
ried out defined in more detail.

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Execution of audit work

8.20. The work which had to be carried out during
each audit visit was quite substantial. In both the 2001
and the 2002 audits the time available was not suffi-
cient for all the work planned to be carried out (in the
case of the 2001 audits for instance the systems of some
bodies involved in ISPA management were not reviewed).

8.20. The audit work on ISPA started in the second half of
2001 with a newly established audit team. Although the
audit plan was ambitious in view of the time and resources
available, the Commission considered it was important to
review rapidly the set up of the systems and the results achieved
were adequate for this purpose.

In some cases the audit work carried out was
8.21.
not adequately documented. For example, the appli-
cable audit questionnaires had not been filled in. It was
therefore not possible to judge whether:

(a)

the audit work was thorough and complete;

8.21. The audit reports themselves are very complete. In
some cases the questionnaires were used as a checklist to ensure
coverage of all points but were not completed. It is accepted
that it is good practice for the questionnaires to be completed
for the audit file and this is being applied for subsequent audit
work.

(b)

(c)

all audit findings were adequately substantiated;
and

all significant findings were included in the audit
report.

Reporting

8.22. The audit findings are in most cases clearly
described in the audit reports sent to the candidate
countries, and the recommendations made appear rea-
sonable. However, audit reports are sometimes sent a
long time after the completion of the field work, which
does not facilitate the timely resolution of the issues
identified.

8.22. The period for sending the completed reports to the
candidate countries was in some cases longer than desirable
because of the number of audits carried out in a limited period
and the complexity of the work. However, the provisional con-
clusions of an audit were always given to the authorities at the
end of the audit mission.

Sapard

8.23. The Sapard component of this audit focused on
the assessment of audits by the Commission and can-
didate countries, monitoring and financial and progress
reports. The audit included a visit to Bulgaria, the can-
didate country with the highest expenditure paid to final
beneficiaries up to the end of 2002 (10,9 million euro).

Audits by the Commission

8.24. Following the provisional conferral of manage-
ment for five candidate countries in 2001, the Commis-
sion decided to grant provisional conferral in 2002 for

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the remaining five (9) countries. The audits undertaken
by the Commission on which these decisions were
based led it to conclude that satisfactory systems had
been put in place. The Court reviewed the Commis-
sion’s files for the two countries with the largest budget
allocations for the whole programming period 2000 to
2006 (Poland and Romania), and concluded that the
documentation by the Commission of the audit evi-
dence, including that relating to staffing, was satisfac-
tory.

In its 2001 Annual Report (10), the Court rec-
8.25.
ommended that the Commission should carry out audits
shortly after the provisional conferral of management
which should cover all levels of control between the
Commission and the final beneficiaries. These checks
are necessary to ensure that the new systems, which the
Commission had approved on paper, were in fact put in
place and working properly. However, in 2002, the
Commission only did so for four countries (Bulgaria,
Lithuania, Poland and Romania) and with limited scope.
Thus, for six countries, the Commission did not ensure
that the systems were in fact working as approved. This
factor should have been taken into account when approv-
ing systems for further measures (11).

8.26. The Commission’s audits for the four countries
where compliance was checked on-the-spot, included
checking the requirement that adequate personnel with
suitable experience was available and assigned to the
tasks. However, the effectiveness of the checks under-
taken was limited because the Commission did not
ensure that it was sufficiently informed of staff changes.
The Commission therefore had no assurance after the
provisional conferral of management that adequate
competent staff were available in key positions, with the
consequent risk that the implementation of the pro-
gramme would be adversely affected.

(9) Czech Republic, Hungary, Poland, Romania and Slovakia.
(10) OJ C 295, 28.11.2002, paragraph 6.32, first recommen-

dation.

(11) The first series of conferral of management decisions only
covered around half of the measures provided for in the
rural development plans. When procedures for further
measures have been completed by candidate countries,
they must be examined by the Commission and approved
by another conferral of management decision.

8.25. The four countries concerned account for 80 % of the
total aid allocated under the Sapard programme. In addition,
the planned financial allocation for the measures approved in
those four countries accounts for more than 60 % of the fund-
ing already approved. Account must be taken of both the
amount of funding approved and the number of measures
approved. For example, even though Bulgaria requested
approval for only three measures, these represent two thirds of
the total Sapard aid for the country.

Since the decision on Hungary was adopted only on 26 Novem-
ber 2002 and the Hungarian authorities had not yet replied
to the letter setting out our comments, the mission could not
be organised before the end of the year.

Additional assurance was obtained from clearance audits in
Bulgaria and Estonia and from the receipt of a certification
report from Lithuania.

8.26. The national funds are required to inform the Com-
mission on their own initiative of changes affecting the per-
sonnel of the Sapard Agencies (Articles 4(7) and 5(4) of the
Annex to the Multiannual Financing Agreement — MAFA).
Where the Commission receives other information that there
have been changes in key staff, candidate countries are asked
to explain the circumstances surrounding those changes. As
soon as the information was received, Commission staff were
sent to Bulgaria, Poland and Romania to check that the sys-
tems put in place following those changes were operating
smoothly.

The Commission is of the opinion that this provides reason-
able assurances that the risks to the Fund are being kept at
an acceptable level.

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8.27. The decision on the certification of the accounts of the
Sapard Agencies, adopted on 2 October 2002, covers five
countries: Bulgaria, Estonia, Latvia, Lithuania and Slovenia.
The first two had incurred expenditure. In the other three
countries, checks covered the ‘euro-account’ and interest earned
by the national fund. The balances on the accounts (which
represented advance payments), the interest earned and its
booking in the accounts were thus subject to audit. This work
will be repeated in 2003.

The question of normal commercial conditions for the inter-
est earned on the euro account has been closely examined as
part of the clearance audit for 2002 carried out in 2003.

8.28.
Following the Court’s 2001 Annual Report, the
Commission has insisted that candidate countries’ manuals of
procedures contain such checks. Future Commission audits
will examine whether these checks are reliable and working
satisfactorily.

8.29. The Commission checks the measures adopted by the
candidate countries regarding possible double payments and
will insist on the relevant ex post checks.

8.27. The Commission undertook clearance of
accounts audits in 2002 for the only two countries
which had expenditure in 2001 (Bulgaria and Estonia).
The Court reviewed whether these audits provided the
Commission with information on the legality and regu-
larity of underlying transactions, which is the case.
However, insufficient checks were performed for the
advance payments made to candidate countries, which
amounted to 140 million euro up to 31 December 2002.
In particular, the Commission’s audits did not include
testing the procedures laid down in the Sapard legal
basis for depositing funds in the Sapard euro account,
checking that normal commercial conditions were
obtained (12) and checking the procedures relating to
the booking of interest in the accounts. These checks
are important as the Court’s audit provided evidence to
show that normal commercial conditions were not
obtained in practice.

In its 2001 Annual Report (13),

the Court
8.28.
reported that the Commission had performed insuffi-
cient checks to determine whether the systems set up
prevent double funding of projects using aid from Phare
or from national sources, and whether these systems
cover the economy and cost-effectiveness of projects, as
foreseen in the Sapard legal basis (14). In its answer to
the Court’s report, the Commission replied that these
matters would receive close attention in subsequent
audits. The Court found no evidence that the Commis-
sion had complied with this undertaking.

8.29.
In particular, in 2002 there were no ex post
checks by the Commission and the candidate countries
to detect double funding. The surveillance systems could
thus not identify cases where Sapard projects were also
receiving funding from national programmes of candi-
date countries. The risk is real since the Court’s audit in
Bulgaria identified the absence of such checks for projects
receiving funding from both EU and national pro-
grammes. The Commission is thus not sufficiently
informed on potential overlaps, which is an important
aspect of legality and regularity.

(12) As required by Article 2(h) of Commission Regulation
(EC) No 2222/2000 of 7 June 2000 and the Multiannual
Financing Agreements signed between the Commission
and each of the applicant countries.
(13) OJ C 295, 28.11.2002, paragraph 6.20.
(14) Article 4(1) of section B of the Multiannual Financing
Agreement specifies that expenditure shall be eligible for
Community support under Sapard only if the use of
Sapard assistance is in accordance with the principles of
sound financial management, and,
in particular, of
economy and cost-effectiveness.

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8.30. The missions currently under way regarding certifica-
tion for 2002 are attaching great importance to these mat-
ters. In particular, a questionnaire has been drawn up on the
basis of the Court of Auditors Annual Report for 2001 in
order to take stock of the situation regarding the pertinent
criticisms that have been raised. Where necessary, the atten-
tion of the national authorities has been drawn to the need to
comply with the relevant recommendations. However the Com-
mission does not consider that certifying bodies should cover
key staffing changes in the candidate countries.

8.31. Since early 2003, as a general rule the Commission
has verified during the preparatory phase of each Monitoring
Committee that agendas include an item allowing discussion
of the checks carried out (including their findings). To date
none of these checks reported at the Committees have indi-
cated the existence of problems, including those which might
warrant programme changes.

Audits by candidate countries and monitoring

8.30. The certifying bodies in candidate countries play
a key role in providing the Commission with informa-
tion on the surveillance systems. Whilst their annual
reports for 2001 were comprehensive, certain areas,
such as recruitment procedures and key staff changes in
the institutions involved (except for the internal audit
units in the case of Bulgaria), conditions for interest on
the Sapard euro account, and overlaps of Sapard with
Phare and/or national programmes, were not covered.
The Commission’s clearance audit did not lead to obser-
vations or recommendations on the scope of the certi-
fying bodies’ reports.

8.31. Through its participation in Monitoring Com-
mittees, the Commission is informed on the legality and
regularity aspects of policy setting, e.g. eligibility crite-
ria, and on whether management procedures such as
preparation of the mid-term evaluation perform effec-
tively. However, information on the results of checks
carried out, including audits, was not submitted by the
Sapard managing bodies to the Monitoring Committee
as required by the Multiannual Financing Agreement
(MAFA). In the absence of this information, possible
problems cannot be identified at an early stage, and
necessary proposals for changes in the Programme can-
not be addressed by the Monitoring Committee. The
Commission should have identified this and advised the
Monitoring Committees’ secretariats accordingly.

Annual activity reports

The Directorate-General for Enlargement

8.32. The Director General’s 2002 activity report for
the Directorate-General for Enlargement includes three
reservations:

(1) backlog of system audits, refers mainly to the fact
that decentralisation was made without such sys-
tem audits;

(2) backlog of closure audits;

(3)

estimation of ‘creances sur intermediaires’, refers
to the reporting of advances for intermediaries,
not yet used at the year end (see paragraph 1.31).

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8.33. The 2001 activity report included two more res-
ervations; difficulties of obtaining proofs regarding pos-
sible irregularities and programmes committed before
the Director-General’s arrival. These two reservations
are reclassified as observation and scope limitation in
the 2002 activity report.

8.34. The reservations are in line with the Court’s
assessment (see paragraphs 8.6 to 8.9).

8.35. The problem of co-financing is mentioned in
the context of internal controls and closure audits.
There is no overview of national co-financing (see also
paragraphs 8.10 to 8.11) and there is a risk that
co-financing requirements will not be met by the can-
didate countries. The Court considers this problem
important enough to merit a full reservation in the
2002 annual activity report.

The Directorate-General for Regional Policy

the Directorate-General

8.36. The results of
for
Regional Policy audits were correctly reflected in the
Director-General’s 2001 annual activity report and dec-
laration that ‘in most countries significant further work
is required to obtain full compliance with the provi-
sions’. In the 2002 activity report, he mentioned that
‘the systems audits… generally show good progress in
the establishment of financial management and control
systems compliant with the requirements of Regulation
(EC) No 1267/1999’. Thus, in the 2002 annual activity
report it was not made explicit that the requirements of
Article 9 for the candidate countries to establish adequate
management and control systems by 1 January 2002
had not been achieved. A summary of the main audit
findings was presented in the activity report and there
it was noted that:
‘in many cases the framework of
agreements remained to be completed, written proce-
dures were still to be finalised, procedures for the treat-
ment of irregularities had to be fully developed, addi-
tional staff had to be recruited, and internal audit was
not yet operational.’

8.35. There is always some risk that part-financing require-
ments may not be met but the risk that this will not be detected
is limited.

The Directorate-General for Enlargement did consider whether
this issue justified a reservation but decided against it for the
reasons explained carefully in paragraph 4.1(c)(i) of the annual
activity report — namely that the issue has not matured yet
and that it will in any case be possible to take remedial steps
prior to project expiry dates. In this context the Directorate-
General for Enlargement still believes that the issue does not
satisfy the requirements for a reservation according to the
guidelines issued by the Secretary-General.

8.36. Chapter 5 of the annual activity report for 2002 cor-
rectly indicates that good progress had been made by benefi-
ciary countries with regard to establishing compliant systems,
in comparison with the situation in the previous year, but
indicates some of the remaining weaknesses identified by the
audit work carried out.

It was clear therefore that compliance with Article 9 had not
been fully achieved.

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The Directorate-General for Agriculture

8.37. Sapard is addressed in paragraph 2.6 of the
Directorate-General for Agriculture’s 2002 annual activ-
ity report. It does not provide a complete overview of
the situation in 2002. Concerning the implementation
of Sapard, the report does not mention that only
14,5 million euro were disbursed to final beneficiaries,
and that the execution rate of payments (total payments
made to final beneficiaries related to the total funds
available) as at 31 December 2002 was only 2 % (see
paragraph 2.39). The report states that the Commission
gave priority to sound financial management and proper
control. This is only partly true, as the audit resources
were allocated primarily to conferral of management
without also undertaking compliance audits after con-
ferral of management to ensure that the systems worked
in practice. The Commission’s analysis does not identify
the weaknesses reported by the Court
(see para-
graphs 8.25 to 8.31)

Audit of contracting and tendering procedures for Phare
and ISPA

8.38. The Court examined representative random
samples of 53 Phare and 13 ISPA contracts concluded
in 2002, to assess whether the contracting authorities
had carried out the contracting and tendering proce-
dures for service, supply and works contracts in accor-
dance with the EU regulatory framework (15), and
whether the Commission’s delegations were carrying
out the required ex ante controls in an effective manner.

8.39.
In line with their obligations to perform ex ante
controls, the Commission delegations were significantly
involved in most of the procurement processes, includ-
ing individual cases where the evaluation report was
not endorsed, demonstrating that ex ante approval by
the delegations is an indispensable element of control.
In general, the delegations have closely followed the
whole evaluation process, although there is in some
cases no comprehensive document in the file describ-
ing the work performed, the issues raised and how these

(15) Article 113(a) of the Financial Regulation, Financing Agree-
ments with the beneficiary countries, manual of Instruc-
tions and the practical guide.

8.37.
It is not the intention of the Directorate-General for
Agriculture’s annual activity report to provide complete infor-
mation on Sapard. Last year such information was presented
in the Sapard annual report.

Conformity audits began in September 2003.

8.39. The Commission agrees that the ex ante controls per-
formed by the delegations constitute an important element of
control. These controls by delegations during the approval
process have been visible and effective, in line with PRAG and
the instructions ‘Deconcentration-ISPA’. The Commission
agrees that in addition to all documentary evidence, a com-
prehensive explanatory note should be available in each file
summarising the decision reached (1).

(1) Practical guide to Phare, ISPA and Sapard contract procedures.

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issues were resolved. In the case of ISPA, reliance was
placed on this ex ante control by the Directorate-General
for Regional Policy’s Director-General in his 2002 dec-
laration.

8.40. The evaluation reports provide a detailed view
of the whole process with the exception that in the case
of the more complicated evaluation criteria, there were
in some cases insufficient justification of the individual
evaluators’ opinion. Proper justification would enhance
the transparency of the evaluation process and clarify
the basis for the proposal to award the contract.

8.41. Three Phare contracts, with a total value of
2,2 million euro or 2,3 % of the total value of contracts
examined (97,5 million euro), were concluded follow-
ing decisions to derogate from the standard procure-
ment procedures (two cases) or were not awarded to the
cheapest bidder (one case), without sufficient justifica-
tion.

8.42. Two ISPA contracts, with a total value of
19,2 million euro or 9,3 % of the total value of con-
tracts examined (208 million euro), were not concluded
in accordance with the regulatory framework. In one
case the tender was awarded to the lowest bidder
although the price was extremely low in comparison to
the other bids. The Evaluation Committee should have
formally requested a detailed explanation for the low
price offered. If the price could not have been justified,
then the bid should have been disqualified. In the other
case the tender was split into two to allow the use of an
existing framework contract procedure, thus avoiding a
new contract being awarded using an open tender pro-
cedure.

The Commission has, on the basis of on-the-spot audits car-
ried out at seven delegations by its Internal Audit Unit, clari-
fied in the course of 2002 what is expected from the delega-
tions as well as making known ‘best practices’ between
delegations. In particular, it has circulated checklists for the
assessment of documents submitted by the national authori-
ties.

8.40.
In case of ISPA, evaluators are requested to provide
full justification of the final result of the evaluation. Incom-
plete evaluation reports are rejected by the delegations.

The PRAG and FIDIC rules are generic and apply to many
situations. This means that judgement must be exercised by
delegations in regard to their application (which could differ
significantly depending on particular circumstances). Support,
such as training, is provided by the Commission, as appropri-
ate. The Commission is committed to a transparent evalua-
tion process and to the proper recording of decisions of the
Evaluation Committee.

8.41.
In the cases referred to by the Court, the Commission
considers that the decisions were justified, although it recog-
nises that documentation of the justification was insufficient.

8.42. The Commission considers that in the first case referred
to by the Court, the bids were not abnormally low. The offer
price was similar to the costs indicated in the relevant techni-
cal studies. In the second case, the splitting of the contract was
justifiable for technical reasons. However to avoid any doubt
in the future, the authorities have been recommended to fol-
low open tendering procedures whenever possible and specifi-
cally for project supervision.

8.43.
In five contracts in the Court’s sample, the low-
est bidder was rejected for administrative or unclear
technical reasons. The practice of asking for clarifica-
tions varies widely between evaluation committees, as
does the guidance given by delegations. In the light of
some of the latest rulings of the Court of Justice, the

8.43. The Commission accepts it is good practice for an
Evaluation Committee to seek clarification where it is possible
and necessary, even though it is not a specific obligation.
Please refer also to the reply to paragraph 8.41. The Com-
mission confirms that according to the practical guide (PRAG)
clarification should be sought where necessary and practically

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possible. The Commission is regularly organising training ses-
sions in the candidate countries where this message is rein-
forced and training provided on its application.

8.44.
In some cases when design and build contracts are
used, it is not possible to carry out a full environmental impact
assessment (EIA) before the project is submitted for approval.
Moreover, conditions in the Financing Memorandum require
that an EIA be completed, when needed, before the com-
mencement of works.

evaluation committees should seek clarification where
it is practically possible and necessary. When ambigu-
ity probably has a simple explanation and can be easily
resolved, it is good administrative practice to seek clari-
fication. This was confirmed by the Court of First
Instance ruling in Case T-211/02.

Audit of payments (Phare, ISPA and Sapard)

8.44. The audit included an examination of a repre-
sentative random sample of 106 payments (88 for Phare,
11 for ISPA and seven for Sapard) made in the year
2002. Although the sample included some payments
on contracts managed in a centralised or devolved man-
ner, the main part of the sample concerned payments
made by the implementing agencies in the candidate
countries to the final beneficiaries on contracts man-
aged in a decentralised manner. In 2002 there was little
physical implementation of ISPA and Sapard projects at
country level. The majority of the payments audited for
these programmes is first or second advance payments
with a very low risk of errors. The audit of 106 pay-
ments did not reveal material errors. However, for ISPA
three errors in the payments made by the Commission
were found. In addition, the requirement to carry out
an environmental impact assessment (EIA) (16) was not
respected for a number of ISPA projects examined as a
full EIA was not submitted at the time of project approval.

Conclusions

8.45. The Court’s audits on the payments in the field
of preaccession measures did not reveal material errors.
However, there is a need to improve the supervisory
systems and controls in order to limit the risk of affect-
ing the legality and regularity of underlying transac-
tions.

8.45. The Commission is tightening up its controls, carry-
ing out further training measures and issuing instructions to
delegations.

8.46. The audit detected the following weaknesses in
Phare supervisory systems and controls:

8.46. A checklist for use by the delegations when endors-
ing payment requests is currently being prepared.

— in the key control of endorsing the payment
requests of the national funds it is not clear what
checks are performed by the delegations,

— there is limited overview of national co-financing,
increasing the risk that co-financing requirements
may not be met by the candidate countries,

(16) Regulatory requirement (Annex I to Council Regulation
(EC) No 1267/1999 establishing an Instrument for Struc-
tural Policies for Preaccession).

While there may be a risk that part-financing commitments
are not met, there is only a limited risk that this would not be
detected and a correction made (see point 8.34). There is an
overview of national part-financing, as now with each pay-
ment request the national authorities have to identify the
national funds allocated to the programme.

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— there is a backlog of closure audits,

— the reporting on audits carried out by the candi-

date countries is incomplete or lacking,

— the internal audit functions in the candidate coun-

tries are not yet fully operational.

As of August 2003 audits have been launched in respect of
49 % by value of 1997 and previous programmes compared
to the original final target of 60 %. Leaving aside the part-
financing issue discussed in points 8.9 and 8.34, there have
been only minor findings from closure audits. In the light of
its experience to date, the Commission is not convinced that
this shortfall truly represents a significant weakness. It is cur-
rently reflecting whether, in the interests of cost-effectiveness,
it should adjust its strategy and targets.

The Commission has taken steps to ensure the fulfilment of
obligations in this regard, for example that the programmes’
final declaration must contain details on audits and their
findings.

This is being addressed in the context of EDIS and the moni-
toring of Chapter 28 obligations.

8.47. The approach followed by the Commission was appro-
priate for the objectives of the audits and included a risk
assessment for the second cycle of audits. For each cycle of
audits there was an enquiry planning memorandum and indi-
vidual mission planning memoranda together with question-
naires setting out the work to be done. In future audit work
for which systematic testing is envisaged, a more detailed
description of the work to be undertaken will be provided.

8.47. The audit of ISPA found that the methodology
for the audits carried out by the Directorate-General for
Regional Policy to assess management and control sys-
tems did not deal adequately with risk assessment at the
planning stage and the development of audit pro-
grammes to be used for the execution of the work. The
Court notes the Commission’s conclusion that the can-
didate countries have in general not yet established
management and control systems which fully respect all
the requirements of Article 9 of the Council Regulation
(EC) No 1267/1999.

8.48. The audit of Sapard found that the Commission
considered that the supervisory systems which were set
up for Sapard would fulfil their function. Through moni-
toring and clearance of accounts audits, the Commis-
sion was informed that most aspects of the systems
operated satisfactorily. However, it did not ensure that
the systems which were approved on paper were work-
ing properly in practice, due to insufficient audits on
those systems, and it was not informed on certain key
issues, notably double funding and the procedures relat-
ing to interest earned on the Sapard euro account.

8.48. With regard to the question of interest earned by the
euro account, such interest and its entry into the account were
closely checked as part of the certification procedure.

Following the Court’s 2001 Annual Report, the Commission
has insisted that candidate countries’ manuals of procedures
contain checks on double-funding. Future Commission audits
will examine whether these checks are reliable and working
satisfactorily.

8.49. The audit of the tendering and contracting pro-
cedures for Phare and ISPA found that the Commission
delegations were significantly involved in most of the

8.49. Regarding the two ISPA cases the Commission does
not consider them to be errors for the reasons given in the
reply to point 8.42.

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procurement processes. This shows that at this stage ex
ante approval by the delegations is an indispensable ele-
ment of control. The Phare contracts were, taken as a
whole, concluded in a legal and regular manner. For
ISPA, the audit revealed two significant errors.

Recommendations

8.50. The Court recommends that:

8.50. Each of these recommendations is being actively
addressed (see the replies to points 8.45 and 8.46).

— concerning Phare,

the Commission should
strengthen the procedure for endorsing payment
requests, reduce the backlog in closure audits,
improve the control of national co-financing and
improve the reporting and analysis of audits car-
ried out by the candidate countries,

— concerning ISPA, the Commission should improve
the methodology for the audits carried out by the
Directorate-General for Regional Policy,

— concerning Sapard, the Commission should plan
and undertake a programme of systematic audits
on the spot in candidate countries to ensure that
systems are working as approved. These compli-
ance audits should include checking staffing, double
funding and cost-effectiveness of projects. The
Commission should ensure that these issues are
also covered by audits of the certifying bodies,

— concerning the Phare and ISPA tendering and con-
the Commission should
tracting procedures,
improve the instructions for seeking clarifications
in tender evaluations and simplify the selection
criteria in tendering. The checks carried out by the
delegations at each stage of the procurement pro-
cess should be better documented. The transpar-
ency of the evaluation process should be improved
by providing better justification of the evaluators’
opinion on the more complicated evaluation cri-
teria.

The Commission actively keeps its audit methodology and
under review will take account of relevant points raised by the
Court for future audit work on ISPA.

Future conformity audits will include detailed checks on the
different matters raised by the Court. At the seminar on 7 and
8 November 2002 on the certification of the accounts of the
Sapard Agencies, the Commission presented ‘Guidelines for
the Sapard certification audit — Model of report for the cer-
tifying bodies’, which cover most of the points raised by the
Court. The certification reports for the 2002 accounts took
account of those guidelines.

A programme of systematic compliance audits is planned. It
will cover the issues raised. However the Commission does not
believe that certifying bodies should cover staff changes in the
financial accounting clearance exercise.

As regards clarifications during tender evaluations, the practi-
cal guide (PRAG) clearly states the reasons and the procedures
for requesting clarifications. Extensive guidance on clarifica-
tions and the clear message to request clarification to ensure a
fair and informed evaluation is provided by the Commission
during training sessions. The potential complexity of the dif-
ferent tenders is presented through examples, case studies and
exercises to staff of delegations and contracting authorities.
The Commission has, on the basis of on the spot audits car-
ried out in 2002, clarified what is expected from delegations
and in particular circulated checklists for the assessment of
documents submitted by national authorities.

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FOLLOW-UP TO SPECIAL REPORT NO 5/1999
CONCERNING THE PHARE CROSS-BORDER
COOPERATION (CBC) PROGRAMME

8.51. The subject of
the Court’s Special Report
No 5/1999 was the implementation and impact of the
Phare cross-border cooperation programme over the
period 1994 to 1998. This programme funded projects
intended to have a cross-border impact in regions of the
Phare beneficiary countries which border on the Mem-
ber States (17). The current annual budget of the Phare
CBC programme is 163 million euro, which represents
approximately 10 % of the total Phare budget.

8.52. The Council
in its conclusions reiterated the
importance of the programme in preparing countries
for membership of the European Union. It called for
improved coordination between Phare CBC and Inter-
reg and the need to finance projects which genuinely
involved cross-border cooperation.

8.53. The main conclusions which required corrective
action by the Commission were as follows:

(a)

(b)

(c)

implementation had been delayed so that the pro-
gramme had only had a modest impact at project
level at the time of the audit in 1998;

some of the projects had only a limited cross-
border impact;

some of the projects focused on national priori-
ties rather than being specifically in the interests of
the local population in the border region;

(d)

there were few joint projects with Interreg;

(e)

(f)

joint plans covering both sides of borders had not
been drawn up;

the 1998 Phare guidelines did not take adequate
account of the specificities of the CBC programme;

(17) Typical projects included border-crossing facilities, waste-
water treatment plants, economic development schemes
and small ‘people-to-people’ projects.

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(g)

(h)

programme management procedures of both the
beneficiary countries and the Commission were
too centralised;

the programme did not contribute to solving the
problem of regional disparities within Phare coun-
tries, the funds being allocated only to regions
bordering on the Member States and not to other
borders.

8.54. The follow-up exercise was based on interviews
with Commission staff in the Directorate-General for
Enlargement and the delegations and officials in the
CBC implementing agencies together with a review of
documentation. The main conclusions are:

8.54.

(a)

the Commission has largely succeeded in fully com-
mitting and contracting funds before the legal dead-
lines. The growing number of completed projects
means that the programme as a whole is now hav-
ing visible results. The programme also has an
institution building effect by helping beneficiary
regions prepare for managing Interreg funds. How-
ever, delays still occur particularly at project prepa-
ration and contract tendering stages;

(b) overall, the projects’ cross-border impact and that
of the programme as a whole has improved, par-
ticularly as a result of the joint programming docu-
ments drawn up by Member States and candidate
countries in accordance with the revised Phare
CBC Regulation of December 1998 (18) (see also
paragraph (e)). However, the real cross-border
impact of individual projects continues to vary;

(b) The cross-border value of individual projects is a func-
tion of the degree of cooperation between authorities on
either side of the border. Although such cooperation has
increased considerably thanks to the setting-up of joint
coordination structures and joint programming, this is a
long-term process requiring several more years to fully
develop.

(c)

(d)

in general, there has been an increase in the involve-
ment of regional and local representatives and a
corresponding rise in the number of projects at
this level;

the Commission has taken further steps to reduce
the differences between the Interreg and Phare CBC
programme to increase the number of joint projects
(see also paragraph (e)). However, the fact that the
Interreg programme is governed by the part of the

(d) With the amendment on 6 September 2002 of Regula-
tion (EC) No 2760/98, Phare CBC has been aligned as
much as possible with Interreg. The remaining differ-
ences pertain to the existing legal and budgetary separa-
tion between external and internal funding sources,

(18) Commission Regulation (EC) No 2760/98 of 18 Decem-
ber 1998 concerning the implementation of a programme
for cross-border cooperation in the framework of the
Phare programme (OJ L 345, 19.12.1998, p. 49).

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Financial Regulation covering the Member States
and the Phare CBC programme by the part of the
Financial Regulation governing external actions in
third countries has continued to be a real impedi-
ment to closer coordination of the two instru-
ments (19);

the introduction of the joint planning document
(see paragraph (b)) has been a significant step for-
ward in improving both the impact of the Phare
CBC programme and cooperation with Interreg;

the Commission has followed a flexible approach
to interpreting the Phare guidelines to ensure that
the specific objectives of the CBC programme are
not unduly constrained by Commission policy
regarding the Phare programme as a whole;

the significant further deconcentration of the Com-
mission services in recent years represents a posi-
tive development in the management of the Phare
CBC programme;

the allocation of Phare CBC funding between dif-
ferent border regions in the candidate countries
remains a significant concern, both in relation to
regional disparities but also to other issues, nota-
bly preparation for the accession. The following
paragraphs set out the Court’s observations on
this subject.

(e)

(f)

(g)

(h)

8.55. The extension of the Phare CBC programme to
border regions between Phare countries has also made
it possible to start to address some of the specific dis-
advantages faced by these border regions. However, the
comments in the budget require that at most one third
of the Phare CBC funding be allocated to the borders
between candidate countries. Romania, being a rela-
tively large candidate country without borders to Mem-
ber States, already consumes a large part of these funds.
Therefore, the amounts committed to these border
regions in other candidate countries have been rather
limited. For example, the annual CBC allocation to the
Polish-German border is 44 million euro, as compared
with just 5 million euro for the Polish-Czech border. No
funds at all were allocated to the Polish-Lithuanian bor-
der. For the Czech-Slovak border funding was only allo-
cated for 1999, the first year following the revision of
the Regulation, after which funding was stopped even
though joint structures had been established and plan-
ning documents had been drawn up.

as has been acknowledged in the communication ‘Paving
the way for a new neighbourhood Instrument’ (2).

(h) See reply to point 8.56.

8.55.
In the four Baltic candidate countries (Estonia, Latvia,
Lithuania and Poland), a multilateral transnational approach
has been followed. A single Baltic Phare CBC Joint Program-
ming Document was drawn up. As a result, Phare CBC funds
have not been allocated per border (e.g. Polish-Lithuanian
border or Lithuanian-Latvia border, etc.) but rather per coun-
try (EUR 4 million each).

As far as the Czech-Slovak border is concerned, given the
requirement that at most one third of the Phare CBC funding
be allocated to the borders between candidate countries, the
Commission found itself faced with the challenge of having to
spread limited funding over a wide area, while at the same
time having to ensure that Phare assistance was concentrated
so as to achieve sufficient impact. In this context, the borders
between countries that were formerly part of the same nation
(i.e. Czech Republic-Slovakia) were given a lower priority.

(19) In particular, the ‘territorial principle’ means that only
projects physically located on EU territory can be funded
by Interreg and in candidate countries by Phare CBC. The
two programmes also have different procurement proce-
dures.

(2) COM(2003) 393 final of 1 July 2003.

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8.56. Of greater concern is the fact that, although the
revised Phare CBC Regulation provided for the possibil-
ity of subsequently further extending the regions eli-
gible for Phare CBC to other neighbouring countries
(meaning, in practice, the Tacis and CARDS beneficiary
countries (20), the Commission did not actually take up
this possibility. The result of this has been that:

(a) while the 10 years of experience gained by the
regions in candidate countries bordering on Mem-
ber States has provided a good basis for managing
Interreg programmes from 2004, regions in can-
didate countries which have not been eligible for
Phare CBC (very largely in the less developed east-
ern regions of the country) will have had no such
experience. Although candidate countries have
allocated some funds for projects in these regions
from their Phare national programmes, this has
been done in an ad hoc way and without any joint
institutional and planning framework. This frame-
work characterises Phare CBC and Interreg pro-
grammes and is one of their major benefits. The
Commission did eventually seek to put funding for
these borders on a more systematic footing by
introducing in 2003 the external border facility for
30 million euro, but this somewhat belated initia-
tive was not supported by such a framework;

8.56. Given the provision included in the revised Regula-
tion, from June 2001 the Commission explored the feasibil-
ity of extending the geographical scope of Phare CBC to the
Phare countries’ ‘external’ borders with adjacent western new
independent States (NIS) (Tacis CBC) and western Balkans
(CARDS) countries. This attempt — conducted when the
negotiations over Chapter 21 ‘regional policy’ were still on
going — was hindered by the uncertainty concerning the
implementation of Interreg programmes at the future EU
external borders in the 2004 to 2006 period. Under these
circumstances, the Commission refrained from launching fully
fledged Phare CBC programmes at each candidate country’s
external borders (a procedure requiring a considerable amount
of scarce candidate country administrative resources), with the
risk that the long-lasting processes initiated might not be con-
tinued upon accession. This prudent approach proved to be
appropriate in light of the decision taken towards the end of
2002 to have multilateral instead of bilateral Interreg pro-
grammes at external borders in 2004 to 2006 (through
grouping several borders within a single programme. This
decision has been further modified by the ‘Neighbourhood
programme’ approach introduced with the Communication
‘Paving the way towards a new neighbourhood Instrument’.

(a) Although Phare CBC has not been applicable to candi-
date countries’ external borders, a sizeable amount of
funds has been allocated from Phare national funds for
actions with cross-border value (investments in border
crossing and transport infrastructures, small projects
grant schemes, etc.) (3) of 6 September 2002, the Com-
mission encouraged Phare countries’ authorities to make
use of their Phare national programme funds to support
actions of a cross-border nature at their ‘external’ bor-
ders. In order to reinforce this orientation, a specific
amount of EUR 30 million (external borders initiative
2003) has been allocated for the 2003 Phare program-
ming exercise. For acceding countries, this ad hoc alloca-
tion will further help prepare for Interreg 2004 to 2006
at future EU external borders.

(20) The Tacis countries concerned are Russia, Ukraine,
Moldova and Belarus, and the relevant CARDS countries
are Albania, Croatia, the former Yugoslav Republic of
Macedonia, and Serbia and Montenegro.

(3) C(2002) 3303-2.

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(b)

the lack of matching funding and an organised
cross-border cooperation framework in the neigh-
bouring border regions of candidate countries
reduced the effectiveness of the Tacis cross-border
cooperation programme (21).

funds per border,

(b) As indicated in the replies to point 7.61 the effectiveness
of the cooperation between Phare CBC and Interreg is
notably due to the Phare CBC Regulation which, not
withstanding its external aid character provides for effec-
tive alignment with Interreg procedures: fixed allocation
of
decentralised management
with ownership by national/regional authorities,
joint multiannual programming documents, joint coor-
dination structures. Matching funds alone are not suf-
ficient for effective cross-border cooperation. For this rea-
son the Commission adopted on 1 July 2003 the
Communication ‘Paving the way for a new neighbour-
hood Instrument’ to address the issues.

8.57. Within the given available level of funding the
Court recommends that:

8.57.

(a)

(b)

(c)

the Commission should provide institution build-
ing support to border regions in candidate coun-
tries which have not been eligible for Phare CBC
but will be eligible for Interreg;

(a) Both the Phare 2003 national programmes and the
‘Phare 2003 External borders initiative’ provide for
institution-building support to help acceding countries to
prepare for Interreg programmes in future ‘internal’ and
‘external’ borders.

consideration should be given to modify the Phare
CBC Regulation, which after the next enlargement
will continue to apply to Bulgaria and Romania, to
allow CBC funding in all border regions;

(b) The modification of the Phare CBC Regulation to extend,
as of 2004, its geographical scope to the Bulgarian and
Romanian borders with adjacent NIS and Balkan coun-
tries and to the Bulgarian-Turkish border, is already
underway.

to increase the impact of recommendation (b), a
specific Tacis CBC Regulation based on the Phare
CBC Regulation should be considered (22). For
detailed recommendations on this point, see Chap-
ter 7, paragraph 7.58;

(c) With the Commission’s adoption of the Communication
‘Paving the way for a new Neighbourhood Instrument’ of
1 July 2003, in 2004 to 2006 the Commission will
introduce Neighbourhood programmes covering the exter-
nal border of the enlarged EU. These programmes will
improve coordination between various instruments (Inter-
reg, Phare CBC, Tacis CBC, CARDS, MEDA) and
increase the effectiveness of cooperation without the need
for new legislation.

(21) A follow-up report on the Tacis CBC programme is con-
tained in Chapter 7, paragraphs 7.49 to 7.62, of this Annual
Report.

(22) While the overall Tacis Regulation provides for a CBC
programme, this programme is not supported by a spe-
cific Regulation providing for the institutional and plan-
ning framework as is the case for the Phare programme.

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(d)

the Commission should consider drawing up a
similar CBC Regulation for countries which are
beneficiaries of the CARDS programme, since no
strategy or programme has yet been developed in
this area, although the CARDS Regulation does
refer to the possibility of funding cross-border
projects (23).

(d) See the response to recommendation (c). CARDS is also

covered by the new Communication.

PRINCIPAL OBSERVATIONS IN SPECIAL
REPORTS

8.58. The Court completed two audits in 2002 on pre-
accession instruments, the findings of which have been
published in Special Reports. The principal observa-
tions are summarised below.

Phare and ISPA funding of environmental projects in
candidate countries (24)

8.59. The European Court of Auditors carried out an
audit to assess the effectiveness of Phare and ISPA aid to
the environment sector. The audit covered projects
financed during the period 1995 to 2000 and exam-
ined their implementation up until the end of 2001. All
the supreme audit institutions in the candidate coun-
tries of central and eastern Europe participated in the
audit.

8.60. The Court’s audit found that the Commission’s
assistance to support institution-building in the envi-
ronment sector had been only partially successful. The
audit confirmed the view expressed by the Commission
in its 2001 and 2002 enlargement strategy papers that
there was still a need for candidate countries to further
strengthen their administrative capacities in the envi-
ronment sector if they were to be able to comply with
the environmental acquis.

(23) Until 2000, Albania and the former Yugoslav Republic of
Macedonia benefited from Phare CBC Programmes with
Greece, but these programmes were not continued when
these countries became eligible for CARDS rather than
Phare funding.

(24) Special Report No 5/2003 (OJ C 167, 17.7.2003).

8.59. As regards ISPA, the audit covers only the years 2000
and 2001 (ISPA did not exist prior to 2000).

8.60. The Madrid Council Conclusions in 1995 indicated
administrative capacity to implement the acquis as a key area
of concern. In the absence of any specific acquis on overall
public administration reform and in the context of subsidiar-
ity, the Commission adopted an adaptive and innovative strat-
egy in an area at the limit of its competence. By any histori-
cal standards, the Phare-assisted pace of change was rapid.
The Commission notes the Court’s agreement that further
institution-building is required and assistance will continue
beyond accession, through the delivery of both the 2002 Phare
action plans, which mobilised EUR 1 billion, and through the
transition facility.

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8.61. This situation partly reflected the limited scale
of funding committed to institution-building, despite
the particular challenges faced by institutions in this
sector, as well as the modest impact of the Twinning
and technical assistance projects that had been funded.

8.62. Candidate countries did not have enough insti-
tutional capacity to develop environmental and financ-
ing strategies at a sufficiently early stage. This resulted
in an inadequate identification of priority projects and
the most efficient ways of financing them. The Com-
mission had sought to reduce ISPA grant levels below
the 75 % ceiling and has cooperated effectively with the
European Investment Bank (EIB), the European Bank for
Reconstruction and Development (EBRD) and other
international financing institutions to achieve this. Nev-
ertheless, the Court considered that there was still fur-
ther scope for reducing grant levels so as to allow an
increase in the number of projects financed.

8.61. The observation on limited funding committed to
institution-building in this sector is based exclusively on the
study of the know-how transfer aspects of institution-building
(about 30 % of Phare annually) and thus quite overlooks the
impact of the 35 % of Phare invested in regulatory infrastruc-
ture annually after 1999. Furthermore the observation hides
the historical fact that for three years of the audit period Phare
was demand driven and the candidate countries preferred
infrastructure projects to either addressing administrative
capacity or investment in institutions. This was completely
changed by the Commission opinion and the Luxembourg
Council Conclusions in 1997. These accession-driven develop-
ments made it possible to massively increase Phare (and later
ISPA) allocations to projects and to progressively increase
both capacity building and investment in institutions, which
became 65 % of overall annual allocations after 1999.

8.62. The preparation of strategies began in 1999 and,
before ISPA was launched, there was a sufficient number of
sound and mature projects prepared that complied with the
ISPA Regulation, addressed the most urgent investment needs
in the environment sector and enabled the Commission to
absorb the entire commitment appropriations for ISPA.

Moreover, the strategies are revised, whenever necessary, to
take account of progress in the implementation or to remedy
weakness.

The Commission considers that the scope for reducing the
grant levels is extremely limited. Grant levels are — on aver-
age — already low if the particular difficult economic condi-
tions in ISPA beneficiary countries are taken into account.

8.63. Limited institutional capacity also caused prob-
lems in project preparation and contract tendering for
environmental infrastructure projects. The Commission
did not always address these issues effectively with the
result that by the end of 2001 only one ISPA construc-
tion contract had been signed. However, in the case of
the earlier Phare infrastructure projects examined it was
found that, once tendering had been completed, actual
implementation progressed relatively smoothly in most
cases.

8.63. The Commission agrees that the institutional capac-
ity for project preparation and implementation needs strength-
ening. Since the beginning of ISPA, a number of measures
have been taken by the Commission to enhance capacity, in
particular for tendering and contracting, and these activities
were expanded in 2002 and 2003. As tendering for large
infrastructure contracts is complex and takes time (at least
nine months), it is not surprising that only one contract was
signed in 2001 (most financing memoranda, a condition for
commencing works, were only countersigned early in 2001).

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8.64. The report’s recommendations identified a num-
ber of further steps to be taken by the Commission to
address the continued significant need for institution-
building, to target scarce grant financing more effec-
tively and to increase absorption capacity.

8.64. With a few exceptions, the Commission’s own find-
ings and assessment agree with the Court’s recommendations,
and as early as 2000 the Commission launched a number of
initiatives to address these shortcomings. These efforts have
produced results, as is shown by the acceleration of payments,
which doubled between 2001 and 2002. The speeding up of
payments was noted positively by the European Parliament.

Twinning as the main instrument to support institution-
building in candidate countries (25)

8.65. A strong administrative capacity is vital for the
candidate countries of central and eastern Europe in
order to be able to adopt and implement Community
law (acquis communautaire), one of the criteria for acces-
sion. The Commission launched Twinning in 1998 as
the main instrument to assist candidate countries in
strengthening their administrative capacity.

8.66. Member State administrations and public institu-
tions have unique knowledge and specific experience
concerning the implementation and enforcement of
Community law. The Twinning Instrument provides for
the transfer of this knowledge and experience through
the provision of Member State civil servants to the can-
didate countries.

8.67. The European Court of Auditors carried out an
audit to assess whether the use of the Twinning instru-
ment by the Commission, the Member States and the
candidate countries had been efficient and effective.

8.68. Upon completion of Twinning projects, candi-
date countries are expected to be able to meet the
requirements of the relevant Community law. However,
in general, Twinning performed below this overall expec-
tation. Significant progress was made in the adoption of
Community law, but rather less in its implementation
and enforcement. The so-called ‘guaranteed’ results were
often only partially achieved and subject to significant
delays. It was too optimistic to expect that a fully func-
tioning, efficient and sustainable candidate country
organisation could be established within the timeframe
of a single Twinning project.

(25) Special Report No 6/2003 (OJ C 167, 17.7.2003).

8.68. The concept of ‘guaranteed results’ was the key feature
of Twinning. Both project partners commit themselves to work
towards a commonly agreed result in a joint project imple-
mentation process. The Commission indicated from the outset
that Twinning projects should focus on limited and well-
defined institutional targets. This realistic approach, however,
conflicted at times with the high level of ambition of the ben-
eficiary countries. It is not, therefore, disputed that the earlier
projects in particular were over-ambitious, and at times failed
to achieve their targets. However, even these ambitious projects
acted as a catalyst in setting the reform process in motion, and
compared to the results achieved by technical assistance from
1990 to 1996, Twinning has a good track record. Multiple
Twinning projects were and continue to be delivered within key
sectors and it is the cumulative impact that the Commission

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8.69. The interaction of the numerous public admin-
istrations involved in Twinning created administrative
complexity that diminished efficiency and effectiveness.
Too much time was spent on purely administrative
issues to the detriment of the main task, namely advis-
ing candidate countries on institution-building. The
lengthy periods between needs assessment and project
realisation, as well as the complicated payment systems,
were two examples of the difficulties identified.

and Member States took into account in the negotiations.
Finally, the positive feedback from administrations involved in
Twinning was essential in building Member State’s confidence
and thereby helped secure closure of the negotiations in Copen-
hagen. This widely acclaimed success was the ultimate guar-
anteed result delivered by Twinning.

8.69. There was a learning process here. Two of the most
important, non-measurable but visible results of Twinning are
network-building and changes of attitudes and behaviour.
During those four years of implementation, Twinning brought
together specialists from Member States’ and candidate coun-
tries’ administrations who were seldom international experts,
creating a network of technical expertise throughout Europe.
This is a fundamental process for building an enlarged Europe
and for bringing Europe closer to its citizens. Most of the
Member State experts and the candidate country civil servants
were involved for the first time in an EU project and had for
the first time the responsibility of managing EU funds. In
many of the cases, the links formed continued after the clos-
ing of the respective project, both between Member States and
candidate countries as well as between different Member State
administrations.

8.70. There was a tendency, moreover,
to over-
emphasise Twinning at the expense of other mecha-
nisms also eligible for EU support. This resulted in some
deviation from the original aim of Twinning and in its
insufficiently selective and coordinated use.

8.70. This could be dealt with at the programming stage.
The identification and design of institution-building Twin-
ning projects is the result of a well-balanced process and dia-
logue between the Commission and the candidate country
under the final scrutiny and approval of the Phare Manage-
ment Committee. Regarding more precisely the ‘overemphasis-
ing of Twinning’ one should recall that in 1998 and 1999
Twinning as a new Instrument was indeed emphasised to get
the process started.

8.71. While the instrument certainly contributed
towards strengthening the candidate countries’ institu-
tional and administrative capacity with regard to the
requirements of EU accession, there was considerable
room for further improvement. The Court had recom-
mended that:

8.71. Through Twinning the Commission pioneered an
unprecedented transfer of know-how on complex and techni-
cal issues from the diverse administrative traditions in Mem-
ber States to the equally diverse candidate countries. It was
also essential in mobilising political will and resources in the
candidate countries.

(a)

the rate of delivery should be increased by a real
results-orientated approach. The basic components
needed for effective implementing capacity should

(a) Rate of delivery: While the recommendation of the Court
is supported. Twinning projects are not assimilated
investment agreements. Meeting the
to supply or

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be better identified and the objectives for individual
projects should be defined more realistically and
precisely;

(b)

the different stages, from needs assessment up to
project realisation, should be completed more
quickly and be less bureaucratic;

Twinning objectives is often dependent upon external,
political factors.

(b) Time-frame of stages in the project: the Twinning manual
now provides for a general deadline of six months between
selection ands start of the project. All other procedural
deadlines,
including those set for Twinning Steering
Committee proceedings do not exceed 10 working days.

(c) payment procedures should be simplified and

speeded up;

(c) The Commission has already taken steps to ensure sim-
plification of payment procedures by increasing the
amount of advance payments.

(d)

the use of fixed-price or lump-sum contracts requir-
ing specified deliverables should be considered;

requiring

(d) The recommendation to use fixed-price or lump-sum
contracts
deliverables would
specified
not be practical in all situations since the financing
of Twinning projects is based on recovery of expenses
incurred by administrations or mandated bodies.

(e)

the use of Twinning should be the result of a con-
scious choice between different instruments: the
Commission should increase its efforts to ensure
the most appropriate mix of the different instru-
ments available for institution-building;

(e) The identification and design of institution-building
Twinning projects is the result of a well-balanced process
and dialogue between the Commission and the candidate
country under the final scrutiny and approval of the Phare
Management Committee. Proper programming is of the
utmost importance and this has been duly stressed in the
Phare programming guidelines at least since 2000.

(f)

the Commission should create a network of preac-
cession advisers (PAAs) to safeguard the store of
specific knowledge, to spread good practice and to
reduce the risk of errors recurring.

(f) Preaccession advisers (PAA) network: The Commission
welcomes this suggestion and is prepared to refine its
database where all the professional data and contacts of
PAAs are already available so that a network could be set
up.

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CHAPTER 9

Administrative expenditure

TABLE OF CONTENTS

Administrative expenditure of the institutions and Community bodies

Introduction

Specific assessment in the context of the Statement of Assurance

Introduction

Evaluation of supervisory systems and controls

Inherent and control risks

Operation of the systems

Commission

Parliament

Results of testing carried out on a sample of transactions of the financial
year 2002

Additional pension scheme for Members of the European Parliament

Legal framework

Accumulated actuarial deficit

Payments of ‘secretarial expenses’ relating to the employment of
assistants of Members of the European Parliament

Committee of the Regions

Annual report and declaration by the Commission’s Director-General for
Personnel and Administration

Overall conclusion and recommendations

Follow-up of Special Report No 13/2000 on the expenditure of the European
Parliament’s political groups

Introduction

Risk of double financing

Legal status

Accounting and reporting

External audit

Employment contracts

Conclusion

Principal observations in Special Report No 3/2003 on the invalidity pensions
scheme of the European institutions

Audit of the satellite bodies

Audit of the European Schools

Paragraph

9.1-9.44

9.1

9.2-9.28

9.2

9.3-9.13

9.3-9.4

9.5-9.13

9.5-9.11

9.12-9.13

9.14-9.23

9.15-9.20

9.16-9.18

9.19-9.20

9.21-9.22

9.23

9.24-9.27

9.28

9.29-9.39

9.29-9.31

9.32

9.33

9.34-9.35

9.36

9.37

9.38-9.39

9.40-9.44

9.45-9.50

9.51

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ADMINISTRATIVE EXPENDITURE OF THE
INSTITUTIONS AND COMMUNITY BODIES

Introduction

9.1. Heading 5 of the financial perspective, ‘Adminis-
trative expenditure’, contains the institutions’ and other
bodies’ administrative appropriations (Part A of the bud-
get in the case of the Commission). These appropria-
tions are managed directly by each institution or body
and are used primarily to pay the salaries, allowances
and pensions of persons working for the Community
Institutions, as well as rent, property, purchases and
miscellaneous administrative expenditure. In the Com-
mission’s case, these appropriations also enable subsi-
dies to be given to associations and organisations that
assist in the implementation of various aspects of the
European Union’s activities.

Specific assessment in the context of the Statement of
Assurance

Introduction

9.2. The audit appraised the legality and regularity of
the transactions underlying the accounts of the admin-
istrative expenditure of the Institutions. It comprised
the following activities:

— evaluating the operation of the supervisory sys-
tems and controls at the Commission’s Directorate-
General for Personnel and Administration, and at
Parliament, which respectively account for 52 %
and 20 % of the total administrative expenditure of
the institutions,

— testing the operation of key controls relating to the
remuneration of staff at the Commission and at
Parliament,

— considering the statement and annual activity
report produced by the Commission’s Director-
General for Personnel and Administration who has
the main responsibility for administrative expen-
diture,

— substantively testing a number of transactions from
across the whole domain of administrative expen-
diture.

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Evaluation of supervisory systems and controls

Inherent and control risks

9.3. Overall inherent risk is low in the field of admin-
istrative expenditure. This is because of the absence,
firstly, of ‘delegation risk’ (administrative expenditure is
directly managed by the Institutions and Community
Bodies, unlike the majority of programme expenditure,
which is carried out on behalf of the Commission by
national bodies or agencies) and, secondly, of ‘subsidy
risk’ (the vast majority of administrative expenditure
involves ‘arm’s length’ transactions related to the employ-
ment of staff and the purchase of works, goods and ser-
vices rather than subsidies or project funding and is
hence less risky).

9.4. As regards the control risk, the results of past
audits by the Court show that the errors found were
mostly of a formal nature and not due to grave weak-
nesses in the control arrangements. However, certain
weaknesses in the supervisory systems and controls
operating in 2002 have been noted. These weaknesses
are referred to hereafter.

Operation of the systems

Commission

9.5.
In 2002 prior approval of transactions by the
Financial Controller’s department (Financial Control)
was still the principal supervisory system. However, in
conformity with the provisions of Article 47 of the
Financial Regulation, as amended in 1998, prior approval
of every single transaction was no longer required.
Financial Control tested a sample of transactions on the
basis of risk analysis. An assurance about the legality
and the regularity of underlying transactions taken as a
whole cannot be drawn by the Commission from the
results of testing carried out by Financial Control, as:

— follow-up to potential errors was limited to the
particular transaction sampled (when an error was
transactions only the
found in a batch of

9.5.

THE COMMISSION’S REPLY

The Directorate-General for Personnel and Administration’s
effort for the expenditure effected by the Informatics Director-
ate was certainly the most visible (on the individual fiches and
by an overall analysis), the proportion of Financial Control’s
tests having been the largest for this department’s expenditure.
Other services also took the remarks into account in their
operations, albeit in a more informal way and generally
through the replies given to the remarks.

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THE COURT’S OBSERVATIONS

transaction in question was sent back to the autho-
rising officer for correction, without examining if
the error had also occurred in other transactions
of the same batch),

— except for expenditure effected by the Informatics
Directorate, the results of testing were not used to
spur management into correcting weaknesses in
the internal control system.

9.6. The Commission’s reform provided for the opera-
tion of Financial Control during 2002 to be comple-
mented by the setting-up of supervisory systems and
controls at the level of the authorising officers. As a
part of this a risk analysis based on self-assessments by
authorising officers by sub-delegation and other man-
agement staff was carried out. However, for several of
the management systems in the Directorate-General for
Personnel and Administration there was no confirma-
tion of these assessments by means of an audit. Further,
although the Director-General mandated an adviser to
monitor the implementation of the Internal Control
Standards (ICS), there was no comprehensive analysis of
whether the standards were implemented adequately
and across all systems.

9.6.

THE COMMISSION’S REPLY

The Directorate-General for Personnel and Administration
has opted for a risk assessment with the Heads of Unit (and
not only with the authorising officers by sub-delegation).
Given the great variety of the activities in the Directorate-
General for Personnel and Administration environment, not
necessarily all of them financial or with important financial
implications, an in vitro risk assessment of, say, the amounts
per budget heading would give little information on the
underlying risks. In fact, the risk assessment covers not only
financial expenditure, but also activities that have no or little
direct financial impact, but nevertheless with operational and
reputational risks that need to be addressed. In that sense, the
risk assessment aims at being complete and is as reliable as a
risk assessment can possibly get since it is done with the per-
sons responsible concerned, the line managers.

This does not mean that the risk assessment should not be
further refined and updated in the light of new events. The
Commission will welcome all suggestions by the Court that
may improve its risk assessment methodology. The risk cor-
respondents’ network, with the explicit support of the Direc-
tors, should indeed take the ownership of the risk assessment,
but the report’s comments do not reflect the considerable effort
expended for the risk assessment. This effort implied a con-
crete cultural change for the Directorate-General for Person-
nel and Administration and looked at the Directorate-General
for Personnel and Administration’s activities from a different
angle.

28.11.2003

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291

THE COURT’S OBSERVATIONS

9.7. Adequate measures were not taken in 2002 in
order to improve the documentation of financial and
operational procedures (ICS 15), particularly within
Directorate C (‘Buildings policy — management of ser-
vices’), and in order to ensure an effective implementa-
tion of ICS 16 (segregation of duties), 17 (supervision)
and 18 (recording exceptions).

If there is no evidence that the risks are properly managed by
line management, Internal Audit Service and Internal Audit
Capacity concentrate on the first instance on the highest risks
as identified by the assessment and the Directorate-General
for Personnel and Administration will subsequently adopt its
risk analysis.

Subsequently to the Internal Control and Risk Self-Assessment,
the Directorate-General for Personnel and Administration has
analysed the risks and weaknesses, and on 16 April 2003
adopted an action plan for the further improvement of the
internal control system.

9.7.

THE COMMISSION’S REPLY

As regards Internal Control Standards 16, the four cases where
the segregation of duties was not completely achieved were
resolved: social security for auxiliary staff, representation
expenses of Commissioners, security service in Luxembourg
and the medical service in Brussels.

As regards Internal Control Standards 17 and ex-post con-
trols: ex post controls were in place in the Informatics Direc-
torate, as stated in the Annual Activity Report.

As regards Internal Control Standards 18, a note on record-
ing exceptions was addressed to all subdelegates on June
2003. The issue was also a standing item on the reporting
template.

9.8. The system of internal controls relating to staff
remuneration paid in Brussels showed:

9.8.

THE COMMISSION’S REPLY

— there should be documental evidence of a system-
atic analysis of the reasons for monthly variations
in the total amount paid (e.g. 73,3 million euro in
September, 76,7 million euro in October and
75,3 million euro in November),

— inadequate supervision of the records entered in
Sysper, the computer system dealing with the staff
personal data. The task of checking the documents
produced and recording the entitlements to spe-
cific allowances they support has been assigned to

Though the system has indeed some weaknesses, as identified
in the Internal Audit Capacity report, the following qualifica-
tions need to be made:

— the Commission accepts the recommendation regarding

the analysis of the monthly variations,

— upon recruitment and retirement, the determination of
rights and obligations and the corresponding data entry
in the computer system are checked by a second official,
and subsequent corrections are checked again by a third
person,

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28.11.2003

THE COURT’S OBSERVATIONS

a team of officials. The work done by each mem-
ber of the team, involving about 12 000 records of
new or changed entitlements a year, is not reviewed
to make sure that no errors or irregularities have
occurred.

— for the rights and obligations of officials in employment,
only one person establishes and checks the data entry,
though sensitive dossiers are coordinated at the unit level,

— for several years, all data entered (including the modifi-
cations) by the unit or sector responsible for establish-
ing the rights, have been checked by another unit or sec-
tor when the Sysper decisions are entered into the
computer system that calculates the salary (‘VAP’). It is
only this second data entry which leads to the payment
of the individual entitlements. Moreover, data entered
into VAP are always checked by another person, and this
is true also for the corrections,

— in the course of 2003, VAP will be replaced by a new
system which will interface directly with Sysper. The pro-
cedure for checking data entered into Sysper will there-
fore have to be reviewed. A working group has been
established to make sure that a procedure is defined
whereby data will always be checked by a second person,
in full compliance with the Financial Regulation.

9.9. The Court examined the results of an audit of
remuneration carried out by the internal audit capabil-
ity (IAC) of the Directorate-General for Personnel and
Administration. As this audit concerned the 2001 bud-
get year its results are not relevant to an assessment of
the legality and regularity of transactions underlying the
2002 accounts. However, certain systems weaknesses
noted by the IAC still existed in 2002, as the results of
the Court’s examination of the remuneration system
show (paragraph 9.8).

9.10. Among the audit reports issued by the Internal
Audit Service (IAS) in 2002 one, concerning the build-
ing infrastructure managed by the European Commis-
sion, relates to administrative expenditure. The audit
was carried out mainly in 2001. Although no illegal or
irregular transaction is reported, IAS considers that a
range of improvements is necessary before assurance
can be provided that the system of internal control is
fully functional.

9.9.

THE COMMISSION’S REPLY

As stated in the reply to point 9.8, remaining system weak-
nesses will be tackled, in the course of 2003, since the auto-
matic transfer of Sysper data into the new Information Tech-
nologies application for salary payments (‘NAP’) requires a
revision of the control procedures for these data.

9.10.

THE COMMISSION’S REPLY

Following the Internal Audit Service report, Directorate
C agreed a protocol defining the corrective measures. Its
implementation is part of the Office for Infrastructure in
Brussels’ work plan.

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293

9.12.

THE EUROPEAN PARLIAMENT’S REPLY

Both the Court and the Financial Controller carried out sub-
stantive testing on a statistical sampling basis. It is inevitable
that individual errors apprehended in one sample may not
have been present in a different sample. For that same reason,
errors were also discovered by Financial Control other than
those reported by the Court. The key point is that Financial
Control identified and reported, on a timely basis, the risk
that such errors could occur.

THE COURT’S OBSERVATIONS

9.11. Table 9.1 shows ‘indicators’ relating to the qual-
ity of the operation of the Directorate-General for Per-
sonnel and Administration’s supervisory systems and
controls in 2002.

Parliament

9.12. The Financial Controller’s work was effective in
detecting and correcting a considerable number of
errors. The Court’s substantive testing, however, found
further errors, which are reported below.

9.13. The examination of the supervisory systems
relating to staff remuneration did not give rise to any
significant observation.

Results of testing carried out on a sample of transactions
of the financial year 2002

9.14. Apart from the findings set out below, no mate-
rial errors were noted in the sample of transactions
tested.

Additional pension scheme for Members of the European Parliament

9.15. As noted by the Court already in 1999 (1), prob-
lems existed concerning the additional pension fund (2)
set up for the benefit of Members and former Members
of the European Parliament following a decision of
12 June 1990 by the Bureau of the European Parlia-
ment. The Court wishes to draw attention to the follow-
ing two aspects:

(1) Opinion No 5/99 of the Court of Auditors of the Euro-
pean Communities on the Additional Voluntary Pension
Scheme and Fund for Members of the European Parlia-
ment (not published).

(2) The fund has the form of a ‘SICAV’ (Société d’Investissement
à Capital Variable) created in Luxembourg by a Luxem-
bourg ‘ASBL’ (Association Sans But Lucratif) whose mem-
bers are present and former Members of the European
Parliament.

294

EN

Official Journal of the European Union

28.11.2003

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28.11.2003

EN

Official Journal of the European Union

295

THE COURT’S OBSERVATIONS

Legal framework

9.16. During 2002, a total of 8 179 999 euro from
Parliament’s budget Item 1 0 3 3 was paid as a contri-
bution to the additional (voluntary) pension scheme.
The remarks to budget Item 1 0 3 3 indicate that the
appropriation ‘is intended to cover the institution’s con-
tribution to the voluntary supplementary pension
scheme for Members (3)’. Two thirds of the contribu-
tions to the scheme are directly charged to Parliament’s
budget Item 1 0 3 3, with one third being paid by the
Members of the European Parliament.

9.17. According to Article 190(5) of the Treaty, the
regulations and general conditions governing the per-
formance of the duties of its Members are laid down by
the European Parliament after seeking an opinion from
the Commission and with the approval of the Council.
Parliament’s contribution to the additional pension
scheme should be based on an act of secondary legisla-
tion adopted in conformity with Article 190(5) of the
Treaty.

9.18.
In its opinion issued in 1999 the Court recom-
mended that the Parliament examine the legal frame-
work of the scheme. As yet no action has been taken.
After having noted the reply of the Parliament, the Court
maintains its opinion that, if the present scheme is to
continue, a sufficient legal basis has to be created as
soon as possible.

(3) The full text of the remarks reads: ‘Rules governing the
payment of expenses and allowances to Members of the
European Parliament, and in particular Annex IX thereto.
Bureau decision of 12 June 1990, as last amended by the
Bureau decision of 13 November 1995. This appropria-
tion is intended to cover the institution’s contribution to
the voluntary supplementary pension scheme for Mem-
bers. Revenue available for reuse is estimated at EUR
300 000.’

9.18.

THE EUROPEAN PARLIAMENT’S REPLY

Article 199,
first subparagraph of the EC Treaty (ex-
Article 142 of the EEC Treaty) stipulates that, ‘the European
Parliament shall adopt its Rules of Procedure, acting by a
majority of its Members’’. The European Parliament is thus
directly empowered by the Treaty to take its own internal
operational measures. Parliament being thus empowered, Rule
22(2) of the Rules of Procedure states that, ‘the Bureau shall
take financial, organisational and administrative decisions on
matters concerning Members and the internal organisation of
Parliament, its Secretariat and its bodies’. The decision to
establish the additional (voluntary) pension scheme naturally
comes within the responsibilities assigned to the Bureau by
this provision. Finally in this context, it is recalled that, on
4 June 2003, the EP adopted a legislative resolution on the
Statute of Members of the European Parliament, which, among
other matters, covers the question of Members’ pensions. It
thus now falls to the Council to approve or reject the draft
Statute. Contacts with the Presidency of Council are under
way (October 2003).

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Accumulated actuarial deficit

9.19. As at 31 December 2002 the asset value of the
fund amounted to around 117 million euro and the
total provisions for pensions and similar obligations to
around 158 million euro, which left a negative actuarial
balance of around 41 million euro (around 8 million
euro at the end of 2001) (4)

9.20.
In 1999 the Court stressed the need to clarify
without delay, and before the adoption of a ‘Statute for
Members’, Parliament’s role in the rules and modalities
of the scheme (5). The Court reiterates that there should
be clear rules established in the scheme to define the
liabilities and responsibilities of the European Parlia-
ment and of the members of the scheme in the case of
a deficit.

9.19 and 9.20.

THE EUROPEAN PARLIAMENT’S REPLY

The amount quoted reflects the value of the pension fund as
at a specific date, which followed a difficult period on the
financial markets. Pension fund valuation is normally a
medium- or even long-term operation. In response to the de-
terioration of the position on the financial markets, the Bureau
decided on 13 May 2002, on a proposal from the Steering
Committee of the ASBL (non-profit organisation) to increase
the contributions by 3 % from 1 January 2003, with 1 %
being borne by Members and 2 % by Parliament, in accor-
dance with the contributions breakdown provided for in the
Rules. In the meantime, the financial markets have picked up
and the situation is now different from that described in point
9.19 and continues to be closely monitored.

Payments of ‘secretarial expenses’ relating to the employment of
assistants of Members of the European Parliament

9.21. A total of around 175 000 euro was paid as a
‘secretarial allowance’ relating to the employment of
various Members’ assistants, although the supporting
documents required by the relevant Bureau rules either
were not submitted to Parliament’s administration, or
did not provide sufficient evidence that the funds had
been used in strict compliance with the rules. In the
meantime the Parliament’s administration has taken
steps so as to correct the anomalies identified by the
Court.

9.21.

THE EUROPEAN PARLIAMENT’S REPLY

A comprehensive review of all files was conducted in 2002.
They were added to as necessary, particularly in the instances
referred to by the Court, with additional detailed supporting
documents being supplied by the Members concerned.

(4) The Court receives annually the accounts from the pen-
sion fund scheme for information. The accounts are
audited by a private audit firm.

(5) Paragraph 22 of Opinion No 5/99 reads: ‘There should be
clear rules established in the Scheme to define the liabili-
ties and responsibilities of the European Parliament and
the members of the Scheme if a future actuarial evalua-
tion were to indicate a deficit. Rules should also cover the
treatment of surpluses. It is essential that this question
should be settled before the proposed new Statute for
Members of the European Parliament comes into effect.
In the view of the Court it would be difficult to justify a
situation in which a continuing contingent liability
remained, with Parliament to meet any part of a deficit
emerging on the occasion of a future actuarial valuation’.

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9.22.
In its Special Report No 10/98 the Court noted
that, because of a lack of transparency, the regulatory
framework applicable in 1998 did ‘not provide the bud-
getary authority with reasonable insurance against the
risk of inappropriate use of the secretarial allowance’ (6).
The rules were amended in April 2000 so as to rein-
force the control of the secretarial allowance. The find-
ings set out above show that if the new rules are not
applied strictly, the risk of inappropriate use of the sec-
retarial allowance remains.

Committee of the Regions

9.23. The Committee contracted a firm to carry out
publishing and printing tasks without first consulting
the Office for Official Publications of the European
Communities and without informing the Office’s Man-
agement Committee. This was contrary to a Decision of
the five EU institutions and both Committees of
20 July 2000 on the organisation and operation of the
Office for Official Publications of the European Com-
munities (7). Furthermore, only a limited call for tender
was launched in the case of a publication, despite the
value of the contract necessitating an open tendering
procedure. The Financial Controller did not approve the
contract and the corresponding financial commitment,
but was overruled. Payments to the firm in 2002 totalled
46 148 euro. A further 16 620 euro was committed for
payments to be made in 2003.

9.22.

THE EUROPEAN PARLIAMENT’S REPLY

The verifications carried out prior to payment have been
strengthened to ensure the strict application of Article 14 and
avoid any risk. Payment to an assistant is possible only where
the contract and the application are accompanied by a copy
of a declaration of membership of a social security scheme; the
relationship between the salary mentioned in the contract and
the amount stipulated on the application needs to be coher-
ent; every payment must be based on supporting documents
such as a contract, hotel bills, train tickets, etc.

9.23.

THE COMMITTEE OF THE REGIONS’ REPLY

After consultation with the Financial Controller and the Joint
Services of both Committees (which had experience in tender-
ing procedures), a tendering procedure was launched to the
Belgian printing companies on the AMI list originating with
DG EAC of the European Commission and other Belgian
companies for a contract to print COR Newsletters for a
three-year period. The Publications Office was discarded as a
provider due to the specificities of these Newsletters, which
demand printing at very short notice and permanent contacts
with the provider.

While admitting that the COR did not respect the need for an
open tendering procedure, it must be said that the call of ten-
der was based on an existing AMI list established by the
European Commission for printing companies.

Due to the legal commitments to the selected company, the
authorising officer proposed to the President, as superior
authority, to overrule the withholding of approval by the
Financial Controller. Following advice from the Administra-
tion, the President overruled the refusal by the Financial Con-
troller and the commitment was approved.

(6) Special Report No 10/98 concerning the expenses and
allowances of the Members of the European Parliament
together with the replies of the European Parliament
(OJ C 243, 3.8.1998, paragraph 1.37).

(7) Decision No 2000/459/EC, ECSC, Euratom (OJ L 183,

22.7.2000, p. 12).

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Annual report and declaration by the Commission’s
Director-General for Personnel and Administration

9.24. As an authorising officer by delegation, the
Director-General for Personnel and Administration has
produced an Annual Activity Report and a Declaration
for 2002. In accordance with the Commission require-
ments, he provides information on the follow-up to
2001 action plans and on the progress made in imple-
menting internal control systems. His Declaration pro-
vides the Commission with reasonable assurance as to
the legality and regularity of the transactions underly-
ing the 2002 accounts.

9.25. The Annual Activity Report gives a clear and
thorough view of the Directorate-General for Personnel
and Administration’s activities and achievements in
2002. Only a part of the Directorate-General for Per-
sonnel and Administration’s activities is directly con-
cerned with the financial procedures relating to the use
of budget appropriations. Hence, only the parts of the
Annual Activity Report specifically dealing with such
procedures are relevant for a statement on the legality
and regularity of the transactions underlying the 2002
accounts. The comments set out below only refer to
these parts of the Annual Activity Report.

9.26. The Director-General recognises that weaknesses
persist and new requirements have to be fulfilled in
order to comply fully with the internal control stan-
dards set up by the Commission. He does not mention
which specific internal control measures recommended
by the Internal Audit Capability for the area of the pay-
ment of remuneration have not yet been implemented.

9.27. As a complete description was not drawn up of
the procedures in operation ensuring, within each direc-
torate, the legality and regularity of transactions, the
Court considers that the authorising officers by sub-
delegation were not in a position to provide the Director-
General with precise information about the operation
of their internal control systems.

9.26.

THE COMMISSION’S REPLY

The Commission wants to refer to the action plan mentioned
under point 9.6, and for the salary question in particular, to
a Protocol signed by the responsible department on 20 Decem-
ber 2002 concerning the follow-up to the recommendations.

9.27.

THE COMMISSION’S REPLY

Although the description of the procedures is one of the Inter-
nal Control Standards, and one of the objectives is to complete
it as soon and cost-effectively as possible, the following points
need to be made:

— even a full description of all procedures is only one of a
series of measures that may result in a reasonable assur-
ance of the Director-General about the operation of
internal controls,

— a manual of financial procedures, in this context no
doubt the most important area, exists and is available
on the Intranet,

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Overall conclusion and recommendations

9.28. Paragraphs 9.15 to 9.23 above set out the Court’s
observations on certain transactions. The Court’s audit
found no important failures of the systems or other
material errors affecting the legality and regularity of
administrative expenditure. The Court recommends
that, in the framework of the enforcement of the new
Financial Regulation, attention be specifically paid to
the reinforcement of the authorising officers’ super-
visory systems and controls.

— another important measure was the training of nearly
all authorising officials by subdelegation (i.e. those with
important budgets) in late 2002 about the new finan-
cial regulations, and more generally about the expendi-
ture cycle,

— an important source of information are the thrice yearly
reports addressed to the Director-General by all subdel-
egates, and which are analysed by the Resource director-
ate,

— this reasonable assurance was also established through
preparatory meetings between directors and the Annual
Activity Report preparation team, and subsequently
through bilateral meeting between the Director-General
and the directors.

9.28.

THE COMMISSION’S REPLY

The recommendations of the Court are well taken. In particu-
lar:

— documenting procedures and developing guidance will
continue, in particular as regards the new Financial
Regulation,

— the segregation of duties, though fully in place at this

moment, will be constantly monitored,

— the system of ex post controls of financial transactions,
put in place as of 1 January 2003, will be reviewed in
the light of the experience over the first half of 2003,

— special attention will be given to the management of

recoveries and decommitments,

— the format and contents of the reports by subdelegates
will be reviewed in the light of 18 months of experience,

— subdelegates will be reminded and informed of their
duties in respect of recording and correcting internal
control weaknesses and of exception reporting (in this
respect two notes were issued on 23 June 2003), ex ante
controls (inter alia, through an assessment of the work-
flows), legality and regularity.

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Follow-up to Special Report No 13/2000 on the expen-
diture of the European Parliament’s political groups

Introduction

9.29. The Court examined the measures taken by the
Parliament in response to the Court’s Special Report
No 13/2000 (8) on the expenditure of the European Par-
liament’s political groups, together with the associated
recommendations made by the budgetary authority
within the discharge procedure (9).

9.30. The Special Report identified a lack of clear rules
governing the eligibility of expenditure and weaknesses
in internal controls, and specifically:

— inadequate rules governing contributions to politi-

cal parties,

— risk of double financing,

— problems over the legal status of the political

groups,

— poorly defined accounting and reporting rules,

— inadequate rules and management of external audit

of the financial statements, and

— significant weaknesses in the definition, status and

management of employment contracts.

9.31. Recommendations made to improve these issues
centred around establishing clearer and more precise
rules, and appropriate management procedures and
controls. Parliament responded by issuing new rules on
the use of the appropriations, and allocated the expen-
diture to a single budget Item (3 7 0 1). The draft regu-
lation on the legal status and funding of European
political parties prohibits donations to the parties by
the political groups of the European Parliament. The
Court found that in general the new rules constituted a

(8) OJ C 181, 28.6.2000.
(9) Decision of 10 April 2002 concerning discharge in respect
of the implementation of the general budget of the Euro-
pean Union for the 2000 financial year — Section I —
European Parliament (OJ L 158, 17.6.2002).

9.31.

THE EUROPEAN PARLIAMENT’S REPLY

On the whole the Court’s remarks are positive, noting ‘con-
siderable improvement’.

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considerable improvement, particularly as they were
extended to issues not previously covered (10). However,
a number of weaknesses persist, as set out in the fol-
lowing paragraphs.

Risk of double financing

9.32. The rules state that expenditure covered by Item
3 7 0 1 may not substitute for expenditure already cov-
ered by other allowances. However, the Court found
that the system did not adequately deal with this issue,
resulting in a risk of double financing of expenditure.

Legal status

9.33. Still no provision identifies the specific status
and the rights and responsibilities of the political groups.
Similarly there is no definition of the rights and respon-
sibilities of national delegations and single Members
when dealing with so-called ‘decentralised expenditure’.

Accounting and reporting

9.34. The certified financial statements of the politi-
cal groups have been made public on the Internet since
December 2002. While the rules provide that the
accounts of the political groups are maintained in

(10) E.g. subscriptions and subsidies to third parties, changes
and mergers between groups and employment contracts.

9.32.

THE EUROPEAN PARLIAMENT’S REPLY

Parliament’s administration will examine together with politi-
cal groups the possible improvements in order to prevent any
double financing of the same expenditure from different bud-
get items. The groups’ rules contain provisions aimed at
avoiding that double funding takes place. Groups only fund
activities if they are carried out on behalf of the group. The
external auditors of the groups verify this.

9.33.

THE EUROPEAN PARLIAMENT’S REPLY

The legal status of the political groups is dealt with in new
Article 29a of Parliament’s Rules of Procedure, adopted by
Parliament on 23 September 2003.

As regards decentralised expenditure, the proposed new rules
governing use of budget Item 3 7 0 1 are designed to provide
further clarification. The group chairmen remain responsible
for the use of Item 3 7 0 1 funds. Decentralised expenditure
is authorised by the group, and this expenditure therefore falls
under the responsibility of the group.

9.34.

THE EUROPEAN PARLIAMENT’S REPLY

As for the divergence of the accounting systems used by the
groups criticised by the Court, the political groups will orga-
nise a meeting of their accountants in order to come up with
a harmonisation of the accounting systems used.

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accordance with a common accounting plan, there is
no definition of the basic accounting principles to be
applied. In practice both cash-based and accrual account-
ing are used (or sometimes a mixture of both), depend-
ing on the political group involved, which makes com-
parison difficult. Furthermore, the financial statements
do not provide the detailed information on decentra-
lised expenditure required by the accounting plan.

9.35. Considerable progress has been made in includ-
ing information on fixed assets in both the accounting
records of the groups and Parliament’s own inventory
system. The accuracy of the information is likely to be
further improved by a proposed harmonisation of the
underlying information.

External audit

9.36. Parliament did not follow the Court’s recom-
mendation of appointing a single external auditor for all
political groups’ financial statements. Instead it issued a
common audit mandate, followed by a list of audit firms
from which the political groups could make a selection.
The Court found that the audit engagements were insuf-
ficiently clear or detailed, and that the process was inad-
equately managed. As a result the content of the audit
statements varied for the seven sets of accounts certi-
fied (by five different firms).

9.36.

THE EUROPEAN PARLIAMENT’S REPLY

Compliance with the common audit mandate must be rein-
forced. The groups expect further improvements once a stan-
dardised audit statement has been drawn up by Parliament’s
administration. The five external audit firms carried out their
work in accordance with internationally recognised audit stan-
dards (ISA), as required in the calls for expressions of interest
and the mandate given by the Bureau on 10 December 2001.

Employment contracts

9.37. While improvements were noted in the rules and
procedures governing employment contracts there still
remain weaknesses in this area. There continue to be
many different types of contract, with many containing
weaknesses. In some cases they may lead to an unneces-
sary risk of litigation and in other cases their compli-
ance with national labour and tax requirements is doubt-
ful.

9.37.

THE EUROPEAN PARLIAMENT’S REPLY

The administration now checks that all contracts received
comply with the rules governing the payment of expenses and
allowances to Members. It systematically checks that persons
who have concluded a contract with a political group do not
hold a Member’s assistant’s contract covering the same period
and thus are not in receipt of payments under the secretarial
assistance allowance.

Each year, the administration will remind the political groups
of their obligation to forward to the Secretariat the employ-
ment contracts as well as contracts for the provision of services
lasting six months or more.

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Conclusion

found that considerable
9.38. While the Court
progress has been made, there remain important areas
where greater efforts are needed (e.g. clarifying the legal
status of the groups, reinforcing controls and improv-
ing management of employment contracts). Moreover,
the rules should be extended to cover mission costs,
which currently represent around one third of expen-
diture of the groups at central level but which are not
subject to common standards.

9.38.

THE EUROPEAN PARLIAMENT’S REPLY

The Court’s observations have been forwarded to the groups,
which note the Court’s recommendation that the rules should
be extended to cover mission costs for which common stan-
dards should be formulated.

9.39. The Court continues to maintain that the cen-
tralisation of a number of administrative functions
within Parliament’s own administration would consid-
erably improve management of the appropriations and
reduce the administrative burden on the groups them-
selves. It would help to reduce the risk of double fund-
ing of expenditure, to allow Parliament to monitor its
potential legal obligations and to provide a better level
of consistency and clarity in employment contracts.

9.39.

THE EUROPEAN PARLIAMENT’S REPLY

The Court’s observations have been forwarded to the groups,
which note that the Court reiterates its opinion that centrali-
sation of a number of administrative functions would improve
management of the appropriations, especially (but not exclu-
sively) with regard to employment contracts.

Principal observations in Special Report No 3/2003 on
the invalidity pensions scheme of the European institu-
tions (11)

9.40. The Court carried out an audit of the European
institutions’ Invalidity Pensions Scheme in order to assess
the cost of invalidity pensions, identify potential sav-
ings, determine whether invalidity pensions are only
granted where a real invalidity has been duly recog-
nised, and evaluate whether the institutions have set up
the management systems required for adequate moni-
toring of, and effective control over, the operation of
the scheme.

9.40 to 9.44.

THE EUROPEAN PARLIAMENT’S REPLY

As it has already indicated in its reply to Special Report
No 3/2003, Parliament accepts the broad thrust of the audi-
tors’ conclusions, particularly as regards prevention and the
need for improved management and coordination in this area.
With this mind, it has already embarked on a major reform
of its system for the management of absences on medical
grounds, with a view to establishing precisely the kind of
holistic approach that the auditors advocate. Details of this
reform were also provided in Parliament’s reply to the report.

Parliament also notes with satisfaction that the Commission
is embarking on a similar exercise and intends, as part of the
latter, to discuss with the other institutions possible reforms
to the Staff Regulations in this area.

(11) OJ C 109, 7.5.2003.

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9.41. The Court’s audit revealed a complex picture.
On the one hand the rate of invalidity retirement has
remained stable over the last 15 years, and, in the opin-
ion of the Court’s medical adviser, invalidity pensions
are awarded in a justified way. On the other hand,
retirement on invalidity grounds is more common in
some grades than normal retirement, and there is evi-
dence that frustration in the working environment is a
significant element in demotivating some staff who are
eventually retired on ill-health grounds. A part of inval-
idity retirements could, moreover, be avoided if adequate
administrative measures for prevention and early treat-
ment of medical problems and the associated employ-
ment problems were taken in good time.

9.41.

THE COMMISSION’S REPLY

The Commission welcomes the Court’s opinion that invalid-
ity pensions are awarded correctly. But it also shares the
Court’s point of view that measures of early prevention and
family support may decrease their number. The Commission
is of the opinion that the measures concerning harassment
which are being investigated, the pilot experiments in family
support, and also some aspects of reform (clearer definition of
objectives and better career planning) will contribute to a bet-
ter working climate and motivation, and thereby avoid, as
stated by the Court, a number of invalidity retirements. All
this notwithstanding, quick results are not to be expected in
this area.

9.42. Shortcomings were found concerning the over-
all policy and management systems for absences due to
illness, characterised by a medical rather than adminis-
trative approach, a lack of clarity and coordination
between the various departments involved, a lack of
resources, unsuitable IT management
tools, and
obstacles resulting from certain provisions of the Staff
Regulations.

9.42.

THE COMMISSION’S REPLY

Some measures of the MAP 2000 package have indeed had
negative effects on coordination between the central services of
The Directorate-General for Personnel and Administration
(leave and medical services) and the human resource manage-
ment units in the directorates-general, which have been
addressed through increased awareness, resulting e.g. in an
increase of the medical controls requested by the heads of units
of the staff concerned.

Since the Court’s audit took place, the functionalities of the
SIC Congés in this area have improved considerably. Also,
data warehouses have been developed on the Sermed system
and on BCCA (base centrale des congés et absences) to allow
for early detection and an improved follow-up (an internal
multidisciplinary group was set up to this effect), adding an
administrative aspect to what is and remains essentially a
medical problem, where the medical approach must prevail.

An evaluation report on the management of leave and absence
was produced in June 2003 and will be discussed by manage-
ment in the autumn so as to identify the necessary measures
to be taken.

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9.43. The result is frequent and costly delays in the
opening and progress of the invalidity procedure, with
the length of the process itself associated with deterio-
rating health and consequently with extremely low rates
of reinstatement, especially in the 50 % of cases involv-
ing psychological disorders.

9.43.

THE COMMISSION’S REPLY

Since the Court examined the system, the Commission has
improved the situation concerning delays: the medical situa-
tion of staff is systematically examined as soon as they total
350 days over the last 36 months.

9.44.

THE COMMISSION’S REPLY

As regards the psychological grounds, which occur in 50 % of
the cases, the Commission plans to start a service whereby a
psychiatrist/psychologist would work in collaboration with the
social workers and the human resource management units of
the directorates-general.

See also reply to the above paragraphs.

9.44. The total net actuarial cost of the invalidity pen-
sions awarded each year has been estimated by the Court
at about 74 million euro. The audit found scope for
financial savings through the adoption of adequate
administrative measures for prevention and early treat-
ment, particularly in cases where the grounds for inval-
idity are psychological. Such measures should include
the development by the institutions of an overall policy
on absences due to illness and on invalidity, with per-
formance indicators, strong support from senior man-
agement, clearly allocated roles and responsibilities,
strong medical and administrative synergy, and with
careful and resource-intensive attention given to the
needs of those members of staff who need support.
This policy should focus both on actions to be taken in
the early stages through preventative measures that
consider the organisation of work and working condi-
tions, and on those actions required at a subsequent
stage to help rehabilitation and encourage members of
staff who are in poorer health to continue to work under
reasonable conditions.

AUDIT OF THE SATELLITE BODIES

9.45. The Court’s annual audit of the Union’s satellite
bodies (SBs) is the subject of specific annual reports (12).
The principal data relating to the SBs are set out in
Table 9.2.

(12) In the process of being published in the Official Journal.

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Table 9.2 — Budgets and staff for 2001 and 2002 — Satellite bodies (SBs)

Headquarters

Year of creation

Budget
(million euro)

Permanent posts

2001

2002

2001

2002

European Centre for the Development of
Vocational Training

Thessaloniki

1975

European Foundation for the Improvement
of Living and Working Conditions

Dublin

European Environment Agency

Copenhagen

European Training Foundation

Turin

1975

1990

1990

European Monitoring Centre for Drugs and
Drug Addiction

Lisbon

1993

European Agency for the Evaluation of
Medicinal Products

London

1993

Translation Centre for the bodies of the
European Union

Luxembourg

Community Plant Variety Office

Angers

1994

1994

13,5

15,3

21,7

16,8

9,2

65,9

27,2

8,6

14,2

17,4

25,2

16,8

10,4

61,3

23,6

10,5

Office for Harmonization in the Internal
Market

European Agency for Safety and Health at
Work

Alicante

1994

163,6

154,7

Bilbao

1995

12,0

13,2

European Monitoring Centre for Racism and
Zenophobia

Vienna

European Agency for Reconstruction

Thessaloniki

Eurojust

The Hague

1997

2000

2002

5,3

411,2

—

Total

770,3

6,2

495,3

2,8

851,6

81

78

87

130

55

211

140

31

798

26

25

241

—

83

88

106

123

59

251

146

33

715

31

28

316

6

1 903

1 985

9.46. The year 2002 was marked by the creation of
four new SBs. Eurojust was set up (13) to improve coor-
dination of legal investigations and prosecutions in order
to fight against serious forms of organised crime. Euro-
just’s accounts for the financial year 2002 are the sub-
ject of a specific annual report (14). The European Food
Safety Authority (15) was administered at the adminis-
trative and financial level by the Commission during
the financial year. It neither collected revenue nor
incurred expenditure during the financial year 2002;

(13) Council Decision No 2002/187/JHA of 28 February 2002

(OJ L 63, 6.3.2002, p. 1).

(14) In the process of being published in the Official Journal.
(15) Regulation (EC) No 178/2002 of the European Parliament
and of the Council of 28 January 2002 (OJ L 31, 1.2.2002,
p. 1).

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there is therefore no specific annual report on it. The
to the European Maritime Safety
same applies
Agency (16)
European Aviation Safety
Agency (17).

and the

9.47.
In 2002 the total budgets of the SBs rose to
851,6 million euro, as against 770,3 million euro in
2001. The number of employees of all the SBs rose
from 1 903 in 2001 to 1 985 in 2002.

9.48. The audits carried out on the SBs have not
brought to light any anomalies likely to significantly
affect the Court’s opinion of their accounts. The SBs
should, however, take care to programme their work
more realistically, in order to avoid unnecessary carry-
overs and/or calls for funds.

9.49. The Commission and the SBs should take the
opportunity offered by the introduction of the new
framework Financial Regulation to reconsider, adapt
and improve their accounting data systems. Harmonisa-
tion of their accounting systems and practices should
be a priority, particularly with a view to consolidating
the SBs’ accounts with those of the Commission (18).

9.49.

THE COMMISSION’S REPLY

As part of the ongoing project to modernise the Commission’s
accounting systems, this consolidation is first foreseen for the
accounts of 2005.

The Commission understands that to consolidate these organ-
isms it will be necessary that the consolidated entities apply
the same accounting rules as are now being developed for the
Commission — Article 133 of the new Financial Regulation
also confirms that such bodies should adopt the accounting
rules and methods as adopted by the Commission’s accoun-
tant. It was thus already foreseen that these bodies would be
informed of the changing requirements with regard to what
information needs to be supplied by them so as to consolidate
their figures — there has already been a two-day meeting held
in Brussels in October 2002 between the Commission and
representatives of the organisms explaining the modernisation
plan and a second meeting in Lisbon in spring 2003 outlin-
ing the advantages of the accounting reform.

Additionally, the bodies have a direct input to the modernisa-
tion project by having two representatives on the Accounting
Standards Committee.

(16) Regulation (EC) No 1406/2002 of the European Parlia-
ment and the Council of 27 June 2002 (OJ L 208,
5.8.2002, p. 1).

(17) Regulation (EC) No 1592/2002 of 15 July 2002 of the
European Parliament and the Council (OJ L 240, 7.9.2002,
p. 1).

(18) See Article 185 of Council Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 on the Financial Regula-
tion applicable to the general budget of the European
Communities (OJ L 248, 16.9.2002, p. 1).

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9.50. All the SBs audited by the Court for the finan-
cial year 2002 have complied with the Interinstitutional
Agreement of 25 May 1999 concerning internal inves-
tigations by the European Anti-fraud Office (OLAF) (19)
and have adopted decisions that conform, to a consider-
able degree, to the model set out in the annex to the
agreement in question. Only Eurojust had not yet
adopted a decision in this matter.

AUDIT OF THE EUROPEAN SCHOOLS

9.51. The results of the Court’s audit of the European
Schools are set out in a specific annual report, not pub-
lished in the Official Journal, which is submitted to the
Board of Governors of the European Schools. For the
financial year 2002, the audit concerned the Schools’
consolidated accounts, which are drawn up by the Office
of the Secretary-General of the Board of Governors, as
well as the accounts of the Munich School and Brussels
II. The audits did not bring to light any anomalies likely
to affect the Court’s opinion of the Schools’ accounts.
At the start of the 2002 school year, the Schools had
18 302 pupils, of whom 10 803 were entitled pupils.
The staff was equivalent to 1 546 full-time persons,
including 1 165 teachers on secondment. The Schools’
budget amounted to 187 million euro, principally
financed by a Commission subsidy (106 million euro)
and by contributions from the Member States (41 mil-
lion euro).

(19) OJ L 136, 31.5.1999, p. 15. In its resolutions concerning
the discharges for 2001, the European Parliament requested
the Court of Auditors to indicate whether all the SBs apply
the provisions of this agreement without restriction.

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CHAPTER 10

Financial instruments and banking activities

CONTENTS

Introduction

Activities in relation to banking operations

Introduction

The internal control system

Minimum requirements

Validation procedures

Internal audit

External audit

Risk identification and management

Risk inventory

Checks and verifications

Conclusion

Guarantee fund for external actions

Loans and borrowings of the ECSC in liquidation

The EEA Financial Mechanism

Introduction

Paragraph

10.1-10.3

10.4-10.11

10.4

10.5-10.8

10.5

10.6

10.7

10.8

10.9-10.10

10.9

10.10

10.11

10.12-10.17

10.18-10.20

10.21-10.39

10.21-10.27

Observations concerning the overall management of the Financial Mechanism 10.28-10.32

Liquidity

Monitoring

Reconciliation

Certification

10.28

10.29-10.30

10.31

10.32

Specific observations concerning the Financial Mechanism projects

10.33-10.38

Public tendering

Appropriate checks and documentation

Efficiency and effectiveness

Conclusion

10.33

10.34

10.35-10.38

10.39

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INTRODUCTION

10.1. The financial instruments of the Community are
the following:

— loans granted either from budgetary funds or from

borrowed funds,

— loan-related interest subsidies from budgetary

funds,

— guarantees on borrowings subscribed and on loans

granted by third parties,

— shareholdings in common interest bodies (1) or in

special operations.

10.2. Within the Commission, the Directorate-General
for Economic and Financial Affairs handles most of the
financial instruments and related banking activities. This
Directorate is also responsible for liaising with the Com-
munity’s specialised financial institutions, the European
Investment Bank (EIB) and the European Investment
Fund (EIF). The Guarantee Fund for external actions
(hereinafter ‘the Guarantee Fund’) is intended to cover
the financial risk of default on loans guaranteed or
granted by the Community to or in a third country. The
EEA (2) Financial Mechanism provides interest rebates
for EIB loans and investment grants.

10.3. The Court’s audit covered:

— the internal controls of the Directorate-General for
Economic and Financial Affairs in relation to its
banking operations,

— the application of the Guarantee Fund,

— the borrowing and lending activities of the Euro-
pean Coal and Steel Community (ECSC) in liquida-
tion, and

— the EEA Financial Mechanism.

(1) Such as the European Bank for Reconstruction and Devel-

opment (EBRD).

(2) European Economic Area.

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ACTIVITIES IN RELATION TO BANKING
OPERATIONS

Introduction

10.4. A directorate in Luxembourg of the Directorate-
General for Economic and Financial Affairs executes
and monitors the Commission’s banking activities. The
directorate was created during the restructuring of the
Directorate-General for Economic and Financial Affairs
that took place in 2002. It took over the old Service des
Opérations Financières’ responsibilities for loans and bor-
rowings, plus the guarantee operations and relations
with the EIB, which were previously handled by the
Directorate-General for the Budget.

The internal control system

Minimum requirements

10.5. The Commission laid down minimum internal
control requirements in a document (3) that contains
and sets out a list of 24 internal control standards (ICS)
and stipulates the minimum criteria to be achieved by
the Commission’s services in order to comply with these
standards. Following its internal control self-assessment
exercise for 2002, the Directorate-General for Economic
and Financial Affairs declared that minimum standards,
not all of which are applicable as such to banking
operations, had not yet been fully implemented for half
of these ICS.

Validation procedures

10.6. Separate internal control systems were estab-
lished within the Directorate in Luxembourg of the
Directorate-General for Economic and Financial Affairs.
Manuals of procedures contain detailed descriptions of
the procedures for validating transactions, the control
functions and the reports that must be made. The inter-
nal control procedures laid down in these documents
have to be updated to take into account the restructur-
ing that has recently taken place within the department.

(3) SEC(2001) 2037/4 of 18 December 2001.

10.5. With respect to the banking operations the internal
rules and the manuals of procedures have been in place, and
have been controlled by internal and external auditors, for
many years. The current updating exercise will take into
account the requirements of the internal control standards
(ICS).

10.6. The current updating exercise will take into account
the impact of restructuring, where appropriate.

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Internal audit

10.7.
Following the restructuring of the Commission,
the internal audit unit that was operating within the
Directorate-General for Economic and Financial Affairs
became the ‘internal audit capability’ (IAC). It carries
out tests of the internal control systems as part of an
annual work programme. It does not have a constant
supervision function. The unit’s last audit of banking
operations and the related treasury transactions was in
1999.

External audit

10.7. The ‘Internal Audit Capability’ (IAC) audit pro-
gramme is based on a detailed risk assessment, which takes
into account the annual audits carried out on banking activi-
ties by both the European Court of Auditors and an external
firm of auditors, and provides for an audit of banking opera-
tions and related treasury activities in 2003.

10.8. The financial statements for the new Commu-
nity Instrument, Euratom, balance of payments,
medium-term financial assistance and food aid financial
instruments are audited by a private audit company. As
part of their audit, the auditors test for compliance with
the existing administrative procedures. The guarantees
for EIB loans do not fall within the scope of these audits.
These operations are subject to EIB audit procedures, to
the audit files of which the Commission has no access.

10.8. The guarantees for European Investment Bank (EIB)
loans are global guarantees extended for external lending in
certain regions. The Council Decisions mandated the Bank to
manage the corresponding loans according to its usual criteria
and procedures. These operations are audited through the EIB’s
normal audit procedures. The legislation currently in force
does not provide for access by the Commission to these audit
files.

10.9. The third parties which manage activities on the
Commission’s behalf are supranational or public institutions
such as the EIB Group and the European Bank for Recon-
struction and Development (EBRD). The Commission con-
siders that these institutions are reliable counterparts, and
that the risk concerning the quality and exhaustiveness of the
information supplied by them is relatively low.

Risk identification and management

Risk inventory

10.9. The Directorate-General
for Economic and
Financial Affairs carried out several self-evaluation exer-
cises during 2002. Amongst other things they resulted
in a diagnosis of the main risks for each directorate of
this Directorate-General for the activities perceived by
the managers (directors and heads of unit), including
the directorate in Luxembourg, to be exposed to the
most risk. The Court notes, however, that this risk
inventory should be extended to cover the quality and
exhaustiveness of the information supplied by third
parties concerning the activities managed by them on
the Commission’s account in accordance with the
requirements laid down in the internal control stan-
dards (ICS) adopted by the Commission (4).

(4) See standard number 11 ‘… In order to set up a sound
internal control system … management must identify the
main risk faced in the following four categories: … Reli-
ability of internal and external financial and management
information’.

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Checks and verifications

10.10. Apart from the initiation of certain opera-
tions (5), which requires consultation with the Commis-
sion Directorates-General involved in the authorisation
procedure (6), the directorate in Luxembourg to a large
extent operates within a closed system and without
adequate control counterweight. Before its reorganisa-
tion, all operations and the associated risks were subject
to close scrutiny by its internal audit unit. This internal
audit unit has been replaced by the internal audit capa-
bility (IAC) which, however, no longer has a permanent
supervision role of the banking operations (see also
paragraph 10.7). Unlike for budgetary operations, the
banking operations, the related treasury transactions
and associated risks are not subject to checks at the
level of the Directorate-General for Economic and Finan-
cial Affairs by a unit outside the directorate in Luxem-
bourg. Annual controls by external auditors are not
designed to fill this gap.

Conclusion

10.11.
In the area of banking activities, the Commis-
sion has established an internal control and manage-
ment system designed to confront the particular diffi-
culties that are specific to that area. Nevertheless, the
reliability and exhaustiveness of the information sup-
plied by third parties must be taken into account in the
risk inventory of the Directorate-General for Economic
and Financial Affairs. Those activities, and the treasury
transactions associated with them, are not subject to ex
post checks by a unit external to the directorate in Lux-
embourg.

10.10. The banking operations that fall within Directorate-
General for Economic and Financial Affairs-Directorate-L’s
responsibility (principally, the borrowing and lending opera-
tions in the name of the EC, Euratom and the ECSC in li-
quidation) as well as the relevant treasury operations, are
audited annually by external auditors, including a check on
compliance procedures.

The forthcoming internal audit of the banking operations
under the direct responsibility of the Commission will address
the need for any changes in the control environment, includ-
ing ex post controls.

10.11. The data on EIB lending covered by the Community
guarantee are supplied to the Commission by the EIB’s account-
ing service which is itself subject to audit. Nevertheless, the
Commission will examine with the EIB whether, and in what
way, further assurance may be given on the reliability of the
data. The same applies to other third parties such as the
EBRD and the Council of Europe Development Bank.

As stated in the reply to paragraph 10.10, the forthcoming
internal audit of the banking operations under the direct
responsibility of the Commission will address the need for any
changes in the control environment, including ex post con-
trols.

(5) For example, loans granted as macrofinancial aid to non-

member countries.

(6) The prior approval of the financial controller was required
until that procedure was abolished following the adop-
tion of the new Financial Regulation.

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GUARANTEE FUND FOR EXTERNAL ACTIONS

10.12. The Community budget is exposed to credit risk
as a result of the increase in assistance for non-member
countries, especially as regards the guarantees for loans
granted by the EIB. The purpose of the Guarantee Fund
for external actions is to reimburse the lenders in the
event of a beneficiary’s defaulting and to avoid direct
calls on the Community budget. To the EIB, as principal
lender, the Community has granted a global guaran-
tee (7) in respect of payments due but not received in
respect of credits opened by it.

10.13. The Directorate-General
for Economic and
Financial Affairs carries out the administrative manage-
ment of the Fund and the European Investment Bank
(EIB) is responsible for the treasury management. The
Court’s audit for the financial year ended 31 December
2002 focused on the Commission’s administrative man-
agement of the Fund. The audit work carried out by the
Court on the Fund’s financial management is based on
a specific agreement between the Court, the EIB and the
Commission, signed in January 1996.

10.14. Council Regulation (EC) No 2728/94 (8) pro-
vides that the Guarantee Fund must reach an appropri-
ate level (target amount) for potential payments, set at
9 % of the amount guaranteed. The Fund is financed by
payments from the budget at the beginning of a finan-
cial year on a provisional basis. At the end of a financial
year, the Fund’s assets may exceed the target amount.

10.15. For the 2002 financial year, the outstanding
capital liabilities for loans and loan guarantees for third
countries, including unpaid interest due, amounted to

(7) Council Decision 2000/24/EC of 22 December 1999
granting a Community guarantee to the European Invest-
ment Bank against losses under loans for projects outside
the Community (Central and Eastern Europe, Mediterra-
nean countries, Latin America and Asia and the Republic
of South Africa) (OJ L 9, 13.1.2000, p. 24).

(8) Council Regulation (EC, Euratom) No 2728/94 of 31 Octo-
ber 1994 establishing a Guarantee Fund for external
actions (OJ L 293, 12.11.1994), as amended by Regulation
(EC, Euratom) No 1149/1999 (OJ L 139, 2.6.1999, p. 1).

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15 358 million euro as at 31 December 2002. At the
same date, the Fund’s assets were 1 646 million euro, or
10,7 % of that total (see Table 10.1). The correspond-
ing target amount totalled 1 382 million euro at the
end of 2002. The surplus to be refunded to the budget
was thus 263 million euro.

Table 10.1 — Guarantee Fund situation

Financial year

Total guarantee
outstanding as at
31 December (1)

Total Fund
resources as at
31 December (2)

(million euro)

Coverage (%)

1994

1995

1996

1997

1998

1999

2000

2001

2002

6 017

5 882

6 715

7 960

9 834

12 052

14 069

15 577

15 358

294,2

300,9

557,4

861,8

1 280,7

1 313,1

1 431,6

1 774,4

1 645,5

4,9

5,1

8,3

10,8

13,0

10,9

10,2

11,4

10,7

(1) Including default interest incurred but not paid at 31 December.
(2) After deduction of EIB fees not paid at 31 December.

Source: Commission.

10.16. The EIB receives a handling fee for successful
repayments in accordance with an implementation
agreement signed in 1999 by the Community and the
EIB. Currently, the handling fee is calculated at 1 % per
annum on the time between the default and the reim-
bursement to the Community. Therefore, the longer a
loan is in default, the more the EIB will receive as fee.

10.16. Concerning the handling fee, a per annum fee reflects
the ongoing work on a recovery, which can be assumed to be
positively related to the lapse of time between the default and
the recovery.

10.17.
In its annual report on the financial year 2001,
the Court stated that the Commission had not been
provided with an overview of the costs incurred by the
EIB arising from the treasury management of the Fund.
In its reply to the Court’s report on the financial year
1999, the Commission had already said that it would
request such an overview. In its reply to the Court’s
report on the financial year 2001, the Commission

10.17. The legislation currently in force does not provide for
a negotiation on a ‘cost plus’ basis, nor is the EIB obliged to
provide corresponding cost information to the Commission.
Therefore, the Commission has negotiated a new degressive fee
structure with the EIB for the management of the Guarantee
Fund for external actions, on a commercial basis.

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stated that it had received some information on the
subject from the EIB. However, the Commission was
not provided with detailed and documented informa-
tion on the EIB’s cost structure (9).

LOANS AND BORROWINGS OF THE ECSC IN
LIQUIDATION

10.18. The European Coal and Steel Community (ECSC)
ceased to exist on 23 July 2002. The loans and borrow-
ings contracted by the ECSC must be wound up in 2027
at the latest. In accordance with a Protocol annexed to
the Treaty of Nice, all ECSC assets and liabilities were to
be transferred to the European Community on 24 July
2002. A Council decision established the measures nec-
essary for the implementation of the Protocol (10).

10.19. The Court examined the financial statements of
the ECSC for the financial year closed on 23 July 2002
and submitted a report on the reliability of the financial
statements of the ECSC in liquidation and the legality
and regularity of the underlying transactions (11). For
the period 24 July 2002 to 31 December 2002, the
Court based its examination on the audit work carried
out by the private external audit company which audited
these financial statements. No new loans were granted
after 23 July 2002.

10.20. The Court reviewed the findings of the private
external auditor and confirms that weaknesses exist
affecting the security and reliability of the IT system
such as the failure to change passwords, no regular con-
trol of access rights and the absence of regular report-
ing.

10.20. Shortcomings and weaknesses affecting the security
of the IT system identified in the report of the private external
auditors have been recognised. In particular, the recommenda-
tion on the password change policy has already been imple-
mented for the Globus system, which is the main financial
application in use. Furthermore, a regular review of access
rights for the IT system is performed by the local informatics
security officer.

A plan in line with the migration process to a new office com-
puting platform (ETP) within the Commission has been estab-
lished to deal with the remaining observations and recom-
mendations in the report of the private external auditors before
the end of 2003 and, in particular, to address the reporting
issue.

(9) See also Council Recommendation (SN 1375/03) for the
discharge of the 2001 budget (chapter 8): the Council
‘considers, like the Court, that the Commission ought to
be able to supply the information that led to the setting
of the annual fee for the treasury management’.

(10) Council Decision 2003/76/EC of 1 February 2003 estab-
lishing the measures necessary for the implementation of
the Protocol, annexed to the Treaty establishing the Euro-
pean Community, on the financial consequences of the
expiry of the ECSC Treaty and on the Research Fund for
Coal and Steel (OJ L 29, 5.2.2003, p. 22).

(11) OJ C 224, 19.9.2003.

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10.21. The EIB bases its activities in the context of this
mandate on the provisions of the Cooperation Agreement, its
operational guidelines and the European Free Trade Associa-
tion (EFTA) commitment letters for individual projects.

THE EEA FINANCIAL MECHANISM

Introduction

10.21. Under Protocol 38 to the Agreement on the
European Economic Area (EEA) (12), signed on 2 May
1992, the Member States of the European Free Trade
Association (EFTA) created the EEA Financial Mecha-
nism. This mechanism is intended to contribute to the
reduction of the economic and social disparities between
the regions of the EEA by providing interest rebates for
EIB loans and investment grants. The Cooperation
Agreement between EFTA (EEA) and the EIB was signed
on 30 June 1992. The existing agreements have contin-
ued to be in force since the accession of the former
EFTA States, Austria, Finland and Sweden. The Coop-
eration Agreement stipulates in Article 1(2) that ‘prior-
ity shall be given to environment, transport, education
and training. Special consideration should be given to
SMEs’.

10.22. The Financial Mechanism provides subsidies
and financing in the form of (13):

— interest rebates of 2 % per annum over 10 years for
a volume of EIB loans totalling ECU 1 500 million,
to be committed in equal instalments over a period
of five years from its entry into force (1 January
1994),

— grants to projects totalling ECU 500 million, to be
committed in equal instalments over a period of
five years from its entry into force (1 January
1994).

10.23. The countries participating in the scheme were
Austria, Finland, Iceland, Liechtenstein, Norway and
Sweden (14). In accordance with the Acts (15) concern-
ing the accession of Austria, Finland and Sweden to the
EU, their contributions (some 80 % of the total grants

(12) Protocol 38 to the Agreement on the European Economic
Area (EEA) (OJ L 1, 3.1.1994, p. 206). The Agreement was
concluded between the Community and the EFTA with
the aim of allowing the EFTA countries to participate in
the Single Market, while not assuming the full responsi-
bilities of EU membership. The participating EFTA coun-
tries are Norway, Iceland and Liechtenstein (following a
referendum, Switzerland did not join the EEA; Austria,
Finland and Sweden became Member States of the EU in
the meantime).

(13) Protocol adjusting the Agreements on the European Eco-
nomic Area, Final Act, Joint Declaration (OJ L 1, 3.1.1994,
p. 572).

(14) Switzerland did not ratify the EEA Agreement and, as a
consequence, did not participate in the Financial Mecha-
nism.

(15) OJ C 241, 29.8.1994, p. 37.

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and interest rebates for EIB loans) have been borne, since
these countries joined the Community on 1 January
1995, by the EU budget. Table 10.2 shows the amounts
contributed by each Member State and by the EU to the
Financial Mechanism.

Table 10.2 — Evolution of the EEA Financial
Mechanism

Member State

Iceland
Norway
Liechtenstein

Funding
(million
ECU/euro)
1994-1998

5,91
112,25
1,09

Repayment
during 2002

Total net contribution

Million euro

%

0,48
10,08
0,10

5,43
102,17
0,99

1,00
18,75
0,18

(Subtotal EFTA)

(119,25)

(10,66)

(108,59)

(19,93)

Austria (only
1994)
Finland (only
1994)
Sweden (only
1994)
EU from 1995

(Subtotal EU +
A + S + FIN)

29,35

20,53

40,43
385,45

0,00

0,00

0,00
39,35

29,35

20,53

40,43
346,10

5,38

3,77

7,42
63,51

(475,75)

(39,35)

(436,41)

(80,07)

Total

595,00

50,00

545,00

100,00

Source: Financial Mechanism (differences are due to roundings).

10.24. The EEA Financial Mechanism Committee (FM
Committee) takes decisions in respect of which projects
to support and on what conditions on the basis of an
appraisal note from the EIB (16). Following the decision
taken by the FM Committee, the EIB concludes con-
tracts with the beneficiaries for loans, interest rebates

(16) Management of the grants and interest subsidies has been
delegated to the European Investment Bank (Decision
4/94/SC of the EFTA States; the Commission is repre-
sented in the Committee), which selects, assesses and
monitors projects presented by the beneficiary Member
States according to financial, economic and technical cri-
teria and then submits proposals to the EEA Financial
Mechanism Committee. The EIB’s remuneration for its
tasks is 0,5 % of the amount of each disbursement.

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and grants. The European Commission (Directorate-
General for Economic and Financial Affairs) manages
the liquid assets of the mechanism (17); available funds
are invested in money-market instruments.

10.25. The operational arrangements for applying the
Cooperation Agreement to implement the Financial
Mechanism between the Commission and the EIB stipu-
late that the Financial Mechanism support shall not be
inconsistent with Community policies. Various maxi-
mum grant levels were determined for the Financial
Mechanism. 90 % is the upper maximum level of com-
bined Community aid and Financial Mechanism together
(the same rule applies for the cohesion financial instru-
ment).

10.26. As the EEA Financial Mechanism entered into
force on 1 January 1994, the last commitment could be
made in accordance with the initial arrangement until
31 December 1998. However, not all amounts commit-
ted have been disbursed because of delays or modifica-
tions. Table 10.3 shows the situation as at the end of
2002.

10.26. Some delays occurred in the starting phase of the
European Economic Area (EEA) Financial Mechanism. Sub-
sequently as disbursements had to be in line with the progress
of the works and in conformity with the contractual provisions
there have also been some delays during project implementa-
tion.

Table 10.3 — Use of the funds of the EEA Financial Mechanism as at 31 December 2002

Beneficiary Member States

Greece

Ireland

United Kingdom
(Northern
Ireland)

Portugal

Spain

Total

(million euro)

Loans committed

Loans disbursed

Interest rebates disbursed

Investment grants committed

Investment grants disbursed

Target percentage per country initially
determined (1)

Percentage per country of total disburse-
ments

354,37

24,3 %

354,37

24,4 %

37,69

24,4 %

100,54

21,4 %

69,22

17,3 %

24,3 %

19,3 %

106,50

7,3 %

106,35

7,3 %

11,72

7,6 %

34,90

7,4 %

34,65

8,6 %

7,1 %

8,4 %

0,00

0,0 %

0,00

0,0 %

0,00

0,0 %

11,00

2,3 %

10,90

2,7 %

2,2 %

1,9 %

315,00

21,6 %

310,34

21,4 %

33,64

21,8 %

105,00

22,4 %

87,92

21,9 %

681,00

46,7 %

681,00

46,9 %

71,23

46,2 %

217,97

46,4 %

198,24

49,5 %

1 456,87

100,0 %

1 452,06

100,0 %

154,28

100,0 %

469,41

100,0 %

400,93

100,0 %

21,0 %

45,4 %

100,0 %

21,9 %

48,5 %

100,0 %

(1) Share of financial assistance of the Financial Mechanism as initially set by the Community.

Source: Financial Mechanism. Provisional data for 2002; rounding differences apply for certain percentages.

(17) Fund Management Agreement between the Financial
Mechanism Committee and the European Community,
signed on 9 July 1999.

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10.27.
In the context of its audit of banking activities
and financial instruments, the Court examined the man-
agement of the measures at the level of the EIB and two
Member States, Spain and Greece. Spain is the biggest
beneficiary of the EEA Financial Mechanism and it
accounts for 48,5 % of all disbursements (interest rebates
and grants) (18). Greece accounts for 19,3 % of the inter-
est rebates and grants disbursed from the Financial
Mechanism up to the end of 2002 (19). The current
audit (20) concerns the management and realisation of
one global loan under which interest rebates were pro-
vided by the Financial Mechanism to a Spanish State-
owned credit institution, which itself provides the loans
and interest rebates to 10 selected projects and, in Greece,
a number of projects benefiting directly from the inter-
est rebates and investment grants of the Financial Mecha-
nism (21).

Observations concerning the overall management of the
Financial Mechanism

Liquidity

10.28. There are still Financial Mechanism payments
to be disbursed. Therefore, uncertainty exists as regards
the calculation of the Member States’ shares of the
Financial Mechanism subsidies (see Table 10.3). Finan-

10.28. The Commission is continually seeking with the EIB
to improve the quality of the forecasts for disbursements. There
are frequent contacts between the services involved for this pur-
pose.

(18) Thirty-nine projects were subsidised, many of them with
sub-projects, including three global loans with 38 projects.
(19) Twenty-seven projects (including 36 sub-projects) were
supported. The projects concern different sectors, such as
loans and interest rebates for financing motorways and
for the Port of Piraeus and for the development and res-
toration of town centres. Seventeen projects (including
the sub-projects) concern the restoration, repair and
improvement of monasteries as part of the national heri-
tage, most of them on Mount Athos.

(20) The Court carried out an audit of two projects in Spain
in 1999 (OJ C 342, 1.12.2000, paragraphs 7.17 to 7.30).
The observations concerned, inter alia, the absence of
public tendering and weaknesses in the application of the
project control system.

(21) The audit covered 8 % of loans and interest rebates sup-
ported by the Financial Mechanism in Spain and 9 % of
loans and interest rebates in Greece, as well as 30 % of
grants supported by the Financial Mechanism in Greece.

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cial forecasts were not reliable in the past: at the end of
2002 the backlog of disbursements (difference between
disbursements forecasted and disbursements made) was
41 million euro. This also affects the management of
the Fund’s liquidity.

Monitoring

10.29. The Financial Mechanism subsidies may be
granted in addition to funds from other Community
measures, such as the Structural Funds or the Cohesion
Fund (see paragraph 10.25), but the maximum ceilings
must be respected. However, neither the Commission,
nor the EIB nor national authorities check at the date of
final disbursement that the ceilings are complied with
in relation to the expenditure actually declared.

10.29. The financing limits are defined in the EFTA com-
mitment letter for each project and introduced into the grant
agreements concerned. The usual ratios to be respected at
every disbursement by the EIB are EFTA grant percentages
≤ 85 % and EU funds (EFTA grant + Cohesion Fund +
ERDF + EIB loan) ≤ 90 %. The Commission consults inter-
nally on proposed grant approvals to coordinate them with the
Structural and Cohesion Funds and avoid breaches of limits.
The information supplied to the Court on disbursements to
the audited projects/global loan limits shows that the EIB kept
within the percentage limits in relation to planned expenditure
as set out in the commitment letters. The Commission will
examine with the EIB whether the checking of compliance
with grant ceilings at the time of the final disbursement needs
to be tightened up.

10.30.
For most of the projects, the EIB employed
monitoring agents to follow up the work carried out
and establish the disbursement claims. They were
required to report on the progress made on the project
and provide the necessary information to allow the EIB
to carry out disbursements. The Court saw examples
where the quality of their work was not adequate. Cal-
culations could not be reconciled or were based on esti-
mates; final reports were not presented, disbursements
were therefore delayed or were based on other informa-
tion, mainly from the beneficiaries.

10.30. On the initiative of EIB and in agreement with the
Financial Mechanism, monitoring agents were employed on
complex projects, in Spain and Greece. In the course of project
implementation, the EIB has recognised both the strengths
and the weaknesses of the monitoring agents and has taken
remedial action whenever required. During project implemen-
tation there have been and still are permanent contacts between
the monitoring agents and the EIB. Disbursements are cal-
culated by taking into account past expenditures of the project
and a forecast of expenditures, generally of 90 days.

Final reports issued by the beneficiaries must be available
prior to the release of the last disbursement. It is usual to base
disbursement calculations on information provided by the
beneficiaries, such information having been verified by either
the Bank and/or the monitoring agents.

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Reconciliation

10.31. The audit revealed several problems with the
reconciliation of the amounts declared as expenditure
for the Financial Mechanism and the accounts kept by
the beneficiaries. In the absence of clear rules, the audi-
tors could sometimes only reconcile the overall amounts
but not the accuracy of the claim details.

10.31. All project promoters have an accounting system.
The Bank is however, not in a position to impose a specific
accounting system on the beneficiaries of which some are not
commercial companies or public sector bodies but entities of a
non-profit nature e.g. the monasteries of Mount Athos. All
the information requested by the Court has been supplied dur-
ing or after the audit.

10.32. Certification is essentially the responsibility of the
promoter in the context of the legal framework applicable to
it. The Commission will examine with the EIB whether the
rules in this area need to be tightened up.

10.33. The EIB has already communicated a number of
elements to the Commission which tend to suggest that no
breach of EU regulations in fact occurred.

Nevertheless, the Commission will further examine with the
EIB whether the alleged breach can be substantiated and, if
so, will take the appropriate action.

Certification

10.32.
Final payments are based on the financial claims
established by the beneficiaries, or sometimes by the
monitoring agents. However, certification by the com-
petent authorities of Member States or by competent
auditors should always be required, which is not fore-
seen by the current rules.

Specific observations concerning the Financial Mecha-
nism projects

Public tendering

10.33. The conditions for the global loan, set in the
finance contract between the EIB and the Spanish credit
institution (22), include the obligation to apply competi-
tive tendering, with free access granted at least to bid-
ders from the signatory States of the Treaty on the
European Economic Area and, where applicable,
in
compliance with the corresponding directives of the
Council of the European Union. In Galicia, the conces-
sion for the installation of a wind farm required 74 %
local production in Galicia (80 % including civil engi-
neering work). During the audit it was explained that
for the installation of an electric transformer, the bene-
ficiary had to prove that the product could not be found
on the domestic market in order to obtain specific per-
mission from the regional authorities to buy the equip-
ment in Sweden. The Commission is invited to examine
the situation in order to avoid that preferences for
national products are set which are not in line with the
Treaty and Article 20 of the Protocol on the Statute

(22) Clause 6.2 of the contract.

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of the European Investment Bank, which states that: ‘(4)
Neither the Bank nor the Member States shall impose
conditions requiring funds lent by the Bank to be spent
within a specified Member State’ (23).

Appropriate checks and documentation

10.34. Once completed, some of the building work is
of a type which can no longer be subject to verification
as regards the quantity as well as the quality of the
material used and the quality of the work done. The
current rules do not provide for adequate independent
and reliable certificates (see paragraph 10.32).

Efficiency and effectiveness

10.35. With regard to efficiency and effectiveness, the
Court’s audit identified some cases which illustrate that
greater efforts are needed to identify suitable invest-
ments and take into account overall project realisation,
particularly in order to avoid damage to the environ-
ment.

10.34. The Commission would refer to the reply to para-
graph 10.32.

10.35. The Financial Mechanism considered projects eli-
gible for grants on proposal by beneficiary States. In case of
interest rate subsidies supported by the Financial Mechanism,
project proposals came from the intermediary bank. All projects
were appraised by the Bank, approved by the Financial Mecha-
nism Committee and by the Commission. As foreseen in the
Agreement, the Bank applied to these projects its usual crite-
ria and procedures in respect to appraising the environmental
impact.

10.36. Eight of the 10 projects of the global loan
examined (wind farms (24) and a waste-water treatment
plant) showed problems of efficiency. The promoters
took the interest rebates available under the Financial
Mechanism because they were available, but the rebates
had no decisive impact on the realisation of the projects.
In the case of a waste-water treatment plant visited on
the spot in Spain, it was found that the planning went
back to 1997 and the plant had been nearly completed
when the contract on the provision of investment grants
was signed. In fact, the audit visit did not reveal any

10.36. The effective rate of interest (irrespective if paid as
interest-rate subsidy over the duration of a loan or upfront as
net present value of the amount corresponding to the 2 %
interest rebate) is clearly a factor influencing the level of
investment.

Nevertheless, an interest-rate subsidy is not the single deter-
mining factor for an investment decision. Even though the
link between interest rate subsidy and investment cannot be
quantified, this does not mean that there is no link at all.

(23) In another context, the Commission itself reported the
failure to comply with the rules on public procurement in
its annual
report on the Cohesion Fund (2001)
(COM(2002) 557 final, p. 39).

(24) Under Spanish law, the operation of wind farms receives
aid from a subsidy on the energy produced by the wind
farm.

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sustainable evidence to support the view that the Finan-
cial Mechanism subsidy had been necessary for the
realisation of any of the three projects visited on the
spot in Spain.

For another project in Greece (25), success
10.37.
depends on the realisation of the other phases of the
overall project, which had not yet started at the time of
the audit due to budgetary and financial constraints.

10.37. The first phase of the Greek project was considered
a success. The second phase of the project has since been
started.

In some cases unused building material and
10.38.
rubbish are left in the landscape or dumped into the
sea, as was the case in front of the Dochiariou monas-
tery (Mount Athos), where building work supported by
the Financial Mechanism was carried out. In the context
of the extension of the Port of Piraeus, for substantive
building works, rocks from a hill on the Island of Sala-
mis were used, causing environmental damage. So far,
this environmental damage has not been made good.

10.38. The Commission takes note of the observations of
the Court, specifically with regard to the Port of Piraeus. The
Commission has already received some information concern-
ing the environmental
issues and the measures that are
planned. It will examine with the EIB whether any further
action is necessary to ensure proper protection of the environ-
ment in connection with the work on funded projects.

Conclusion

10.39. The Financial Mechanism provided assistance
to some projects in the beneficiary countries. However,
a number of improvements are still necessary. Final
payments should only be carried out on the basis of
appropriate certificates issued by the competent authori-
ties of the Member States. The Commission should play
a more active role in order to ensure that the European
rules on competition and tendering are respected and
that assistance is given to projects which would other-
wise not be implemented.

10.39. Certificates issued by competent authorities of the
Member States (or rather beneficiary States) or auditors are
not set out in the various agreements.

(25) Renovation of the old town of Corfu.