Court of Auditors — Annual report concerning the financial year 2003 - Report on activities financed from the budget, together with the institutions' replies
Date: 2004-10-07
Institutions: European Court of Auditors
Subjects: European Court of Auditors, activity report, financial year, general budget (EU)

30.11.2004

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Official Journal of the European Union

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COURT OF AUDITORS

In accordance with the provisions of the Treaties (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 6 and 7 October 2004, adopted its

ANNUAL REPORT

concerning the financial year 2003

(2004/C 293/01)

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
Július MOLNÁR
Vojko Anton ANTONČIČ
Gejza HALÁSZ
Jacek UCZKIEWICZ
Josef BONNICI
Irena PETRUŠKEVIČIENĖ
Igors LUDBORŽS
Jan KINŠT
Kersti KALJULAID

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TABLE OF CONTENTS

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

5

Page

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

47

67

89

Chapter 5 — Structural measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Chapter 6 — Internal policies, including research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Chapter 7 — External actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Chapter 8 — Pre-accession aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Chapter 9 — Administrative expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Chapter 10 — Financial instruments and banking activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301

REPORT ON THE ACTIVITIES OF THE SIXTH, SEVENTH, EIGHTH AND
NINTH EUROPEAN DEVELOPMENT FUNDS (EDFs) . . . . . . . . . . . . . . . . . . . . . . . . . . . 315

ANNEXES

Annex I

— Financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III

Annex II

— Reports and Opinions adopted by the Court of Auditors during the last five years . . . . . . . . . . XVII

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GENERAL INTRODUCTION

0.1. The Court’s 27th Annual Report covering the 2003 finan-
cial year follows the structure established for 2002: the Statement
of Assurance is presented in Chapter 1 (1); observations on bud-
getary management are given in Chapter 2; Chapters 3 to 9 report
on own resources and activities financed from different parts of
the budget; and Chapter 10 covers financial instruments and
banking activities. The Court’s observations on the European
Development Funds, including a Statement of Assurance, are pre-
sented separately in this document. The replies of the Commis-
sion (or other EU institutions where appropriate) are presented
alongside the Court’s observations.

0.4. Despite progress made by the European institutions, fur-
ther efforts are needed to ensure that the EU budget is imple-
mented in a way which satisfies the legitimate expectations of the
citizens of the Union. Once again, the Court has no reasonable
assurance that the supervisory systems and controls of significant
areas of the budget are effectively implemented so as to manage
the risks concerning the legality and regularity of the underlying
operations. The bulk of expenditure is managed in a shared or
decentralised way, which requires, either through good practice
or regulation, an adequate control over EU funds. The Court’s
audit work has repeatedly shown that many irregularities occur
in such expenditure.

0.2. As for previous years, the chapters covering revenue and
the major areas of expenditure, which reflect the headings of the
financial perspective (2), have, as their main element, detailed
analyses and results of the audit work carried out in the context
of the Statement of Assurance. These ‘specific assessments’ (3)
form the basis for the Statement of Assurance set out in Chap-
ter 1. The chapters present the results of reviews following up
progress made on implementing recommendations arising from
previous audits. They also include summaries of 10 Special
Reports published by the Court since the last Annual Report. The
Annexes to Chapters 3 to 9 set out the elements used for moni-
toring and evaluating financial management of the EU budget.

0.5.
In its Opinion No 2/2004 (4), the Court underlines the need
for efficient and effective control over the EU budget at all levels
of administration. It considers that there remains scope for fur-
ther improving the design of control systems by establishing clear
and consistent objectives and responsibilities, ensuring effective
coordination, providing information on their costs and benefits
and ensuring a consistent application of requirements. The Court
proposes that a Community internal control framework be devel-
oped to facilitate effective control of the EU budget. The frame-
work should contain common principles and standards to be
used as a basis for developing new or existing control systems.
The Commission should be responsible for promoting the
improvement in internal control systems in partnership with
Member States.

0.3. This report is being published in a period of considerable
change for the European Union: enlargement of the Union to 25
Member States; negotiation of an EU Constitutional Treaty; an
enlarged and renewed European Parliament; and a change of
Commission amid ongoing administrative reform aimed at better
delivery of EU policies and improved financial management. In
addition, negotiations are under way on the future funding of the
Union and spending for the 2007 to 2013 financial perspective
period.

(1) In accordance with Article 129(4) of

the Financial Regulation
(OJ L 248, 16.9.2002) the Statement of Assurance is also published
with the consolidated annual accounts of the European Community
in a separate edition of the Official Journal of the European Union.
(2) The financial perspective is determined by agreement between the
European Parliament, the Council and the Commission and sets limits
on expenditure for each of seven categories (headings) of expenditure
for commitment appropriations, and on total expenditure for pay-
ment appropriations. This report does not present a separate chapter
on the Reserves heading as its resources are only used through trans-
fer to the other headings.

(3) Article 248(1) of the EC Treaty as amended by the Treaty of Nice.

0.6. A particular challenge facing the Union, discussed in Chap-
ter 2 of this Annual Report, is the increasing level of outstanding
commitments, expenditure legally committed but yet to be made.
At the end of 2003, these represented five years’ worth of pay-
ments at the current spending rate, a significantly worse situation
than at the same moment of the previous financial perspective
period. The situation is caused by overly ambitious budgeting and
the inability of Member and beneficiary States to absorb EU funds,
partly due to delays in setting up the necessary management and
control requirements, and partly due to an insufficient number of
projects eligible for Community financing.

(4) Opinion No 2/2004 of the Court of Auditors of the European Com-
munities on the ‘single audit’ model (and a proposal for a Community
internal control framework) (OJ C 107, 30.4.2004).

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0.7. A realistic expectation of spending ability, and of the tim-
ing of that spending, should be made when budgeting in the
2007 to 2013 financial perspective period. A significant propor-
tion of the new period will be needed to liquidate commitments
made in the current 2000 to 2006 period. Unless specific mea-
sures are taken, underspending in the new period will build upon
the problem causing an even greater gap between budgeting and
spending (and therefore policy delivery) in the future.

0.8. Over the coming year the Court will continue to build upon
its role as the independent audit institution of the European
Union. It has taken advantage of its expansion to 25 Members to
streamline its decision-making procedures with the purpose of
improving delivery of its reports and opinions. The Court is con-
stantly seeking to improve its audit methodology and tools, as
well as training its staff, in order to better fulfil its mission to con-
tribute actively to improving financial management of the Union
at all levels.

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Official Journal of the European Union

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REPORT ON THE ACTIVITIES FINANCED
FROM THE BUDGET

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Official Journal of the European Union

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CHAPTER 1

The Statement of Assurance and supporting information

TABLE OF CONTENTS

The Court of Auditors’ Statement of Assurance

Reliability of the accounts

Legality and regularity of the underlying transactions

Information in support of the Statement of Assurance

Introduction

Reliability of the accounts

Observations concerning the consolidated statements on the implementation of the bud-
get

Observations concerning the consolidated financial statements: balance sheet

Treasury management

Action plan for the modernisation of the accounting system

Legality and regularity of the underlying transactions

Own resources

The Common Agricultural Policy (CAP)

Structural operations

Internal Policies

External Actions

Pre-accession aid

Administrative expenditure

Development of the Commission’s internal control system

The Commission’s management representations

Progress in the area of administrative reform

Paragraph

I-IX

II-IV

V-IX

1.1-1.88

1.1-1.6

1.7-1.26

1.11-1.12

1.13-1.15

1.16-1.21

1.22-1.26

1.27-1.54

1.27-1.30

1.31-1.34

1.35-1.38

1.39-1.42

1.43-1.46

1.47-1.50

1.51-1.54

1.55-1.87

1.58-1.71

1.72-1.87

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THE COURT OF AUDITORS’ 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 Euro-
pean Communities for the financial year ended 31 December 2003. 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 25 June 2002 and with the accounting principles, rules and meth-
ods set out in the annexes to the consolidated financial statements (3). Except for the effects of the observation in paragraph III, they
faithfully reflect the revenue and expenditure of the Communities for the year and their financial position at the year-end.

In the absence of effective internal control procedures for miscellaneous revenue and advances, the Court cannot be certain

III.
that the transactions relating to the sundry debtors item have been correctly and completely recorded.

IV. Without calling into question the opinion expressed in paragraph II, the Court wishes to draw attention to the fact that, as in
the past, the accounting system used to draw up the 2003 accounts was not designed to ensure that the assets are fully recorded.
On 17 December 2002 the Commission approved an action plan for the modernisation of the European Communities’ accounting
system which should be operational as from 1 January 2005. The Court notes, however, that the full implementation of all the new
rules and accounting plans requires a considerable effort by the bodies whose accounts will be subject to consolidation.

Legality and regularity of the underlying transactions

V.
In view of the results of its audits, the Court is of the opinion that the transactions underlying the consolidated annual accounts
of the European Communities, taken as a whole, are legal and regular in respect of revenue, commitments and administrative
expenditure.

VI. As regards other expenditure, the Court established that:

a)

b)

In the case of the EAGGF Guarantee Section the payments were, again, materially affected by errors. Arable crops are less sub-
ject to the risk of error than animal premiums, whereas the other categories of expenditure which are not subject to the inte-
grated administration and control system present a higher risk whilst being subject to less effective controls. There is still room
for progress as regards agricultural expenditure in its entirety in order to rectify the significant shortcomings observed in the
supervisory systems and controls;

in the case of the structural measures, owing to persistent weaknesses at Member State level in the systems for supervising and
controlling the implementation of the EU budget, payments were still subject to the same errors occurring with the same fre-
quency as in previous years;

(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, financial year 2003.

(2) Firstly, the Court’s audits focus on macroeconomic statistics for which the underlying data cannot be audited directly, and secondly, they cannot

possibly cover the imports that have not been subject to customs supervision.

(3) See Annex 1, Volume 1 of the final accounts of the European Communities, financial year 2003.

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c)

d)

in the case of internal policies, the improvements noted in the supervisory systems and controls are not yet sufficient to prevent
significant errors of legality and regularity in terms of payments. 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, a relatively large number of legality and regularity errors continue to affect not only the bod-
ies responsible for implementing the projects but also the projects themselves. Although in principle 2003 was the last year of
management decentralisation, it is essential that the tools needed to supervise and control systems and expenditure should
become operational with a view to making the improvements which are still necessary;

e)

in the case of pre-accession aid, shortcomings in the supervisory systems and controls which had already been identified in 2002
resulted in errors and greater risks affecting the legality and regularity of the transactions.

VII. The Court notes the progress made by the Commission as regards the reform of its internal control system and the positive
impact of this reform on the legality and regularity of operations subject to direct management by the Commission. However,
progress is still required in terms of actual implementation.

VIII.
In the area of shared or decentralised management (see paragraphs VI(a) and (b) and VI(d) and (e) respectively) and of indirect
centralised management (see paragraph VI(c)), where operations are materially affected by errors, a greater effort must be made to
apply the supervisory systems and controls in an effective manner so as to improve the handling of the attendant risks.

IX. The Court notes that the Commission, as the institution responsible under Article 274 of the Treaty for implementing the bud-
get, included, for the first time in its Synthesis of the 2003 annual activity reports of its Directorates-General and departments, an
analysis of the assurance provided by the supervisory systems and controls as to the legality and regularity of the underlying trans-
actions, which, in general, is corroborated by the Court’s audit work.

6 and 7 October 2004

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 EC Treaty, the Court of Audi-
tors provides the European Parliament and the Council with a State-
ment of Assurance concerning the reliability of the accounts and
the legality and regularity of the underlying transactions (the DAS).
Since the financial year 2002, in the wake of the Treaty of Nice,
which extended the Court’s mandate by authorising it to supple-
ment this statement with specific assessments of each major area of
Community activity, the Court has sought to consolidate the basis
for its statement by relying more systematically on an examination
of the way in which the supervisory systems and controls set up by
the Commission in each of these major areas work.

1.2. The aim of the work on the reliability of the accounts of the
European Communities is to obtain reasonable assurance that all
the revenue, expenditure, assets and liabilities have been properly
registered and that the annual accounts 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 gather sufficient evidence, of a direct
or indirect nature, to prove that the underlying transactions are in
accordance with the applicable regulations or contractual provi-
sions 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 statement on a number of sepa-
rate sources:

a)

b)

c)

an examination of the way in which the supervisory systems
and controls set up both in the Community institutions and in
the Member States and third countries work;

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

an analysis of the annual activity reports and 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 Community management procedures.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.5. Once again, the Court paid particular attention to the efforts
made by the Commission as part of the reorganisation of its inter-
nal control system and to the follow-up given to the action plans
annexed to the Syntheses of the annual reports and declarations of
its Directors-General for the financial years 2001 and 2002 (see
paragraphs 1.55 to 1.87).

1.6.
Lastly, overall and 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 this Chapter and to Chapters 3 to 9.

Reliability of the accounts

1.7. The Court’s observations concern the final consolidated
annual accounts for the financial year 2003, as drawn up by the
Commission in compliance with the provisions of the Financial
Regulation of 25 June 2002 (4).

1.8.
Pending the implementation of the action plan on the mod-
ernisation of the accounting system as of the financial year 2005
(see paragraphs 1.22 to 1.26) and in the absence of a suitable
accounting system, the preparation of the year-end financial state-
ments is to a large extent based on records outside the accounts.
The evaluations used for this are not linked to the budgetary trans-
actions from which they stem and the central accounting depart-
ments are not always able to guarantee their accuracy or their com-
prehensiveness. Furthermore, the present accounting system, which
to a large extent follows cash-based accounting principles, does not
make it possible to distinguish between administrative expenditure
and capital expenditure, between final payments and prefinancing,
or even to determine the amount of debts and receivables. The cal-
culation of the economic out-turn is thus adversely affected. The
reservations contained in the declaration of the Director-General for
Budgets (flawed presentation of the assets and finances of the Com-
munities and the EDF, and architecture of the accounting system
based on two subsystems instead of one integrated system) are con-
firmed by the Court’s findings.

1.9. Table 1.1 contains a follow-up of the four reservations con-
cerning the reliability of the accounts which were expressed in the
2002 DAS and other points raised by the Court in the Annual
Report concerning the financial year 2002, which, according to the
Commission, ought to be settled in the context of the modernisa-
tion of the Community accounting framework.

(4) Articles 129(3) and 181(2) of Council Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 on the Financial Regulation applicable
to the general budget of
the European Communities (OJ L 248,
16.9.2002).

1.8. The European Communities use cash accounting, as do most other
public sector organisations in the world. The Commission is aware of the
limitations of this approach, which is why it has undertaken the project for
the modernisation of the accounting system and the move to accrual
accounting as mentioned by the Court. The Commission aims to comply
with International Public Sector Accounting Standards (IPSAS) by 2005,
the deadline set in the Financial Regulation, and is addressing the issues
mentioned by the Court.

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30.11.2004

EN

Official Journal of the European Union

C 293/15

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.10. Despite the progress that has been noted, in particular as
regards the presentation of the financial statements and the reduc-
tion in the number and scale of the reservations, the Court’s audit
highlighted the fact that the following problems, already pointed
out in previous reports, still persist:

1.10.

a)

agricultural expenditure - modulation: accounting entries have
been made against a budget heading which ultimately will not
be the one to which the expenditure concerned will be charged
(88,9 million euro in 2003), and expenditure which has not yet
been implemented (237,9 million euro at 31 December 2003)
has been presented in the accounts as already having been
effected (see paragraphs 1.13 and 1.14 of the 2002 Annual
Report);

ECIP (European Community Investment Partners): the Commis-
sion’s basis for recording a 100 % write-down in the value of
loans,
investments and advances (88,5 million euro at
31 December 2003) was a dubious one, as the constituent
parts to which it applies are not even identified (see paragraph
1.18 of the 2002 Annual Report);

Eurotech Capital, Venture Consort and Joint Venture Pro-
gramme: in the absence of accurate and detailed information on
the amounts invested, the Commission wrote off its participa-
tions in full (12,7 million euro at 31 December 2003) even
though repayments are still being made (see paragraphs 1.21
and 1.22 of the 2002 Annual Report);

b)

c)

d)

a) As regards the accounting entry of EUR 88,9 million in 2003, the
procedure for the entry of amounts deducted under Articles 3 and 4 of
Regulation No 1259/1999 has been drawn up in line with Article 1
of Commission Regulation No 1017/2001 (amending Article 2 of
Regulation No 296/1996).

As regards expenditure which has not yet been implemented by the
Member States (EUR 237,9 million in 2003), Article 5(2) of Coun-
cil Regulation No 1259/1999 states that these amounts remain
available to the Member State concerned for a maximum of three
years to finance support measures under Regulation No 1257/1999.

The current system of modulation is being phased out and there are
no plans to change entry in the budget accounts in its final years.
Entry in the general accounts is being examined in connection with the
transition to accrual accounting in 2005.

b) The value reduction of 100 % was applied because the information
required to calculate the exact value of the investments and loans
granted under the ECIP instrument was not available. As part of the
move to accrual-based accounting (in particular regarding pre-
financing) all open files are currently being reviewed. This exercise
should be completed by January 2005 and should provide a solid
basis for assessing the recoverability of outstanding amounts in the
2004 accounts. Until the completion of this review it is considered
both more consistent and more prudent to continue with the 100 %
value reduction.

c) As far as the presentation of the invested amounts in the balance sheet
of the Communities is concerned, the Commission considers that a
write-down of invested amounts is fully justified on the basis of the
principle of prudence. The very nature of investments in risk capital
and other high risk business areas such as joint ventures in the central
and eastern European Countries and the Newly Independent States
carries an inherent potential risk of loss. The Commission notes that
it has made good progress since the previous year in finalising and
closing contracts which have reached the end of their term.

EAGGF-Guarantee: reservations concerning the exhaustiveness
and accuracy of
the amounts due to the Commission
(905,9 million euro net at 31 December 2003) have been
expressed by several certifying bodies (see paragraph 1.25 of
the 2002 Annual Report);

d) With regard to the correct evaluation of the debts, the doubtful debts
provision is based on the best estimates of each paying agency involved
— this is the same procedure that was used in 2002. This is based
on the surmise that the paying agencies are in the best position to
evaluate the chances of recoveries.

The Commission has made several
improvements to accounting
arrangements for CAP debtors in recent years. These include requiring
Paying Agencies to maintain debtors ledgers, and Certifying Bodies to
check that these ledgers are complete. Certifying Bodies for 81 of the
85 agencies were able to provide assurance that debtors ledgers were
not materially misstated.

C 293/16

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

e) The Commission continues to improve its methods of dealing with this
area using the systems currently at its disposal, as stated in response
to the remark 1.23 in the annual report 2002 (for example, the regu-
lar reporting of overdue amounts since mid-2003.) However, as also
stated in the response given last year, the major improvements in this
area can only be made with the introduction of the new accounting
system in 2005, in particular the accounting for pre-financing pay-
ments.

f) As was indicated in 2002, the Commission has already done signifi-
cant work in this area. However, such problems can ultimately only be
resolved with the introduction of the new accounting system in 2005.
Currently the figures are established by a manual exercise based on
reports supplied by the financial intermediaries.

g) As pointed out last year, while not all interest was recorded as bud-
getary revenue it was none the less included in the annual accounts.
Since the introduction of the new Financial Regulation which requires
all interest to be returned to the Commission, the Commission has
continued to improve the procedures for recording such interest.

h) As has been discussed in the Accounting Standards Committee, there
is currently no international public sector accounting guidance avail-
able in this area. Thus until this is available, the current practice will
remain in force.

i) As replied in 2002, this issue is being analysed as part of the mod-
ernisation of the accounting system project, and changes will be made
to the current accounting treatment in 2005.

1.11. The annual accounts necessarily present financial information as
known at the time of their closure. The reliability of this information will
always be subject to the findings of audits under way at that time or under-
taken subsequently. The accounts can only recognise the amounts to be
recovered when the Commission adopts its decisions under clearance of
accounts or similar procedures.

e)

f)

g)

sundry debtors

recording of
(3 610,4 million euro at
31 December 2003): the Court is not able to give an assurance
as to the correctness and completeness of the sundry debtors
(see paragraph 1.23 of the 2002 Annual Report and paragraphs
1.14 and 1.15 of this year’s Report);

recording of amounts held by financial intermediaries (included
under the sundry debtors — see paragraph (e))
totalling
1 008,6 million euro at 31 December 2003 (5): in the absence
of a suitable accounting system, the Court is not able to give an
assurance as to the correctness and completeness of the
amounts entered as held by financial intermediaries (see para-
graph 1.27 of the 2002 Annual Report);

Interest on advances paid to financial intermediaries: the Com-
mission is still not able to demonstrate that the interest yielded
by advances is recorded systematically and without delay as
budget revenue, and this allows doubts as to the exhaustiveness
of the records concerning the Community contribution to cer-
tain programmes (see paragraph 1.29 of the 2002 Annual
Report);

h) provision for pensions: the current presentation in the balance
sheet of the provision for pensions (22 800 million euro at
31 December 2003 according to an actuarial study) and of the
corresponding amount receivable from the Member States has
the effect of neutralising the impact on the economic out-turn
(see paragraphs 1.31-1.32 of the 2002 Annual Report);

i)

current liabilities: the presentation under this balance-sheet item
of some of the payment appropriations carried over (176,5 mil-
lion euro at 31 December 2003) is inappropriate (see paragraph
1.34 of the 2002 Annual Report).

Observations concerning the consolidated statements on the
implementation of the budget

Provisional components of the implementation of the budget

(clearance of

1.11. Despite the Court’s observation in its Annual Report con-
cerning the financial year 2002 (6), there is still no indication in the
year-end accounts that some transactions are likely to be corrected
at a later date by the Commission’s departments or by the Member
States
the EAGGF-Guarantee paying agencies’
accounts, adjustment of the provisional amounts in the case of the
VAT and GNI own resources, closure procedure for projects and
programmes relating to Internal policies, External actions and Struc-
tural Funds), nor any indication of the possible scale of such cor-
rections. Furthermore, there are other uncertainties which may

(5) Including 46,5 million euro in interest.
(6) Annual Report of the Court of Auditors concerning the financial year

2002, paragraphs 1.10 and 1.11.

30.11.2004

EN

Official Journal of the European Union

C 293/17

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

temporarily affect the accounts, for example the reservations, con-
cerning around 11 300 million euro, issued by the bodies certify-
ing the accounts of the agricultural paying agencies (see para-
graph 4.54), and the Commission’s postponement of its financial
clearance decision for the financial year 2003 of paying agency
accounts representing 43 % of the expenditure declared for the
financial year 2003, pending further information or the completion
of certain audit work (see paragraph 4.69).

The Commission is preparing rules for the accounting treatment of such
recoveries, and for improving the explanatory notes to the annual accounts,
as part of the modernisation of the accounting system. The effects of this
analysis should be seen in the 2005 annual accounts.

Concerning the Commission’s postponement of the financial clearance deci-
sion see reply to point 4.79.

1.12. The Commission, aware of this issue, has improved the explana-
tory notes to the financial statements accordingly so as to include a clearer
explanation of the treatment of commitments foreseen in the Financial
Regulation, in particular making reference to the inclusion of a contingent
liability concerning the budgetary commitments of differentiated appropria-
tions not yet made for future years.

1.13. Regulatory amendments providing for an annual estimate by
Member States of the amount of the debts in their separate account for
which they consider recovery has become unlikely are expected to be for-
mally adopted by the end of 2004.

1.14.

See also reply to 1.10. e).

Controls over provisional payments and pre-financing will be improved as
from 2005 as part of the modernisation of the accounting system.

Budgetary commitments and contingent liabilities

1.12. According to the new Financial Regulation, applicable as of
1 January 2003, budgetary commitments for actions extending over
more than one financial year may be broken down over several
years into annual instalments only where the basic act so pro-
vides (7). This practice, which has already been applied in the past
for structural measures (8), in accordance with the sectoral regula-
tions, is henceforth also expressly provided for in respect of other
areas (for example, for international agreements in the fisheries sec-
tor and for other external actions). The amounts which, pursuant to
the Financial Regulation, have not yet been recorded as budgetary
commitments are presented as contingent liabilities. Nevertheless,
these differences of definition for commitments from one area to
another make it difficult to interpret the figures presented in the
statements on the implementation of the budget.

Observations concerning the consolidated financial
statements: balance sheet

Traditional own resources

1.13. The established entitlements recorded in the separate
accounts, known as the ‘B accounts’, were written down by
1 043,9 million euro on 31 December 2003 resulting in a net
amount of 729,3 million euro in the Commission’s financial state-
ments. This correction was made in recognition of the fact that
recovery of a large number of these claims is doubtful. This write-
down was calculated on the basis of statistics and represents an esti-
mated amount.

Recording of sundry debtors

1.14. The recording of sundry debtors continues to pose prob-
lems (9). Provisional payments are still entered as final expenditure
and amounts to be recovered are not entered immediately. In the
absence of adequate internal control procedures for miscellaneous
revenue in the authorising officers’ departments, the Court cannot
obtain assurance that the record of amounts receivable is complete
and accurate.

(7) Article 76(3) of the Financial Regulation of 25 June 2002.
(8) Annual Report concerning the financial year 1999, paragraph 8.16, and
Annual Report concerning the financial year 2000, paragraph 9.13.
(9) Annual Report concerning the financial year 2002, paragraph 1.23.

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THE COMMISSION’S REPLIES

1.15.
In spite of the movements noted, in particular following the
implementation of the procedure to set off amounts receivable
against payments due, the recovery of a large number of amounts
receivable is still subject to considerable delay. In addition, interest
on arrears is not calculated and charged systematically and there is
no end-of-year procedure to calculate and record in the accounts
the interest accrued. The Court considers that monitoring of the
backlog of arrears should be coordinated more efficiently at central
level and that a system should be set up which would enable the
departments concerned to ensure that amounts receivable are
recorded immediately.

1.15. The Commission has introduced since the beginning of 2003 the
central co-ordination of recoveries and monitors unpaid recovery orders,
(‘ROs’), through a quarterly aged balance that shows the amount of the
unpaid ROs outstanding per quarter and per authorising officer. The Com-
mission also records in its database the follow-up actions made for each
RO, and the indicators which accompany the aged balance.

Since 2004, the Accounting Officer has used an IT tool to monitor the
recovery of interest on arrears, and the establishment of ROs by the respon-
sible authorising officer for such interest. Interest is recorded in the accounts
during the year when it is received, but no evaluation is made of interest
accrued at the year-end, as the Court points out. This issue will be addressed
as part of the modernisation of the accounting system project and the move
to accrual accounting.

Treasury management

Since the financial year 1999 the Court has made a number
1.16.
of observations concerning the Sincom 2 computerised system.
Those relating to security (10) concerned, amongst other things, the
payment system used by the Commission’s treasury management,
which accepted these observations and undertook to solve the
problems found (11). In 2002 and at the beginning of 2003, the
Internal Audit Capability (IAC) of the Budget Directorate-General and
the Internal Audit Service (IAS) carried out audits of the Commis-
sion’s treasury management and these audits confirmed that the
problems highlighted by the Court still exist.

1.17.
In the context of its work on the Statement of Assurance for
2003 the Court carried out a follow-up to its previous observations,
which revealed that some points have still not been dealt with, in
particular those relating to a number of security problems and the
segregation of duties.

In order to cope with the existing risks, the security system
1.18.
in place should be improved in respect of the definition and man-
agement of user profiles and users’ rights of access to the system’s
various functions. Some users have rights of access to transactions
within treasury management which are mutually incompatible. The
number of users with system administrator or equivalent rights,
allowing them to carry out all transactions in the system, is too
high. The profiles of some of these users are generic and not per-
sonalised and this makes monitoring their activities difficult. The
Court also found that generic users are created ad hoc for specific
periods and purposes but are given broad rights of access.

1.18. The Commission agrees that the number of users with extended
access rights was too high. This number has now been significantly reduced.
The Commission is developing and will put in place before the end of 2004
a reporting system to enable it to identify such cases in the future.

The Commission is currently reviewing all accesses to the central account-
ing system with the aid of a specialist consultant. This work is expected to
be completed by the end of 2004 in time for the introduction of the new
accounting system (ABAC).

(10) Mainly paragraphs 8.55 and 8.56 of the Annual Report concerning the
financial year 1999 and paragraphs 9.41 to 9.43 of the Annual Report
concerning the financial year 2000 and the continuous follow-up in the
Sector Letters of the following years.

(11) See the replies to the paragraphs mentioned above.

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THE COMMISSION’S REPLIES

1.19. When payments are launched in the central accounting sys-
tem, files containing all the data on the payments are transferred to
a system used for coordination with the banks. The Commission
should continue its efforts to guarantee a complete control over the
integrity of the data contained in the files which are transferred to
the banks.

1.19.
In November 2003 the Budget Directorate-General introduced a
new mechanism for the protection of payment transactions between SIN-
COM2 and the SWIFT network. This new protection mechanism is not yet
fully applicable as it does not cover transactions involving small amounts
which are more difficult to alter in the base because of their specific format.
The Budget Directorate-General plans to expand the new protection mecha-
nism — which is more complicated to implement for this type of transac-
tion — by the end of 2004.

1.20.
In 2003, the Commission modified its technical infrastruc-
ture. It finalised a new contingency plan, which has not yet been
tested. In the field of treasury management, a test (17 February
2004) to retrieve the bank coordination system using an alternative
site, in the event of system failure, showed that improvements
needed to be made in the start-up procedure.

1.20. The SINCOM2 contingency plan was tested in November 2002.
A new contingency plan will be needed because of the operational changes
and changes in technical infrastructure expected when the Commission’s
new accounting and financial system (ABAC) comes into operation in
January 2005. As regards treasury management, the Budget Directorate-
General will improve the procedure for launching the SWIFT contingency
plan before the end of 2004 along the lines identified during the test.

In addition to the problems identified in paragraph 1.16,

1.21.
other points have still not received an adequate response:

1.21.

a)

b)

c)

the rules governing the management of imprest accounts have
still not been applied in the context of the implementation of
the new Financial Regulation;

a) Although the imprest account section in the treasury has not been fully
adapted, extra resources have been devoted to it in order, particularly,
to verify the bank accounts of all imprest accounts;

a solution still has to be found to the problem of preventing the
recording of accounting entries in bank accounts which have
been closed, without losing historic data;

b) An IT procedure exists since the beginning of 2004 which rejects any
attempted posting to the general ledger accounts for closed bank
accounts;

a clear and formalised description of the tasks and responsibili-
ties within treasury management must be drawn up in order to
allow an appropriate segregation of duties, on the one hand,
and, on the other, efficient management of the necessary sub-
delegation of powers.

c) The formalisation of delegations from the Accounting Officer to trea-

sury staff was completed in September 2004.

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THE COMMISSION’S REPLIES

Action plan for the modernisation of the accounting system

1.22. On 17 December 2002 the Commission adopted the Action
Plan for the modernisation of the European Communities’ account-
ing system (12), which was a response to a number of previous
observations by the Court and takes into account the provisions of
the new Financial Regulation adopted in June 2002 (13). This action
plan, which is intended to be fully operational as of 1 January 2005,
consists of two strands, one concerning the adoption of the new
accounting framework (14) and the other the development of the
information systems required for its implementation (15). The two
committees provided for under this action plan, a project oversight
board and an advisory committee for accounting standards, were
set up during the first quarter of 2003.

1.23. The Advisory Committee for Accounting Standards, which
is chaired by the Commission’s Accounting Officer, consists of rep-
resentatives of certain institutions (the European Parliament, the
Court of Justice and the Commission) and certain satellite bodies
(agencies) (16), and also external experts. Its task is to examine inter-
national accounting standards (17) and to adapt them to the Com-
munity context, as required by the provisions of Article 133(2) of
the Financial Regulation. This examination led, in April 2004, to the
submission of 15 draft basic accounting rules covering the various
subjects likely to be dealt with in the accounts with a view to the
presentation of the year-end financial statements in accordance with
the principle of accruals-based accounting (18).

1.24. These basic rules still have to be definitively adopted by the
Commission’s Accounting Officer, who, in addition, must ensure
that they are transposed into charts of accounts applicable in the
institutions and bodies whose accounts are to be consolidated (19).
As regards the timetable described in the Commission’s action plan,
the progress made so far with the work would seem to indicate that
the planned deadlines are likely to be kept to. The basic accounting
rules and the charts of accounts of the bodies whose accounts are
required to be consolidated should therefore be available in time for
the drawing-up of the accounts for the financial year 2005.

(12) Communication from the Commission - Modernisation of the Account-
ing System of the European Communities (COM(2002) 755 final of
17 December 2002).

(13) See also Resolution of the European Parliament concerning discharge
for the 2001 financial year, paragraph 23 (OJ L 148, 16.6.2003).
(14) Action 16 (accounting framework) of the Action Plan (COM(2002) 426

final of 24 July 2002).
(15) Action 17 (core financial

information systems) of the Action Plan

(COM(2002) 426 final of 24 July 2002).

(16) See Article 185(1) of the Financial Regulation of 25 June 2002.
(17) International Public Sector Accounting Standards (IPSAS) issued by the Inter-
national Federation of Accountants (IFAC) or, in their absence, Interna-
tional Accounting Standards (IAS)/International Financial Reporting Stan-
dards (IFRS) issued by the International Accounting Standards Board
(IASB).

(18) See Articles 123 to 125 of the Financial Regulation of 25 June 2002.
(19) See Article 129 of the Financial Regulation of 25 June 2002.

1.24. All directorates-general were consulted on the draft accounting
rules in June 2004, as well as the accounting officers of the Institutions and
Agencies (in accordance with Article 133 of the Financial Regulation).
Their comments and remarks have been taken into account in the finali-
sation of these rules. These rules have been used as a basis for preparing
the accounting manual. The objective of the manual is to describe the appli-
cation and operation of these rules and the new accounting system. The
directorates-general were consulted on the draft manual in July 2004.

The chart of accounts was also finalised in July 2004, again based on the
new accounting rules and following consultation with the Institutions and
Agencies.

The accounting rules will be adopted by the Accounting Officer of the Com-
mission in the last quarter of 2004.

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THE COMMISSION’S REPLIES

1.25. As regards the informatics aspect, provision has been made
to develop an integrated information system containing, in gen-
eral (20), all the accounting data needed for the introduction of an
accruals-based accounting system on 1 January 2005 in accordance
with the Financial Regulation. The progress made concerning
accounting standards has made it possible to lay down the archi-
tecture and the operating arrangements for this system. The local
systems used by the authorising officers by delegation have to be
linked to the central information system. Nevertheless, as the Court
has already pointed out (21), the timetable for the necessary adap-
tations and validations is very ambitious and there is a risk that the
Commission will be forced to make gradual adjustments to the cur-
rent systems.

1.25. The project continues to be implemented largely in accordance with
the timetable in the Commission’s Communication of 17 December 2002,
and with the more detailed project plan proposed on 8 July 2003. Subject
to the testing of the IT functionalities once their development is completed,
the new central IT system, termed ‘ABAC’, is expected to be ready to under-
take the transition to accrual accounting in 2005. The essential of the IT
developments required of the services other than the Budget Directorate-
General has been scheduled over the second half of 2004. According to the
self-assessments received by end-June 2004, all expect to complete these
developments by the end of 2004. However, given the limited time
available, several expect to complete development at a date which leaves no
margin for unforeseen circumstances.

The modernisation project has very largely met the objectives set and aims
to continue to respect the time table set, so far as concerns meeting the for-
mal requirements of the new Financial Regulation in 2005. The Commis-
sion still considers that this ambitious objective is feasible, though remain-
ing subject to the risks faced by all large-scale IT developments.

that

1.26. The operation of drawing up the opening balance sheet as
at 1 January 2005 is crucial to the success of the transition from a
cash-based accounting system to an accruals-based system. From
this perspective, the accounting data must be processed in such a
way that the comparative components required to draw up the
financial statements for 2005 will be available. For this reason it is
essential
the authorising departments be provided with
adequate resources to carry out this large-scale operation properly
and that provision be made for suitable support and monitoring by
the central accounting departments. It is also very important for the
accounting officer to ensure that the procedures for initiating and
validating accounting operations in the authorising departments are
organised in such a way as to guarantee correct booking as soon as
they take place, even if, pursuant to the Financial Regulation (22),
the reliability of the data comes under the responsibility of the
authorising officer.

1.26. The Commission is aware of the importance and scale of the open-
ing balance sheet exercise, which is why it has allocated the appropriate
resources to its services so as to accomplish this task. Extra human resources
have been given to directorates-general to help identify the opening bal-
ances for pre-financings, invoices and guarantees, as well as for creating the
new legal entity files. Meetings to provide further information and support
have also been arranged with the directorates-general by the central ser-
vices and there is constant dialogue between the two. Additionally, a fre-
quently asked questions list is maintained on the Intranet.

The Accounting Officer will validate the Authorising Officer’s systems as
required by the Financial Regulation. The Commission is providing train-
ing and guidance to support the authorising services in their responsibility
for introducing procedures which ensure the reliability of the accounting
data.

(20) Ex-budget borrowing and lending transactions managed by the
Directorate-General for Economic and Financial Affairs will not be
incorporated until July 2005. The accounting information system of the
EDFs will be adapted to the requirements of accruals-based accounting
in 2006.

(21) Annual Report concerning the financial year 2002, paragraph 1.8.
(22) Article 61(2) of the Financial Regulation of 25 June 2002.

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Legality and regularity of the underlying transactions

Own resources

1.27. The scope of the Court’s work was subject to the limits
explained in paragraphs 3.6 and 3.42.

1.28. Although the transactions examined by the Court were not
on the whole affected by material errors, the Court’s audit found a
number of features in the Members States’ supervisory systems and
controls and in their traditional own resources accounts which
require improvements in order to reduce the risks of incorrect and
incomplete sums of Community own resources being made avail-
able (see paragraphs 3.59 to 3.62).

1.28. The Commission will follow up the Court’s specific findings with
those Member States involved. In the meantime the Commission antici-
pates that an amendment to the traditional own resources accounting
requirements will lead to Member States maintaining more accurate and
reliable separate accounts.

1.29. With the exception of the reservations concerning the
supervision of the implementation of preferential trade agreements,
the Directors-General responsible declared that the control proce-
dures introduced provide the requisite guarantees as regards the
legality and regularity of the underlying transactions, which is cor-
roborated by the Court’s audit findings (see paragraph 3.58).

1.30. The overall situation for the entire sector is stable compared
with previous years. However, further progress is required to elimi-
nate the risks with regard to the accuracy of the statistical data used
to calculate resources (VAT and GNI) and to the legality and regu-
larity of certain transactions.

1.30. The Commission takes note of the weaknesses identified by the
Court in its conclusions in Chapter 3 and will examine the measures that
could be introduced to address them.

The Common Agricultural Policy (CAP)

1.31. The Court’s audit of the way the supervisory systems and
controls in the Member states work revealed that, in general, the
IACS is a useful source of information for assessing the legality and
regularity of approximately 58 % of the CAP. On the other hand,
inconsistencies and control weaknesses were found concerning aid
paid in relation to quantities produced (olive oil, cotton, tobacco
and dried fodder), rural development aid, export refunds and inter-
vention storage (see paragraphs 4.24 to 4.46).

1.31. The Commission considers that the supervision and control it exer-
cises over the Common Agricultural Policy (CAP) form a sound basis for
addressing the risk of irregularity in the underlying transactions. Errors and
deficiencies found in the areas mentioned remain subject to recoveries from
the Member States concerned under the clearance of accounts procedure.

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1.32. As already noted by the Court in previous years, CAP expen-
diture as a whole was significantly affected by error. However, there
are variations between the main categories of agricultural expendi-
ture as regards the risk affecting their legality and regularity. Arable
crops are less exposed than animal premiums, while the other cat-
egories of expenditure are exposed to a more critical level of risk
and are subject to less effective checks (see paragraph 4.47).

1.33. The annual activity report and declaration by the Director-
General of the Directorate-General for Agriculture would allow a
better assessment to be made of the legality and regularity of the
underlying transactions if they were based to a greater extent on the
most pertinent existing sources of information, such as the IACS,
rather than on information relating to financial years previous to
2003, the usefulness of which is still only limited in the context of
the Court’s Statement of Assurance (see paragraphs 4.18 to 4.23).

1.32. The Commission points out that its budget is exposed to the risk
of irregularity in the underlying transactions by the nature of the aid
schemes financed by the Community. The Commission endeavours to limit
this risk when designing the aid schemes, and through its supervisory sys-
tems and controls over the implementation of each scheme. Any control sys-
tem is a trade-off between the cost of operating the defined intensity of
checks on the one hand, and the benefit these procedures bring on the other.
In the Community context the benefit involves reducing the risk that funds
are wasted and containing the risk of error to a tolerable level, which varies
between different budgetary areas, depending on both the cost of controls
as well as the inherent risk of transactions containing errors or irregulari-
ties. This view is consistent with the Court’s opinion no 2/2004 on the
‘single audit’ model.

The Commission has sought to switch support to direct payments to farm-
ers as, inter alia, such a change in policy limits the risk to the Fund and
helps to protect EU tax-payers’ interests. The 2003 CAP Reform, followed
by the second wave of the Reform in 2004 on Mediterranean products, will
further enhance this positive evolution. In addition, the Member States had
to ensure that many of the schemes referred to by the Court were linked to
IACS from 1 January 2003. Regarding export refunds and some inter-
vention measures, the Commission agrees that those schemes are exposed
to greater risk. Nevertheless, the continuing reduction in the incidence of
irregularities communicated by Member States seems to suggest that the
effort made over the years to strengthen controls and sanctions for non-
IACS aid (via ex-post checks under Regulation 4045/89, for example) has
not been without effect.

1.33. The declaration of assurance of the Director-General of the Agri-
culture Directorate-General is, as far as EAGGF Guarantee is concerned,
based on the following elements:

The existence of an effective clearance of accounts procedure as foreseen by
article 53.5 of the Financial Regulation. Financial corrections imposed are
based on the Commission audits carried out in Member States. The fact
that clearance of accounts decisions are made some years after the year of
the expenditure concerned is an integral part of the procedure, which
includes the right of Member States to respond to the findings.

The assurance which can be gained from the accreditation of paying agen-
cies, the annual certification procedure and the IACS. These elements per-
mit a great deal of reliance to be placed on the control over the expenditure
declared.

A number of other elements contribute to the basis on which the assurance
is obtained. These include results of audits made by the Commission’s Inter-
nal Audit Service and the Internal Audit Capability and possible informa-
tion received from OLAF. The Directorate-General for Agriculture also
takes account of information received from the Court of Auditors. The
annual activity report aims to highlight the principle achievements of the
year (see reply to point 4.22.).

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1.34. Although, with regard to the IACS, the risks affecting legal-
ity and regularity are generally better managed, taking agricultural
expenditure as a whole there is still some progress to be made in
order to rectify the substantial shortcomings found in the supervi-
sory systems and controls. Furthermore, the content of the annual
activity report and the drafting of the declaration of the Director-
General could be improved with a view to providing a source of
information for the Court’s Statement of Assurance.

1.34. The Commission considers the current system of statistical report-
ing for IACS to be effective. It agrees that, in cases where controls have been
poorly executed by Member States (for example certain post-payment
checks), improvements should be sought. In any case, discrepancies are
investigated and dealt with under the clearance of accounts procedure as
appropriate.

The Agriculture Directorate-General will take account of the Court’s rec-
ommendation for future annual activity reports.

Structural operations

1.35. The Court’s audit confirmed that there are still weaknesses
in the Member States’ systems for the supervision and control of the
implementation of the Community budget. With regard to the clo-
sure of the various forms of intervention in the 1994-1999 pro-
gramming, there was found to have been little progress because the
Member States had submitted incomplete and inadequate documen-
tation in support of the final payment claims. This is compounded
by the difficulties encountered by the Commission’s departments
when processing files (see paragraph 5.67). The Court’s audit con-
firmed the repetition of weaknesses of the same type as in previous
years in the management and control systems for the 2000-2006
period (see paragraph 5.68).

1.35. The Commission considers that the supervision and control it exer-
cises over the structural measures form a sound basis for addressing the risk
of irregularity in the underlying transactions.

Despite the late submission and variable quality of the closure documen-
tation provided by Member States, the Commission made good progress in
2003 in examining the final claims for 1994-1999 programmes. The clos-
ure strategy adopted by the Commission aims to reduce the risk that final
payments are made for irregular expenditure.

For the 2000-2006 period the Commission refers to its reply to
point 1.38.

1.36. The results of the Court’s audit of beneficiaries revealed the
repetition of errors of the same type and with the same frequency
as in previous years, which confirms the findings regarding system
failures (see paragraph 5.56).

1.36. The Commission is continuing to devote a large proportion of its
audit resources to checking Member States’ systems. Where necessary it uses
its powers to suspend payments to programmes whose systems show seri-
ous weaknesses which place Community funds at risk and applies financial
corrections for resulting irregularities. The Commission follows up errors
identified in the Court’s and its own audits and take measures to correct
them.

In their annual activity reports and declarations,

1.37.
the
Directors-General provided an assurance as to the legality and regu-
larity of the underlying transactions, but the Court found that for
all of the structural measures the reservations made were not com-
patible with the assurance given. Furthermore, it was found that the
risks associated with the closure of the 1994-1999 programme
period were not the subject of a reservation in the declarations of
the Directors-General responsible (see paragraphs 5.57 to 5.62).

1.37. The assurance given by the four Directorates-General responsible
for the resources of the Structural Fund was justified by the progress made
in examining and auditing the systems of the Member States. The absence
of reservations on 1994-1999 programmes is justified given the rigorous
procedures in place in the Directorates-General and the closure audits which
are being carried out to verify the reliability of the closure statements.

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THE COMMISSION’S REPLIES

1.38.
In general, the Court notes that the operation of the super-
visory systems and controls for the 2000-2006 programme period
has still not achieved a satisfactory level, which is reflected in the
large number of material errors still detected in this area.

1.38.
For the 2000-2006 period the Commission is following a multi-
annual strategy, which in addition to including a level of audit work on the
current period commensurate with the risks, taking account of other pri-
orities, also involves applying the ‘single audit’ approach in order to maxi-
mise the effect of its own and Member States’ audit work. In addition, the
Commission disseminates guidance and good practices to Member States.

Internal policies

Shortcomings were identified in respect of the management
1.39.
and control systems of the sixth Framework Programme for
Research and of the programme for the European Refugee Fund in
the freedom, security and justice field. Furthermore, work must con-
tinue on the supervisory systems and controls at Commission level
so as to complete the implementation of the internal control stan-
dards (see paragraphs 6.4 to 6.16 and 6.41).

1.39. The Commission fully supports the objectives which the Court lists
in the report and pursues them in its day-to-day management. The control
systems have been strengthened under the administrative reform and will
continue to be subject to strict monitoring.

As regards the second phase of the European Refugee Fund, the Commis-
sion organised monitoring visits to all the Member States in 2002 and
2003. These visits showed that improvements were possible and the short-
comings have been taken into account in the planning of ex-post con-
trols.

1.40.
Substantive testing of transactions in the Internal Policies
sector revealed weaknesses in the Commission’s internal control
systems and numerous errors at final beneficiary level, which con-
firms the Court’s previous observations on the legality and regular-
ity of the underlying transactions and corroborates the weaknesses
identified in the control procedures applied (see paragraphs 6.17 to
6.26 and 6.42). An analysis of the Commission’s ex post financial
audits in the Internal Policies sector also showed that a large num-
ber of final beneficiaries overdeclared the costs relating to the opera-
tions cofinanced by the European Union. In this regard, the Court
believes that the corrective measures provided for in the case of the
sixth RDT Framework Programme to reduce the risks affecting the
legality and regularity of the underlying transactions are inadequate
(see paragraphs 6.27 to 6.33 and 6.43).

1.40.
In particular since the implementation of its administrative reform,
the Commission is confident that it respects the requirements of the Finan-
cial Regulation regarding ex-ante and ex-post controls on directly man-
aged expenditure. The Commission constantly seeks to improve its super-
visory systems and controls, and welcomes the recommendations the Court
makes to this effect. At the final beneficiaries’ level, the analysis of ex-post
financial audits by the Commission shows that final beneficiaries make
mistakes often due to the complex nature of the fifth Framework Pro-
gramme model contract. These mistakes are made in two senses, some con-
tractors overstate, and others understate their expenditure. The net impact
of the errors on the Commission’s budget remains limited.

Measures have been introduced and the sixth Framework Programme has
been considerably simplified, leading to substantial improvements in man-
agement at the level of participants.

1.41. The quality and reliability of the information contained in
the activity reports for 2003 had improved, thus making a better
assessment of the legality and regularity of the underlying transac-
tions possible. Nevertheless, there are still weaknesses as regards the
drafting of the reservations (see paragraphs 6.34 to 6.40 and 6.44).

1.41. Reservations are drafted after thorough examination of the activi-
ties of the DGs and the main factors are contained in their annual activity
reports. (Each reservation is covered by an action plan which is systemati-
cally followed up)

1.42.
In general, the Court notes that the improvements observed
in 2003 in internal control are not yet sufficient to avoid numerous
errors at the level of final beneficiaries and weaknesses in the opera-
tion of the Commission’s own systems (see paragraph 6.45).

1.42. The Commission is always trying to improve the systems intro-
duced, particularly in the light of the Court’s recommendations (see para-
graph 6.44).

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THE COMMISSION’S REPLIES

External actions

1.43. Although 2003 was, in principle, the last year of the devo-
lution process for the geographical programmes (23), the reliability
and effectiveness of the controls (checks, reviews, inspections, inter-
nal audits and audits carried out by external firms) differ markedly
between the Delegations and the Directorates in the Europe Aid
Cooperation Office (see paragraphs 7.14 to 7.32).

1.43. The main budgetised geographical programmes were almost all
devolved during the period 2001-2003 but devolution of the thematic
budget lines has taken place during 2004. The gradual implementation of
devolution explains to a large degree the difference between Delegations and
between the different directorates of EuropeAid.

1.44. A small number of errors which had no significant finan-
cial impact were found at the level of the Commission’s central
departments and Delegations (see paragraph 7.36). On the other
hand, the Court’s audit revealed the existence of weaknesses in the
internal control systems and a relatively large number of irregulari-
ties at the level of the bodies responsible for implementing the final
beneficiaries’ projects and in the actual projects (see paragraphs
7.37 to 7.39).

1.44. The Commission agrees with the Court that the observance of ten-
der and procurement procedures by project management units and NGOs
remains an area of concern. With the devolution of projects stricter con-
trols can be applied on the spot by the respective delegations. Moreover,
since June 2003, in line with the revised grant contract provisions, the
project accounts are subject to an audit before the final payment is made.

1.45. The Directors-General responsible declared that the control
procedures introduced provide the requisite guarantees concerning
the legality and regularity of the underlying transactions. The annual
activity reports of the Humanitarian Aid Office and the EuropeAid
Cooperation Office describe the internal control systems in place.
However, in the case of the EuropeAid Cooperation Office the Court
noted that the systems for supervising the legality and regularity of
the expenditure underlying the financial statements presented by
the bodies responsible for implementation are not yet able to guar-
antee the legality and regularity of the payments made by these
bodies.

1.45.
Essential supervisory systems and controls for EuropeAid were
operational in 2003. These controls were considered as adequate for the
purpose of deriving overall assurance in the context of the Director-
General’s declaration. See also the replies to paragraphs 7.45 and 7.48.

1.46. With regard to the field as a whole, some elements required
for the supervision and control of the systems and expenditure were
already in place in 2003. Nevertheless, it is essential for these com-
ponents to be made operational with a view to improving the legal-
ity and regularity of the underlying transactions, which is still nec-
essary,
for
implementing projects and at that of final beneficiaries.

the organisations

responsible

level of

the

at

1.46. Over recent years, the utilisation of standard contractual docu-
ments (contracts, grants and financing agreement) has contributed to
improve the level of control by the Commission. Payments and the verifi-
cation of supporting documents are made as required by the financial regu-
lations. Contract provisions for ‘certification audits’ have also been improved
(see replies to paragraphs 7.30 and 7.32). Moreover, the external audit
strategy has been strengthened through the establishment of annual audit
plans – on the basis of a risk assessment — of audits to be launched by
headquarters and delegations.

(23) Devolution means that the Commission’s central departments transfer
to delegations in the beneficiary countries tasks and responsibilities
relating to the management of cooperation activities financed by the
European Union.

30.11.2004

EN

Official Journal of the European Union

C 293/27

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Pre-accession aid

1.47.
In spite of the improvements noted, the evaluation of the
supervisory and control systems further identified a number of
weaknesses in the audits carried out by the Commission of the man-
agement and control systems in the candidate countries. These
weaknesses must be corrected in order to reduce the risk resulting
from the removal of the Community Delegations’ ex ante controls
(see paragraphs 8.40 to 8.43).

1.47. The Commission is following up the findings of the Court for pre-
accession aid and will take every appropriate action. The Commission pro-
vided extensive support and guidance to the accession countries and carried
out substantial audit work to help them improve their management in
accordance with EU rules. It is continuing its work to ensure that the coun-
tries that have now joined the European Union have appropriate systems
for managing the Structural and Cohesion Funds.

1.48. The Court’s checks on payments revealed errors. Further-
more, there is a risk that national obligations as regards parallel
co-financing may not be met (see paragraphs 8.30 to 8.34).

1.48. The Commission considers that a number of errors identified by the
Court do not have a financial impact and are formal in nature.

Co-financing is monitored during implementation. However in a decentra-
lised environment assurance of absolute compliance with any requirement,
not only co-financing, can only be obtained when closure audits are carried
out.

1.49. The Commission considers that the Director-Generals’ Annual
Activity Reports clearly set out risks attaching to pre-accession aid.

Nevertheless, the Commission will
co-financing as this issue matures and in the light of developments.

further consider a reservation on

1.50. The Commission is aware of the need for further improvement in
the management and control systems in the new Member States and the
accession countries. It continues to support these improvements, inter alia
through its own audit work.

Concerning the errors in its internal systems found by the Court, the Com-
mission refers to its reply to paragraph 1.48.

In their annual activity reports and declarations,

1.49.
the
Directors-General provided an assurance as to the legality and regu-
larity of the underlying transactions, whilst expressing significant
reservations concerning Phare and ISPA (24). The Court believes that
the risk of non-compliance with cofinancing obligations on the part
of the applicant countries is sufficiently important to justify a res-
ervation in the 2003 declaration accompanying the annual activity
report of the enlargement Director-General (see paragraph 8.36).

1.50. Notwithstanding the fact that, in 2003, the candidate coun-
tries made real progress in creating management structures and set-
ting up internal control mechanisms, efforts still need to be made
with a view to getting them to work efficiently so that there is posi-
tive progress in the situation regarding the legality and regularity of
Community expenditure and due account is taken of the removal
of the Delegations’ ex ante controls. The in-depth audit carried out
by the Court in 2003 revealed that, in general, the situation regard-
ing the Commission’s own supervisory systems and controls is
unsatisfactory, which is reflected in the number of errors detected
at transaction level. These errors confirm the risk already identified
in 2002, which results from the weaknesses identified in these sys-
tems.

(24) No reservations were expressed with regard to Sapard in the Director-

General’s declaration.

C 293/28

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Administrative expenditure

1.51.
In spite of the efforts made in 2003, the Court’s audits
revealed that the changes required to fully implement the new inter-
nal control framework laid down in the Financial Regulation had
not yet been implemented in their entirety by the majority of the
institutions (see paragraph 9.65).

1.51. The Commission has considered implementation of the reform as
one of its first priorities. So, by the end of 2002 all services conducted a
detailed Readiness assessment which indicated that services were ready for
implementing the requirements of the new Financial Regulation.

The Office for Official Publications of the European Communities has
already stated that it intends to increase its efforts in the area mentioned
by the Court of Auditors, in particular in the 2003 annual activity report
(page 100) and in the Readiness assessment.

1.52. The Court’s audit did not reveal any significant problems
affecting the legality and regularity of the transactions examined
taken as a whole (see paragraphs 9.66 and 9.68).

1.53. The annual activity reports of the majority of the institu-
tions’ authorising officers by delegation and the declarations of the
Directors-General provided reasonable assurance as to the legality
and regularity of the administrative expenditure (see paragraphs
9.16 to 9.17,9.24,9.29,9.34,9.46,9.53,9.63 and 9.67). However, in
his declaration the Commission’s Director-General for external rela-
tions expressed two reservations concerning the implementation of
the internal control standards in the Community Delegations (see
paragraph 9.64).

1.53. The Commission notes that it is one of the institutions whose
authorising officers by delegation provided reasonable assurance.

The Director-General for External Relations in his declaration for 2003
has formulated reserves on the implementation of control standards No 17
(Surveillance) and No 12 (Management information) in the Delegations
and maintained the reserve on control standard No 16 (Segregation of
duties) formulated in 2002. A specific action plan to address these reserves
is under implementation since January 2004.

1.54. Although examination of the transactions showed a stable
situation compared with previous years, the institutions must still
work towards reinforcing the supervisory systems and controls in
order to minimise the risks entailed by the existing weaknesses for
the legality and regularity of the underlying transactions.

1.54. As far as the supervisory systems are concerned, the Commission
considers that supervision is really executed in the services but, as stated in
the overview of the state of the internal control systems (1), acknowledges
that there is still room for improvement in order to evidence that supervi-
sion. The Commission plans to have specific workshops on this issue in the
second half of 2004.

See also the comment concerning the Official Publications Office in the
reply to paragraph 1.51.

(1) Overview on the state of internal control in the Commission DGs and Services

in 2003 (SEC(2004) 720).

30.11.2004

EN

Official Journal of the European Union

C 293/29

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Development of the Commission’s internal control system

1.55.
In the context of its Statement of Assurance (DAS) for the
financial year 2002, the Court examined the progress of the admin-
istrative reform of the Commission (25) by carrying out an initial
evaluation of the Commission’s new internal control system, as well
as of the guarantees it provided as regards the legality and regular-
ity of the transactions underlying the budgetary payments (26).

In 2003 the Court continued its evaluation of the Commis-
1.56.
sion’s internal control system. On the one hand the Court exam-
ined the extent to which the management representations contained in
the annual activity reports and declarations by the Directors-General
and in the Commission’s Synthesis are confirmed by the Court’s
audit findings and could be taken into account, where necessary, for
the DAS. On the other, the Court examined the progress made in
implementing key elements of the revision of its internal control
system (White Paper actions, action plans annexed to the Synthesis
of the 2002 and 2001 annual activity reports and declarations by
Commission Directors-General and minimum internal control
rules).

1.57. According to Article 274 of the EC Treaty, the Commission
is responsible for implementing the budget. Nevertheless, not all the
transactions are subject to the same management system and the
impact of the reform of the Commission varies from sector to sec-
tor. With regard to expenditure, the Financial Regulation distin-
guishes between the following cases (Article 53):

1.57.

a)

the Commission implements the budget on a centralised basis
(administrative expenditure and internal policies). In this case,
implementation tasks are performed either directly by its
departments (direct centralised management), or indirectly
when the Commission resorts to agents (indirect centralised
management) In the case of the first category, the reform affects
all the procedures for implementing expenditure. In the second
category, the reform has a particular impact on those aspects
concerning the definition, supervision and implementation of
the tasks concerned;

b) management of the transactions is assigned to the national
authorities in the Member States (EAGGF-Guarantee and Struc-
tural Funds). This is shared management and the Commission
must verify that the national authorities act in compliance with
the applicable rules. In this case the reform of the Commission
only affects activities concerning the monitoring of implemen-
tation;

(25) Following the European Parliament’s request of January 2000 for the
Commission to streamline its management, on 5 April 2000 the Com-
mission submitted a White Paper entitled ‘Reform of the Commission’
(COM(2000) 200 of 5 April 2000).

(26) Annual Report concerning the financial year 2002, paragraphs 1.62 and

1.63.

b) The Commission has developed an audit strategy based on the single
audit approach which aims to improve the management and control sys-
tems in the Member States.

C 293/30

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

c)

the Commission can entrust implementation of certain aspects
of its operations to beneficiary countries after having carried out
an ex ante check (pre-accession aid). Management is then termed
decentralised and the reform affects most of the aspects of man-
agement, in the same way as in cases of delegation by the Com-
mission to an agent in the context of centralised management.

The Commission management representations

2003 Synthesis report

1.58. By means of its 2003 Synthesis of the annual activity
reports (27), the Commission is continuing its efforts at transparency
as regards its obligation to render an account of its manage-
ment (28). The Court found that for the first time the Commission
had presented an analysis of the degree of assurance provided by the
supervisory systems and controls with regard to the legality and
regularity of the underlying transactions. In this way, as an institu-
tion, it assumes responsibility for the implementation of the budget
as provided for in the Treaty (Article 274) by adopting as its own
the Authorising Officers by delegation’s management representa-
tions.

1.59. The Commission states that is not yet in a position to pro-
vide assurance without qualification with respect to one important
area of shared management (Structural Funds). Moreover, it notes
that, in spite of a satisfactory level of assurance in the areas of direct
and indirect centralised management, there is still a problem with
regard to grants based on the partial reimbursement of costs
declared by the beneficiaries. In fact, reservations concerning the
frequency of errors have been issued by most Directorates-General
managing these types of programme. All the above-mentioned
statements are confirmed by the Court’s audit findings (see para-
graphs 5.66 to 5.69 and 6.41 to 6.45).

(27) Communication from the Commission to the European Parliament and
the Council — Synthesis of Annual Activity Reports 2003 of DGs and
Services (COM(2004) 418 final of 9 June 2004).

(28) See the Annual Report concerning the financial year 2002, paragraph
1.108 and that concerning the financial year 2001, paragraph 9.98.

1.58-1.60. As in previous financial years (see section 5.3.3 of the 2002
synthesis (COM(2003) 391) for shared management), when adopting the
2003 Synthesis of Annual Activity Reports the Commission gave an over-
view of the assurances given by the various authorising officers by delega-
tion and introduced corrective measures at institution level in the case of
recurrent weaknesses in certain sectors.

In particular, the Commission has expressed its position on a number of
sectors which can be identified more clearly under the new structure of the
2003 synthesis and in which the weaknesses detected by the authorising
officers require action at institution level. The synthesis proposes action by
the institution only for those areas where important weaknesses have been
identified at Commission level. For those areas not explicitly mentioned in
the synthesis, the assurances are provided at Directorate-General/Service
level through the declaration of each authorising officer by delegation.

1.59.

See replies to paragraphs 1.35 to 1.38.

For the Structural Funds, each Directorate-General took account of the level
of audit work completed on the systems for the 2000-2006 and its own
audit strategy in determining the scope of its reservations, which were gen-
erally more limited than in 2002.

30.11.2004

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Official Journal of the European Union

C 293/31

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.60. However, the Commission has not stated its position on the
situation regarding the Common Agricultural Policy, which is the
most important area in which management is shared. The same
applies to centralised management
(Own resources and Pre-
accession aid) and joint management (External aid).

1.60.

See reply to paragraph 1.58.

Annual activity reports and declarations of the Directors-General for the financial
year 2003

Annual activity reports

1.61. The new circular (29) on the 2003 Annual activity reports,
which for general matters refers to the guidelines for drawing up the
2002 annual activity reports and to some aspects of shared man-
agement (30), introduces changes and some new elements:

a)

b)

c)

the timetable has been brought forward as required by the new
Financial Regulation (31);

the Directorates-General are asked to present a number of
management indicators (32) and to formalise the reservations
by presenting standardised summary information in a standard
table (33);

a declaration by the Director of Resources is attached to the
annual activity report to certify the reliability of the informa-
tion on the drafting process, the financial data and the imple-
mentation of internal control standards (34).

(29) Circular on the 2003 activity reports, SEC(2003) 1469 of 19 December

2003.

(30) Commission Communication ‘The 2002 review of the implementation
of activity-based management in the Commission, including clarifica-
tion of the methodology for the establishment of Annual Activity
Reports’ (COM(2003) 28 of 12 March 2003) and Commission Commu-
nication ‘Clarification of the role of the Directors-General in shared
management’ (C(2003) 1830-2 of 17 June 2003).

(31) Article 60(7) of the Financial Regulation.
(32) The performance indicators concern human resources, the implemen-

tation of the budget and auditing.

(33) The standard table requires a minimum of information about the cause,
the materiality criterion employed, quantification (where the weakness
is quantifiable), the impact as regards reasonable assurance and the cor-
rective measures envisaged.

(34) Addendum to the circular on the 2003 activity reports (SEC(2004) 147

of 19 February 2004).

C 293/32

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.62. The Commission considers that the annual activity reports are a
useful management tool for supplying information on the weaknesses
detected and providing an effective remedy. It feels that substantial improve-
ments have been made to these reports and to the declarations accompa-
nying them in 2003 and will continue its efforts along these lines.

1.64.
In order to highlight only the most serious management weak-
nesses (management by exception), the term ‘reservation’ has been restricted
to those shortcomings which have a real and verifiable impact — i.e. not
those with only a potential risk — on the assurance to be given that the
control procedures introduced provide the requisite guarantees as to the
legality and regularity of the transactions carried out during the reference
year. Now that the term ‘reservation’ has been defined in this way, progress
still has to be made on the precise determination by the authorising officer
by delegation of the impact which the reservations expressed have on the
assurance given.

1.62. These elements, plus peer review, helped to improve the qual-
ity of the annual activity reports. Thus, in general, the correspond-
ing annual activity reports noted the follow-up to the action plans
adopted in the context of the annual activity reports and the Com-
mission’s 2002 Synthesis (35) and the monitoring of the measures
taken as a result of the internal and external audit recommenda-
tions. The introduction of a specific circular on these action
plans (36), which are incorporated into the Commission’s annual
management plans, enabled progress to be monitored more effec-
tively. However, the Court feels that this whole exercise requires fur-
ther consolidation if it is to be implemented effectively.

Reservations contained in the declarations of the Directors-General

1.63.
In their declarations attached to the annual activity reports,
the Directors-General state that the internal controls carried out in
their departments offer reasonable assurance that the underlying
transactions are legal and regular. In the event of internal control
weaknesses or irregularities, they make reservations and draw up
action plans which include deadlines for implementation.

1.64.
In order to establish the actual scope of the reservations, the
Directors-General are asked to specify their criterion for defining
the materiality threshold. Apart from materiality based on nature or
context, the guidelines establish the threshold as a function of the
budget for the activity in question, i.e. 2 % of the value of the activ-
ity concerned (37). The Court feels that this notion of materiality is
not in itself adequate to identify systemic weaknesses (38).

(35) Commission Communication ‘Synthesis of Annual Activity Reports

2002 of DGs and Services’ (COM(2003) 391-4 of 9 July 2003).

(36) Circular on the follow-up to the action plans resulting from the 2002
annual activity reports and from the synthesis (SEC(2003) 1078 of
10 October 2003) drawn up to implement Action No 24 ‘Follow-up by
services’ (ref. 5.4.6.) of the 2002 summary.

(37) COM(2003) 28 of 12 March 2003.
(38) The fact is that weaknesses may constitute a risk for management with-
out necessarily leading to actual errors in terms of the legality and regu-
larity of the underlying transactions. In order to assess the significance
of a systemic weakness, account must be taken not only of its nature (i.e.
the seriousness of the shortcoming) but also of its extent (i.e. the poten-
tial financial impact).

30.11.2004

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Official Journal of the European Union

C 293/33

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.65. The Directors-General may depart from this criterion if they
feel that the context requires such a decision or if the shortcoming
is intrinsically significant. In such cases, the choice of a new thresh-
old or of another materiality criterion must be justified in the annual
activity report. Where appropriate, this choice should take account
of the risks intrinsic to each of the areas considered. In this connec-
tion, the Commission should define a more suitable, specific policy
for establishing materiality thresholds based on the nature of the
transactions concerned and on the risks that are acceptable for the
area in question and for determining the resources to be allocated
to checks (39).

1.66. All the Directors-General stated that they had obtained rea-
sonable assurance that the resources allocated to them had been
used for the specified purposes and that the internal controls which
they had introduced had ensured that the underlying transactions
were legal and regular. 21 of the 39 declarations contain reserva-
tions limiting the assurance given by the Directors-General. Thus,
as in the previous year (40), the Director-General for Budgets upheld
the reservations concerning imperfections in the Commission’s
accounting systems (41) (see paragraph 1.8).

1.67. The main reservations are shown inTable 1.2. Of the 49
reservations expressed in 2003 (42), the majority concern weak-
nesses already brought to light in 2002 (43). The other reservations
had generally already been mentioned in various connections in the
annual activity reports of the Directorates-General for the previous
year (see paragraphs 3.58, 4.18, 5.57 to 5.62, 6.36, 7.47, 8.35,
8.37 and 9.64). This shows that the weaknesses identified can be
eliminated only in the medium term (see paragraphs 1.73, 1.76 and
1.79).

1.65. The Commission is willing to consider the possibility of introduc-
ing a certain degree of flexibility when determining the materiality thresh-
olds for the various areas of management.

1.66.

See Commission’s reply to paragraph 1.8.

1.67. Although it does not agree with the Court’s criticisms in Table 1.2
on the impact and the scope of reservations, the Commission takes note of
the Court’s observations and will continue to enhance the information so
that the Court can use it more effectively in support of its declaration of
assurance.

(39) Opinion No 2/2004 of the Court of Auditors on the ‘single audit’ model
framework)

for a Community internal control

(and a proposal
(OJ C 107, 30.4.2004, p. 1).

(40) Paragraph 1.92 of the Annual Report concerning the financial year

2002.

(41) The Joint Research Centre also issued a reservation about the reliability

of the accounts.

(42) The situation is stable compared with the previous year.
(43) E.g. Directorates-General Agriculture, Budget, Enlargement, Employ-
ment and Social Affairs, Environment, Fisheries, Information Society,
Press and Communication, Regional Policy, External Relations,
Research, Energy and Transport, Eurostat and the Joint Research Centre.

C 293/34

EN

Official Journal of the European Union

30.11.2004

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30.11.2004

EN

Official Journal of the European Union

C 293/35

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.68. The guidelines for the annual activity reports and the Char-
ter for Authorising Officers by Delegation (44) specify that the res-
ervations must not make the declaration meaningless and that, in
extreme cases (45), the Director-General may not be able to provide
the required assurance.

1.69.
For 2003, the extent of the reservations expressed by some
departments (46) is not compatible or sufficiently justified in view of
the assurance provided in the declarations (see Table 1.2 and para-
graphs 5.57 to 5.62, 7.48, 8.36 and 8.38). The impact of the res-
ervations on the assurance given in the declarations was neverthe-
less defined more clearly than in the financial year 2002.

1.69. Determination of the impact of reservations on the assurance is
improving as the practice becomes routine. The Commission considers that,
at present and increasingly so in the future, determining the consequences
of the reservation for the area in question already makes it possible to estab-
lish — and will make it even clearer in future — that the assurance to be
given by the authorising officer by delegation is totally justified.

1.70. The Court’s work shows that the supervisory systems and
controls in several areas of the financial perspectives have not yet
reached a satisfactory level and that further efforts are required in
order to strengthen them. Thus, some weaknesses singled out by the
Court during its audits should have been included in the declara-
tions of the Directors-General (see Table 1.2 and paragraphs 4.22,
5.62, 6.37, 7.48 and 8.36). In addition, the Declaration by the
Director-General of DG Agriculture is not based on an examination
of the transactions belonging to the financial year 2003 (see para-
graphs 4.19 and 4.20).

See answers to paragraphs 1.33, 1.37 and 1.67 and to the spe-

1.70.
cific paragraphs mentioned by the Court.

1.71.
In spite of some improvement, the Court believes that the
annual activity reports and declarations of the Directors-General
cannot yet systematically serve as a useful basis (see paragraph 1.4)
for its audit conclusions in the various areas of the financial per-
spectives (see Table 1.2).

1.71. Through its work to improve the content of declarations and its
monitoring of compliance with the standards on which the declarations are
based, the Commission is endeavouring to make the annual declarations
into a reliable indicator of its performance and its strategy for dealing with
the risks identified, in order that the Court can use them as a basis for its
assurance.

(44) Action No 63 ‘Description of the responsibilities of each financial actor’
of the White Paper and the ‘Guidelines for the declaration and reserva-
tions of the Authorising Officer by Delegation in the context of the
annual activity report’ (SEC(2002) 401 of 9 April 2002).

(45) E.g. when the reservations have a significant impact on the Directorate-

General’s budget.

(46) E.g. the Directorates-General for Agriculture, Education and Culture,
Enlargement, Employment and Social Affairs, Fisheries, Press and Com-
munication, Regional Policy and Eurostat.

C 293/36

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.72. The significant progress made in 2003 does not rule out the need
to implement the corrective measures in the various sectors identified in the
2003 synthesis report. In some cases, the problems underlying these opera-
tions will only be resolved effectively and satisfactorily in the medium term.
Thus, every year the synthesis of annual activity reports takes stock of the
progress achieved and sets out and updates all the actions to be conducted
at Commission level.

Each of the actions under the White Paper and previous syntheses calls for
the application of an instrument (e.g. a communication, the introduction
of a measure, etc.). Once this instrument has been achieved, the action as
such is no longer taken into consideration and, if the underlying problem
has not been resolved, a new action is undertaken, usually through the
annual synthesis report. This makes it possible to update the measures to
be taken and also to perform an annual consolidation of ongoing actions
which is not obstructed by the wide range of actions carried out in the past.
It is thus the consolidation in the most recent synthesis which must be taken
into account to obtain a table of ongoing horizontal actions.

Progress in the area of administrative reform

2003 Synthesis

1.72.
In general, the Commission states in its Synthesis that 2003
saw substantial progress in the area of administrative reform, that
practically all of the actions of the White Paper had been completed
and that most of the action plans envisaged by the 2001 and 2002
Syntheses had been completed or had made significant progress.
However, the Court’s audits show that this assessment is very opti-
mistic. Furthermore, the Commission itself acknowledges in the
various sections of its Synthesis that some areas will still require
monitoring in the years to come, thereby corroborating the Court’s
audit findings in the following areas:

a)

b)

c)

d)

e)

the implementation of the actions of the White Paper (see para-
graphs 1.74 to 1.76) and of the 2001 and 2002 Syntheses (see
paragraphs 1.77 to 1.79);

the implementation of internal control standards (47) (see para-
graphs 1.80 to 1.84);

the production of adequate indicators for activity-based man-
agement, and strategic planning and programming (see para-
graphs 1.85 to 1.87);

financial management and reporting (48) (see paragraphs 1.27 to
1.54 and 1.22 to 1.26);

the quality and extent of the reservations contained in the dec-
larations of the Directors-General (see paragraphs 1.63 to
1.71).

1.73. The Court shares the Commission’s view that the aforemen-
tioned points are already covered by the actions envisaged in the
syntheses for previous years. It stresses the importance for the Com-
mission of successfully consolidating all the horizontal action plans
and notes the Commission’s willingness to consider the recommen-
dations contained in its opinion on the single audit model (49).

(47) In particular, internal control standards. The internal control system
concerns not only the departments in Brussels but also the Commis-
sion’s local offices (delegations, representations and executive agencies).
(48) In particular, shared, central, direct and indirect management, ex-ante
and ex-post checks and the implementation of the Financial Regulation.

(49) Court Opinion No 2/2004.

30.11.2004

EN

Official Journal of the European Union

C 293/37

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.74-1.76. Once the instruments aimed at by the various measures have
been installed, the settlement of outstanding issues will be covered each year
by the synthesis reports (see reply to paragraph 1.72). Within this frame-
work, the Commission considers that most of the actions mentioned by the
Court had been achieved at 31 December 2003.

1.75. The Commission would make two comments on Action 83:

— in communication COM(2004) 93, which is mentioned by the Court,
Action 83 is incorporated into Action 62, which refers both to the
reform and to the effect of policies on the resources required;

— the resources required are examined every year during the annual
policy strategy exercise (APS): since 2003 the Commission has
adopted the policy of restricting the new posts it requests to the level
needed for an enlarged European Union (see also the communication
COM(2002) 311 on this subject) and of satisfying its other require-
ments by redeployment and the allocation of posts freed by successive
early retirement schemes.

White Paper actions

1.74. As part of its monitoring of progress in the area of admin-
istrative reform, the Commission announced that, of the 36 actions
listed in Chapter V of the White Paper (50) on ‘Audit, management
and financial control’, 32 had been completed in 2003. A progress
report on the White Paper was thus drawn up (51) to include a full
account of the objectives still to be attained and of the measures still
to be implemented.

1.75. The Court notes the progress made by the Commission as
regards the design of the new regulatory control framework but
believes that the results as far as implementation and actual proce-
dure are concerned are not yet satisfactory. Thus, of the 18 out of
36 actions under Chapter V of the White Paper that had still not
been completed at the end of the financial year 2002 (52), eight
actions were still being implemented (53) as at 31 December 2003.
For eight of the 10 other areas where actions have theoretically been
completed, the objective has not yet been fully achieved, implemen-
tation is not yet satisfactory or there is no guarantee that they are
permanent (54).

1.76. Many of the unfinished actions are also covered in the syn-
thesis of the annual activity reports and declarations (55) (see para-
graphs 1.77 to 1.79) and require departments to change their hab-
its or necessitate the introduction of new activities (56). Full
completion of these actions, which will enable the attendant objec-
tives to be achieved,
is feasible only in the medium term
(see Table 1.3).

(50) COM(2000) 200 of 5 April 2000.
(51) Communication from the Commission ‘Completing the reform man-
date: progress report and measures to be implemented in 2004’
(COM(2004) 93 of 10 February 2004).

(52) Paragraphs 1.65 to 1.67 of the Annual Report concerning the financial

year 2002.

(53) Actions Nos 74 ‘Contracts database’, 83 ‘Adequate levels of staffing’, 87
‘Examination of the progress made by Commission departments during
the process of change’, 93 ‘The better coordination of interaction
between OLAF and other services’, 94 ‘The imperviousness of legisla-
tion and contract management to fraud’, 95 ‘Optimisation of early
warning system’, 96 ‘More effective management of recovery of unduly
paid funds’ and 97 ‘Improved financial monitoring and control of Struc-
tural Funds’.

(54) Actions Nos 66 ‘Financial Irregularities Panel’, 71 ‘An Audit Progress
Committee’, 78 ‘Minimum standards for internal control’, 81 ‘Strength-
ening the role of the Directorates-General control function’ internal
audit structures/audit capabilities, 82 ‘Declaration by the Director-
General in his annual activity report’, 85 ‘Design of adequate internal
controls and financial processes’, 90 ‘Assessment of Human Resources
needs for financial management and control’ and 91 ‘Training’ (man-
agement and finance).

(55) COM(2004) 418 final of 9 June 2004.
(56) Paragraph 1.109 of the Annual Report concerning the financial year

2002.

C 293/38

EN

Official Journal of the European Union

30.11.2004

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EN

Official Journal of the European Union

C 293/41

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Action plans annexed to the Synthesis of the annual activity reports of the
Commission Directorates-General and departments for the financial years 2002
and 2001

1.77. The synthesis of the annual activity reports and declarations
of the Directors-General (57) for the financial year 2002 takes stock
of the reform of the Commission’s internal control system and
launches a new action plan to rectify the weaknesses observed. This
action plan comprises 25 corrective measures in addition to the
action plans set out by the Directors-General in their annual activ-
ity reports and the follow-up of the action plan envisaged in the
2001 Synthesis (58). Of the actions which are likely to have an
impact on the legality and regularity of the underlying transac-
tions (59), the Court found that the horizontal actions (60) had not
been completed (61) by 31 December 2003.

1.77-1.78.
In line with what was set out in the reply to paragraph 1.72
— that the actions to be undertaken are updated each year and the actions
established by previous syntheses disappear — the actions in the 2001 and
2002 syntheses which were not completed at 31 December 2003 have
been taken over and updated in the 2003 synthesis.

Substantial progress has been made in the implementation of two actions
concerning shared management. By September 2004 the Commission had
adopted communications on the legal responsibilities under shared man-
agement (COM(2004) 580 final) and on the alignment of audit meth-
odology in this area (C(2004) 3115); in December 2003 the Commis-
sion also published revised audit manuals for the Structural and Cohesion
Funds. In the draft legislation for the Structural Funds in the 2007-2013
period the Commission has also taken up the idea of annual declarations
by an independent audit body which was also mentioned in
action 17.

(57) COM(2003) 391-4 of 9 July 2003.
(58) Communication from the Commission to the European Parliament and
the Council entitled ‘Synthesis of the Annual Activity Reports and dec-
larations
Service’
(COM(2002) 426 of 24 July 2002).

the Directors-General

and Heads

of

of

(59) Actions Nos 1 ‘Internal Control Standards’ (ref. 5.4.5), 3 ‘Communica-
tion’ (ref. 3.3.2), 6 ‘Accounting framework’ (ref. 5.3.7), 7 ‘Shared man-
agement’ (ref. 5.3.3), 8 ‘Co-financing’ (ref. 5.3.4), 9 ‘Recovery’ (ref. 5.3.2),
12 ‘Co-ordination of the Commission’s audit community’ (ref. 3.3.2), 13
‘Audit methodology’ (ref. 3.3.3), 14 ‘Follow up of audit reports’ (ref.
5.3.8), 15 ‘Follow up OLAF’ (ref. 5.3.9), 17 ‘Audit in shared manage-
ment’
(ref. 5.3.3), 19 ‘Audit Progress Committee: organisation’
(ref. 3.3.3), 21 ‘Management risk assessment’ (ref. 3.3.2), 23 ‘AAR Meth-
odology’ (ref. 4.4) and 24 ‘Follow up by services’ (ref. 5.4.6).

(60) Actions Nos 6, 7, 8, 9, 12, 15, 17, 19, 21 and 23.
(61) Actions Nos 6, 7, 8, 9, 12, 17 and 21: ‘ongoing’; actions Nos 15, 19 and
23: ‘completed, partially completed or follow-up action to be launched’.

C 293/42

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.78.
Similarly, the follow-up of the action plan envisaged in the
2001 Synthesis reveals that most of the actions which had not been
completed by the end of the financial year 2002 (62) were still being
implemented (63) on 31 December 2003. In two of the areas cov-
ered by actions which had, in principle, been completed, the objec-
tive has not yet been achieved in full, implementation is not yet sat-
isfactory or there is no guarantee that they are permanent (64). In
two other areas, the actions are incomplete and the objective has
been partially achieved (65).

1.78. With regard to the actions on shared management, the Commis-
sion refers to its reply to paragraph 1.77.

Two separate actions are planned for Action 5: consideration of the
resources needed (see reply to paragraph 1.75) and establishment of a
method for assessing the resources required for existing and new activities.
As regards Action 14, the Personnel and Administration Directorate-
General has defined, through a poll in departments, the recruitment pro-
files relating to their needs and has asked the European Personnel Selection
Office (EPSO) to organise the corresponding competitions from 2003 on.
In the meantime, it may be necessary to continue recruiting more tempo-
rary staff on permanent posts.

As regards Action 15, the Commission would point out that on 14 July
2004 it adopted communication C(2004) 2694 on training and recruit-
ment needs in the area of financial management as identified in the syn-
thesis of Annual Activity Reports 2002.

1.79. The Court encourages the Commission to implement the
unfinished action plans so that the new internal control system can
actually function, in particular in the areas of shared management,
management risk assessment and debt recovery (see Table 1.3).

1.79. The Commission is investing considerable effort and interest in
progressing on the three issues highlighted by the Court (i.e. shared man-
agement, risk management and recovery) as reflected in both the Synthesis
of the 2003 and 2002 annual activity reports and the Overview of the
state of internal control systems.

(62) Paragraph 1.76 of the Annual Report concerning the financial year

2002.

(63) Actions Nos 1 ‘Research programmes’, 4 ‘Structural Funds’ (shared man-
agement), 5 ‘Human resources’ (reform), 7 ‘Management Information
Systems’, 12 ‘Shared management’, 14 ‘Human resources’ (recruitment),
16 ‘Accounting framework’ and 17 ‘Core financial Information systems’.
(64) Actions Nos 9 ‘Internal control procedures, in particular financial pro-

cedures’ and 15 ‘Training’ (financial management).
(65) Actions Nos 2 ‘External actions’ and 18 ‘Action plans’.

30.11.2004

EN

Official Journal of the European Union

C 293/43

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Internal control standards

1.80. The Court analysed the application of internal control stan-
dards (66) by 16 of the Commission’s Directorates-General (67). The
aim was not only to measure the degree of implementation but also
to evaluate the Commission’s application of the standards so as to
assess the legality and regularity of the underlying transactions in
the area concerned.

1.81. The Court found that, in general, the scope and substance
of the systems and basic controls underlying the standards set out
in 2003 (68) are not easy to compare with those defined in 2002.

1.81. The fact that baseline requirements defined in 2003 are not
entirely comparable with those defined in 2002 is consistent with the phi-
losophy of those requirements. In fact, the baseline requirements were ini-
tially introduced in 2000 to make the 24 Internal control standards more
concrete in practice by defining the minimum requirements at that time.
Each year the baselines are updated in order to consider any additional
requirement from any relevant Commission’s decision/communication
adopted in the meantime.

In terms of charting progress from one point in time to another, the
clarifications/updating made to the baselines make it difficult to compare
the position at the end of 2002 and the end of 2003. However, there have
been significant actions taken to strengthen internal control, particularly
regarding the flow of information from Directorates-General to their Com-
missioner on critical issues of audit and control and Directorates-General
have already demonstrated a strong commitment to delivering this in prac-
tice.

(66) Standards Nos 11 ‘Risk analysis and management’, 12 ‘Adequate man-
agement information’, 14 ‘Reporting improprieties’, 17 ‘Supervision’, 18
‘Recording exceptions’, 20 ‘Recording and correction of internal con-
trol weaknesses’, 21 ‘Audit reports’ and 22 ‘Internal audit capability’.
(67) The Directorates-General for Economic and Financial Affairs, Agricul-
ture, Education and Culture, Employment and Social Affairs, Fisheries,
Regional Policy, Research, the Information Society, Enlargement, Bud-
Justice and Home Affairs, the
get, Personnel and Administration,
Humanitarian Aid Office, the EuropeAid Cooperation Office, Eurostat
and the Internal Audit Department.

(68) Communication to the Commission ‘Self-assessment of the readiness of
Services to be compliant with the internal control baselines by
31 December 2003’ (SEC(2003) 1287 of 26 November 2003).

C 293/44

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.82. The Commission declared that 91 % of the baselines had
been complied with by 31 December 2003 (69). Of these baselines,
26 % seem to have been introduced since the end of September
2003 when the Directorates-General reported on their ability to
meet the deadline of 31 December 2003 for complying with all of
the baselines (70).

1.82-1.83. As indicated by the Court, Directorates-General assessed in
December 2003 that overall 91 % of the baselines were achieved against
65 % reported by September 2003. It should be noted that in many cases
those baselines not fully implemented by September 2003 were ongoing
actions, where important progress had already been made and where there
was only a little work required to finalise them.

As stated in the Overview, the Commission acknowledges that in future the
focus on internal control will need to concentrate on how well the internal
control arrangements are working in practice and delivering the assurances
needed rather than focusing overly on compliance.

Furthermore, effective implementation of an appropriate internal control
system which delivers the assurances needed takes time. In reality, impor-
tant attempts have already been made in moving beyond compliance. To
this end, the Commission has developed a tool, iCAT (internal control
assessment tool), to help services to assess the effectiveness of their internal
control systems and some Directorates-General started to use a first ver-
sion of this tool in 2003.

1.83.
In the Court’s view, it is hard to see how this rate of progress
can have an immediate impact on the actual workings of the inter-
nal control system upon which the legality and regularity of the
underlying transactions is based. As regards the introduction of pro-
cedural rules or control instruments, more time is needed to ensure
that these standards are actually applied. Thus, in most cases the
Court’s audit aimed to establish whether the practices of the
Directorates-General complied with the internal control baselines
(see paragraphs 4.23, 6.5, 7.40 and 7.41 and 9.55).

1.84. As regards the internal control standards examined at the
Directorates-General selected, the Court found that the information
presented was balanced insofar as it referred more to the existence
and compliance of the internal control mechanisms than to their
actual workings (see Table 1.4 and paragraphs 4.23, 5.10, 6.5, 7.43
and 9.55). Overall, this degree of implementation cannot yet be
considered sufficient to enable the Commission’s internal control
system to provide reasonable assurance as to the legality and regu-
larity of the underlying transactions.

1.84. The table 1.4 differs from the Commission’s services’ own assess-
ment, which concludes that the internal control standards were 91 %
applied at 31 December 2003. The incomplete application largely con-
cerned areas with little effect on the risk of irregularity.

Concerning the link between the level of compliance with those standards
and the assurances needed on the legality and regularity of the underlying
transactions, see Commission’s reply to paragraphs 1.82 and 1.83.

(69) Information note by Mrs Schreyer ‘concerning the readiness of Com-
mission departments to comply with the minimum requirements of the
internal control standards by 31 December 2003’ (SEC(2004) 250 of
27 February 2004).

(70) SEC(2003) 1287 of 26 November 2003.

30.11.2004

EN

Official Journal of the European Union

C 293/45

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C 293/46

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Indicators of the quality of revenue and expenditure

1.85.
In general, the 2003 annual activity reports contain infor-
mation on the results achieved (in terms of economy, efficiency and
effectiveness) by the Directorates-General as regards political activi-
ties and the management of the resources allocated.

1.85. The aim of the annual activity reports is to take stock of the
achievement of the objectives laid down in line with the Commission’s pri-
orities and the resources required for this purpose. They represent an instru-
ment for monitoring the results of activities in relation to the objectives laid
down, the risks involved, utilisation of the resources allocated and opera-
tion of the internal control system.

1.86. However, the Court’s analysis reveals that the design and use
of this information by the Commission (71) is still not sufficient (72)
to measure the quality of the internal control system and aspects of
the legality and regularity of the underlying transactions (73).

1.86. The monitoring aspects are therefore highlighted in the annual
activity reports. The overview mentioned above in paragraph 1.53 gives a
more detailed account of internal control systems at the Commission.

The aspects linked to the legality and regularity of transactions are moni-
tored by each Directorate-General. Ex ante and ex post control systems
have been introduced or are now being introduced. Nevertheless, the Com-
mission is ready to analyse the possibility of further developing the con-
cepts of performance indicators already launched in the context of the
Activity Based Management (ABM) process.

1.87. The Court believes that the production of information for
monitoring the legality and regularity of the underlying transactions
should be a priority for the Commission. In the context of the stra-
tegic planning and programming cycle, this information would be
an essential management tool for guaranteeing the quality of the
revenue and expenditure and for assessing the progress made (74) if
it concerned the extent to which key aspects of the supervisory sys-
tems and controls had been implemented and the frequency, nature
and impact on the budget of the errors which these systems and
controls had not detected and rectified.

1.87. Continuous improvement of its performance and the assumption
of responsibility by its managers to achieve the objectives laid down and
implement an efficient internal control system are Commission priorities.

Although monitoring implementation of the control systems and determin-
ing the extent to which they guarantee the legality and regularity of trans-
actions is not the sole purpose of the annual activity reports, the Commis-
sion is willing to explore the possibility of giving greater coverage to
supervisory controls and risk management in the next annual activity
report.

(71) SEC(2003) 1469 of 19 December 2003.
(72) Paragraphs 1.68 to 1.74 of the Annual Report concerning the financial

year 2002

(73) E.g. the Directorates-General for Competition, Environment, Internal
Market, Press and Communication, Interpretation, Trade, Energy and
Transport, the Legal Service and the Group of Policy Advisers did not
provide the performance indicators proposed by the guidelines .

(74) Paragraph 1.110 of

the Annual Report concerning the financial

year 2002.

30.11.2004

EN

Official Journal of the European Union

C 293/47

CHAPTER 2

Budgetary management

TABLE OF CONTENTS

Introduction

General observations

Increase in budget

92 % spending rate for payments

Reduced and better managed surplus

More realistic carryover of appropriations from year to year

Outstanding commitments continue to increase

Specific observations

Community revenue

Agriculture

Structural operations

Increase in outstanding commitments

Internal policies

External actions

Pre-accession aid

Administration

Conclusions and recommendations

Paragraph

2.1-2.4

2.5-2.22

2.5-2.6

2.7-2.8

2.9-2.13

2.14-2.15

2.16-2.22

2.23-2.46

2.23-2.24

2.25-2.26

2.27-2.35

2.33-2.35

2.36-2.38

2.39-2.40

2.41-2.45

2.46

2.47-2.50

C 293/48

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

2.1. This chapter discusses the implementation of the EU budget
in 2003, the last full year before enlargement of the Union and half
way through the 2000-2006 financial perspective.

2.2. The annual budget of the European Union is approved by the
budgetary authority (Parliament and Council) on the basis of pro-
posals presented by the Commission. The Commission implements
the budget in cooperation with Member States and other beneficiary
states in the case of expenditure on agriculture, structural opera-
tions, external actions and pre-accession aid.

2.3. There are separate budgets for commitments and payments.
Most expenditure on structural operations and on internal and
external policies takes the form of programmes managed over a
number of years (e.g., 2000 to 2006 for the Structural Funds cur-
rent programming period), in which budgetary commitments —
reflecting legal commitments to spend — are made in one year but
paid off (‘liquidated’) over a number of years (‘differentiated appro-
priations’) (1).

2.4. Detailed information on budgetary implementation for 2003
can be obtained from the Commission document entitled ‘Report
on budgetary and financial management — Financial year 2003’.
Article 29 of the Financial Regulation requires this report to be
published in the Official Journal of the European Union. This was not
done for the 2002 report but the document was made available on
the Commission’s website (2). The 2003 version is available at the
same location. The Court notes the efforts made to improve the
document as compared with 2002 but considers that the overall
analysis could be made more useful by including information on
the cumulative state of implementation of Community programmes
and on the speed with which Member and beneficiary States make
payments to final beneficiaries.

2.4. The Commission appreciates the Court’s statement regarding the
improved ‘Report on budgetary and financial management’ and agrees with
the observation of the Court that there is still room for further improve-
ments. With regard to payments to final beneficiaries, the regulations (for
example, Regulation (EC) 1260/1999 for the Structural Funds, Regula-
tion (EC) 1663/95 for EAGGF Guarantee) require Member and benefi-
ciary States to reimburse final beneficiaries promptly. In future the Com-
mission could distinguish, in the information provided on the Structural
Funds in its ‘Report on budgetary and financial management’, between
advances, paid at the beginning of the period and serving to constitute a
rolling fund with which to pre-finance expenditure, and reimbursements of
expenditure declared by final beneficiaries. The amount of advances (for the
Structural Funds, 7 %) can be taken to be equivalent to the maximum level
of payments by the Commission not yet paid to final beneficiaries.

(1) See Annex I for further background information on the budget.
(2) http://europa.eu.int/comm/budget/infos/publications_en.htm.

30.11.2004

EN

Official Journal of the European Union

C 293/49

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

GENERAL OBSERVATIONS

Increase in budget

2.5.
For 2003, total payment appropriations in the approved ini-
tial budget (3) increased by 1,9 % compared with the final 2002
budget. Commitment appropriations increased by just 0,3 %.
According to the Commission the virtually static level of commit-
ment appropriations ‘demonstrates the determination of [the] bud-
getary authority and [the] Commission alike to tackle the problems
of outstanding commitments still awaiting payment’ (4).

2.6. Commitment and payment appropriations remained respec-
tively 2,6 billion euro and 5,4 billion euro below their annual
financial perspective ceilings (5). The margin in respect of commit-
ments mostly relates to agriculture: the other expenditure areas are
at, or near, their respective ceilings. For payments, the financial per-
spective ceiling applies to the budget as a whole and not by area.

92 % spending rate for payments

2.7. Table 2.1 gives an overview of the budgetary outturn for the
2003 financial year for both commitments and payments. In 2003
the proportion of commitment appropriations used (the implemen-
tation rate for commitments) was 99 %, similar to the 98 % rate in
2002. The proportion of payment appropriations used (the spend-
ing rate for payments) was 92 %, which represents an increase on
the 86 % achieved in 2002. This increase was primarily due to
higher spending on structural operations — 90 % of payment
appropriations were spent, compared with 74 % in 2002 (see para-
graphs 2.27 to 2.30).

2.8. These overall spending rates do not tell the whole story about
budget implementation for two main reasons. Firstly, only a small
proportion of the commitments made in a particular year result in
payments during the same year (see paragraphs 2.3 and 2.16 to
2.22). Secondly, ‘payments’ as defined in the Commission’s accounts
include advances made to Member and beneficiary States adminis-
trations’ or other intermediaries to be used for payment to final ben-
eficiaries. In some cases, such as Sapard (see paragraph 2.43), pay-
ment of the funds to final beneficiaries can take considerably longer.

(3) Adopted by the European Parliament on 19 December 2002 (OJ L 54,

28.2.2003).

(4) Source: General budget of the European Union for the financial year 2003

— The figures, paragraph 3.

(5) Subsequent amending budgets brought the commitment appropriations
to 2,5 billion euro and payment appropriations to 10,4 billion euro
below the ceilings.

2.8.
In the case of Sapard, payments are made upon receipt of eligible
claims, where the beneficiaries have to demonstrate that eligible project
expenditure has been incurred. This process can be lengthy. The Sapard
countries generally experienced technical and procedural difficulties during
the initial period of implementation, resulting in delays in the processing
of applications and payment claims. Although there are still certain prob-
lems in some countries, overall the situation has improved substantially.

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Table 2.1 — Implementation of the 2003 budget by financial perspective heading

Financial perspective heading

Financial
perspective
ceiling

Initial
appro-
priations (1)

Final appro-
priations (2)

Commitments
and
payments
made

Implemen-
tation rate

Appropriations
carried over
to 2004

% of final
appro-
priations
available

Appro-
priations
lapsed

% of final
appropriations
available

Budget

Implementation of the budget

(a)

(b)

(c)

(d)

(e) = (d)/(c)

(f)

(g) = (f)/(c)

(h)

(i) = (h)/(c)

(million euro and %)

Commitment appropriations

Common agricultural policy

47 378

44 780

44 865

44 462

99 %

Structural operations

33 968

33 980

34 013

33 987

100 %

Internal policies

External action

Pre-accession aid

6 796

6 796

7 744

7 173

4 972

4 949

5 219

5 067

3 386

3 386

3 449

3 393

Administrative expenditure

5 211

5 360

5 616

5 545

Reserves

Rounding

434

434

1

328

– 1

148

93 %

97 %

98 %

99 %

45 %

41

4

430

94

43

39

0

0,1

0,0

5,6

1,8

1,2

0,7

0,0

361

22

141

59

13

31

0,8

0,1

1,8

1,1

0,4

0,6

180

54,9

Total

102 145

98 686

101 233

99 775

99 %

651

0,6

807

0,8

Payment appropriations

Common agricultural policy

44 780

45 096

44 379

Structural operations

33 173

31 838

28 528

Internal policies

External actions

Pre-accession aid

Administrative expenditure

Reserves

Rounding

6 204

4 844

2 707

5 360

434

1

7 257

5 672

4 899

4 286

2 799

2 240

6 087

5 305

148

364

– 1

98 %

90 %

79 %

88 %

80 %

87 %

41 %

331

177

920

113

55

650

0

0,7

0,6

12,7

2,3

2,0

10,7

0,0

0,9

9,8

9,2

10,2

18,0

2,2

59,3

385

3 134

665

500

504

132

216

– 1

Total

102 767

97 318

98 339

90 558

92 %

2 246

2,3

5 535

5,6

(1) Budget finally adopted by the European Parliament on 19 December 2002 (OJ L 54, 28.2.2003).
(2) Budget appropriations amended after taking into account amending budgets and transfers, and including appropriations carried over from 2002, appropriations resulting

from the contributions by third parties and other revenue corresponding to a defined purpose, and appropriations made available again.

Source: 2003 annual accounts.

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Reduced and better managed surplus

2.9.
For 2003 the surplus (6) of the budget totalled 5,5 billion
euro — for analysis see Table 2.2. While still large in absolute
terms, it represents a fall compared with 7,4 billion euro in 2002
and 15,0 billion euro in 2001.

Table 2.2 — Composition of surplus 2003 (and 2002)

2003

2002

(million euro)

Revenue

Own resources

Other revenue

Expenditure

Agriculture

Structural operations

Internal policies

External actions

Pre-accession aid

Administration

Reserves

Rounding

Exchange differences

Earmarked revenue (4)

Other (5)

Budgeted

88 989

8 514

97 503

Amending
budgets (2)

– 4 978

– 4 978

Collected

83 633

9 836

93 469

Contribution
to surplus

– 378

1 322

944

Budgeted

Collected

80 926

15 126

96 052

79 775

15 659

95 434

Contribution to
surplus

– 1 151

533

– 618

Total

Underspend-
ing (1)

Amending
budgets (2)

Less carryover
to 2004 (3)

Underspend-
ing (1)

Less carryover
to 2003 (3)

717

8 310

1 585

613

559

760

216

– 1

– 5 000

22

– 331

– 177

– 920

– 113

– 55

– 650

0

Total

12 759

– 4 978

– 2 246

Total surplus

1 419

8 104

1 390

546

849

645

481

1

– 315

– 3 254

– 750

– 68

– 51

– 548

– 9

13 434

– 4 995

386

3 133

665

500

504

132

216

– 1

5 535

– 109

– 740

– 146

5 484

1 104

4 850

640

478

798

97

472

1

8 440

– 253

0

– 147

7 422

Includes the cancellation of 2 074 million unused credits brought forward (309 million in 2002).

(1)
(2) Amending budgets 6/2003 and 7/2003.
(3) Amount carried over includes, 1 044 million euro in respect of third party earmarked revenues for which the usual cancellation rules for carry-overs do not apply (684 mil-

lion euro in 2002).

(4) Adjustment for earmarked revenue received but not budgeted for. No adjustment necessary in 2002 due to different budgeting procedures.
(5) Sundry elements mainly related to reused credits carried forward and EFTA contributions.
Source: 2003 annual accounts.

(6) The surplus is not a reserve which can be used in future years. Unused

payment appropriations are in most cases cancelled and ‘lost’.

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2.10.
In respect of the 2002 financial year the Court criticised the
Commission for failing to take action on substantial underspend-
ing, although the situation was foreseen before the year end (7). In
2003 specific measures were taken by the Commission to improve
the forecasting of the use of the budget, taking into account infor-
mation from Member and beneficiary States. The improved infor-
mation received permitted the Commission to bring forward the
amending budget referred to above whereby it reduced payment
appropriations by 5 billion euro, with a commensurate reduction in
revenue.

2.11. The Commission’s action during 2003 represented a signifi-
cant improvement in budgetary management as compared with the
previous year. However, despite the action taken, the large remain-
ing surplus (5,5 billion euro) indicates that there was scope for a
substantially greater reduction in appropriations.

2.12. Table 2.3 shows the level of gross underspending, and its
consequences, for the past five years. Over this period underspend-
ing has caused 39,9 billion euro of payment appropriations to be
cancelled. Over the same period the budget has increased by 16,3 %,
representing a cumulative total of 53,6 billion euro of extra appro-
priations.

Underspending (1)

Proportion of budget

Resulting in:

Amending budget

Carryover

Cancellations

Table 2.3 — Underspending 1999 to 2003

1999

7 071

8,1 %

0

5 019

2 052

2000

11 478

12,1 %

0

2 609

8 868

2001

17 173

17,7 %

0

2 188

14 985

2002

13 434

13,6 %

0

4 995

8 440

(million euro)

2003

12 759

13,0 %

4 978

2 246

5 535

(1) Gross underspending on payment appropriations for the year and appropriations brought forward.
Source: Annual accounts 1999 to 2003.

2.13. The Court notes that it is unrealistic to expect 100 % imple-
mentation of the budget. Expenditure must be legal and regular and
respect the principles of sound financial management. In the shared
management areas of the budget (over 80 % by value) if requests are
not forthcoming from Member States or other intermediaries the
Commission cannot make payments. Even with directly managed
expenditure the Commission often depends on claims from benefi-
ciaries. The consequence of continued underspending is an increase
in the build-up of outstanding commitments (see paragraphs 2.16
to 2.22) and a concentration of payments at the end of the pro-
gramming period which is difficult to manage.

(7) Paragraph 2.10 of the Court’s 2002 Annual Report.

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More realistic carryover of appropriations from year to year

2.14. As the Court pointed out in its 2002 Annual Report (8), the
carryover of appropriations from one year to another complicates
the management, accounting and reporting of the budget unneces-
sarily. The carryover of payment appropriations from 2002 of
5,0 billion euro, which considerably reduced the reported surplus
in that year, was significantly in excess of the carryover in previous
years (see Table 2.3). Of the amount carried over, 3,3 billion euro
represented appropriations for the settlement of final claims on the
1994 to 1999 programming period for the Structural Funds. In its
2002 annual report (9) the Court warned that it was unlikely that
the Commission would be able to liquidate these appropriations,
and this proved to be the case: 1,9 billion euro of these credits were
cancelled in 2003, adding to the surplus.

2.15. The carryover of payment appropriations from 2003 to
2004 is 2,2 billion euro, comprising 1,2 billion euro in respect of
the operational budget and 1,0 billion euro in respect of third party
funds (see paragraph 2.37). Compared with 2002 this represents a
more realistic level of carry forward of credits.

Outstanding commitments continue to increase

2.16. At the start of the programming cycle for expenditure sub-
ject to multiannual programmes it can take Member and beneficiary
States a considerable time to set up the required administrative and
control procedures, identify and approve suitable projects for EU
financing and provide the necessary national co-financing. Other
than the payment of first advances, which precede underlying
expenditure on a project, it is therefore often difficult for the Com-
mission to make substantial payments from the budget until well
into the programming cycle. The budget for payment appropria-
tions should be more realistic by taking better account of the pro-
gramme cycle and the ability of Member States to absorb expendi-
ture. Commitments are made at the beginning of the programme
(except in the case of the Structural Funds where they are made on
an annual basis — see paragraph 2.33) and are carried forward (10)
until the corresponding payments are made.

2.14. The Commission considers that the carryover procedure set by the
regulatory framework is expedient, fairly simple, practical and transparent
(see Commission’s reply to the 2002 annual report, paragraphs 2.11
and 2.48).

After the carryover, the amount of payment appropriations on the budget
for the settlement of final claims for the 1994 to 1999 programme period
was in line with the Member States’ forecasts of the payments they would
claim on the commitments outstanding. The budget turned out to be more
than required for two reasons. First, the forecasts underestimated the
amount of commitments that would not be claimed and would have to be
decommitted. In the event, some EUR 2,8 billion of commitments were
decommitted in 2003 in addition to the EUR 3,5 billion paid. Secondly,
the closure documents (most of which were received just before the deadline
of 31 March 2003) were of uneven quality, requiring clarifications and
further work by Member States in many cases and delaying closure in these
cases until 2004.

2.16. The Commission recognises that the budget for payment appro-
priations should be more realistic by taking better account of the pro-
gramme cycle and the ability of Member States to absorb expenditure. The
payments budgets presented by the Commission represent its best estimates
of the actual payment needs. As reliance on Member States’ payment fore-
casts led to an over-estimation of needs, the Commission has resorted to
budgeting more in line with its own estimates, based on recent patterns in
implementation and foreseeable trends. As a result, implementation rates
have improved in the last few financial years.

The overlap of programme cycles for multiannual programmes tends to
smooth the pattern of payments over time. For example, at the beginning
of a new Structural Fund programme, period payments made in respect of
programmes of the previous period normally compensate for the still low

(8) Paragraph 2.11.
(9) Paragraph 2.26.
(10) Subject to certain conditions such as a final date for implementation set
in compliance with the principles of sound financial management
(Article 77 of the Financial Regulation) or specific measures such as the
year n+2 rule in respect of the Structural Funds (see paragraph 2.35).

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level of payments under current programmes before they reach cruising
speed. This compensatory effect was less marked during the changeover
from the 1994 to 1999 to the 2000 to 2006 periods, mainly because of
the changeover in the payments system between the two periods from an
advance-based to a reimbursement-based system. The Commission refers to
its communication of 20 September 2002 ‘Evolution of budgetary execu-
tion of the Structural Funds,
in particular outstanding commitments
(RAL)’ (COM(2002) 528 final).

2.17. The time lag between commitments and payments of ‘differenti-
ated’ expenditure, which is responsible for the ‘RAL’, is inherent in the bud-
geting of this expenditure. As noted in the reply to the previous point, the
pattern of such expenditure is smoothed over time by the overlap of finan-
cial perspective periods.

2.17. The higher the value of the outstanding commitments, the
greater is the demand on the payments budget in future years. The
lags inherent in the budgetary process are illustrated by Table 2.4.
For ‘differentiated’ expenditure (11), payments in 2003 in respect of
commitments made during 2003 totalled only 5,7 billion euro out
of the 49,6 billion euro committed, or some 11 %. In practice com-
mitments can take many years to clear, and others never result in
payment and have to be cancelled — see paragraph 2.21.

Table 2.4 — Change in balance of outstanding commitments 2003

Grand
total

Non-differentiated expenditure

Differentiated expenditure

Agriculture

Adminis-
tration

Reserves

Total non-
differentiated

Structural
operations

Internal
policies

External
actions

Pre-
accession

Total
differentiated

(million euro)

Commitments brought
forward

Balance brought forward

99 820

231

473

Payments

– 35 590

– 210

– 376

Decommitments

Cancellations

– 4 138

– 102

– 3

– 19

– 11

– 83

0

0

0

0

704

66 731

11 205

12 763

8 417

99 116

– 586

– 26 603

– 3 405

– 2 865

– 2 131

– 35 004

– 14

– 2 917

– 504

– 658

– 45

– 4 124

– 102

0

0

0

0

0

Commitments made in
2003

Commitments made

99 775

44 462

5 545

148

50 155

33 987

7 173

5 067

– 54 968

– 44 169

– 4 929

– 148

– 49 246

– 1 925

– 2 267

– 1 421

– 6

0

292

– 6

613

0

0

– 6

905

0

0

0

69 273

12 202

12 886

9 525

103 886

3 393

– 109

0

49 620

– 5 722

0

Payments

Cancellations

Balance carried forward

104 791

Source: 2003 annual accounts.

(11) Expenditure on structural operations, internal policies, external actions

and pre-adhesion aid.

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2.18. At the end of 2003 outstanding commitments totalled
104,8 billion euro — see Table 2.4. This is equivalent to 94 % of
the commitment budget for 2004 (EU25) and represents an increase
of 5,0 % compared with 2002. The increase took place despite:

2.18. The comparison of the level of outstanding commitments between
1996 and 2003 should be seen in the light of a changed system for both
annual commitments and payments for the Structural Funds.

2.19. The Commission refers to its answer to paragraph 2.48.

— decommitments of 4,1 billion euro, 2,7 billion euro of which

related to a special procedure (see paragraph 2.21);

— a near-static commitments budget in 2003 (see paragraph 2.5);

and

— the inclusion in the budget of additional payment appropria-

tions specifically intended to alleviate the problem.

For differentiated expenditure the balance of outstanding commit-
ments represents around 2,5 years of payments at the current
spending rate. At a similar point during the previous financial per-
spective period (1996) the value of outstanding commitments on
differentiated expenditure was 47,9 billion euro, representing just
under one-and-a-half years of payments at the then spending rate.

2.19. However, the balance of outstanding commitments does
not represent the full extent of legal commitments of expenditure
made by the Union, due principally to the effect of the Structural
Fund commitment process (see paragraph 2.33). The balance of
expenditure legally committed at the end of 2003 on the 2000 to
2006 programming period, and disclosed as off balance sheet items
in the annual accounts, but not yet appearing as commitments in
annual budgets, amounts to some 95 billion euro (see para-
graph 2.34). Taking this into account’ total commitments outstand-
ing some three years before the end of the current programming
period therefore stand at around 200 billion euro, or five years of
payments at the current rate (12). Although the time limit for mak-
ing payments goes beyond the end of the programming period (13),
a high level of outstanding commitments will put pressure on the
payments budget and may possibly delay the closure of the pro-
grammes. These factors risk influencing the budgetary implemen-
tation of the early years of the next programming period as has
been the case in the past.

(12) Notwithstanding the annual commitments to be made in the other bud-

getary areas over the period.

(13) Up to the end of 2008 for payments in Member States, until 2010 for
final payments by the Commission (COM(2002) 528 Final of
20.9.2002).

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2.20. Graph 2.1 shows the value of outstanding commitments on
differentiated expenditure over the past ten years, compared with
the commitment budget for each year. Over the last five years there
has been a 47 % increase in the value of outstanding commitments
for differentiated expenditure. This was due to two factors: firstly,
the years 2000 to 2003 are the start-up period for major pro-
grammes (14) (see paragraph 2.16); and secondly, continued under-
spending of payment appropriations (see paragraphs 2.12 and
2.13).

Graph 2.1 — Outstanding commitments 1994 to 2003

NB: differentiated appropriations comprises expenditure on structural operations, internal policies, external actions and pre-adhesion aid.
Source: Annual accounts 1994 to 2003.

(14) Structural Funds 2000 to 2006; Sixth framework programme for

research and technological expenditure — 2002 to 2006.

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2.22.
For the Structural Funds the Commission already provides infor-
mation, inter alia, on the cumulative state of implementation in its annual
‘Analysis of the budgetary implementation of the Structural Funds’. The
Commission is, however, ready to provide further information (see reply to
paragraph 2.50). The demand on future payments should be reduced by
the ‘n+2’ rule (see reply to paragraph 2.48).

2.21.
For a number of years the Court has been highlighting the
need for the Commission to identify and take action on old and
dormant outstanding commitments which may never result in pay-
ments. At the end of 2002 in a joint declaration the Budgetary
Authority and the Commission undertook to deal with ‘potentially
abnormal’ outstanding commitments (15) by the end of 2003. Dur-
ing 2003, of the 17,3 billion euro identified as ‘potentially abnor-
mal’, payments were made on 4,0 billion euro, 2,7 billion euro were
decommitted and 10,6 billion euro were found to be valid and
therefore maintained.

2.22. The current budget data and its analysis provides little infor-
mation on the consequence of the high level of outstanding com-
mitments, as well as on the cumulative state of implementation of
the different Community programmes. The high level of outstand-
ing commitments represents a significant demand on future pay-
ments which may be difficult to manage in the context of the bud-
getary process, and in terms of respecting the financial perspective
ceiling.

SPECIFIC OBSERVATIONS

Community revenue

2.23. Table 3.1 summarises Community revenue for 2003 and
Graph 3.1 shows the distribution of the different types of revenue.
Graph 3.2 illustrates the evolution of actual revenue over the period
1989 to 2003. In particular, traditional own resources and the VAT
resource declined in importance; the Gross National Income (GNI)
resource rose. Amending budget No 6/2003 of 4 December 2003
reduced the amount of the revenue required for 2003 by 5,0 bil-
lion euro.

2.24. The amounts of the VAT-based resource collected fell by
5,0 % compared with 2002 due to adjustment of the VAT bases of
previous years, the fluctuations in the pound sterling/euro exchange
rate and a lower-than-previous uniform rate of call. In addition a
decrease of 2 % of the GNI forecasts impacted the VAT resource
through the capping procedure (16).

(15) Defined as commitments for which no payments have been made for
the last two years, and commitments that have been in the budget for at
least five financial years.

(16) The VAT resource is derived from the VAT base which is defined as the
total value of goods and services liable to VAT according to the 6th
Directive. This base is capped so that it will not exceed 50 % of GNI in
each country. If GNI falls then so does the VAT resource.

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2.26.
In veterinary and plant health measures for 2003 commitments
were made for 99,7 % of the commitment appropriations. The reason why
a large amount of the payments were carried over to 2004 is that, accord-
ing to the legal base, Member States have time until some point in year
n+1 (2004) to request for payment on activities agreed with the Commis-
sion and carried out in year n (2003). For the Commission these payments
are covered by the commitments made in year n (2003).

Agriculture

2.25. Total available appropriations for commitment and pay-
ment for agriculture in 2003 amounted to 44,9 billion euro and
45,1 billion euro respectively (17), an increase of 1,2 % compared
with 2002. Final expenditure was 44,5 billion euro for commit-
ments (99 % implementation rate) and 44,4 billion euro for pay-
ments (98 % implementation).

2.26. The lowest rate of spending (64 %) was on a variety of mea-
sures which collectively accounted for 3 % of the total authorised
appropriations, including export refunds on processed products,
food programmes and veterinary measures (‘ancillary expenditure’).
The underspending was mainly due to delays in implementing vet-
erinary and plant health measures. Such expenditure also comprises
the bulk of the amount carried over to 2004. Implementation in the
other areas of the budget, including rural development (18), was
almost total.

Structural operations

2.27. The commitment budget for the year increased by 0,4 %
compared with 2002. The payment budget increased by 3,2 % com-
pared with 2002. The overall spending rate for payments (after the
cancellation referred to in the following paragraph) was 90 %,
which represents a significant increase on implementation in 2002
(74 %).

2.28. Gross underspending compared with the original budget
was 8.3 billion euro, a similar level to 2002 (see Table 2.2). How-
ever the effect on the overall surplus was reduced by the cancella-
tion of 5,0 billion euro of payment appropriations that the Com-
mission realised could not be spent (see paragraph 2.31). Despite
the net underspending of 3,3 billion euro for structural operations
overall, a large increase in spending took place in respect of Objec-
tive 2, where the rate of implementation increased from 48 % in
2002 to 91 % in 2003 (based on a 1,1 % higher budget).

(17) Including amounts carried over from 2002.
(18) Unlike in 2002, when there was a significant underspending on rural

development: paragraph 2.19, Court’s 2002 Annual Report.

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In addition to payments for 1994 to 1999 programmes of EUR
2.30.
3,5 billion, some EUR 2,8 billion were decommitted. The combined effect
of payments and decommitments reduced the ‘RAL’ for 1994 to 1999
programmes from EUR 15,4 billion at the end of 2002 to EUR 9,1 bil-
lion at the end of 2003, a reduction of 41 %.

2.31. The Commission refers to its answer to paragraph 2.16.

2.29.
For Community Initiatives, which are programmes carried
out in Member States at the initiative of the Commission, imple-
mentation in 2002 was only 25 % and the budget was reduced by
2 % in 2003. The spending rate in 2003 was 48 %, largely due to
delays in the closure of the 1994 to 1999 period programmes (30 %
spending rate) because of the late submission of final claims by
Member States. For payments in 2003 related to the 2000 to 2006
period the spending rate was 75 %.

For on-going payments under the current Structural Fund
2.30.
programmes (2000 to 2006 period), which represent about 74 % of
the total initial budget for the area, the spending rate was around
96 %, an increase on the 91 % achieved in 2002. The spending rate
was much lower for the closure of the 1994 to 1999 programmes.
Some 11,0 billion euro of payment appropriations were available
for the year: only 3,5 billion euro (32 %) were used (19). The Com-
mission responded by cancelling 5 billion euro of payment appro-
priations relating to the pre-2000 programmes in an amending
budget which increased the overall spending rate (see para-
graph 2.27).

2.31.
In its 2002 Annual Report (20) the Court highlighted poor
forecasting by Member States as one of the main reasons for the
Commission not being able to take appropriate and timely action
on underspending. Efforts were made in 2003 to improve the fore-
casting process and the overall forecasting error for the Structural
Funds fell from 73 % to 50 %. However, this still represents a dif-
ference between forecast and actual payments of 13,0 billion euro.
For the 2000 to 2006 programmes the best Member State estimate
was 12 % higher than actual needs, and the worst estimate was over
two-and-a-half times actual needs — five Member States had fore-
casting differences of over 1 billion euro.

(19) As reported in paragraph 2.26 of the Court’s 2002 Annual Report
delays were experienced by the Commission in closing programmes due
to most claims being received close to the deadline (31 March 2003)
and the often incomplete nature of those claims, leading to the signifi-
cant risk that payments could only be made in 2004. The Commission’s
forecasts did not take the possibility of these delays sufficiently into
account.

(20) Paragraph 2.24.

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2.32. Despite measures to ensure that applications for payments
are received from Member States evenly throughout the year (21),
during 2003 over half of the payments were made between Sep-
tember and December, and one quarter in December alone. This
concentration of processing of transactions at the year end makes
an unreasonable demand on the Commission’s management
resources.

2.32. The Commission has little influence on the pattern of expenditure
declarations by Member States. The Regulation asks for payment claims to
be submitted three times a year, the third one by the end of October, but
does not provide for sanctions. The ‘n+2’ rule has an impact in both direc-
tions: it encourages Member States to file large payment claims just before
the year-end; on the other hand, the Commission’s regular reminders of the
situation of programmes with regard to the rule encourages them to accel-
erate claims.

Increase in outstanding commitments

2.33. The commitment appropriations for the 2000 to 2006
Structural Fund period have to be entered in the budget according
to the allocation of the financial perspective, as determined by the
European Council meeting in Berlin. The overall allocation for the
seven-year period is 230,2 billion euro (22) (both Structural Funds
and Cohesion Fund together). Of the 210,6 billion euro relating to
the Structural Funds, 201,1 billion euro (23) were allocated to Mem-
ber States (i.e., legal commitments were made) through expenditure
programmes agreed between 2000 and 2002. Budgetary commit-
ments are then made annually over the seven-year programming
period. Because of the delays in adopting the new programmes the
planned level of legal commitments could not be made, so the
financial perspective ceilings from 2002 onwards were increased by
the appropriations not used in 2000 and 2001.

for

2.34.
For the 2000 to 2002 period net underspending on struc-
tural operations payment appropriations totalled 26,6 billion euro
(2000: 8,0 billion euro; 2001: 10,5 billion euro; 2002: 8,1 billion
euro). Outstanding commitments
structural operations
increased by 2,5 billion euro to 69,3 billion euro in 2003; nearly
two-and-a-half years worth of payments at the 2003 spending rate.
In relation to the 2000 to 2006 programming period outstanding
commitments increased by 19 % to 53,2 billion euro — 2,3 times
current spending. Moreover legal commitments made following the
European Council meeting in Berlin, but not yet transformed into
budgetary commitments (see paragraph 2.33), total 95 billion
euro (24), giving a total outstanding commitment equivalent of over
164 billion euro, or nearly six years of payments.

(21) Article 32(3) of the general provisions of the Structural Funds requires
that Member States ensure, as far as possible, that applications for
interim payments are presented to the Commission in batches three
times a year, with the last application being no later than 31 October.

(22) At 2003 prices.
(23) 8,4 billion euro was retained as a performance reserve, and 1,1 billion
euro for technical assistance and innovative measures were not pre-
allocated.

(24) See off-balance-sheet commitments in the annual accounts: item 5 of

contingent liabilities.

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2.35. The Commission recognised the risk to which the Court refers and
took action by increasing its checks on payment claims.

2.35.
For the 2000 to 2006 programming period, new rules were
introduced to decommit commitments automatically for which no
payment has been made within the two years following the year the
commitment was made. The decommitments in 2003 following
these rules amounted to just 31 million euro, representing 24 mil-
lion euro for ESF and 7 million euro for EAGGF-Guidance. No
decommitments were made for ERDF because intermediate expen-
diture claims were made by Member States. However, there is a risk
of Member States claiming expenditure that is ineligible, in order to
avoid the cancellation of commitments.

Internal policies

Expenditure falling within the Internal policies category of
2.36.
the financial perspective is mostly directly managed by the Com-
mission and is dominated by research and technological develop-
ment, which represented 58 % of payments in 2003. The approved
payments budget showed an average 0,8 % increase on 2002, with
a wide variation between the various headings. For example research
and technological development expenditure was subject to a 2,7 %
reduction in appropriations, whilst for Trans-European networks
there was a 12 % increase. Approved commitment appropriations
increased by an average of 3,4 %.

2.37. The payment spending rate was 78 %, representing a fall
compared with 2002 (83 %). However, this underspending, which
contributed 626 million euro to the overall surplus, is in large part
explained by the special arrangements for ‘earmarked third party
revenues’ (25). When third countries contribute to Community pro-
grammes the contributions are recorded in the year of receipt as
both commitments and payments appropriations, even though the
time needed to implement projects means that demand for pay-
ments is spread over several years. Unused payment appropriations
are carried forward automatically until the funds can be used, which
has a corresponding downward effect on the spending rate. Of the
1,6 billion euro gross underspending for the year, 0,8 billion euro
was contributed by the third party revenue-linked expenditure
(27 % spending rate), and utilisation of the standard budgetary
appropriations — with a spending rate of 93 % — contributed the
balance.

(25) See paragraphs 2.32 and 2.33 of the Court’s 2002 Annual Report.

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2.38. Outstanding commitments at the end of the 2003 financial
year amounted to 12,2 billion euro — an 8,9 % increase on 2002
— which represents over two years of payments at the current
spending rate. This reflects the higher increase in commitments
than payments for the year (3,4 % versus 0,8 %) and is partly
explained by the fact that 2003 was near the beginning of the
6th framework programme (FP6) for research and technological
development (2002 to 2006).

External actions

2.39.
Expenditure on external actions is mostly directly managed
by the Commission and comprises a large number of different head-
ings, with no single heading representing more than 16 % of the
total. The approved budget for commitments was 3,0 % higher than
in 2002. In the case of payments the increase was 3,8 %. The spend-
ing rate for payments was 87 %, similar to that in 2002 (89 %),
which indicates that the extra budget was absorbed, but no more.

2.40. At
the end of 2003 the outstanding commitments
amounted to 12,9 billion euro, an increase of 1,0 % compared with
2002. The balance of outstanding commitments represents three
years’ worth of payments at the current spending rate.

Pre-accession aid

2.41.
Pre-accession aid comprises amounts paid to accession and
candidate countries to the European Union and is mostly managed
in cooperation with the beneficiary states. Only 67 % of payment
appropriations were spent in 2002. In the 2003 budget, commit-
ment and payment appropriations increased by 1,7 % and 4,3 %
respectively. In 2003 payments totalled 2,2 billion euro, represent-
ing a spending rate of 80 %. Underspending, though proportion-
ately less than in 2002, contributed 0,5 billion euro to the overall
surplus.

2.42.
For phare expenditure was 1,5 billion euro, representing a
spending rate of 94 %, and a substantial increase from the 69 % rate
in 2002.

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Sapard (26), the smallest of the three pre-accession instru-
2.43.
ments, received a year-on-year increase in payment appropriations
of 20 % (73 million euro out of the overall 112 million euro
increase), despite a spending rate of just 34 % in 2002. Payments
made to beneficiary states in 2003 increased to 264 million euro (a
rate of 61 %), but not by nearly enough to absorb the increased
budget. Implementation depends on requests for payment from the
beneficiary states, and these were received later than expected. By
the end of 2003, 323 million euro had been transferred to final
beneficiaries. This represents a substantial
increase over 2002
(34 million euro) but cumulative payments to final beneficiaries of
Sapard until the end of 2003 still only represents 15 % of available
funds (2 % by the end of 2002).

2.44. The ISPA (27) spending rate of payment appropriations fell
from 79 % in 2002 to 60 % in 2003. The low rate of implementa-
tion was due to a higher than needed budget and slower than
expected project implementation. Delays were encountered in ten-
dering and contracting procedures and in beneficiary state admin-
istrations making requests for first advance payments following
project approval.

2.45. At the end of 2003 outstanding commitments on all pre-
accession aid totalled 9,5 billion euro, representing over four years
worth of expenditure at the current rate (the highest of any budget-
ary area). Despite the payments budget being increased to help
reduce the level of outstanding commitments, the balance rose by
13,2 % compared with 2002.

2.43. The Commission’s answer to paragraph 2.39 of the Court’s 2002
annual report sets out the reasons for the under-utilisation of the budgets
for Sapard, one of which was that greater priority was given to firm man-
agement of appropriations.

Overall spending rates in 2002 were low chiefly because Poland, Romania
and Hungary, which together account for 70 % of the total Sapard bud-
get, did not receive the Decision conferring management of aid (itself con-
ditional upon the establishment of sound administrative and control sys-
tems by the national authorities) until the second half of that year.

Payments made and payment applications received by the Commission as
at 1 July 2004 amounted to EUR 688,7 million (32 % of available funds
for the 2000 to 2003 period) of which EUR 429,6 million have been
transferred to final beneficiaries. The implementation of Sapard has now
reached cruising speed.

2.44. Tendering procedures were protracted in some cases because of the
need to ensure a fair and transparent process. The Commission encouraged
beneficiary state administrations to request their first advance payments
quickly, but they were sometimes slow in doing so.

2.45. The Commission refers to its reply at paragraph 2.48.

In pre-accession aid as in other budget areas, commitments in the budget
are predetermined by the conclusions of the Berlin Council 1999 and the
related Interinstitutional Agreement. Annual commitments are then made
(for Sapard in the decisions authorising signature of each annual financ-
ing agreement) which give rise to a global commitment of the appropria-
tions in the Community budget.

Consequently, the level of outstanding commitments (the difference between
total available commitments and payments made) is not solely a function
of future payments but also a result of administrative steps, predetermined
by the relevant regulations. Payments are made upon receipt of eligible
claims, where the beneficiaries have to demonstrate that eligible project
expenditure has been incurred. The ratio of outstanding commitments to
payments will continue to fall as payment rates improve.

(26) Instrument supporting sustainable agricultural and rural development in
the central and eastern Europe Member States and candidate countries.
(27) Instrument supporting economic and social cohesion in the applicant

countries, particularly in the fields of the environment and transport.

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Administration

2.46. Administrative expenditure mostly comprises staff and
building costs. Two thirds of the budget is used by the Commission,
with the other institutions and agencies making up the balance. For
2003 the budget increased by 3,5 % (28) to meet the effects of infla-
tion and prepare for enlargement, with the Commission receiving a
2,1 % increase, the other institutions a 4,5 % increase and pensions
a 6,3 % increase. The increase for the Commission was moderated
by the front-loading of expenditure on enlargement in the 2002
budget (29); without this measure the budget would have exceeded
the financial perspective ceiling. The implementation rate was 87 %,
a small decrease on 2002 (89 %).

CONCLUSIONS AND RECOMMENDATIONS

2.47. On the basis of implementation of the 2003 budget, man-
agement by the Commission can be judged a partial success: esti-
mates were improved, underspending was reduced and action was
taken to reduce appropriations before the year end. However, the
surplus of the year of 5,5 billion euro (and the underlying under-
spending) remains large, and shows the potential for further
improvement.

(28) The same for both commitments and payments as the administrative

expenditure is non-differentialed.

(29) A similar frontloading exercise occurred in respect of the 2002 finan-

cial year involving the 2001 budget.

2.47. The annual payment budget is principally established through a
‘bottom-up’ procedure. For each commitment, the corresponding payment
profile is determined, as a rule assuming a normal rate of implementation.
Accordingly, unforeseen delays and downward adjustments of programmes
lead to an under-implementation (i.e., an over-budgeting) of appropria-
tions.

At authorising officer level, priority is given to safeguarding the availabil-
ity of payment appropriations to be able to meet, at due date, all payment
obligations. The need to safeguard the availability of appropriations is also
partly due to the time-consuming procedures for transfers and supplemen-
tary budgets, which require the approval of the budgetary authority.

For the Structural Funds, by far the biggest source of aggregate under-
implementation and/or over-budgeting in the last years, the payment bud-
get has been based on Member States’ forecasts, with a substantial down-
ward adjustment due to the Commission’s own estimates, as well as a need
for an overall budgetary rigour, capping the annual growth of the payment
budget. The past substantial forecasting uncertainties for the Structural
Funds have been, to a large extent, related to the closure of the 1994 to
1999 programmes with unexpected large under-utilisation of the pro-
gramme allocations by Member States.

However, within the above constraints, the Commission is looking at
possibilities to reduce the aggregate over-budgeting of the past years. One
possibility is to shorten the time span — and thereby the uncertainties —
between the payment forecast, budget decisions and implementation.
This can be done by revising forecasts during the budgetary procedure,
before the budget is finally approved, however, only within the limits of the
Financial Regulation. A second possibility is to make an active use of the
‘early warning system’, i.e., the annual budget implementation plan and

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2.48. The value of outstanding commitments continued to grow
in 2003 and reached 104 billion euro by the year end, despite mea-
sures taken by the Commission such as the provision of additional
payment appropriations and specific action on all
‘potentially
abnormal’ commitments. Furthermore, this balance does not reflect
95 billion euro of legal commitments entered into for the Structural
Funds. The increasing time gap between commitments and pay-
ments, the likely extra demand on administration at the end of the
current programming periods, and the potential demand on the
future programming period are all areas that require urgent atten-
tion.

2.49. The continuing underspending should be contrasted with
recurring increases in the budget over the same period. It is contra-
dictory to increase the budget each year when there is not the abil-
ity to absorb the resources on multi-annual programmes within the
timescale foreseen. The Court recommends that in the budgetary
process realistic account of the ability to make payments is taken
when setting both the commitment and payments budgets.

2.50. The Court recommends that the Commission continues to
improve its information on budgetary implementation. Its budget-
ary analysis should provide clear information on the cumulative
state of implementation of Community programmes, taking into
account the use of commitments, the level of payments to final ben-
eficiaries and commitments still to be made. These improvements
will require a considerable investment by the Commission and
Member States in providing the necessary information. However the
increased transparency should help improve management of the
budget and improve accountability for the use of EU funds to the
citizen.

its monitoring and revision, involving an amending budget which reduces
payment appropriations (as happened in 2003 for the Structural Funds).
A third possibility is to enhance payment forecasts and their monitoring,
one example being the efforts to improve the Member States’ forecasts for
the Structural Funds.

2.48. The time lag between commitments and payments of ‘differenti-
ated’ expenditure, which is responsible for the ‘RAL’, is inherent in the bud-
geting of this expenditure.

For the Structural Funds, which account for the bulk of the ‘RAL’, the risk
of an overhang that is difficult to manage in terms of settling payments at
the end of the current programme period has been reduced, compared to the
past, by the ‘n+2’ rule, which in effect involves closing annual commitments
continuously during implementation some three years after they were
entered in the budget. The ‘n+2’ rule should result in a stabilised level of
outstanding commitments over the next few years, absorbing also the EUR
95 billion of legal commitments referred to by the Court as they fall due.
A ‘RAL’ for the 2000 to 2006 period of 2,3 times current annual pay-
ments (see paragraph 2.34) is in line with the Commission’s forecast. The
Commission refers to its ‘RAL’ communication of September 2002 (see
paragraph 2.16) and to the joint declaration on the liquidation of old and
‘potentially abnormal’ commitments (see paragraph 2.21).

2.49.
Past absorption problems are only one criterion in forecasting pay-
ments. For example, past delays in implementation may actually imply a
need for future increases of appropriations.

2.50. The Budgetary and Financial Management Report has focused on
annual implementation. In addition, the Commission has, in certain areas,
provided more comprehensive reports. For the Structural Funds, the Com-
mission prepares annually the document ‘Analysis of the budgetary imple-
mentation of the Structural Funds’, covering, inter alia, the cumulative
state of implementation.

As in 2003 for the recommendation of inserting a section on own
resources, the Commission is ready to follow this recommendation. It is
willing in the next Budgetary and Financial Management Report to pro-
vide information on the cumulative state of implementation of the most
important Community programmes, as well as the use of commitments and
payments at different levels to the extent that this information is available
to the Commission, as recommended by the Court. As this will require
establishing new sources of information, it will take some time to fully
implement the Court’s recommendation.

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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

Introduction

Evaluation of supervisory systems and controls

Commission supervisory systems and controls

Supervisory systems and controls in Member States

Paragraph

3.1-3.2

3.3-3.62

3.3-3.41

3.3-3.6

3.7-3.34

3.7-3.9

3.10-3.34

Results of controls carried out on customs declarations and national accounting systems 3.35-3.40

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

3.36-3.40

Work of other auditors

VAT/GNI own resource

Introduction

Evaluation of supervisory systems and controls

Commission supervisory systems and controls

3.41

3.42-3.57

3.42-3.43

3.44-3.50

3.44-3.48

Delays in payment and submission of data relating to VAT and GNI own resources

3.49-3.50

Results of controls carried out on the corrections and compensations in the VAT state-
ments produced by Member States

Observations

Annual activity reports and declarations of the Directors-General

Conclusion and recommendations

Own resources preparedness of the acceding countries

3.51-3.57

3.54-3.57

3.58

3.59-3.62

3.63-3.68

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INTRODUCTION

3.1. The revenue of the budget of the European Union consists of
own resources and other revenue. As shown in Table 3.1,
Graph 3.1 and Graph 3.2, own resources are by far the main
source of financing for budgetary expenditure (89 %). There are
three categories of own resources: traditional own resources (cus-
toms duties, agricultural duties, and sugar levies) (13 %), own
resources calculated on the basis of value added tax collected by
Member States (26 %), and own resources derived from the Mem-
ber States’ gross national income (61 %). As regards budgetary man-
agement of own resources see paragraphs 2.23 and 2.24.

Table 3.1 — Revenue for the financial years 2002 and 2003

Type of revenue and corresponding budget heading

(million euro)

Actual revenue
in 2002

Development of the
2003 budget

Initial budget

Final budget

Actual
revenue in
2003

% change
(2002 to 2003)

(a)

(b)

(c)

(d)

e = [(d) – (a)]/(a)

1

Traditional own resources

9 214,0

12 140,3

10 906,2

10 857,2

— Agricultural duties (Chapter 1 0)

— Sugar and isoglucose levies (Chapter 1 1)

886,4 (1)

649,5 (1)

879,8

546,6

879,8

1 011,8

546,6

383,2

– 41,0 %

17,8 %

14,1 %

— Customs duties (Chapter 1 2)

9 701,1 (1)

10 713,9

9 479,8

9 462,1

– 2,5 %

— Collection expenses adjustment for 2001 (Chapter 2 0)

– 2 023,0 (2)

—

—

—

—

2 VAT resources

22 388,2

24 121,3

21 748,0

21 260,1

– 5,0 %

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

22 539,0

24 121,3

21 748,0

21 534,9

— Balances from previous years (Chapter 3 1)

– 150,8

0,0

– 274,8

3 GNI resource

45 947,6

59 404,0

51 356,7

51 235,2

11,5 %

— GNI resource from the current financial year (Chapter 1 4)

45 850,3

59 404,0

51 356,7

50 624,3

— Balances from previous years (Chapter 3 2)

4

Budgetary imbalances

— UK correction (Chapter 1 5)

— Final calculation of UK correction (Chapter 3 5)

97,3

148,2

149,0

– 0,8

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

610,9

280,1

281,1

– 1,0

89,0 %

5 Other revenue

17 736,4

1 837,4

8 513,9

9 836,1

– 44,5 %

— Surplus from previous financial year (Chapter 3 0)

15 375,0

1 000,0

7 676,8

7 676,8

– 50,1 %

— Miscellaneous revenues (Titles 4 to 9)

2 361,4

837,4

837,1

2 159,3

Grand Total

95 434,4

97 502,9

92 524,8

93 468,6

– 8,6 %

– 2,1 %

(1) These figures are presented net of the collection expenses of 2002 (3 725,6 million euro) that were brought to account in 2002 under Chapter 1 9. Under Article 42 of the
new financial regulation the budget may not contain negative revenue. For 2003, therefore, both budget and actual figures for Chapters 1 0, 1 1 and 1 2 are net of col-
lection costs, and Chapter 1 9 no longer exists.

(2) Chapter 2 0 appeared only in 2002, to permit the adjustment of collection expenses for traditional own resources from 10 % to 25 % that came into force during 2002 but

with retroactive effect to 1 January 2001 (see the Court’s 2002 annual report, paragraph 2.16).

Source: 2003 revenue and expenditure account.

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Graph 3.1 — Breakdown of actual revenue in 2003

Source: 2003 revenue and expenditure account.

Graph 3.2 — Evolution of sources of actual revenue 1989 to 2003

(1) Contains surplus from previous financial year and miscellaneous revenue.
Source: 2003 revenue and expenditure account.

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3.2. The other revenue consists mainly of the surplus from the
previous financial year. In the last three years (2001-2003) this
component has been much greater than previously; the matter is
discussed in paragraphs 2.9 to 2.13.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT
OF ASSURANCE

Traditional own resources

Introduction

3.3. Traditional own resources are established and recovered by
Member States under national legal and regulatory provisions which
must meet the requirements of the Community rules (1). Member
States must aggregate the data arising from the individual customs
entries into the so-called A account, and pay the total amounts of
duty established, less collection costs, to the Commission’s account
by a specified date in the second month following the month in
which the entitlement was established. As an exception, duty that
remains unpaid and unsecured, or is secured but under appeal, need
not be made available until it is in fact collected. If Member States
exercise this option, the duty concerned is not registered in the A
account but must instead be entered in a separate account (2) (the
so-called B account).

3.4. The risks to the collection of traditional own resources are
evasion of duty by misrepresentation or simply by smuggling, mis-
calculation or failure to establish duty because of undetected mis-
takes or weaknesses in systems, and errors or omissions in Member
States’ accounting for duty received that result in misstatements to
the Commission of the amount to be made available.

(1) Decision 2000/597/EC, Euratom of 29 September 2000 on the system
of the Council European Communities’ own resources (OJ L 253,
7.10.2000, p. 42); Council Regulation (EC, Euratom) No 1150/2000 of
22 May 2000 implementing Decision 94/728/EC, Euratom on the sys-
tem of the Communities’ own resources (OJ L 130, 31.5.2000).

(2) Article 6 of Council Regulation (EC, Euratom) No 1150/2000.

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3.5. The Court’s audit work included evaluation of supervisory
systems and controls, both in the Commission and in Member
States, as well as direct testing of customs declarations and national
accounting systems. It consisted of:

a)

b)

a review of the organisation of customs supervision in twelve
Member States (3), which together were responsible for 96 % of
the import duties collected in 2003,
in order to evaluate
whether the arrangements in place gave reasonable assurance
of completeness. The Court examined in particular the man-
agement of agricultural tariff quotas in six Member States, cus-
toms control over imports under preferential trade arrange-
ments in seven Member States, and customs supervision at
seaports in ten Member States;

examination of the Commission’s accounts for traditional own
resources and the underlying national accounting systems in
twelve Member States (3), and analysis of the flow of duties
from all Member States in order to gain reasonable assurance
that the amounts recorded at each stage were complete and
correct. The work included evaluation of internal controls, rec-
onciliations, and audit of a sample of transactions at each level.

3.6. The Court emphasises that its audit cannot cover either unde-
clared imports or those that have escaped customs surveillance and
for which duties remain unrecovered.

Evaluation of supervisory systems and controls

Commission supervisory systems and controls

3.7. The Commission may request Member States to 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 or
autonomously (4). Individual inspection reports are addressed to the
Member States involved and these reports, together with the replies
received, are examined during meetings of the Advisory Committee
on Own Resources (5). An overall report on the functioning of the
inspections is drawn up every three years and presented to the bud-
getary authority (6).

(3) Belgium, Denmark, Germany, Greece, Spain, France, Italy, the Nether-

lands, Austria, Portugal, Finland and the United Kingdom.

(4) Article 18 of Council Regulation (EC, Euratom) No 1150/2000.
(5) The Advisory Committee on Own Resources (ACOR), established by
Article 20 of Council Regulation (EC, Euratom) No 1150/2000, consists
of representatives of the Member States and of the Commission, and pro-
vides the channel for liaison between the Commission and the Member
States on own resources matters. It examines questions concerning the
implementation of the own resources system, as well as the estimates of
own resources.

(6) The latest is document COM(2003) 345 final, Fourth report from the
Commission on the operation of the inspection arrangements for tradi-
tional own resources (2000-2002).

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3.8. The Court has reviewed the work of the Commission unit
that carried out these inspections. As in previous years, its method-
ology was found to be soundly-based and the documentation of its
work is good. Themes for inspection are selected on the basis of risk
analysis. In 2003 a priority subject of the unit’s work was the moni-
toring of the traditional own resources collection systems in the
acceding countries. The Court also reviewed this subject, and did
not identify in these countries substantial shortcomings other than
those mentioned in the monitoring reports of the Commission to
the Council (see paragraphs 3.63 to 3.68).

3.9.
In addition, on the basis of its ongoing risk analysis of tradi-
tional own resources, the unit carried out inspections in all Mem-
ber States of the B-account and write-off procedure, and of the man-
agement of customs declarations made electronically. On B
accounts the unit’s results match those of the Court (see para-
graph 3.40); on electronic declarations the unit found that the sys-
tems were on the whole satisfactory, and that computerisation
brought benefits and should be extended. It is not the role of the
Commission’s inspection services to give overall assurance that the
accounting is correct and that all amounts due are identified and
established. The results of their work are nevertheless taken into
account by the Court.

Supervisory systems and controls in Member States

3.10. The supervisory systems and controls for traditional own
resources in Member States consist in the first instance of supervi-
sion by the customs authorities, defined by the Community Cus-
toms Code (7) as ‘action taken in general by those authorities with a
view to ensuring that customs rules and, where appropriate, other
provisions applicable to goods subject to customs supervision are
observed’. Community legislation does not generally prescribe
either particular methods or the level of customs control, this being
at the discretion of the Member States. The following observations
arise regarding certain aspects of customs supervision.

Agricultural tariff quotas

3.11. The Court carried out an examination of the management
of the agricultural tariff quotas. Under these quota arrangements,
certain agricultural products can be imported into the Union at
reduced or zero rates. The objective of the Court’s audit was to
obtain assurance that the quotas were legally and regularly allo-
cated, and to assess the managing and monitoring activities related
to the different quota arrangements.

(7) Articles 4(13), 4(14) and 37 of Council Regulation (EEC) No 2913/92 of
12 October 1992 establishing the Community Customs Code (OJ L 302,
19.10.1992, p. 1).

3.11. -3.12. Tariff quotas are managed:

— either by import certificates, giving a right to import at a reduced or
zero tariff for a specified amount of products within a specified period.
This system gives commercial security to importers;

— or by the ‘first come/first served’ system based on customs declarations,
giving a right to import at a reduced or zero tariff for the quantity
shown on an import declaration in so far as the import quota has not
been exhausted on the day of declaration.

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3.12. The quotas are managed by the Commission, through com-
petent authorities in the Member States. Importers apply to the
national authorities for import licences. After the Commission has
confirmed that a quota allocation is available, the national author-
ity issues the import licence, which must be presented to the cus-
toms authorities by the importer, together with the goods declared
for importation. The customs services are responsible for verifying
that the imported goods comply with the import licence. Once the
whole quantity for which the licence has been issued has been
imported, the licence is returned to the issuing authorities. National
authorities inform the Commission about actual imports under
quota arrangements.

3.13. The Court examined quota management both in the Com-
mission and in six Member States (Belgium, France, Germany,
Spain, the Netherlands and the United Kingdom). The most impor-
tant market sectors were subject to this audit. The Court draws
attention to the following issues that will need further action by the
Commission.

3.14. The multitude of quotas (8) and different procedures related
to them puts a heavy burden on the managing services in both the
Commission and the Member States, and increases the risk of
irregular applications and inefficiency. The Court therefore invites
the Commission to streamline and harmonise the procedural frame-
work related to the quotas.

(8) At the time of the Court’s audit there were about 950 quota measures in

force.

3.14. Awareness of the problem raised by the Court was one of the rea-
sons which led to the start of work on the AMIS-Quota project in 2002.
The project foresees a central and integrated IT system that will help to
manage agricultural import tariff quotas other than those managed by the
‘first come, first served’ system. The project will allow the national compe-
tent authorities to feed the newly developed computerised system directly
with data concerning the quantities covered by import licences (requested,
issued, used, and unused). AMIS-Quota will reduce the workload neces-
sary for managing quotas and will contribute to the monitoring and trans-
parency of the management process by centralising all relevant quota
management information.

The Commission is currently examining the regulations and systems relat-
ing to tariff quotas and import/export licences, with a view to making
appropriate simplification proposals. It is intended that the implementa-
tion of AMIS-Quota, together with the outcome of the simplification study,
will provide a positive response to the problems raised by the Court.

As far as monitoring is concerned, since 2001, 64 quotas concerning agri-
cultural products have been transferred to the ‘first come, first served’ sys-
tem with the aim of facilitating the management and corresponding moni-
toring.

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3.15.
From its audit the Court has found that the system for pro-
viding Member States with appropriate and up-to-date information
in respect of official stamps used by the national authorities com-
petent to issue licences (9) has not been properly applied in four of
the six Member States visited. It recommends that the Commission
should review the procedures for informing Member States and take
appropriate remedial action.

3.15. The Commission supplies Member States on a regular basis with
all information available concerning the ‘licence issuing’ agencies and prints
of their official stamps via the Member States’ representatives on the Man-
agement Committee on Trade Mechanisms.

The Commmission will remind Member States of the necessity of making
the information avalaible to those customs offices responsible for verifying
the licences.

3.16. Currently, certain quotas allow large numbers of importers,
all linked to a main operator, to introduce their own licence requests
to ensure a maximum quota allocation. This causes unnecessary
paperwork and delays in the application procedures. The Court
therefore recommends the Commission to issue additional provi-
sions, to prevent this from happening.

3.16.
In an effort to counter this, the Commission proposed prohibiting
access to certain quotas for known linked persons under Article 143 of
Regulation (EEC) No 2454/93 (Implementing provisions of the Customs
Code). This proposal has been vigorously opposed by almost all Member
States.

In the beef sector the requirements (1) as to who can apply for the quota
have been tightened. Proofs must be presented of independent activity by the
importer, coupled with a high security to be forfeited where appropriate
documents are not produced.

3.17. The Commission is considering the appropriate action to take in
the light of the French authorities’ extensive and detailed responses to the
Court’s comments.

3.17.
For French overseas departments (Guadeloupe, French Gui-
ana and Martinique) the Court found that for importation of cer-
tain products under quota arrangements, no quota allocation was
requested at the Commission by the French authorities. Neither was
information about imported quantities submitted to the Commis-
sion by French customs. This implies that imports can take place in
excess of the available quotas. The Court invites the Commission to
investigate and correct these shortcomings in the quota manage-
ment in the French overseas departments.

3.18. The Court has also identified shortcomings in the imple-
mentation of the quota rules and in the controls related to imports
under quota arrangements in several other Member States. The
Court invites the Commission to follow up these cases.

3.18. The Commission is continuing to follow up the implications of
these findings with the relevant Member States. Five of the points have been
satisfactorily resolved including financial corrections, where required.

Customs controls over imports under preferential trade arrangements

3.19. The Community is involved in various forms of preferential
trade arrangements (some 40 concerning around 150 countries).
Preferential treatment was claimed for 21 % by value of all Com-
munity imports in 2001. Preferential trade arrangements are based
on the concept of origin, which means that only goods originating
in the beneficiary countries are entitled to preferential treatment.

(9) Article 30(4) of Commission Regulation (EC) No 1291/2000 of
9 June 2000 laying down common detailed rules for the application of
import and export licences and advance fixing certificates for agricultthe
system ofural products (OJ L 152, 24.6.2000, p. 1).

(1) Regulation (EC) No 954/2002 and (EC) No 780/2003.

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3.20. The consultation period on the Green Paper on preferential origin
rules is now closed and the Commission is preparing a synthesis of the
replies received and orientations both for determining origin and revising
administrative management and control.

3.20. Origin rules are complex, and it is widely recognised that it
is difficult for customs authorities to check that the arrangements
are being used properly. In a Green Paper on preferential origin
rules issued in December 2003 (10), the Commission noted that the
rules needed to be fundamentally reviewed, and launched a consul-
tation exercise.

3.21. The main features of the current preferential arrangements
are certification of originating status by the competent authorities
of the exporting country or (under certain conditions) the exporter
himself and subsequent verification of preferential origin by the
country of export, at the request of the importing country.

3.22. Monitoring compliance with preferential rules is based on a
division of duties and mutual trust between the different national
authorities concerned. In this context the Court notes that in his
declaration for 2003, the Director-General for Taxation and the
Customs Union issued a reservation on the supervision of prefer-
ential trade, specifically in relation to sugar imported from Balkan
states, for which the amount of own resources involved is not in
itself material, but which illustrates the need for effective adminis-
trative cooperation between the authorities concerned.

3.22. The Director General’s reservation demonstrates the Commission’s
awareness of the need for assurance of the proper application of rules of ori-
gin by exporting countries worldwide despite a lack of sufficient resources
to monitor all preferential partner countries.

The Commission intends to ensure proper follow-up of the Director Gen-
eral’s reservation.

3.23. The correct balance is needed in three areas, namely the cri-
teria for acquiring originating status and their legal framework, the
supervision of their application, and the procedures put in place. In
2003 the Court focused on the existing systems for preferential
imports in the seven Member States that are the most significant
importing countries (11). The Court’s examination covered customs
controls upon importation, the use made of subsequent verification
requests, and customs control strategy.

Customs controls on importation

3.24. The main control at importation is a check that the certifi-
cates of origin are genuine. Arrangements provide for exporting
countries to supply the names and addresses of the authorities issu-
ing certificates, together with copies of the stamps they use, so that
importing countries can check the certificates.

(10) Green Paper on the future of rules of origin in preferential trade arrange-

ments (COM(2003) 787 final of 18.12.2003).

(11) Belgium, Germany, Spain, France, Italy, the Netherlands, the United

Kingdom.

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3.25. However, in two Member States (Germany and Spain) there
was found to be a systematic problem with the copying and distri-
bution of these specimen stamps to local customs offices. The cop-
ies that reached the local customs offices were delayed, or illegible,
making it impossible to check certificates properly. There is thus a
risk that ineligible imports are accepted for preferential treatment.

3.25. The Commission supplies Member States with complete and
prompt information on exporting countries’ competent authorities and the
stamps they use through a new electronic interface called ‘SMS’. In additon
the Commission has now received assurance from both Member States that
solutions to the problem have been identified and implemented. This may
be the subject of future scrutiny.

3.26. A sample of import declarations for selected products from
certain third countries was examined. It was noted that all the cer-
tificates of origin from certain countries in the sample had been
issued retrospectively, that is, after the goods had left the exporting
country. This should only happen in exceptional cases (12), since it
implies that the exporting countries’ authorities had no possibility
of controlling the goods before shipment. However, subsequent
verification had not been requested by the Member States’ customs
authorities for any of these certificates.

Subsequent verification

3.27. The arrangements provide that subsequent verifications of
certificates of origin and invoice declarations are to be carried out
‘at random’ or whenever the customs authorities have ‘reasonable
doubts’ as to the authenticity of such documents (13). Enquiries
about the authenticity of certificates of origin rely on the effective
cooperation of the issuing authorities.

3.28.
For the cases selected randomly by Customs the number of
subsequent verification requests that received no reply from benefi-
ciary third countries was very high compared to that for reasonable
doubt cases. For example, for one Member State (Belgium) only
40 % of random verification requests received an answer within the
prescribed time limit of six months. Under the current provisions,
‘no reply’ means, for a ‘random’ verification, that the preferential
status of the goods is maintained and as a consequence undue pref-
erential treatment may be granted. On the other hand it was noted
that two Member States (Spain and the United Kingdom) regarded
all subsequent verifications as ‘reasonable doubt’ cases, and with-
drew preferential treatment if there was no reply.

3.26. The Commission will examine the situation referred to by the
Court and will take the necessary measures where appropriate.

3.28.
It is important to distinguish between the different purposes behind
the two methods of selecting certificates for post-clearance verification by the
country of issue. Reasonable doubt is for use where the customs authorities
have a concern about the bonafides of a certificate but insufficient grounds
for refusing preferential treatment immediately. In these circumstances in
the absence of any or a satisfactory response within a specific time period
then it is appropriate to require payment of the full rate of duty. Verifica-
tions of randomly selected certificates merely provide an indicator of the
overall level of reliability of the system. In those circumstances the absence
of a prompt response from the issuing country does not provide grounds for
charging the importer the higher rate of duty. The Commission is however
aware that the frequent use of randomly selected verification requests might
prove counter-productive, and the need for such checks will be revisited
when the Commission services’ consider the action to take on the Green
paper.

In recent years the Commission has paid attention during its inspections of
traditional own resources to the proper selection and prompt follow-up of
verifications on the basis of reasonable doubt. The Commission notes that the
Court’s examination of this area appears to indicate that these efforts have
been largely successful. The Commission has been assured by Spain and the
United Kingdom that procedures are now in place to request occasional veri-
fications on a random basis and will encourage Belgium to tackle the level of
non-response noted by the Court.

(12) Article 85 of Commission Regulation (EEC) No 2454/93 of 2 July 1993
laying down provisions for the implementation of Council Regulation
(EEC) No 2913/92 establishing the Community Customs Code
(OJ L 253, 11.10.1993, p. 1), as last amended by Commission Regula-
tion (EC) No 2286/2003 of 18 December 2003 (OJ L 343, 31.12.2003,
p. 1).

(13) Article 94 of Commission Regulation (EEC) No 2454/93.

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3.29. As the Court itself remarks in paragraph 3.10 Community cus-
toms legislation rarely prescribes specific levels of customs control. In line
with this approach no rates have been set for such verifications. The
arrangements for verification by third countries are just one of the tools
available to Member States to meet their obligation to ensure the proper
application of that legislation.

3.30. As already indicated in reply to paragraph 3.20 the Commission
is considering the follow-up to be given to the Green Paper.

Customs control strategy

3.29. As Member States make progress in introducing paperless
electronic customs clearance systems (14), checks on origin certifi-
cates are transferred from the import stage to post-import control.
This reduction in the level of checks at the time of importation in
Member States is mainly countered by post-clearance controls;
however an increase in subsequent verifications of certificates of
origin could also play a part in compensating for the change. No
evidence that there had been such an increase was found. For
example, in two Member States visited (Belgium and Spain), the rate
of subsequent verifications was less than 1 % of preferential imports.

3.30. When post-import controls show that imports were not eli-
gible for preference, an importer who has certificates of origin and
can demonstrate that he acted in good faith may be entitled to relief
from the duty otherwise due. This possibility is not available when
invoice declarations (15) are used as the proof of origin, since they
engage the responsibility of the exporter rather than of national
authorities. Increased use of invoice declarations as the document
to certify origin would thus present advantages from the own
resources point of view, and the Court notes that this is among the
options put forward in the Commission’s Green Paper mentioned
above.

Customs surveillance of arrivals of goods at ports

3.31. The Court examined customs clearance through selected
ports in 10 Member States (16) where the import duty collected con-
stitutes a major revenue stream representing, at national
level,
between 10 and 50 % of total duty collected. The audit concen-
trated on an evaluation of the customs surveillance and control pro-
cedures that are intended to ensure that all goods are declared prop-
erly and in due time, and that import duties are correctly established.

3.32. With the exception of the weakness at Antwerp (Belgium),
which is described in the following paragraph, it was found that in
general there were satisfactory procedures for ensuring that goods
arriving were properly declared and that import duty due was cor-
rectly identified.

(14) See Communication of the Commission to the Council, the European
Parliament and the European Economc and Social Commitee concern-
ing a simple and paperless environment for Customs and Trade
(COM(2003) 452 final, 24.7.2003).

(15) Invoice declarations are a simplified form of preference document,
accepted as proof of origin for imports from certain countries (usually
subject to limits on value), in place of certificates issued by official bod-
ies. They consist of a statement using prescribed text, made by the
exporter on the invoice or other commercial document. They are sub-
ject to subsequent verification in the same way as other proofs of ori-
gin.

(16) Belgium, Germany, Greece, Spain, France, Italy, the Netherlands, Portu-

gal, Finland and the United Kingdom.

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3.33. Once the Commission has had the opportunity to examine the Bel-
gian authorities’ comments it will take any necessary follow-up action.

3.34. The Commission will follow-up the Court’s findings in Germany
and Finland and will use those from the two locations in Portugal in its
current correspondence with the Portuguese authorities about anomalies in
the control of temporary storage found in other ports during Commission
inspections.

3.33. At Antwerp a high number of containers selected by Cus-
toms for x-ray scanning were not presented. Over a period of
months the number of non-presented containers showed an
increase, and for the month of August 2003 reached a level of 16 %
(197 out of a total of 1 251 selected containers). Such evasion of a
customs control represents a serious impairment of customs super-
vision. In general such non-presentation is only subject to a fine of
125 or 250 euro. It was also noted at Antwerp that a rate of less
than 50 % was achieved for 16 out of 36 targets in the control plan.

Time limits on temporary storage

3.34. Cargo arriving by sea may be put in separate temporary
storage for a maximum of 45 days before it is assigned to a
customs-approved treatment or use. The Court noted considerable
differences between different Member States’ practices regarding
this time limit. In Portugal the time limit is strictly applied, with
fines of 5 % of the customs value in case of infringement. However,
in several other Member States customs control over the time limit
is light and in Hamburg (Germany) for example, no listing was
made of over-45-day cases; at Helsinki (Finland) consignments
more than a year old were still in temporary storage, and local
instructions on the rule needed updating.

Results of controls carried out on customs declarations and
national accounting systems

3.35. As mentioned above (see paragraph 3.5(b)), the Court exam-
ined the accounting for traditional own resources at the Commis-
sion and in Member States, and analysed the flow of duties. No
major problems were found in the accounting and making avail-
able to the Commission of the main flow of import duties through
the A accounts. However, the following observations arose as
regards the B accounts.

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

3.36.
Established entitlements for which no security was required,
together with those which have been challenged and might be sub-
ject 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 balances are included in
the Communities’ balance sheet under ‘Amounts owed by Member
States’.

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3.38. The Commission anticipates that the amendment introducing a
specific deadline will be adopted by the Council in the latter part of 2004.

3.40. As the Court acknowledges the Commission is continuing to
examine Member States’ management of the B account and to require
remedial action where necessary. As has already been alluded to in the
Commmission’s responses to paragraph 3.38. the Commission is also pur-
suing amendments to the regulations governing the operation of the B
account with a view to improving its accuracy and reliability.

3.37. At 31 December 2003 the gross balance for the B accounts
standing in the Commission’s books, namely 2 364,3 million euro,
was 1,9 % greater than the equivalent figure at 31 December 2002
(2 321,2 million euro) (17).

3.38. The B-account balance includes some long-standing entries
for which full recovery must now be regarded as very doubtful. 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 unlikely to be recovered. Accord-
ingly, in its Opinion No 7/2003 (18) the Court welcomed a Com-
mission proposal (19) for amendments to the Regulation, including
a requirement that Member States write off amounts of traditional
own resources that are not recovered by a specific deadline (five
years) following the date on which the demand for payment became
definitively enforceable. Until this amendment is adopted, the
B-account balance will contain an increasing sum, made up of
amounts which may never be recovered.

3.39.
In order to take account of this problem the Commission
has entered in its balance sheet a write-down of 1 043,9 million
euro which reduces the net B-account balance by 58,9 % to
729,3 million euro. The Court has examined the method used to
calculate the adjustment and finds it reasonable in the circum-
stances.

3.40. As in previous years (20), both the Court, and the Commis-
sion in its inspections (see paragraph 3.9), found systematic prob-
lems with B accounts, including delays in making entries, errone-
ous entries, omissions and incorrect cancellations,
in several
Member States (Belgium, Germany, Greece, Portugal, Finland and
the United Kingdom). Germany removed entries totalling 40,1 mil-
lion euro from its B account, but a full explanation of this reduc-
tion has not yet been received. Furthermore, anomalies were noted
in reporting of B-account balances to the Commission (Belgium,
Italy, Sweden).

(17) Figures given are before deduction of collection costs (25 %).
(18) Opinion No 7/2003 on a proposal for a Council Regulation amending
Regulation (EC, Euratom) No 1150/2000 implementing Decision
2000/597/EC, Euratom on the system of the Communities’ own
resources.

(19) Proposal for a Council Regulation? proposed by the Commission on
7 July 2003, amending Regulation (EC, Euratom) No 1150/2000 of
22 May 2000 implementing Decision 2000/597/EC, Euratom on the
system of the Communities’ own resources (COM(2003) 366 final —
2003/0131 (CNS)).

(20) See the Court’s 2002 Annual Report, paragraph 3.12.

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Work of other auditors

3.41. The use of work done by other auditors, where available, to
inform the Court’s own audit work and conclusions represents a
valuable support for the assessment in the context of the statement
of assurance. In the audit of customs supervision at seaports (see
paragraphs 3.31 to 3.34), concrete cooperation took place with the
German Federal Court of Audit (Bundesrechnungshof). A common
audit approach was adopted, using the same audit questionnaires,
and the Court has taken into account the findings, confirmed by the
supporting documentation made available. In several Member States
(Denmark, Greece, Spain, Italy, the Netherlands, Finland) audit docu-
mentation on issues related to the statement of assurance was made
available to the Court, and has been used in this way. In a number of
Member States, however, documentation of the work done by audit
and inspection bodies dealing with customs matters is, as a matter
of policy, not available to the Court.

VAT/GNI own resource

Introduction

3.42.
In contrast to the EU’s revenue from traditional own
resources, the VAT and GNI own resources reflect macroeconomic
statistics whose underlying data cannot be tested directly. For this
reason, the VAT/GNI audit takes as its starting point the receipt by
the Commission of the macroeconomic aggregates prepared by the
Member States (either as forecasts or as real figures) and seeks to
assess the Commission’s system for handling the data until they are
ultimately included in the final accounts. Specific aspects of the
underlying statistical data of the VAT/GNI own resources may,
however, be the subject of separate audits by the Court, like the one
carried out this year on corrections and compensations in Member
States’ VAT statements.

3.43. The Court’s audit concerning the VAT and GNI own
resources thus covered supervisory systems and controls, correc-
tions and compensations in the Member States’ VAT statements and
the establishment of the budget and its implementation in the fol-
lowing areas:

— monthly payments by Member States,

— balances and adjustments to balances in respect of previous

years,

— calculation of the United Kingdom correction and its financing
in 2003 plus the final calculation and its financing for 1999,

— refunds to Member States.

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3.45. The Commission recently decided to sub-divide some reservations
where this seems likely to enable separate elements of complex problems to
be resolved one-by-one. Where this is done, absolute numbers of reserva-
tions may appear to diminish more slowly, even though there remain fewer
real problems.

3.46. The present legal framework enables Member States to reflect their
particularities and the Commission’s controls must necessarily take account
of national variations. Nevertheless, the Commission will continue to
encourage national administrations to present data in a clear, readily
understandable, rigorous and more uniform way. For the policy regarding
reservations, see the reply to paragraph 3.57.

Evaluation of supervisory systems and controls

Commission supervisory systems and controls

3.44. The Commission inspection activities (21) carried out in
cooperation with the Member States constitute an essential element
of the control system for VAT/GNI-related own resources. The
Court reviewed the work of the units carrying out these inspections.

3.45.
In respect of the VAT own resource, the Commission’s
on-the-spot inspections carried out during the financial year 2003
led to nine new reservations (see paragraph 3.56) in respect of spe-
cific elements of Member States’ VAT statements (22). Progress was
made in reducing the number of reservations (20 were lifted during
the year), but 74 remained at the end of 2003 (see also para-
graph 3.57) (23).

3.46. The preparation and the reporting of these inspections,
which focused on Member States’ VAT statements, are of good
quality, as is the follow-up of the audit observations. However, the
Court notes that the effectiveness of the inspections could be fur-
ther increased if the VAT statements were produced in a clear regu-
latory and procedural framework and if a clear policy was estab-
lished for the management of reservations by the Commission (see
paragraph 3.57).

3.47. Concerning the GNI own resource, the Court pointed out in
its observations in the Annual Report for the financial year 2002 (24)
that the exact nature of the checks (25) in respect of the annual GNI
questionnaires carried out by the Commission beyond the simple
initial arithmetical test was unclear, as there were no specific guide-
lines on the nature and scope of these checks. Following the Court’s
recommendation the Commission has introduced specific checklists
for checking the data in GNI questionnaires.

(21) 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, Eura-
tom on the system of the Communities’ own resources (OJ L 130,
31.5.2000, p. 1).

(22) The VAT statement is a document drawn up by the Member States
which must contain the data used to determine the VAT base. The VAT
base constitutes the basis for the calculation of the VAT own resource
and is required for the Commission’s control (Articles 7 and 11 of
Council Regulation (ECC, Euratom) No 1553/89).

(23) Taking into account the subdivision introduced by the Commission in

2003 the actual number of reservations is 85.

(24) See Annual Report for the financial year 2002, paragraphs 3.40-3.41

and 3.51-3.52.

(25) Article 19 of Council Regulation (EC, Euratom) No 1150/2000 provides
for annual inspections of aggregates for errors in compilation and
examination of calculations and basic statistics if necessary. Article 5(1)
of Council Regulation (EC, Euratom) No 1287/2003 provides for veri-
fication of sources and methods used by Member States to calculate
GNI.

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3.48. However, there is still limited direct verification by the Com-
mission of the underlying national accounts which provide the fig-
ures presented in the GNI questionnaires.

3.48. Verification of the national accounts is carried out through the
analysis of countries’ inventories of sources and methods used to compile
GNI. The Commission does little direct verifications of data in the sense
indicated by the Court, but is investigating the possibility for carrying out
more direct verifications in the future.

Delays in payment and submission of data relating to VAT and GNI own
resources

3.49.
Portugal and Sweden were late in paying their contributions
for VAT and GNI own resources, which were due by the first work-
ing day of December 2003. Portugal paid its outstanding contribu-
tion of 113 million euro on 2 January 2004. Sweden paid its out-
standing contribution in two amounts, 715,2 million SEK
(79,1 million euro) on 19 December 2003 and 2 546,2 million SEK
(280,5 million euro) on 2 January 2004. In all cases, the Commis-
sion requested interest for late payment which was paid by Portu-
gal and Sweden in due time.

3.49. The Commission shares the Court’s concern about these instances
of delayed payment.

Making use of systematic monitoring and rigorous follow-up action, the
Commission seeks to ensure that Member States respect Community rules
for own resources payments.

3.50.
Furthermore, an increasing number of Member States were
late in submitting their VAT statements to the Commission. Nine
Member States did not respect the deadline of 31 July 2003 for sub-
mitting the VAT statements for the year 2002. Moreover, three
Member States did not respect the deadline of 22 September 2003
for presenting the GNI questionnaires. The Court points out that
not respecting the Community timescales could hamper the work
of the Commission in respect of the calculation of Member States’
own resources contributions and in respect of its own VAT/GNI
inspections.

3.50. The Commission’s records show that six VAT statements met the
deadline of 31 July. Two more arrived on 1 August and by 31 August only
two statements were lacking, although one Member State had sent only a
summary. The penultimate statement was received on 12 September and
the Portuguese statement on 1 April 2004, following the opening of
infringement proceedings.

The Commission has recently increased pressure on Member States to
respect the deadlines, even if in practice control work has not been signifi-
cantly hampered by these mostly minor delays.

Results of controls carried out on the corrections and com-
pensations in the VAT statements produced by Member States

3.51. The Court examined the calculation and presentation of
corrections and compensations in the VAT statements produced by
Member States which, like the collection of VAT by Member States
examined by the Court last year, are an important element in the
calculation of the VAT own resources. The Court also reviewed the
Commission’s management activities relating to the correct appli-
cation of legislation concerning the VAT own resource.

3.52. Corrections and compensations must be calculated by Mem-
ber States in order to obtain the harmonised VAT base from which
the VAT own resource is calculated, as laid down in Community
legislation (26).

(26) See Article 2 of Council Regulation No 1553/89 and Article 2 of Coun-

cil Directive 77/388/EEC (Sixth Directive).

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3.54. Corrections and compensations are made because Member States
do not apply Community VAT provisions in the same way. This implies a
special effort on national administrations’ part if data are to be presented
in the same clear and consistent way, especially as they may not possess the
same information about taxes and taxpayers for reasons often related to
differing national circumstances (cultural factors, data protection rules,
etc.). The Commission continues its efforts to ensure the use of precise, uni-
form methods and reliable, up-to-date sources.

3.55. Member States raised numerous questions of methods and sources
with the Commission following the introduction of the VAT resource and
newer Member States did so following successive enlargements. They tend
to stop doing this after an initial period. Radical adjustments are now rare
and the Commission is satisfied that its services have not failed to discuss
any changes, which are often made at the Commission’s urging, with the
Member States concerned. Nevertheless, the Commission will remind Mem-
ber States of the legal requirement for them to take the initiative in report-
ing significant changes rather than waiting for the Commission to raise the
matter.

3.53. The importance of corrections and compensations for VAT
own resources can be seen from their total absolute value (27),
which for the financial year 2002 amounted to approximately
245 137 million euro or 5,85 % of the harmonised VAT base.

Observations

Presentation and use of methodologies and data

3.54. The Court has noted differences in the treatment of correc-
tions and compensations presented by Member States in the annual
VAT statements. These differences can affect the harmonised and
accurate calculation of the corrections and compensations and may
lead to unequal treatment of Member States. They concern the
amount of supporting details given with the calculation and the age
of the data used. They are exacerbated by the absence of clear
rules (28) on how corrections and compensations are to be calcu-
lated, how the calculations and related data are to be presented and
which data sources may be used.

3.55. Although it is the responsibility of the Member States to
produce correctly calculated corrections and compensations and to
inform the Commission about the methodologies used in their cal-
culation, Member States rely heavily on the outcome of the Com-
mission’s inspection visits for adjusting or updating their method-
ologies and data sources.

Management of reservations

3.56.
If corrections or compensations have not been calculated in
accordance with Community legislation, the Commission has the
possibility of formulating a reservation, which makes it possible to
adjust these corrections and compensations after the legal dead-
line (29).

(27) The total absolute value of the corrections and compensations for the
financial year concerned has been calculated as the sum of the positive
and negative corrections to the VAT receipts, regardless of their signs,
divided by each Member State’s weighted average rate, plus the sum of
the positive and negative compensations to the intermediate VAT base.
(28) The procedural framework for calculating and presenting corrections
and compensations is largely laid down in Council Regulation (EEC,
Euratom) No 1553/89 on the definitive uniform arrangements for the
collection of own resources from value added tax and in an internal
guide on the determination of own resources from VAT, drawn up by
the Commission for the benefit of EU officials and the administrations
of Member States.

(29) See Article 9(2) of Council Regulation (EEC) No 1553/1989.

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3.57. The Court has observed inconsistencies in the setting and
lifting of reservations concerning corrections and compensations,
and reservations can remain in force for long periods. This may lead
to unequal treatment of Member States, which could have an impact
on the VAT base. The Court recommends the Commission to review
and document its policy guidelines for reservation management.

3.57. Reservations are not normally placed where the financial conse-
quences of a requested change are judged negligible, where a method has
been accepted in the past but needs adjustment or where a change of sources
and/or methods is expected to be agreed before the next control visit, pro-
vided that there is no risk that the VAT statement in question will be time-
barred. Reservations are lifted when the Member State has met the Com-
mission’s demands. Where questions of principle or interpretation are at
stake, the Commission has stated its intention to instigate legal proceed-
ings in the European Court of Justice. The Commission can agree to review
and document this policy.

Annual activity reports and declarations of the Directors-General

3.58. The Court has examined the annual activity reports and dec-
larations of the Directors-General for DG Taxation and Customs
Union (see paragraph 3.22), DG Budget and Eurostat. Though the
annual activity report for DG Budget mentions control activities
related to traditional own resources and the VAT own resource, it
does not make any specific reference to control activities related to
the GNI own resource, even though it is this resource that provides
more than half of the revenue. The Eurostat annual activity report
likewise does not refer to control activities on the GNI data used by
DG Budget in calculating the GNI own resource.

Conclusion and recommendations

3.59. Taking into account the scope of the audit (see para-
graphs 3.5 and 3.6), and with the exception of the B-account mat-
ters noted in paragraph 3.40, the checks and systems analysis car-
ried out by the Court gave satisfactory overall results concerning the
reliability of the accounts recording traditional own resources (see
also monitoring elements in Annexes 1 and 2). The audit work car-
ried out on the systems and related transactions which underlie the
accounts also gave satisfactory overall results as far as the legality
and regularity of the underlying transactions is concerned, but leads
to the following recommendations on systems:

3.58. Annual activity reports present the activities of Directorates-
General at a high level of aggregation and tend to deal with specific activi-
ties mainly if they are priorities or have given rise to particular problems. It
is therefore not surprising that the activity of verifying GNI data is not
explicitly visible in the reports from the two services. This activity appears
in its rightful place in the annual management plans of the two services,
which set out the work programme for the year and are subject to regular
internal monitoring and review.

3.59. The Commission has explained in its reply to paragraph 3.40 its
ongoing efforts to improve Member States’ management of the B account
together with the regulatory amendments expected to be in place by the end
of 2004.

a)

b)

as regards agricultural tariff quotas the Court found a number
of issues where the Commission and Member States could
improve the quota management (see paragraphs 3.11 to 3.18);

a) As stated in the replies to paragraphs 3.17. and 3.18., the Commis-

sion will do all in its power to improve matters.

as regards preferential trade (see paragraphs 3.19 to 3.30), the
Court notes that control of compliance depends on coopera-
tion and that many verification requests receive no replies from
the authorities of the beneficiary third countries. The consulta-
tion procedure launched by the Commission will need to take
this problem into account, as well as examining the limitations
of a document-based evidencing system, particularly in the
light of the move towards paperless systems;

b) The Commission’s Green paper was a root and branch exploration of
the whole concept of proof of preferential origin as it now applies, the
way it is established and the respective responsibilities of economic
operators and public authorities in managing and controlling it.
Progress in this area will be an important part of following-up the
Green Paper, as has already been indicated in response to point 3.20.

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c)

as regards ports, except for the weaknesses at Antwerp (see
paragraph 3.33), the Court found that customs supervision was
generally satisfactory. There is, however, scope for standardis-
ing the approach to the time limit on temporary storage (see
paragraph 3.34).

c) Once it has had the opportunity to consider the Belgian authorities’
views the Commission will take any necessary measures regarding
Antwerp. The Commission will continue to follow-up the question of
Member States’ management of prompt removal from temporary stor-
age during its inspections of TOR.

In relation to the scope of the audit, as set out in para-
3.60.
graphs 3.42 and 3.43, the Court found that the VAT and GNI
resources were being correctly calculated by the Commission and
entered in the Community accounts.

3.61. The audit of the corrections and compensations in VAT
statements produced by Member States has however identified two
weaknesses in the system (see paragraphs 3.54 to 3.57) which, as
well as the reservations mentioned in paragraph 3.45, cast some
doubts on the accuracy and reliability of the VAT statements pro-
duced by the Member States:

3.61. The Commission believes that while complete accuracy and reli-
ability can never be wholly guaranteed, its control activities, its bilateral
contacts with Member States and the meetings of the Advisory Committee
on Own Resources (ACOR) all serve to ensure a high level of uniformity,
transparency and equality of treatment. Reservations also contribute to this
process:

a) The Commission has issued non-binding guidelines for the establish-
ment of VAT statements, which the Court possesses. While the Com-
mission has no power to issue binding instructions and is most
unlikely to obtain such power, its services work to ensure that each
Member State correctly applies the existing rules to its own particular
situation. This is done through control missions and the resulting
reports, through meetings of the ACOR and by the use of an intranet
site accessible to all European Union and national officials concerned
that acts as a major stimulus to greater uniformity. The Commission
notes the suggestions made by the Court in this chapter and will make
every effort to put them into effect.

b) The Commission’s policy on reservations is explained in para-
graph 3.57. As noted there the Commission will clarify and docu-
ment this policy.

3.62. The Commission is examining ways to carry out more direct veri-
fication in the sense indicated by the Court.

a)

there is no precise and clear regulatory and procedural frame-
work on how corrections and compensations are to be calcu-
lated, how the calculations and related data are to be presented
and which data sources may be used. The Commission should
make proposals, either in the form of changes to the legislation
or through the issue of binding instructions or guidelines,
which would ensure a more transparent and uniform treatment
of corrections and compensations by Member States, and pro-
vide a more structured framework for the Commission’s inspec-
tions;

b)

inconsistencies in the setting and lifting of reservations con-
cerning the corrections and compensations have been noted.
The Commission should review and document its policy for
the management of reservations, so as to ensure transparent,
coherent and equal treatment of Member States.

3.62.
In respect of the GNI-related own resources, the Court
repeats the recommendation made last year (30) that the Commis-
sion increase its direct verification activities regarding the underly-
ing national accounts data which feeds into the GNI questionnaires,
in order to increase the reliability of the calculation of the most
important own resource (see paragraph 3.48 and monitoring ele-
ments in Annex 2).

OWN RESOURCES PREPAREDNESS OF THE ACCEDING
COUNTRIES

3.63.
In view of the accession of the ten new Member States to the
European Union, the Court reviewed these countries’ preparations
for accession, taking into consideration that they would have to
apply Community legislation in respect of own resources from the
moment of accession.

(30) See paragraph 3.57 of the Annual report for the financial year 2002.

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3.64. The aim of the review was to assess how the Commission
monitored the adequacy and reliability of own resources-related
activities in these countries and whether the identification and
follow-up of remaining problem areas was appropriate and com-
plete. All three types of own resources were subject to this review.

3.65. The review did not identify substantial shortcomings in
these countries other than those mentioned in the Commission’s
monitoring reports to the Council. The Court, however, wishes to
draw attention to the following points that need further action or
follow-up, both at the Commission and in the acceding countries.

3.66. At the time of the Court’s review, several areas of customs
procedures were still under development, making it too early to
assess their fitness for operation at the moment of accession. Cus-
toms information technology and interconnectivity questions were
the largest pending issues in many countries. The projects had been
subject to serious delays, and further delays could endanger the
proper functioning of the customs services at the moment of acces-
sion and after it. The accounting procedures for customs duties had
not been finalised, and the Court could not yet obtain assurance
that the rules for accounting for traditional own resources and mak-
ing them available to the Commission would be correctly applied.
Efforts are also needed to ensure the systematic use of risk analysis
techniques in customs control and the clearance of goods.

3.66. The Court draws attention to some of the challenges involved in
evaluating, in advance of accession, whether the acceding countries would
be able to fulfil their obligations to collect and account for traditional own
resources. As part of its monitoring activity the Commission identified those
areas where further progress was required and obtained commitments from
the countries concerned to take the action needed. Progress against these
commitments was monitored monthly until accesssion.

The Commission tasks needed in the customs IT field to prepare the EU
enlargement were completed well in advance of the deadline. The Commis-
sion has provided active support to the countries concerned in the develop-
ment and testing of the customs IT systems. Since enlargement no prob-
lems have been experienced with interconnectivity between the customs IT
systems and the Commission’s systems and all the new Member States have
provided the obligatory traditional own resources accounting statements on
time. The Commission will be visiting every new Member State during the
last four months of 2004 to examine the procedures and systems actually
in place and to evaluate the timeliness and accuracy of their accounting for
traditional own resources.

In respect of the VAT own resource, the Commission should
3.67.
consider whether ‘best practice’ examples from the existing Mem-
ber States’ VAT calculations could be made available to the acced-
ing countries. At present, it is not always clear for these countries
how much information, in the form of calculations and supporting
documents, should be given.

3.67. The Commission has in fact used existing Member States’ state-
ments that it considers exemplary to show the new Member States what is
expected and has followed this up by on-the-spot explanations of how these
examples may be adapted to other countries’ needs. This action is reinforced
by the use of the CIRCA intranet to increase awareness of best practice.

3.68.
Phare projects on exhaustiveness and on GNI inventories
directed by Eurostat to bring GNI estimates fully into line with ESA
95 have been delayed from their original timetable.

3.68. The Commission confirms the delay reported by the Court, but
believes there is sufficient time for the Commission to verify the new Mem-
ber States’ GNI calculations before the 2004 data become final in 2008
(in accordance with Article 10(8) of Council Regulation 1150/2000).

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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
available with significant delays.

charged with the
The Commission unit
inspection activities provided for
in the
Regulation (Council Regulation No 1150/
2000) acts on all cases of delay, and Member
States are invited to pay default interest when
appropriate.
In the course of its regular inspections the unit
increased its emphasis on accounting
has
matters, 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 including
late and duplicated entries, incorrect amounts and
entries that should have been made in the A
accounts.

charged with the
The Commission unit
inspection activities provided for
in the
Regulation (Council Regulation 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.

The Commission’s actions are satisfactory.

Certain Member States need to devote resources
to
systems
concerned.

bookkeeping

improving

the

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ANNEX 2

Supervisory systems and controls

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

Aspects of the Commission supervisory system

Traditional own resources

VAT

GNI

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

A

A

A

A

A Works well, few or minor improvements required.
B Works but improvements necessary: more direct verification of GNI data required.

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

A

A

A

A

A

A

A

B

A

A

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CHAPTER 4

The common agricultural policy

CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Scope of the audit

Work of the certifying bodies

IACS

Post-payment checks under Regulation (EEC) No 4045/89

The Court’s sample of transactions

Annual Activity Report of the Director-General for Agriculture

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 2003

Audit opinions of certifying bodies

Analysis of the work of certifying bodies

The Commission’s decision

Conformity decisions taken in 2003

Adequacy of corrections

24 months rule

Time taken to make corrections

Clearance of accounts decisions in recent years

The Court’s conclusions

Financial clearance decision

Conformity decisions

Follow-up to previous observations

Export refunds — destination and placing on the market

Support scheme for olive oil

Principal observations in Special Reports

Evaluation of farm incomes by the Commission

Paragraph

4.1-4.4

4.5-4.51

4.5-4.6

4.7-4.8

4.9-4.12

4.13-4.16

4.17

4.18-4.23

4.24-4.46

4.24-4.30

4.31-4.34

4.35-4.39

4.40-4.43

4.44-4.46

4.47-4.48

4.49-4.51

4.52-4.80

4.52

4.53-4.69

4.54

4.55-4.61

4.62-4.69

4.70-4.76

4.71-4.72

4.73

4.74

4.75-4.76

4.77-4.80

4.77-4.79

4.80

4.81-4.98

4.81-4.89

4.90-4.98

4.99-4.139

4.99-4.105

Management and supervision by the Commission of control measures and expenditure
relating to foot-and-mouth disease

4.106-4.112

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Recovery of irregular payments under the common agricultural policy

Paragraph

4.113-4.121

The introduction of a system of identification and registration of bovine animals (SIRB)
in the European Union

4.122-4.129

Sound financial management audit of the common organisation of the market in raw
tobacco

4.130-4.139

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INTRODUCTION

4.1.
Expenditure in 2003 on the common agricultural policy
(CAP), i.e. the European Agricultural Guidance and Guarantee Fund
totalled 44 378 million euro.
(EAGGF Guarantee Section),
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 and veal, 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 spending. These payments, which have
been an important part of the CAP since its reform in 1992, are pri-
marily intended to compensate farmers for reductions that have
been made in CAP prices.

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

(a)

(b)

(c)

(d)

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

the paying agencies subject these claims to administrative
checks and, on a sample basis, to on-the-spot-checks, mainly
through the Integrated Administration and Control System
(IACS);

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

the accounts and payments of the paying agency are examined
by an independent auditor (certifying body) who reports to the
Commission in February of the year following the budget year;

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

(f)

the Commission may then examine payments made by the
paying agencies and, if they were irregular, or if financial con-
trols 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 ‘disal-
lows’ such expenditure as part of the ‘clearance of accounts’ in
‘conformity decisions’). When it disallows expenditure the
Commission reduces its payments to paying agencies accord-
ingly.

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Graph 4.1 — Breakdown of EAGGF-Guarantee expenditure by economic category — financial year 2003

(1) Others: production, processing or consumption aid paid to producers or organisations of producers or processors and other measures.
(2)
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

Intervention: public and private storage, fruits and vegetables withdrawal arrangements, compulsory and voluntary distillation.

and milk levies).
The total of area aid, animal premiums together with other direct aid gives an overall total for direct aid of 67 % of CAP expenditure.

Source: The Commission’s annual accounts for 2003 — gross data.

Graph 4.2 — Breakdown of EAGGF-Guarantee expenditure by sector — financial year 2003

Source: The Commission’s annual accounts for 2003 — Volume II.

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4.4. The Commission’s Director-General for Agriculture produces
each year an activity report on the Directorate-General for Agricul-
ture’s (DG AGRI) 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 work of the certifying bodies (see paragraphs 4.7
to 4.8);

(b) evaluated supervisory systems, notably IACS and post-payment

checks (see paragraphs 4.9 to 4.16);

(c)

tested transactions directly (see paragraph 4.17);

(d) examined the report and declaration by the Director-General

for Agriculture (see paragraphs 4.18 to 4.23).

4.6.
Paragraphs 4.24 to 4.46 set out the Court’s assessment of the
legality and regularity of expenditure under the CAP, based mainly
on the above sources of evidence. Observations on the reliability of
the accounts are set out in Chapter 1, paragraphs 1.10 and 1.11.

Work of the certifying bodies

4.7. The certifying bodies’ audit of the paying agencies covers
their accounts, their processing of, and checks on, claims for pay-
ment of CAP subsidies, and whether they comply with the criteria
for accreditation (see paragraph 4.53). The relevant EU legislation
does not require the certifying bodies to examine claims at the level
of farmers or traders (see paragraph 4.8.(c)).

4.8. The Court has examined the work of certifying bodies cov-
ering 80 % of expenditure in 2003 as part of its annual examina-
tion of the clearance of accounts process (see paragraphs 4.55 to
4.61). Although the Commission had concerns about the work per-
formed by a number of the certifying bodies (see paragraph 4.65),
for the purpose of the Statement of Assurance the Court has drawn
the following general conclusions from their work:

4.8.

a)

the reports provide assurance that financial information pro-
vided by the paying agencies (and incorporated in the Commis-
sion’s accounts) is materially accurate, but this assurance does
not extend to information on debtors for a number of agencies
(see paragraph 4.61);

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(c) The work of the certifying body is to give assurance on the integral-

ity, accuracy and veracity of the accounts.

(b) overall, the reports provide assurance that claims for payment
are checked and processed by the paying agencies in accor-
dance with the applicable rules, but a significant number of
certifying bodies qualify their audit opinion in respect of cer-
tain areas of spending (see paragraph 4.54);

(c)

the work of the certifying bodies (as defined by Regulation (EC)
No 1663/95) is however not designed to, and does not, pro-
vide direct assurance that the information supplied by claim-
ants, and used by paying agencies to calculate the payment
due, is correct and therefore that payments are legal and regu-
lar.

IACS

4.9.
IACS comprises a computerised database of holdings and aid
applications, systems for identifying parcels of agricultural land and
identifying and registering animals, and a set of administrative
checks and on-farm inspections. IACS covers expenditure on area
aid schemes (see paragraphs 4.24 to 4.30) and animal premium
schemes (see paragraphs 4.31 to 4.34) directly. Claims for a num-
ber of other schemes must be compatible with the system (see para-
graph 4.35).

4.10. The Court has continued to examine the operation of IACS
(see paragraphs 4.9 to 4.13 of the Court’s 2002 Annual Report).
This year it examined the way IACS is implemented by a further
seven agencies (Niedersachsen (Germany), Extremadura (Spain),
Luxembourg, Austria, Finland, RPA and DARD (United Kingdom))
and returned to five agencies where problems were identified in
2002 (Bavaria (Germany), ONIC and Ofival (France), LASER (Neth-
erlands) and AGEA (Italy)).

4.11. The main findings of the Court’s audit are as follows:

4.11.

(a)

administrative checks (notably cross-checks to parcel or ani-
mal databases) were good or satisfactory in all paying agencies
except Luxembourg (area aid and animal premiums) while
some penalties on claims for animal premium were not calcu-
lated or applied correctly in Austria and Northern Ireland;

(a) The aspects raised by the Court in respect of Austria and Northern
Ireland are being followed up in the context of the clearance of
accounts procedure. The situation in Luxembourg is being dealt with
in the clearance of accounts procedure.

(b)

risk analysis and selection procedures for on-site inspections
were generally weak (see also 4.26);

(b) The Court’s remarks are in line with the Commission’s own findings,
which have resulted in detailed discussions with the Member States
and a significantly reinforced IACS legislation with effect from claim
year 2004.

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C 293/95

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(c) most on-site inspections were satisfactorily performed, but
some weaknesses were apparent at most paying agencies, and
the quality of inspection was lower for animal premiums than
for area aid (for example, DARD (Northern Ireland, United
Kingdom) where excessive notice of inspection visits was
given);

(c) The two regimes are substantially different. In particular, the various
bovine premia are directed towards different types of animals and
involve different conditions. This, in addition to the need to check the
movements of animals, has a significant impact on the nature of the
inspections.

(d)

reporting of the results of inspection was weak at many agen-
cies. Errors and anomalies in the figures sent to the Commis-
sion were significant for Niedersachsen, Luxembourg and RPA
England (all animal premiums). Reporting is less reliable for
animal premiums than for area aid claims.

Annexes 2 and 3 set out further details of the Court’s findings.

(d) The Commission has also identified the discrepancies mentioned by
the Court. Overall, the statistics are considered as reliable as neces-
sary for the purpose in hand i.e. to verify compliance with governing
legislation on eligibility and control regimes. The Court uses data
requested and collated by the Commission, and the tabulated presen-
tation and information is generally taken from data the Commission
has itself produced. The animal premium sector is more diverse than
the arable crop sector, explaining the difficulties in reporting.

The Court correctly states that the information supplied by Member
States is not always fully correct, or presented in the timely fashion
required by the governing legislation, in which case the Commission
ensures prompt follow-up and revision in the framework of the clear-
ance of accounts. In the case of Niedersachsen revised information has
been provided.

4.12.
For those 14 Member States which had satisfactorily imple-
mented IACS (not Greece), IACS inspection results represent an
important source of evidence of the legality and regularity of CAP
transactions. However, the errors noted above in the reporting of
results, particularly for checks on animal premiums (see para-
graphs 4.31 to 4.32), reduce the reliability of the figures produced,
while the fact that inspection results sent to the Commission do not
distinguish between the different area aid subsidies, and include
checks performed on forage areas, reduces the usefulness of the
information for area aid (see paragraphs 4.24 to 4.30).

4.12. The Commission considers the statistical reporting to be a very
good tool to verify the legality and regularity of CAP expenditure. In short,
such discrepancies are duly corrected under the clearance of accounts pro-
cedure.

While acknowledging that more detailed statistical information supplied by
the Member States could provide a more secure environment, the benefits
would be subject to ‘diminishing returns’ and there is a clear need to sim-
plify administrative procedures.

Post-payment checks under Regulation (EEC) No 4045/89

4.13. Member States are required to perform a programme of
post-payment scrutinies of commercial documentation for a range
of CAP subsidies, including export refunds, processing and trans-
formation subsidies, processing of cotton, olive oil and tobacco and
some rural development expenditure. Member States must satisfy
themselves that transactions have taken place and been executed
correctly; and must take steps to recover sums lost as a result of
irregularity or negligence.

C 293/96

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.14. The Court examined the application of the regulation
through visits to 11 Member States and to the Commission (1). The
audit covered the period from July 2002 to June 2003, for which
the Member States had to report by the end of 2003. This covered,
in most Member States, payments made in 2001. For each Member
State the planning, execution, reporting and monitoring of the
checks was examined. The Court examined the quality of the sys-
tems which will be applied by Member States in the future to check
and, if necessary, correct subsidies paid in 2003.

4.15. The Court found that:

4.15.

(a)

coordinating bodies in the Member States generally prepared
scrutiny plans in accordance with the regulation, but only half
of checks planned for the period were complete at the end of
2003, although Member States had reported a higher number
to the Commission;

(a) According to the Member States’ annual reports the number of scru-
tinies completed was 2 469 which is 63 % of the 3 907 checks
planned for the period.

A further 33 % of the planned scrutinies were indicated as ‘ongoing’;
the fieldwork for most of these had been already performed, and either
the report remained to be finalised or a reply was awaited to a mutual
assistance request made to another Member State. A deadline of up
to six months is permitted for replies to mutual assistance requests.

(b) one fifth of scrutinies examined by the Court were wholly
unreliable. Fewer than one in three were considered wholly
satisfactory in the Court’s view (2);

(b) The Commission is not in a position to confirm the conclusion of the
Court. The Commission will take these elements into consideration
in its future work in relation to Regulation (EEC) No 4045/89 con-
trols.

(c)

the annual reports by the coordinating bodies do not present
statistics on the results of scrutinies in a format, which permits
meaningful analysis and comparison, notably because there is
no legislative requirement to report differing rates of error in
different areas of expenditure;

(c)

Information received is analysed and treated by the Commission ser-
vices in order to provide elements of comparison between Member
States.

(d)

the Commission had not put in place a programme of inspec-
tions to ensure the effectiveness of checks carried out (the last
inspections were made in 1999/2000);

(d)

Such programmes of inspections have taken place in previous years
based on risk analysis and another round is currently being carried
out.

Moreover, implementation of Regulation (EEC) No 4045/89 is also
evaluated in the field of export refunds, the largest area of expenditure
covered by the regulation. The recent audit enquiries on differentiated
refunds, prefinancing and origin each included an assessment of the
contribution made by Regulation (EEC) No 4045/89 scrutinies to
addressing the specific risks involved.

(1) Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Neth-

erlands, Portugal, United Kingdom.

(2) Wholly unreliable: not performed or not covering a number of risks or
eligibility conditions; wholly satisfactory: covering all key risks and eli-
gibility conditions.

30.11.2004

EN

Official Journal of the European Union

C 293/97

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(e)

the Commission made no written response to Member States
on their risk analyses, scrutiny plans or annual reports (3).

(e)

For the period under review, the Commission services obtained addi-
tional assurance through informal discussions and requests for infor-
mation.

4.16. Where they are performed properly, post-payment scruti-
nies provide a valuable tool in the identification of irregular CAP
payments (see Graph 4.3). However, in the form in which they are
currently reported by Member States, they do not assist the Com-
mission in identifying and assessing the key risks of irregularity.

In the course of 2004 the Commission services implemented signifi-
cant improvements in the monitoring and control of this aspect
through formal letters to several Member States aiming in particular
to improve the risk analysis proposed.

4.16. More than 3 000 scrutinies are performed annually. During the
period in question 320 irregularities were detected by the end of 2003 and
this number will increase when the ongoing scrutinies are completed. Dur-
ing the period 2001 to 2003 860 irregularities were communicated to
OLAF as a result of application of Regulation (EEC) No 4045/89. The
post-payment scrutinies are not only an important tool for identification of
irregularities but also serve as a considerable preventive element.

Graph 4.3 — Regulation (EEC) No 4045/89: Number of post-payment checks performed and irregularities identified
1997/1998 to 2001/2002

Source: Commission.

The Court’s sample of transactions

4.17. The Court examined a representative sample of 2003 pay-
ments drawn from the expenditure of 25 paying agencies (which
were collectively responsible for 75 % of CAP expenditure) as well
as from the direct expenditure of the Commission.

4.17. The control systems for CAP expenditure generally provide for
physical checks on a percentage of transactions, 100 % documentary con-
trols, dissuasive sanctions, and either post-payment checks according to
Regulation (EEC) No 4045/89 or/and compatibility with IACS.

(3) According to Regulation (EEC) No 4045/89 ‘the programmes estab-
lished by the Member States and forwarded to the Commission, shall be
implemented by the Member States, if, within eight weeks, the Commis-
sion has not made known its comments’.

C 293/98

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Through these tests, the Court sought to obtain direct evidence that
payments were properly made for an eligible activity. Such tests
provide good evidence for expenditure on area aid subsidies and, to
a lesser extent, animal premiums where physical evidence is usually
available to the auditor. By contrast, in areas such as export refunds
or aids paid on the basis of the quantity produced, the auditor can
only check documents. The extent to which such documents pro-
vide reliable evidence is influenced by both the nature of the trans-
action and the control system concerned (see also paragraphs 4.36,
4.37 and 4.46).

Annual activity report of the Director-General for Agriculture

4.18. The activity report describes what DG AGRI has done dur-
ing 2003 and contains a declaration by the Director-General that
control procedures give assurance on the legality and regularity of
underlying transactions. It seeks to provide management assurance
that the system of internal control is working satisfactorily. The
Director-General’s declaration includes five qualifications. Two of
these relate to CAP expenditure: continuing concerns about the
management and administration of the International Olive Oil
Council; and the failure of Greece to fully implement the IACS. The
report discusses progress made on these two issues since 2002 and
concludes that despite the progress achieved, it is not yet possible
to know whether the problems noted have been resolved.

For CAP expenditure where management is shared with the

4.19.
Member States the basis for the Director-General’s declaration is:

(a)

the financial clearance decision for 2002 (not 2003);

(b) conformity decisions (see paragraph 4.70) taken during 2003,
which do not include corrections in respect of 2003. (Confor-
mity decisions on expenditure in 2003 will be taken in future
years) (4).

4.20.
In other words, the declaration is relevant to transactions
undertaken in years previous to 2003. It is not designed to, and
does not, provide assurance on which the Court can rely for the
2003 Statement of Assurance.

(4) The Director-General’s declaration is drawn up in accordance with the
Commission’s charter of tasks and responsibilities of authorising officers
by delegation, issued in 2004. This states that, for expenditure under
shared management, the annual activity report should be related, not to
the accounts of the year for which the activity report is produced, but to
accounts for earlier years. Article 60 of the Financial Regulation how-
ever provides that ‘the authorising officer shall be responsible for ensur-
ing that the requirements of legality and regularity are complied with (…)
and shall report to his/her institution on the performance of his/her
duties in the form of an annual activity report (…)’.

4.19 and 4.20. The declaration of assurance of the Director-General of
DG AGRI is, as far as EAGGF Guarantee is concerned, based on the fol-
lowing elements:

The existence of an effective clearance of accounts procedure as foreseen by
Article 53(5) of the Financial Regulation. Financial corrections imposed
are based on the Commission audits carried out in Member States. The fact
that clearance of accounts decisions are made some years after the year of
the expenditure concerned is an integral part of the procedure, which
includes the right of Member States to respond to the findings.

The assurance which can be gained from the accreditation of paying agen-
cies, the annual certification procedure and the IACS. These elements per-
mit a great deal of reliance to be placed on the control over the expenditure
declared.

A number of other elements contribute to the basis on which the assurance
is obtained. These include results of audits made by the Commission’s Inter-
nal Audit Service and the Internal Audit Capability and possible informa-
tion received from OLAF. The Directorate-General for Agriculture also
takes account of information received from the Court of Auditors.

As can be seen from the above, the declaration does cover transactions in
2003.

30.11.2004

EN

Official Journal of the European Union

C 293/99

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.21. The supervisory systems in place for the CAP provide DG
AGRI with a large amount of data of relevance to the legality and
regularity of the expenditure concerned. In particular IACS identi-
fies many incorrect claims and blocks payments and can penalise
farmers who significantly overstate claims for subsidies.

4.22. The annual activity report does not make reference to the
results of checks under supervisory systems; nor to apparent weak-
nesses in these systems. Nor does it mention the Commission’s con-
tinuing postponement of the clearance of the accounts for 21 pay-
ing agencies for 2001 and 2002 (see paragraph 4.66), nor
comment on the nature and budgetary impact of conformity deci-
sions taken in 2003.

4.22. The annual activity report shall present the main achievements
within the activities carried out by a service and evaluate to what extent they
fulfil the programme announced in the annual management plan. The con-
trol systems in place shall be described and weaknesses identified and
deemed to have a material impact on the statement of assurance of the
Director-General shall be subject to a reservation and be duly qualified and
quantified.

Among these control systems, the annual activity report of DG AGRI for
2003 provides information in particular about the clearance of accounts
systems in place, the clearance decisions made by the Commission during
the year and it quantifies the conformity decisions. There is an explicit effort
made to keep the report relatively short and therefore not all items are
reported on specifically. As the Court indicates, DG AGRI could consider
adopting a broader approach in its future annual activity reports, includ-
ing a more comprehensive description of the elements on which the assur-
ance of the authorising officer by delegation is based.

4.23. The report notes that 14 of the internal control standards
had been fully implemented by 31 December 2003. By February
2004 only four remained to be partly implemented. The Commis-
sion’s internal audit service carried out an in-depth audit of DG
AGRI in October 2003, making a number of observations in respect
of internal control standards. These recommendations were, for the
most part, accepted by DG AGRI and remedial action was under-
taken as described in the annual activity report.

The Court’s assessment of areas of CAP spending

Area aid schemes

4.24.
Spending on arable crop subsidies paid on an area aid basis
amounted to 16 340 million euro in 2003, 36 % of CAP expendi-
ture. All of this expenditure is covered by IACS.

C 293/100

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.25. The IACS inspection results on declarations of area for 2002
(resulting in subsidy payments in 2003) are set out in Table 4.1.
These results cover arable crops (56 % of the total area inspected),
and also forage areas (5), which are not subsidised on the basis of
the area cultivated. It is not possible to distinguish between inspec-
tion results for different crops (wheat, protein crops, durum wheat,
etc.) or for forage areas (on which area aid is not paid). The overall
figures given do not, therefore, relate solely to area aid schemes, and
mask variations between different aid schemes.

4.25. While acknowledging that more detailed statistical information
supplied by the Member States could provide a more secure environment,
the benefits would be subject to ‘diminishing returns’ and there is a clear
need to simplify administrative procedures.

4.26.
If the comparison is limited to the 14 Member States which had
satisfactorily implemented IACS (see point 4.47 a), the overall error rate
reported by the Member States to the Commission is as follows:

Level of errors

Overall error rate

Error rate
Random selection

Error rate
Risk evaluation

> 0 %

> 3 %

> 20 %

> 30 %

1,5 %

1,4 %

0,9 %

0,5 %

1,6 %

1,4 %

0,9 %

0,4 %

1,5 %

1,4 %

0,9 %

0,5 %

As noted by the Court, the overall figures are influenced by the greater use
of remote sensing in risk-based inspection in mainly Finland, France, Ire-
land and United Kingdom.

The IACS Regulation has been amended as regards risk analysis, especially
in introducing an obligation for Member States to review annually the effi-
ciency of the risk factors used.

4.27.
If Greece is excluded, the tests performed on a random basis show
essentially the same rate of error as those selected on the basis of an analy-
sis of risk.

4.26. The overall rate of error reported to the Commission is
1,7 % (compared with 1,3 % for subsidy payments made in 2002
and 2,4 % for 2001). The overall total includes the results of checks
on claims selected at random and on the basis of an analysis of risk.
The overall rate of error found in random checks is 2,4 %, com-
pared to 1,5 % for checks selected on the basis of an evaluation of
risk (6).

4.27.
It is remarkable that tests performed on a random basis
show a higher rate of error than those selected on the basis of an
analysis of risk. Some Member States report higher rates of error for
tests based on risk analysis than for random testing (Sweden (3,3 %
error in risk-based checks, 1,5 % at random), Italy (3,3 % on basis
of risk, 1,9 % at random) and Austria (2,5 % on basis of risk, 0,7 %
at random)). At the other extreme Greece reported 1,9 % for risk-
based sampling compared to 13,5 % for random sampling.

(5) Forage area comprises pasture and land devoted to production of fodder
crops which are not subsidised on an area aid basis. Forage areas are used
in the calculation of stocking density for animal premiums.

(6) The overall figures here may be influenced by the greater use of remote
sensing in risk-based inspection (58 % of the area checked) compared to
random inspections (50 % of the area checked) given that remote sens-
ing appears, in general, to be less reliable. However, this factor cannot
explain the lower error rate found for risk-based checks in Greece, Spain
or Luxembourg.

30.11.2004

EN

Official Journal of the European Union

C 293/101

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C 293/102

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.28. Member States checked 8,6 % of claims on the spot, repre-
senting 11,9 % of the area for which claims were made. Member
States found errors in more than one in three of the claims checked.
Three fifths of checks were made using remote-sensing (typically
aerial photographs), the remainder being classic on-site inspections.
There were marked differences among Member States (see-
Graph 4.4). For example:

(a) Luxembourg found an error in 80 % of the claims checked; Ire-
land, where most checks were of forage areas, found the low-
est frequency of errors (9 %);

(b) detected errors had the greatest impact on the area claimed in
Greece and Italy where they amounted to 3,9 % and 3,3 %
respectively of the area checked, followed by Sweden (2,9 %)
and Luxembourg (2,8 %);

(c) Portugal (98 %) made most use of remote sensing. Aerial pho-
tographs were not used at all by either Austria or Luxembourg.

Errors found by the IACS inspectors can result in the appli-
4.29.
cation of significant penalties. Where the error found is of 3 % or
lower, subsidy for the crop group concerned is paid for the amount
claimed less the amount of error. Where inspection finds an error
of between 3 % and 20 %, payment is reduced by the amount of the
error, and a penalty equal to twice the amount of the error is
applied. Where inspectors find an error exceeding 20 % of the
amount claimed, the entire subsidy for that crop group is with-
drawn. Overall the Member States found errors exceeding 20 % of

Graph 4.4 — Area aid. Results of field inspections: percentage of applications inspected which were overstated

NB: Tests performed in year N are relevant to payments made in year N + 1.
Source: DG AGRI — IACS 2001 and 2002 Statistics.

30.11.2004

EN

Official Journal of the European Union

C 293/103

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.31 and 4.32. As indicated in point 4.11 d) the inspection statistics
are under scrutiny and subject to audit as part of the annual work pro-
gramme.

the amount claimed in nearly one in ten of claims inspected. Such
errors were most frequently identified in Spain (one in five claims
inspected), Portugal and Luxembourg (one in seven) and Greece
(one in eight).

4.30. Taken as a whole, the results of the Court’s testing of trans-
actions (76 of which related to area aid payments) are broadly con-
sistent with the results of random testing performed by the Mem-
ber States, and the distribution follows closely the pattern of
previous years:

(a)

the majority of the payments were free of error;

(b) around one in three was affected by relatively small errors of
measurement (no more than double the 3 % error rate for
which no penalties are imposed under IACS (paragraph 4.29)).
As in previous years, errors of this nature and scale, while fre-
quent, have no marked impact on overall expenditure;

(c) a relatively small number of wholly or largely unjustified claims
is a greater source of irregular expenditure than these small
measurement errors (7).

Animal premium schemes

Spending on animal premiums amounted to 9 890 million
4.31.
euro in 2003, 22 % of CAP expenditure. IACS inspection statistics
for animal premiums show the number of animals claimed by farm-
ers which inspectors found not to exist or not to be eligible for sub-
sidy. As discussed in paragraph 4.12, the Court considers these sta-
tistics to be less reliable than the equivalent statistics for area aid
applications. In 2002 (i.e. in respect of claims paid in 2003), for the
largest scheme, the suckler cow premium (see Table 4.2 and
Graph 4.5), 14 Member States inspected 18,7 % of the animals
claimed, finding 2,0 % of these to be missing or ineligible (in 2001,
6,4 % were found to be ineligible). For the special beef premium the
percentage of animals missing or disallowed was 3,8 % in 2002, for
the extensification premium 1,5 % (8), and for the sheep and goat
premiums 5,6 %.

4.32. Overall, the amount of error found by IACS inspections of
animals continues to show considerable variation from year to year
and from Member State to Member State.

(7) For example, this year the Court’s testing identified one claim by a farmer
in Spain who had sought payment on a piece of land that was too densely
planted with trees to be eligible for subsidy for arable crops. In 2002 the
audit identified two payments where the error exceeded 20 % of the area
claimed (in Greece and France). And in 2001 the Court also identified
two declarations which were largely or wholly unfounded, involving pro-
tein crops in Italy, and maize production in Greece.

(8) Ireland, Italy, Austria and Finland all report no errors for extensification

premiums. Overall results for this measure appear unreliable.

C 293/104

EN

Official Journal of the European Union

30.11.2004

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30.11.2004

EN

Official Journal of the European Union

C 293/105

Graph 4.5 — Suckler cow premium: percentage of claims inspected with errors

(1) This information is not available as Luxembourg failed to provide the Commission with their results.
NB 1: Average figures are for claims partially and fully rejected.
NB 2: Tests performed in year N are relevant to payments made in year N + 1.
Source: DG AGRI — IACS 2002 Statistics, summarising inspection results provided by the Member States.

4.33. The direct testing performed by the Court revealed both
errors in the amount claimed and deficiencies in the operation of
control systems:

4.33. The Commission is aware of these problems and through the clear-
ance of accounts procedure has urged Member States to take the necessary
actions to improve the situation. It is anticipated that such improvements
will be forthcoming from claim year 2003 onwards.

(a) over-declaration of livestock (Italy) where inspectors had failed
to detect that the farmer had fewer eligible ewes than he
declared in his claim for subsidy;

(b) poor management of documentation and the recording of live-
stock data by beneficiaries (Greece, Spain, France, Italy and Por-
tugal);

(c) differences in the number of animals present on the farm and
recorded in the farm registrar by beneficiaries (Spain, France
and Portugal).

4.34.
Frequent animal movements and the complex conditions of
the animal premium schemes are two of the 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 inherent risk of overpayment of ani-
mal premiums.

4.34. The various bovine premia are directed towards different types of
animals and have to comply with different conditions. There is also a wider
variety in practices/conditions over Europe in the animal sector compared
to the area aids. The risk that some farmers over-declare cannot be elimi-
nated, but it is reduced by a dissuasive control and sanctions system.

C 293/106

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Subsidies paid on the basis of quantity produced

4.35. The EU subsidises olive oil, cotton, tobacco and dried fod-
der production (5 297 million euro, 12 % of CAP expenditure in
2003) on the basis of the quantity produced, rather than the area
used to grow the crop. Expenditure of this kind poses particular
risks:

(a) quantities produced may be overstated (if the activities of pro-
ducers are not properly supervised and/or their records are not
reliable there is no other way of verifying the figures declared);

(b) producers have an incentive to understate the area devoted to
the production of such crops, and to claim they used some of
the area for the production of crops subsidised on an area aid
basis.

4.36. To seek to reduce such risks, Community legislation pro-
vides for a number of control mechanisms. These include:

(a)

requiring claims to be compatible with IACS area declarations;

(b) a number of requirements for processors (for example, quality
of weighing equipment, standard accounting information);

(c)

requiring Greece, Spain, France, Italy and Portugal to set up an
olive tree register and a geographical information system (9)
and (except in France) setting up olive oil control agencies to
carry out checks on mills, producers and producer associations.

If these control mechanisms do not operate effectively there can be
no assurance on the accuracy of payments made.

4.36. The Commission agrees with the Court’s view and has identified
the same particular risks as regards production aid. The checking systems
for the various COMs take account of these risks. If these systems are not
applied correctly, financial corrections are applied as part of the clearance
of accounts procedure.

4.37. The Court’s audit of a sample of transactions identified a
number of errors and of deficiencies:

4.37.

(a)

in Greece, staff in regional offices did not always have access
to the IACS database, which is an obstacle to effective on-site
checks (see paragraph 4.35(b)). Producers have an incentive to
understate the area cultivated with crops paid on actual pro-
duction and to overstate crops paid on an area basis;

(a) The Commission is aware of the shortcomings of the IACS in Greece,
which have resulted in a large number of financial corrections as
regards field crops. The consequences of these shortcomings for checks
on the schemes for production aid are taken into account when the
accounts for those schemes are cleared.

(9) The geographical information system links parcel identification, regis-
ters and aerial photographs to allow administrative checks on the num-
ber and location of olive trees.

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THE COMMISSION’S REPLIES

(b) neither Greece nor Spain had a functioning olive oil GIS for
the period relevant to payments made in 2003, and Spain
failed to perform the number of on-site inspections required to
compensate for this;

(b)

Payments in 2003 were for the 2001/02 marketing year. Along
with checks on mills, the olive tree register is one element in the sys-
tem of checking production aid for olive oil. It is compulsory only
from the 2003/04 marketing year. In earlier years, the lack of the
register could be offset by on-the-spot checks on crop declarations. As
far as the Commission is aware, the main Autonomous Communi-
ties used an olive tree register for 2001/02, and so carried out no
on-the-spot checks. This point, along with the inspection system in
Greece, is being considered as part of the clearance of accounts pro-
cedure.

(c)

in Greece the Court found a quantity of cotton rejected by a
ginning mill which nevertheless received subsidy.

(c) The Commission will look at the case the Court mentions.

4.38. The findings of the olive oil control agencies are set out in
Tables 4.3 and 4.4.

Table 4.3 — Olive oil inspection agencies: checks on mills (2001 to 2002), relating to claims paid in 2003

Mills checked

In depth

Summary

Proposals to withdraw
authorisation

Member State

Number of
mills

Total

Greece

Spain

Italy

Portugal

2 541

1 715

5 737

710

Total

10 703

No

1 146

1 001

3 144

449

5 740

%

45,1

58,4

54,8

63,2

53,6

No

805

881

1 881

449

4 016

%

31,7

51,4

32,8

63,2

37,5

No

341

120

1 263

(1)

1 724

%

13,4

7,0

22,0

(1)

16,1

No

149

9

298

74

530

(1) Portugal do not carry out summary checks.

Source: Annual Reports for 2001 to 2002 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

% of mills
checked

13,0

0,9

9,5

16,5

9,2

Table 4.4 — Olive oil inspection agencies: checks on producers (2001 to 2002), relating to claims paid in 2003

Producers checked

Member State

Number of
producers

Total

On site

Using documents

Greece

Spain

Italy

Portugal

No

4 562

1 446

1 879

2 519

854 780

435 605

972 499

142 464

Total

2 405 348

10 406

%

0,5

0,3

0,2

1,8

0,4

No

2 811

753

298

1 621

5 483

%

0,3

0,2

0,0

1,1

0,2

No

1 751

693

1 581

898

4 923

%

0,2

0,2

0,2

0,6

0,2

Source: Annual Reports for 2001 to 2002 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

Aid payments withdrawn or
reduced

No

27

149

60

199

435

% of producers
checked

0,6

10,3

3,2

7,9

4,2

C 293/108

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.39. The Commission monitors the Member States’ checks on the work
of the inspection agencies. Account is taken of any shortcomings in the pro-
cedures for clearing the accounts relating to production aid for olive oil.

4.42. The errors highlighted by the Certifying Bodies in respect of rural
development expenditure will be followed up in the framework of the clear-
ance of accounts procedure (financial and compliance audit) and financial
corrections will be proposed if they are found to imply a risk for the Fund.

4.39. A key part of the agencies’ work relates to checks on olive
mills (producers are paid on the basis of quantities weighed and
processed at the mills). Where the agencies find discrepancies (such
as irregular accounting or reporting increased quantities or yields)
at the mills they may propose a range of penalties, the most serious
being to remove the mill from the approved list. In 2002 (checks
affecting 2003 expenditure) the agencies proposed this course of
action at one in 10 of the mills inspected. In practice, ministries of
agriculture of the Member States often impose a lesser penalty. For
example, in Greece, the ministry of agriculture only followed the
recommendation of the olive oil control agency in four out of
241 cases (10). The report of the Italian agency provides an estimate
of the discrepancy between the quantity of olives declared in
demands for subsidy (663 200 tonnes) and the estimated quantity
entering mills (573 500 tonnes). The quantity on which subsidy
was claimed exceeds estimated production by 15,6 % in 2002, and
by an average of 8,1 % over the period 1984 to 2002.

Rural development

4.40. Rural development expenditure amounted to 4 719 million
euro in 2003, 11 % of CAP spending. This covers spending on agri-
environmental schemes, forestry, investments, support for young
and for retiring farmers.

4.41.
Schemes of this kind frequently have relatively complex eli-
gibility conditions which sometimes need to be checked over sev-
eral years.

4.42. The certifying bodies have qualified their audit opinion on
the accounts of three agencies which specialise in rural development
measures (Bayern Umwelt (Germany), Cnasea (France) and Ifadap
(Portugal)). Errors affecting rural development expenditure are
involved in the audit qualification of a further five agencies (Bayern
Landwirtschaft (Germany), INGA (Portugal), NRW Westfalen (Ger-
many), Région Wallonne (Belgium), Saarland (Germany)).

4.43. The errors found by the Court include:

(a)

(b)

reimbursement of ineligible costs (Germany and France);

relatively small overstatements of the area claimed for environ-
mental schemes (Finland, France and Austria).

(10) In 2001 to 2002 the Greek olive oil agency recommended withdrawing
approval for 149 olive mills and in 2000 to 2001 for 211 mills. In
2000 to 2001 the Sanction Commission of the Ministry of Agriculture
considered 144 recommendations and implemented the recommenda-
tions in four cases. In 2001 to 2002 it considered 241 recommenda-
tions, withdrawing approval from five mills.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Other expenditure

Expenditure not covered by the above headings amounts to
4.44.
8 132 million euro. This includes export refunds, which are paid to
cover the difference between EU and world market prices and allow
surplus EU production to be disposed of on world markets, subsi-
dies for the withdrawal and storage of excess production, a number
of small subsidy schemes, and veterinary expenses.

4.45. The Court continues to find serious errors in these areas of
spending, for example in subsidies for dried grapes (Greece),
reported on in the 2002 Annual Report, and the treatment of direct
expenditure on veterinary measures (France).

4.46. The Court examined two control systems relevant to expen-
diture not covered by IACS and predominantly classified here as
other expenditure:

(a) post-payment checks (see paragraphs 4.13 to 4.16) were found
to be of a low standard in terms of both the performance of
inspections (one in five proving wholly unreliable) and the
reporting of errors (the Commission has no information on
the type of expenditure most at risk);

(b) physical and documentary checks on goods at the time of
export cover at least 5 % of subsidised exports (11). All Mem-
ber States reported the number of checks performed to the
Commission, but several did not communicate the number of
errors detected. The results do not indicate the amount of sub-
sidy claims rejected, nor the type of export refunds most
affected.

4.45. The Commission has and will continue to propose financial cor-
rections for deficiencies found in subsidies for dried grapes, the aid for which
is mainly concentrated in Greece.

As for the veterinary measures in France, the problem highlighted by the
Court concerned the late submission of the request for the financial contri-
bution. The late request was exceptionally accepted as priority was given to
the eradication of TSE. The late submission was acknowledged and regu-
larized in the corresponding Commission Decision concerning the financ-
ing of the TSE programs submitted by all the Member States, and there-
fore in the Commission’s view does not constitute an error.

4.46.

(a)

commercial documents under Regulation (EEC)
Scrutinies of
No 4045/89 are an ideal complement to front-line controls and
offer increased assurance of the sound execution of the budget. These
controls are separate from and additional to the pre-payment control
and sanctions systems applying to all expenditure.

(b) The Court raised this matter in its 2002 annual report. The Com-
mission, which was already aware of this necessity, has already taken
steps to start collecting data on the financial volume of the exports
subject to physical checks.

Conclusion

4.47. As in previous years, the Court found that CAP expenditure,
viewed as a whole, and drawing on all available evidence, was mate-
rially affected by error. The Court notes, however, that different
degrees of risk attach to the main categories of CAP spending:

4.47.

a)

in the 14 Member States which in 2003 had satisfactorily
implemented IACS, expenditure on arable crops appears to be
the lowest risk category of CAP expenditure, and subject to the
most effective control system;

(11) Council Regulation (EEC) No 386/90.

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THE COMMISSION’S REPLIES

(b)

animal premiums are subject to a generally satisfactory and
operational system of checks, which results in the rejection or
correction of many claims made by farmers. However, largely
because of frequent animal movements, final expenditure
remains subject to a greater degree of risk than arable pay-
ments;

(c)

categories of expenditure which cannot be checked through
IACS pose greater risks because the systems available to con-
trol them are not as effective.

(c) 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. The 2003 CAP
Reform, followed by the second wave of the Reform in 2004 on
Mediterranean products, will further enhance this positive evolution.
In addition, many of the schemes referred to by the Court became
compulsorily IACS compatible from 1 January 2003. Regarding
export refunds and some intervention measures, the Commission
agrees that those schemes are exposed to greater risk. Nevertheless,
the continuing reduction in the incidence of irregularities communi-
cated by Member States seems to suggest that the effort made over
the years to strengthen controls and sanctions has not been without
effect.

4.48. The Court identified a number of ways in which the opera-
tion of supervisory systems could and should be improved (see
paragraph 4.49).

Recommendations

4.49. The Commission should seek to:

4.49.

(a) The Commission agrees that, in cases where controls have been poorly

executed, improvements should be sought.

(b) The Commission services consider the current system of statistical
reporting to be an efficient tool. When information supplied by
Member States appears not to be fully correct, the Commission ser-
vices ensure prompt follow-up and revision in the framework of the
clearance of accounts.

(c) The Commission is in fact already implementing this recommenda-
tion in performing detailed analyses each year, when establishing the
annual work plan.

(a)

(b)

identify the reason for poor-quality checks of CAP spending (in
particular for post-payment checks) and ways in which they
could be improved;

improve the format of reporting of the results for all supervi-
sory systems, providing a breakdown of the information avail-
able on the number and value of payments checked and of
errors found by budgetary chapter (for example, distinguish-
ing between findings for area aid and for forage areas, and,
within area subsidies, between results for the basic cereal sub-
sidy and the supplement for durum wheat);

(c) use the information so provided to compare the results pro-

vided by the different Member States in order to:

(i)

(ii)

identify subsidies which are particularly subject to fraud
and error;

evaluate the performance of the different paying agencies
in preventing and detecting errors; and

(iii) propose changes to regulations and to systems aimed at
eliminating areas of risk and reducing the rate of error.

30.11.2004

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C 293/111

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.50.
In the light of the Court’s findings for 2002 and 2003, and
the comments made by the Commission in the reply to last year’s
report, the Court recommends that the Commission investigate the
reason why, for IACS checks on areas, tests performed on a random
basis continue to show a higher rate of error than those selected on
the basis of an analysis of risk.

4.50.

See reply to point 4.26.

In its efforts to improve the IACS, the Commission has amended the IACS
Commission Regulation in January 2004 as regards risk analysis, espe-
cially in introducing an obligation for Member States to review annually
the efficiency of the risk factors used.

4.51. The Court considers that a summary of the results of super-
visory checks should be included in the Annual Activity Report of
the Director-General for Agriculture (see also paragraph 4.22).

4.51. DG AGRI will take account of the Court’s recommendation for
future annual activity reports.

CLEARANCE OF ACCOUNTS

Introduction

4.52. Clearance of accounts is a procedure designed to ensure that
CAP payments have been legal and regular and that appropriate
amounts are definitively charged to the Community budget (12). It
involves:

(a) an annual ‘financial clearance’ decision, in which the Commis-
sion decides whether to accept the CAP paying agencies’
accounts for the preceding budgetary year in the light of reports
by the ‘certifying bodies’ which audit them;

(b)

‘conformity decisions’ under which the Commission decides
whether to ‘disallow’ expenditure (i.e. refuse to finance it defini-
tively for the Community budget) and ‘make corrections’, (i.e.
reduce payments to the Member States concerned accordingly).
Such decisions relate to several EAGGF years. In most cases,
disallowance takes place because the Commission has identi-
fied weaknesses in Member States’ control systems, and the
Commission applies a scale of flat-rate corrections based on the
seriousness of the management failure. The process is selective,
not comprehensive. The Commission examines particular areas
of expenditure in particular Member States as the basis for its
conformity decisions.

The Court examined how these arrangements functioned in 2003.

(12) In cases of shared or decentralised management, in order to ensure that
the funds are used in accordance with the applicable rules, the Commis-
sion shall apply clearance of accounts procedures or financial correc-
tion mechanisms which enable it to assume financial responsibility for
the implementation of the budget in accordance with Article 274 of the
EC Treaty and Article 179 of the Euratom Treaty; Article 53.5 of the
Financial Regulation, Council Regulation (EC, Euratom) No 1605/2002
of 25 June 2002 (OJ L 248, 16.9.2002, p. 1).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Financial clearance decision for 2003

4.53. The Court examined in detail the reports produced by the
certifying bodies of the 25 paying agencies (see Table 4.5) from
which transactions for substantive testing were selected by the
Court for the Statement of Assurance purposes. These reports indi-
cate whether, in the view of the certifying bodies, paying agencies’
accounts are true, complete and accurate (13); and whether the agen-
cies’ control systems are satisfactory. In addition, the Court exam-
ined any other reports on paying agencies for which a qualified cer-
tificate was given. The Court sought to establish whether:

(a)

reliance could be placed on the work of the certifying bodies;

(b)

the Commission’s financial clearance decision took proper
account of the work of the certifying bodies and was otherwise
satisfactory.

Audit opinions of certifying bodies

4.54.
For the financial year ending 15 October 2003, 64 paying
agencies managing 32,9 billion euro received an unqualified audit
opinion (see Table 4.5). The remaining 21 agencies, managing
11,3 billion euro, received a qualified or negative opinion because
of:

(a) material levels of error in the expenditure of Ifadap (Portugal),
Baden-Württemberg, Bayern Umwelt (Germany) and Catalunya
(Spain) (14);

(b)

the inability of some certifying bodies to provide assurance on
certain areas of spending (scope limitation) because of specific
weaknesses in control systems (Saarland and NRW-Westfalen-
Lippe, Ofival, Oniflhor, Cnasea), difficulties in obtaining infor-
mation from paying agencies or further information requested
(Hamburg, Berlin and Bayern StMiLF) or decisions to audit
advances paid during 2003 as part of the 2004 certification
work (Ofival (15));

(13) Article 3 of Commission Regulation (EC) No 1663/95 (OJ L 158,

8.7.1995, p. 6).

(14) The French certifying body also made reservations for material level of
errors amounting to 13,8 million euro on the accounts of Ofival,
Cnasea, Odeadom and SDE.

(15) Due to the 2003 droughts, five Member States (Germany, France, Italy,
Luxembourg, Portugal) were authorised to make advance payments of
2004 aid to livestock farmers under specified schemes during the period
1 September to 15 October 2003. In total 501,4 million euro was made
available for this purpose of which 225 million euro for France (Com-
mission Regulation (EC) No 1621/2003 (OJ L 231, 17.9.2003, p. 7)).

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C 293/113

Table 4.5 — Paying agencies by expenditure declared in 2003

No

Member State

Paying agency

Amounts declared in
million euro

% of total

Qualified accounts

Disjoined accounts (1)

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85

Italy
France
Greece
United Kingdom
France
Ireland
Spain
Denmark
Germany
Austria
France
Spain
Spain
Finland
France
Portugal
Germany
France
Spain
Spain
Germany
Germany
France
Germany
Germany

Sweden
Germany
United Kingdom
Belgium
Spain
Netherlands
Germany
Netherlands
France
Spain
Germany
Germany
Germany
Italy
Netherlands
United Kingdom
France
Germany
United Kingdom
Belgium
Germany
Belgium
Germany
Germany
Spain
Spain
France
Spain
Spain
Germany
Italy
Portugal
Spain
Italy
Spain
Spain
Netherlands
Ireland
Spain
Italy
Austria
Netherlands
Italy
Luxembourg
Spain
Italy
Spain
Netherlands
Spain
France
Germany
United Kingdom
Belgium
France
Germany
Germany
United Kingdom
Germany
Germany
Spain

AGEA
ONIC
Opekepe
RPA
Ofival
DAF
Andalucia
EU-direktoratet
Bayern, Landwirtschaft
AMA
ONIOL
Castilla — La Mancha
Castilla — Léon
MMM
Cnasea
INGA
Niedersachsen
Onilait
Extremadura
FEGA
Baden-Württemberg
Mecklenburg-Vorpommern
Oniflhor
Sachsen-Anhalt
Bayern, Umwelt

4 891,34
4 594,60
2 765,73
2 758,04
2 380,50
1 893,02
1 741,57
1 219,66
1 074,78
1 074,97
936,40
932,60
915,23
874,40
797,76
744,13
652,57
631,07
607,96
473,35
446,75
309,15
263,92
254,70
22,32

Subtotal (2)

33 256,52

SJV
Hamburg-Jonas
SERAD
BIRB
Aragón
PZ
BLE
LASER
FIRS
Cataluña
Nordrhein-Westfalen Westfalen-Lippe
Schleswig-Holstein
Brandenburg
SAISA (ex DCCC)
HPA
DARD
Onivins
Thüringen
NAWAD
Région Wallonne
Hessen
Vlaamse Gemeenschap ALP
Sachsen
Rheinland-Pfalz
Canarias
Valencia
Odeadom
Navarra
Galicia
Nordrhein-Westfalen Rheinland
ENR
IFADAP
Murcia
AGREA
Asturias
País Vasco
DLG
DCMNR
Madrid
Region Lombardie
ZA Salzburg
PT
ARTEA (Toscana)
Ministère de l’Agriculture
La Rioja
AVEPA (Veneto)
Cantabria
PVVE
Baleares
ACCT/SDE
Saarland
FC
Vlaamse Gemeenschap ALT
Ofimer
Hamburg
Nordrhein-Westfalen LfEJ
CCW
Bremen
Berlin
FROM

864,38
586,24
569,01
559,35
527,45
518,11
432,82
402,24
375,11
371,92
352,50
335,72
312,32
300,30
290,18
283,85
283,75
272,08
246,02
237,53
228,83
204,06
199,81
187,08
161,30
150,68
142,56
137,29
133,71
124,31
109,38
104,75
90,06
68,07
63,73
59,50
58,73
52,76
52,46
50,71
49,48
47,15
45,23
44,21
41,33
40,13
35,31
34,04
24,62
21,15
19,82
15,87
7,92
7,82
7,28
4,57
4,53
2,34
1,36
0,90

11,06
10,39
6,26
6,24
5,38
4,28
3,94
2,76
2,43
2,43
2,12
2,11
2,07
1,98
1,80
1,68
1,48
1,43
1,38
1,07
1,01
0,70
0,60
0,58
0,05

75,22

1,96
1,33
1,29
1,27
1,19
1,17
0,98
0,91
0,85
0,84
0,80
0,76
0,71
0,68
0,66
0,64
0,64
0,62
0,56
0,54
0,52
0,46
0,45
0,42
0,36
0,34
0,32
0,31
0,30
0,28
0,25
0,24
0,20
0,15
0,14
0,13
0,13
0,12
0,12
0,11
0,11
0,11
0,10
0,10
0,09
0,09
0,08
0,08
0,06
0,05
0,04
0,04
0,02
0,02
0,02
0,01
0,01
0,01
0,00
0,00

×

×

×

×
×
×

×

×

×

×

×
×

×
×

×

×

×

×
×

×

×

×

×
×

×

×

×
×
×

×

×

×

×

×
×

×
×

×
×
×

×

×

×

×

×

×
×

×

×

×

Subtotal

10 955,73

Total

44 212,25

24,78

100,00

11 266,58

19 042,73

(1) Accounts disjoined from the financial decision taken on 29 April 2004.
(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 euro zone: Denmark: 7,428, Sweden: 9,1458, United Kingdom: 0,6842.

Source: Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2003.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(c) breaches of the criteria for the accreditation of paying agencies
which do not have a direct financial impact (16) and other con-
trol weaknesses — Opekepe (Greece), Vlaamse Gemeenschap
(Belgium), SDE (France), Ministry of Agriculture (Luxembourg);

(d)

some certifying bodies’ inability to give an opinion on the com-
pleteness of the debtor’s statement (SERAD, Niedersachsen,
Ifadap and Opekepe).

Analysis of the work of certifying bodies

4.55. The Commission seeks to ensure that the certifying bodies
properly audit expenditure managed by the paying agencies by
establishing guidelines (including on the sampling of transactions in
order to establish whether there is a material level of error (17)), and
by reviewing the reports of the certifying bodies to ensure that this
guidance has been applied.

Audit of expenditure

4.56. The certifying bodies reviewed the procedures put in place
by paying agencies to administrer CAP expenditure. In the case of
69 paying agencies, responsible for 40 billion euro of expenditure,
they also tested a statistical sample of the paying agencies’ docu-
ments relating to CAP payments. Some 24 000 transactions were
tested in this way.

4.57. The Commission concluded that, in addition to the qualifi-
cations noted in paragraph 4.54:

(a)

(b)

(c)

(d)

there was a material level of error in the expenditure of three
other paying agencies (Madrid, Cantabria and Mecklenburg-
Vorpommern);

the French certifying body had not used the required approach
to sampling;

the United Kingdom certifying body had not tested a suffi-
ciently large sample of transactions;

the reports for HPA and LASER (Netherlands) did not provide
the required information about sampling and the treatment of
errors.

(16) For example, delegation of the authorisation function and/or the tech-

nical service; adequacy of the internal audit service.

(17) Materiality is defined for these purposes as 1 % of the value of the popu-

lation from which the sample is taken.

30.11.2004

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.58.

For its part the Court identified:

4.58.

(a)

that the report for Luxembourg suffered from the same weak-
nesses as those for HPA and LASER;

(b)

that there was inadequate information in nine of the reports
for Spanish paying agencies. However the Commission
obtained additional information which enabled it to clear the
accounts. The Court reviewed the work of two of the certify-
ing bodies concerned on the spot. One of these had performed
a thorough audit of the accounts and was able to provide full
documentation of the work carried out (Castilla-La Mancha).
For the other agency (Andalucía, the largest in Spain) the situ-
ation was unsatisfactory. The certifying body had contracted
out the audit in November 2003 leaving the contractee very
limited time to perform the audit. There was little audit evi-
dence to support the work carried out and supervision was
inadequate. Compliance testing was performed too late and at
a negligible level.

(a) The accounts for Luxembourg have been disjoined — due to lack of
reporting on the measures taken in response to previous year’s rec-
ommendations. The issues mentioned by the Court will also be taken
into consideration before the final clearance decision for this Member
State.

(b) Regarding the late appointment of the auditor by the certifying body
in Andalucía, the Commission agrees that such decisions should be
made in good time. It will insist (as has already been done in the past
for other paying agencies) on the importance of early appointment of
audit firms.

As far as the limited level of compliance testing is concerned, the Com-
mission makes its clearance proposal taking into consideration the
whole work performed by the certifying body.

Finally, with regard to the questions of the limited audit evidence and
supervision, the Commission will insist on the need to ensure that both
aspects receive sufficient attention by certifying bodies (in particular
when audit firms are appointed to perform all or part of the audit
work).

Debtors

Paragraphs 4.113 to 4.121 summarise a Special Report by

4.59.
the Court on CAP irregular payments and debts.

4.60. The total value of debts as at 15 october 2003 was 2,3 bil-
lion euro (similar to the previous year). Four certifying bodies quali-
fied the debtors statement (see paragraph 4.54) and many others
noted significant weaknesses in the management, recording and
recovery of debts (17 paying agencies).

4.61. Reports for several of the paying agencies indicate that the
work performed by the certifying bodies is not sufficient to ensure
that all debts are reliably recorded. In addition, the Commission
guideline (18) on the valuation of debt requires certifying bodies to
form an opinion on the value of debts to the paying agencies which
are likely to be recovered. Four did not do so.

4.60 and 4.61. The Commission shares the view of the Court as regards
the importance of this issue. It is aware of the difficulties of debt manage-
ment in a number of paying agencies and also of the improvements intro-
duced. This question has received particular attention since 1999 and will
continue to be the subject of further review and action. Nevertheless, hav-
ing taken all the available information into consideration, the Commission
was able to propose clearance of the paying agencies’ accounts, despite the
existence of some difficulties. The Commission has always taken note of
problems identified and will futher insist on the necessity of clear opinions
from certifying bodies on this subject.

The Commission continues to closely supervise this issue, and four visits to
Member States have been organised for the second half of 2004.

(18) AGRI/24487/2000.

C 293/116

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Commission’s decision

4.62. The Commission analysed and evaluated the accounts, cer-
tificates and reports for all paying agencies except for six which
were submitted late or in an incomplete state (19). The Commission
carried out a series of checks on individual payment data in order
to identify possible double payments (20).

4.63. The Commission took its financial clearance decision on
29 April 2004 (21), within the deadline laid down in the regulation.

4.64. The Commission accepted the accounts of 56 paying agen-
cies which together account for 25,2 billion euro (57 % of the total
declared). Where there are quantifiable errors in the accounts of
paying agencies the Commission has indicated that it will make
appropriate financial corrections.

4.65. The Commission postponed its decision on the accounts of
29 paying agencies representing 19 billion euro (43 % of the total
declared). The reasons given by the Commission for postponing its
decision on the accounts common to more than one paying agency
were:

(a) a failure by the certifying bodies to respect the sampling guide-
lines (the use of too low a confidence level/sample size too
small) (15 accounts); or

(b)

insufficient details given by the certifying bodies about the sam-
pling method used (two accounts) (22).

4.66.
It is standard practice for the Commission to delay its
approval of the reports of certifying bodies where it has doubts
about the adequacy of their work. The accounts of four paying
agencies were omitted from the financial decision for 2001; and
those of 17 paying agencies from the financial decision for 2002.

4.67. On no occasion in the past has the Commission however
postponed its decision in respect of such a large number of paying
agencies, representing such a large proportion of expenditure.

(19) Sweden, NAWAD (United Kingdom), Berlin, Hamburg, Niedersachsen

and Bayern StMiLF.

(20) The results of this exercise have not been made available to the Court.
The Commission has asked certifying bodies to pay particular attention
to the risk of duplicate payments as part of their 2004 work.

(21) Commission Decision 2004/451/EC (OJ L 155, 30.4.2004, p. 129).
(22) The Court raised this issue in its Special Report No 22/2000 on evalu-

ation of the reformed clearance of accounts procedure.

30.11.2004

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Official Journal of the European Union

C 293/117

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.68. By the end of this year the Commission expects to clear the
accounts for the four paying agencies disjoined for 2001, plus more than
half of the paying agencies disjoined for 2002 (for which all necessary
information has been provided).

4.68.
It is not clear at what stage the Commission will be able to
accept the paying agency accounts not included in its decision of
29 April 2004. Past experience suggests that the delay could be con-
siderable, the 2000 accounts for the former Greek paying agency
were not approved until 2003, when the agency had ceased to exist.
None of the accounts not included in the 2001 and 2002 financial
decisions had been approved by April 2004. The accounts of 10
paying agencies (23) remain uncleared for two out of the past three
years.

4.69.
Postponing the financial clearance decision does not have
any financial consequences for the Member States concerned, nor
does it prejudice any future decision on the eligibility of expendi-
ture to Community financing. Nevertheless, the Commission could
not reach a conclusion on the accounts of the paying agencies cov-
ering 43 % of the expenditure declared for 2003 by the due date.

Conformity decisions taken in 2003

4.70.
In 2003, the Commission took three conformity decisions
in respect of expenditure declared from 1996 to 2002 (24), refusing
to finance 377 million euro, of which the Court examined an
amount of 366 million euro and has sought to establish whether
the corrections were:

(a) adequate and well founded;

(b) made in good time.

Adequacy of corrections

4.71. The Court concluded that in respect of 308 million euro of
disallowed expenditure, the Commission’s procedures were well
founded and the amounts disallowed consistent with its normal
scale of flat-rate corrections (25).

(23) Baden-Württemberg, Bayern Umwelt, Opekepe, SDE, Ofival, ONIC,

Oniflhor, FIRS, Onivins and NAWAD.

(24) Commission decisions 2003/102/EC (OJ L 42, 15.2.2003, p. 47),
2003/364/EC (OJ L 124, 20.5.2003, p. 45) and 2003/536/EC (OJ L 184,
23.7.2003, p. 42).

(25) 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 mak-
ing it impossible to determine the eligibility or regularity of a claim,
with, as a result, a high risk of loss to the Fund.

C 293/118

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30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.72.
In the following cases, the Court took the view that a more
rigorous application of the Commission’s own rules would have
been justified (and would have increased the sum disallowed by
65 million euro):

4.72.
In assessing the financial corrections the Commission has to con-
sider what alternative forms of check would reduce the risk to the EAGGF.
Its decision must therefore be deemed to be in line with the rules and pro-
tocols.

(a) olive oil in Italy, correction of 13 million euro. The Commis-
sion applied a 2 % flat-rate correction to expenditure incurred
in 2000, thus relating mainly to the 1998/99 marketing year.
The correction is mainly for significant weaknesses found in
the checks carried out at the mills and a lack of rigour in the
performance and follow-up of compatibility checks on the
quantities of olive oil produced. In addition the Geographical
Information System (GIS) was not complete and operational
when the expenditure was incurred; and, the minimum num-
ber of alternative checks required (26) during the marketing
year 1998/99 were not made. The Commission has classified
these checks as key controls. A correction rate of 5 % would
have been consistent with the Commission’s scale of flat-rate
corrections;

(b) olive oil in Greece, correction of 45,1 million euro. Since
1994, the Commission has applied a 5 % correction because
of the non-implementation of the olive oil register and inad-
equacies of the computerised database. Member States had five
years from 1998/99 to implement the GIS, which replaces the
olive tree register and database. The Commission considers
that the lack of effort to develop the GIS is a weakness in itself
and that the improvements made do not compensate for its
absence. Thus the 5 % flat-rate applied to expenditure incurred
in 2000, relating mainly to 1998/99 marketing year, has been
maintained. These checks are key controls and as they are not
implemented, a 10 % correction would have been consistent
with the Commission’s normal scale of flat-rate corrections.

The Commission considers that it has fully and correctly applied its guide-
lines on fixing the levels of financial corrections, and must stress also its
legal obligation to accurately assess the real risk to the Fund. The Com-
mission maintains that the rates of financial correction imposed in the con-
cerned cases were justified.

(a)

In the 1998/99 marketing year Italy introduced alternative forms of
check that reduced the risk to the EAGGF. This led the Commission
to propose a correction rate of 2 % despite the existence of failings in
key controls. In particular Italy had an olive cultivation register and
in 1998/99 made many on-the-spot checks in connection with cre-
ation of the olive cultivation GIS. These checks resulted in significant
penalties on growers whose crop declarations showed discrepancies.

(b) Under the olive oil production aid scheme there are two key interde-

pendent controls, on mills and on trees.

It is true that Greece had neither an olive cultivation register, opera-
tional computerised files or an olive cultivation GIS (compulsory from
1998/99), but she did make the alternative checks specified in the
rules for cases where there was no GIS and imposed penalties when
incorrect declarations were found. There were also checks on mills and
on abnormally high yields.

These factors led the Commission to maintain a 5 % correction rate
for the marketing years in question.

(26) Article 28(2) and (3) of Commission Regulation (EC) No 2366/98
(OJ L 293, 31.10.1998, p. 50) states that alternative checks are required
as long as the GIS is not complete and operational.

30.11.2004

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Official Journal of the European Union

C 293/119

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

24 months rule

4.73. The Commission’s ability to refuse financing of expenditure
declared is limited to expenditure incurred in the 24 months pre-
ceding the date on which it notified the findings of its enquiry to the
Member State (27). Thus, a weakness detected during an enquiry
covering a period of three years can only lead to a correction of
expenditure declared during two years. A proposal to increase the
period to 36 months, made by the Commission in 2002 and
endorsed by the Court, was rejected by the Council (28).

Time taken to make corrections

4.74. The average length of the clearance of accounts procedure,
for corrections made in the three decisions taken in 2003, from the
date of the mission in the Member States to the inclusion of the cor-
rection in a decision, is more than two and a half years (900 days).
This is a reduction from the average length of the procedure in
2002 of three years (1 100 days). However, the average time taken
from the date of the mission to the final letter notifying the correc-
tion continues to exceed significantly the standards defined inter-
nally by the Commission’s services.

Clearance of accounts decisions in recent years

4.74. The Commission acknowledges that in some cases delays in the
progress of accounts clearance persist. But, as the Court finds from year to
year, major efforts have been made to reduce the average duration of the
procedure. These will be continued.

4.75. Clearance of accounts takes place over a period of years (see
paragraphs 4.52 and 4.70). Table 4.6 shows the results of the
Commission’s clearance decisions for 1991 and subsequent years.
Clearance is not yet complete for any year later than 1997. The total
corrections represent the Commission’s view, for the budget lines
and Member States it has examined, of the amount of expenditure
which, mainly because of weaknesses in Member States’ systems for
managing and controlling expenditure, should not be borne by the
Community budget.

4.75.
In June 2004 only nine procedures remain open (three predating
1 January 2000) out of a total of 482 initiated between 1997 and the
end of 2000.

The Commission has applied itself to reducing the backlog and the oldest
cases still open were given particular attention when the 2004 work pro-
gramme for auditing agricultural expenditure was drawn up.

4.76. Graphs 4.6 and 4.7 set out the distribution of corrections
in decisions taken by the Commission during the period 1999 to
2003 (29), by Member State and market sector. These decisions
relate to items of expenditure from the Community budget years
1996 to 2002.

(27) Article 8 of Commission Regulation (EC) No 1663/95 (OJ L 158,

8.7.1995, p. 6).

(28) Proposal for a Council Regulation amending Council Regulation (EC)
No 1258/1999 on the financing of the common agricultural policy
(COM(2002) 293 final).

(29) 1999 was the first year in which the Commission took conformity deci-
sions under the revised procedure for clearance of accounts introduced
in 1996.

C 293/120

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Official Journal of the European Union

30.11.2004

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30.11.2004

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Official Journal of the European Union

C 293/121

Graph 4.6 — Corrections in conformity decisions (1999 to 2003) per Member State

Source: Commission’s ‘conformity’ decisions taken from 1999 to 2003.

Graph 4.7 — Corrections in conformity decisions (1999 to 2003) per market

Source: Commission’s ‘conformity’ decisions taken from 1999 to 2003.

C 293/122

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Court’s conclusions

Financial clearance decision

4.77.
Subject to the individual problems listed in paragraphs 4.54
to 4.57, the certification of paying agencies’ accounts worked sat-
isfactorily.

4.78. There is however scope for:

the Commission to evaluate the work performed by certifying
bodies on the spot on a cyclical basis (see paragraph 4.58);

(a)

(b)

4.78.

(a)

Specific on the spot reviews of the certifying bodies’ activity will be
considered, after examining all the priorities for the auditors of the
Commission.

the certifying bodies to follow more closely the Commission’s
guidelines in respect of the treatment of CAP debts (see para-
graphs 4.59 to 4.61).

(b) The Commission will insist on the importance of proper reporting on
debtors and increase the attention paid to this subject for the next
accounts clearance decision.

4.79. The fact that no financial clearance decision has yet been
taken for 43 % of expenditure declared for 2003 nor for 21 paying
agencies accounts for 2001 or 2002 is a cause for concern (see
paragraphs 4.65 and 4.68).

4.79.
It should be emphasised that the disjunction of accounts does not
cause any financial consequences for the Member States concerned, nor does
it prejudice any exclusion of expenditure of Community financing.

The postponement of the clearance allows the Member States to provide
additional information and in some cases to perform certain tasks requested
by the guidelines which were not finalised by the regulatory deadline of
30 April. Once these matters are addressed by the Member States the
Commission should be in a position to clear the disjoined accounts.

The Commission continues to make efforts to clear the backlog of cases
from the 2001 and 2002 exercises. It expects to clear the accounts for the
four paying agencies disjoined for 2001, plus more than half of the pay-
ing agencies disjoined for 2002.

4.80. The Commission maintains that the rates of financial correction
imposed in the following cases were justified.

4.81. The significance of export refunds as a policy instrument has
steadily decreased due to the successive reforms of the Common Agricul-
tural Policy designed to make Community produce more competitive by
bringing EU prices closer to world market prices. 10 years ago expenditure
on export refunds exceeded 10 billion euro; in 2003 it was down to
3,7 billion euro. This trend is expected to continue with the latest CAP
reforms of 2003 and 2004.

Conformity decisions

4.80. Most of the corrections made in 2003 were calculated on
the basis of the Commission’s normal scale of flat-rate corrections
(see paragraph 4.71). In two cases, a higher rate of correction could
have been applied (see paragraph 4.72).

FOLLOW-UP TO PREVIOUS OBSERVATIONS

Export refunds — destination and placing on the market

4.81.
Export refunds are subsidies paid on the export of agricul-
tural products to compensate exporters for the difference between
EU prices and lower prices prevailing on the world market. Rates for
the same product may vary according to the destination.

30.11.2004

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Official Journal of the European Union

C 293/123

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

In its Special Report No 7/2001 (30) the Court recognised
4.82.
that it was preferable to apply one refund rate for each product to
all destinations, although this was not immediately possible. It
therefore made the following recommendations to simplify and
improve the financial control of such transactions:

4.82 and 4.85. The Commission has reacted appropriately to remedy
the weaknesses identified in the special report. An action plan was defined
and has been implemented. The Commission believes that with the mea-
sures taken, the management of the risks involved has significantly
improved.

(a) Relaxing the requirements for proof of arrival could generate a poten-
tial risk for the Community budget through a loss of control over
exports to countries for which an export refund is not fixed. It would
also expose the Commission to fundamental criticism of the way the
EU monitors and controls its subsidised trade with third countries,
particularly taking into consideration its international undertakings
to refrain from granting export refunds for specific markets.

(b) The Commission considers that generally speaking customs import
declarations issued by official state authorities give greater assurance
that goods have been imported in the third country for which the
refund is paid than transport documents and commercial invoices
issued by private operators. However, the Commission has decided to
double the de minimis limit by which payment claims involving
small amounts of refunds can be exempted from production of proof
of import, but to maintain this requirement for differentiated export
refunds above this limit.

(c) Given the decision to continue to require proof of import for differ-
entiated export refunds, there is no need for a posteriori checks that
products had been placed on the market intended to be intensified.
Nevertheless, the Commission has encouraged Member State authori-
ties to use the data held by transport companies as an additional ele-
ment of check on the arrival of goods at their destination.

(a) proofs of arrival should not be required in every case, but only

in cases of doubt, or for high risk destinations;

(b)

transport documents and commercial invoices should be pre-
sented to CAP paying agencies for all claims exceeding the de
minimis limit (31);

(c)

a posteriori checks that products had been placed on the mar-
ket intended (and not exported elsewhere) should be intensi-
fied; shipping and container movement databases should be
selected for a posteriori
consulted for
checks (32).

the transactions

4.83. The Court also put forward a series of detailed recommen-
dations for improvements in financial control arrangements which
should be applied if the requirement for the systematic presenta-
tion of proofs of arrival was maintained.

4.84. The Council and Parliament supported the Court’s recom-
mendation for changes (33). In particular the Parliament invited the
Commission to make a radical effort to simplify legislation and pro-
cedures for more transparency, before phasing out the export
refund scheme.

4.85. The Commission has not taken action to simplify the
scheme as recommended in paragraph 4.82.

4.85.

See reply to paragraph 4.82.

(30) OJ C 314, 8.11.2001.
(31) Article 17 of Commission Regulation (EC) No 800/1999.
(32) Council Regulation (EEC) No 4045/89.
(33) 2 410th session of the Council of the European Union of 18 February
2002 and the Decision of the European Parliament of 10 April 2002
concerning discharge in respect of the implementation of the general
budget of the EU for the financial year 2000 (Commission) (OJ L 158,
17.6.2002).

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4.86. On the other hand the Commission has responded posi-
tively to many of the Court’s more detailed observations and rec-
ommendations:

(a) procedures for the approval of supervisory companies have

been reinforced;

(b) provision now exists for sanctions against supervisory compa-

nies for the issue of false certificates;

(c)

(d)

rules have been introduced governing the issue of certificates of
unloading by Member States’ embassies;

the de minimis limit to be applied for the purposes of checking
export refund consignments has been doubled;

(e) provisions were made to prevent carousel traffic in milk prod-
ucts between the EU and the Baltic states by removing export
refunds on milk products to those states;

(f)

(g)

(h)

a procedure was set up in 2001 (34) for online exchange of
information with Russian customs concerning falsified import
declarations (although this is not used by all Member States);

some improvements have been made in respect of exports of
cattle: the higher refund rate for pure-bred breeding animals is
now only payable for animals less than 30 months of
age (35) (36);

the Commission’s Clearance-of-Accounts unit examined the
system of proofs of arrival in 2001 and 2002 and has, as a
result, initiated financial correction action against certain Mem-
ber States.

4.87. However, on other detailed points raised by the Court, the
Commission:

(a) has not taken over responsibility for approval of supervisory

companies;

(34) Commission Regulation (EC) No 2584/2000 as last amended by Regu-

lation (EC) No 44/2003.

(35) Refunds are still however calculated by weight, which is logical for ani-
mals for slaughter, and not by head, which is appropriate for breeding
animals.

(36) Commission Regulation (EC) No 118/2003: preamble (4): ‘… As to live
animals for reproduction, in order to prevent any abuse export refunds
for pure-bred breeding animals should be limited to heifers and cows of
no more than 30 months of age.’

4.87. Having examined the recommendations of the Court the Commis-
sion decided not to follow the recommendation suggested by the Court in
point a) whereas actions have been taken in relation to points b) and c).

(a) Within the framework of shared management the responsibility for
approval of supervisory companies lies within the Member States and
the Commission has no intention to take it over. Member States are
closer to events on the ground and are in a better position for man-
aging the conditions for the approval and control of supervisory com-
panies.

following the Court

However,
recommendation, procedures for
approval of supervisory companies have been reinforced (see Commis-
sion Regulation (EC) No 1253/2002 (OJ L 183, 12.7.2002,
p. 12)).

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(b) has not yet provided Member States with a model file of
acceptable proofs of arrival (customs documents and customs
stamps used in various non-Member States);

(c)

could have made more effective use of external audit firms to
examine the system of differentiated export refunds.

4.88. OLAF has followed up some cases of concern identified by
the Court, but has not taken or completed action in respect of a
series of other cases involving illegal exports to Iraq, shortages in
deliveries of cattle to Lebanon, carousel trade in milk products with
the Baltic States, diversion of cheese from the United States of
America to Canada and deliveries to North Korea of feta cheese
which substantially exceeded its expiry date.

(b) The verification of the validity of proofs which are furnished by
exporters in the payment application for differentiated refunds is the
responsibility of Member States’ paying agencies. However, the Com-
mission launched a tendering procedure, but this proved to be unsuc-
cessful and had to be relaunched. Bearing in mind the time needed
for the tender’s procedure and completion of the study, the results will
not be available until the end of 2005. Meanwhile, in order to
ensure a better coordination between paying agencies, Member States
have been asked to exchange copies of the customs import documents,
customs stamps and customs codes (entry for home use, entry for
warehousing, entry for inward processing, etc.) that are available in
their paying agencies concerning various third countries included in
the study.

(c) The Commission contracted for the first time external audit firms for
this task in 2001. With hindsight some aspects might have been per-
fectible and experience has already been, and will continue to be,
taken into account in possible future engagements of external audi-
tors.

4.88. The case ‘diversion of cheese from USA to Canada’ will be fina-
lised shortly. Follow-up actions for all mentioned cases are still ongoing.

4.89. There has thus been only a partial follow-up to the Court’s
recommendations (and the Council’s and Parliament’s conclusions).
Destination-specific export refunds continue to account for a sig-
nificant proportion (45 %) of expenditure on export refunds, (i.e.
1 882 million euro in 2003).

4.89. As the Court recognises in paragraph 4.87, the Commission has
responded positively to many of the Court’s more detailed observations and
recommendations. For the recommendations not accepted, due explanation
is given in the reply to paragraphs 4.83, 4.86 and 4.88.

The Commission has reacted where appropriate to remedy the weaknesses
identified in the Court’s special report. An action plan was defined and has
been implemented. The Commission believes that with the measures taken,
the management of the risks involved has significantly improved.

Support scheme for olive oil

In July 2000 the Court published a Special Report (37) on
4.90.
the results of its audit of the support scheme for olive oil. The audit
was focused on the management of the scheme by the Commission
and the operation of the controls in the Member States, in order to
assess their contribution to the achievement of the main objectives
of the scheme. The Council adopted on 29 April 2004 a reform of
the common market organisation (CMO) for olive oil, which will
enter into force on 1 November 2005 (38).

(37) Special Report No 11/2000 on the support scheme for olive oil

(OJ C 215, 27.7.2000).

(38) Council Regulation (EC) No 865/2004 (OJ L 161, 30.4.2004, p. 97).

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4.91.

In its Special Report the Court observed in particular that:

(a)

the system for the Commission’s management and control was
not sufficiently efficient and reliable;

(b)

the CMO objectives set were not sufficiently clear;

(c)

in creating and implementing the olive cultivation geographic
information system (GIS) (39) in the Member States, the Com-
mission should not allow repetition of the delays experienced
with the initial olive cultivation register;

(d) any reform should maintain the principle of sound financial
management set out in the Financial Regulation and the CMO
objectives should be specified in such a way to make it possible
to measure progress towards them;

(e) payment based on the number of trees rather than the quantity
of production would pose fewer control problems but would
reinforce further the need of the olive cultivation GIS.

4.92. The Council and the Parliament (40) supported the Court’s
recommendation relative to the need for sufficient and reliable man-
agement and control through a workable olive cultivation GIS and
the integration of the olive oil data in the IACS system. Because con-
sumption aid was abolished by the 1998 reform and because of the
insignificance of export refunds, the Court’s follow-up concentrates
on the production aid to olive oil producers.

4.93. The Court notes that, in the period before the 2004 reform,
the Commission had already addressed a number of issues concern-
ing notably overproduction and competitiveness of olive oil pro-
duction. Despite the fact that every year the Commission has invited
the Member States to accelerate their procedures, a discrepancy
between the number of penalties recommended by the olive oil
control agencies and the number of penalties effectively imposed by
the Member States still persists.

(39) Following the provisions of Article 2 of Council Regulation (EC)
No 1638/98 the ″Olive Cultivation GIS″ shall be created using the data
from the olive cultivation register, and information shall be geographi-
cally situated using computerised aerial photographs.

4.93. The Commission closely monitors the quality of the Member
States’ monitoring of the work of the inspection bodies. Any inadequacies
found are taken into account in the accounts clearance procedures for the
olive oil production aid.

(40) European Parliament resolution on the European Court of Auditors Spe-
cial Report No 11/2000 on the support scheme for olive oil, accompa-
nied
(CD5-0009/2001 —
by
2001/2001/COS).

Commission’s

replies

the

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4.94. The 2004 reform, by setting clearer objectives and replac-
ing the quantity based production aid by an area aid, abolished a
number of measures in which the Court had found weaknesses,
notably those concerning the controls in the Member States, the
obligation to estimate production yields, and the decoupling of aid
from production. However, the Commission did not quantify the
reform objectives as required by the Financial Regulation. This hin-
ders the measurement of progress in achieving them.

4.94. The reform of the olive oil sector is part of the reform of the com-
mon agricultural policy started in 2003 and aims at achieving the same
objectives, which were presented in the explanatory memorandum of the
proposal for a long term policy perspective for sustainable agriculture
(COM(2003) 23 final, 21 January 2003), namely:

— to enhance the competitiveness of the EU agriculture,

— to promote a more market oriented, sustainable agriculture,

— to provide a better balance of support and strengthen rural develop-

ment.

The achievement of the objectives is assessed by the Commission as part of
the ongoing management and monitoring of the implementation of the
CMO. Council Regulation (EC) No 864/2004 foresees that the Commis-
sion shall, before 31 December 2009, provide the Council with a report
on the situation among others of this sector, accompanied, if appropriate,
by proposals for amendments.

4.95. Under the new Council Regulation the aid will be based on
the area planted with olive trees with a minimum amount of aid of
60 % allocated to the single payment scheme. This part of the aid
will be related neither to production of olive oil nor to the number
of olive trees. The remaining 40 % will be linked to the number of
olive trees. However, until the olive cultivation GIS has been com-
pleted, the management and control of this 40 % part of the aid,
linked as it is to the number of olive trees, will continue to depend
on insufficiently reliable statistical data. The absence of data and
lack of reliability of the Commission’s statistical information was
also confirmed by an external evaluation, requested by the latter, to
evaluate the impact of the main market organisation measures of
the olive oil sector (41).

4.95. The remaining funds (up to a maximum of 40 %) would be
retained by Member States for the granting of aid confined to olive groves
already registered in a GIS. Producer Member States have informed the
Commission as regards completion at various stages of the GIS. According
to legislation in force, the GIS shall be fully operational for the payment of
the aid from the marketing year 2003/04 onwards (advance payment fixed
in September 2004, final payment to be fixed in June 2005) – see also
reply to 4.97.

The purpose of this aid is to contribute to the maintenance of olive groves
of environmental or social value. It will be granted per hectare of olive
grove, whether or not in production. For the granting of this aid variations
in the number of trees registered on 1 January 2005 in the olive groves
should not exceed 10 %.

4.96. Contrary to the Court’s recommendation the Commission
proposed to the Council (42) a delay in the completion of the olive
cultivation GIS by two years until 31 October 2003. The fact that
this has not been fully completed to date will have a negative impact
on the implementation of the reform.

4.96. The proposal to delay in the completion of the olive cultivation GIS
was motivated by the limited progress achieved in 2001 by the Member
States in the execution of the GIS and the aim of obtaining a reliable and
trustworthy tool for the management of the sector. In cases where the GIS
had not been completed, Member States were required to carry out rein-
forced on the spot controls (Regulation (EC) No 2366/98).

The proposal was accompanied by additional provisions stipulating that
from November 1st 2003, olive trees and corresponding areas not attested
by a GIS or olive oil produced therefrom are not eligible for aid to be paid
to olive producers. According to the information provided by the producer
Member States to the Commission, the GIS is largely operational to check
the aid payments for the marketing year 2003/04, and its role in the prac-
tical implementation of the reform will be verified in due course in the
framework of the clearance of accounts procedure.

(41) Report to the Commission on ‘Evaluation des impacts des principales
mesures de l’OCM dans le secteur de l’huile d’olive’. ADE SA, Brussels,
December 2002.

(42) Commission Proposal of 22 December 2000 for a Council Regulation
amending Regulation No 136/66/EEC and Regulation (EC) No 1638/98
as regards the extension of the period of validity of the aid scheme and
the quality strategy for olive oil (OJ C 213 E, 31.7.2001, p. 1).

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4.97. The Commission has taken into account in the clearance of
accounts procedure the Member States’ failure to comply with CMO
provisions concerning the olive oil register and the computerised
files. However, in its Annual Report 2002 (43) and in the present
Annual Report, the Court called on the Commission to be more rig-
orous in respect of applying its own instructions concerning cor-
rections of olive oil expenditure (see paragraph 4.72 and Annual
Report 2002, paragraph 4.61).

4.97. The Commission maintains that the rates of financial correction
imposed in the concerned cases were justified. See the reply to point 4.72.
and the 2002 Annual Report.

In view of the foregoing, the Commission should take

4.98.
immediate action to address the following outstanding issues:

4.98.

(a)

(b)

set appropriate and measurable indicators in order to monitor
the implementation of the reform objectives and, in this way,
to comply with the provisions of the Financial Regulation on
sound financial management, and to improve the management
of the CMO;

insist that Member States dispose of a workable and reliable
olive cultivation GIS and if this cannot be achieved, make
appropriate financial corrections in accordance with the rules
applicable.

(a) The reform of the olive oil sector is part of the reform of the Common
Agricultural Policy started in 2003 and therefore aims at achieving
the same objectives. The Commission will monitor the achievement
of these objectives.

(b) As of November 1 2003, olive trees and corresponding areas not
attested by a GIS or olive oil produced therefrom are not eligible for
an aid to be paid to olive producers.

The Commission accepts the Court’s recommendation and as in the
past will continue to verify that checks are made correctly and uni-
formly.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORTS

Evaluation of farm incomes by the Commission

4.99. According to Article 33(1) of the EC Treaty, one of the five
objectives of the common agricultural policy (CAP) is to ensure a
fair standard of living for the agricultural community, in particular
by increasing the individual earnings of persons engaged in agricul-
ture. This objective is proving to be a genuine guiding principle of
the CAP.

4.100. The Commission has three systems for measuring farm
incomes: the Farm Accountancy Data Network (FADN), which mea-
sures the incomes of agricultural undertakings on the basis of har-
monised accounts, but is inadequate as far as the quality and com-
parability of the results are concerned, the Economic Accounts for
Agriculture (EAA), which provide data that vary in quality accord-
ing to the Member State concerned, and the Income of the Agricul-
tural Household Sector (IAHS) containing non-homogeneous and
obsolete statistics.

(43) Report on the activities financed from the budget.

4.100.
Improving the quality and especially the comparability of the sta-
tistical data from the FADN is a major concern of the departments respon-
sible for these statistics and has been the subject of constant attention on
the part of the Commission, the FADN Committee and the Member States.
The latter have introduced a basic methodology designed to improve qual-
ity and harmonise the results from the FADN. It is true that the regional
diversity of agriculture, in both socio-economic and structural terms, has
meant the adoption of rules specific to some Member States. However, the
impact of the methodological differences referred to by the Court is reduced
as much as possible by the efforts made regarding sampling and weight-
ing.

The economic accounts for agriculture are continuously and closely moni-
tored for accuracy and comparability by the Working Party ‘Agricultural
accounts and prices’ and more specific controls such as the inventories. This
is why the quality of the income statistics produced under the EAA has
always been considered satisfactory. In addition, although the choice of
sources of data is left to the Member States depending on the specific struc-
ture of their agricultural sector and their statistical system, this has little
impact on the quality of the EAA data.

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It is in fact not the harmonisation of data sources but the harmonisation
of definitions and principles of data extraction which guarantees the har-
monisation of the EAA data among Member States and contributes to
their quality. Finally, studies have shown that the multiplicity of data
sources makes accuracy indicators very difficult to establish and complex to
interpret for such statistics as national accounts and accounts for agricul-
ture.

The statistics on incomes of agricultural households do not benefit from the
same degree of quality, homogeneity and updating as the FADN and the
EAA. A taskforce to develop and improve these statistics was set up in
2003 in collaboration with the FAO, the OECD and UN/EEC.

4.101. The European Community has never defined the concepts
of ‘agricultural population’, ‘fair standard of living’ or ‘income’ that
are set out in Article 33 of the EC Treaty. As a consequence, there
are to this day no clear concepts and criteria that can be applied to
the statistics that are supposed to measure these magnitudes.

4.101 and 4.102. There are various different measures of income (inter
alia, income by branch of activity and income of households at macroeco-
nomic level, and income of holdings at microeconomic level). These have
been extensively used and published by the Commission for the purposes of
monitoring and analysing the levels of and changes in incomes in agricul-
ture, as well as contributing to generating agricultural policy.

4.102. The Court was able to establish that the nature of the
information needed on the financial situation of farmers has evolved
over the years. Whereas under the Mac Sharry reform of 1992 the
aim was merely to make up for losses of revenue by means of direct
payments, the Commission is now also interested in the sources of
non-farm income and in the distribution of incomes within the agri-
cultural sector. Information on the overall income of agricultural
households is needed in order to examine these questions.

4.103. With the assistance of an expert, the Court endeavoured to
clarify the various concepts set out in Article 33 EC. The conclu-
sion of this study was that, where there are no other data, the over-
all disposable income for all the members of the household can be
taken as an approximate indication of the standard of living. Fur-
thermore, an agricultural household’s standard of living can no
longer be considered fair if the overall disposable income of all the
members of the household falls below a certain threshold compared
with other business households.

4.104. The Court examined the Commission’s three agricultural
statistics systems from the point of view of their ‘relevance’ with
regard to the requirements of the CAP. The purpose of all these sys-
tems is to measure incomes in the agricultural sector. However, the
FADN gives only the figure for the profits of so-called professional
farms, without taking account of either non-farm income or the
incomes of other household members. As for the EAA, the main
result it gives is the surplus remaining after the costs of all the agri-
cultural products have been covered. These two systems do not
therefore give any direct information on the standard of living of
agricultural households. The IAHS project was conceived for this
purpose, but it has never produced reliable and comparable results.

4.104. The statistical instruments represented by FADN and EAA have
made it possible from their inception to monitor, evaluate and analyse
changes in the income generated by agricultural activity, both across the
agricultural sector as a whole and by farm specialisation. Moreover, since
the most significant part of farm households’ income comes from agricul-
tural activity (and mainly commercial holdings), these statistics also make
it possible to monitor and analyse changes in farm households’ income in
a relatively reliable way. In fact, this is in line with of Article 33 (a) and
(b), which explicitly link the goal of ensuring a fair standard of living for
the farming community to increases in income generated by agricultural
activity.

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4.105.
Each of the statistical tools provides additional information in the
decision-making process. Therefore, they should be seen as complementary
parts in a very complex policy field.

The statistics of the EAA and of the FADN have for many years provided
very useful, reliable and relevant information on the incomes generated by
agricultural activity. This information has proved very important for the
monitoring, evaluation and design of the common agricultural policy. So
far these figures on income from agriculture could be regarded as relatively
reliable estimates of farm households’ income to the extent that the latter
draw the major part of their income from farming.

The socio-economic developments in the agricultural sector and recent
changes in agricultural policy (in particular as regards rural development)
may well require more detailed figures on farm income. Although reliable
statistics on the income of agricultural households already exist in a con-
siderable number of Member States, it would be worth making a study of
the feasibility and cost of statistics that measure the standard of living of
the farming population across all the Member States of the Union.

The financial situation and income levels of farming undertakings and in
the agricultural sector generally will continue to be the subject of regular
monitoring on the basis of FADN and EAA data, the harmonisation and
consistency of which will need to be strengthened through increased col-
laboration among the various services concerned.

4.106. Directive 90/423/EEC, amending Directive 85/511/EEC on
control measures for FMD, sets up a comprehensive system for the preven-
tion, control and eradication of the disease.

While banning prophylactic vaccination for technical and economic rea-
sons, the Directive introduced contingency planning for FMD and a sys-
tem of antigen reserves to cater for the possibility of emergency vaccination,
and modified other animal health legislation in order to prevent the spread
of the disease.

4.105.
In conclusion, the Community statistical systems do not at
present provide enough information on the net incomes of agricul-
tural households and do not allow the standard of living of the agri-
cultural population to be assessed. The Commission should there-
fore redefine precisely the Community’s needs in this area and
reorientate the existing statistical systems accordingly.

Management and supervision by the Commission of control measures
and expenditure relating to foot and mouth disease (44)

4.106. The need to complete the single market and promote trade
in livestock in general made it essential for the Community to estab-
lish a common policy for preventing and controlling foot-and-
mouth disease (FMD). As from 1992, therefore, it extended to all
Member States the ban on preventive vaccination of livestock
against the disease and introduced a complex system of prevention
and control with the aim of both restricting the introduction of the
virus and preventing it from spreading throughout the territory of
the Community. In the event of an epidemic, contaminated animals
were to be slaughtered, the carcasses destroyed, and premises and
equipment disinfected. All the expenditure defrayed by Member
States in this connection would then become partially reimbursable
from an emergency veterinary fund set up within the EAGGF Guar-
antee Section.

Following the 2001 crisis Member States requested reim-
4.107.
bursement of 1 616 million euro from the emergency veterinary
fund. That cost, combined with the scale of the outbreak, was the
motivation for the Court’s audit. The audit had three objectives: to
ascertain, firstly, whether the method of analysis used by the Com-
mission as the basis for the eradication strategy was up to date; sec-
ondly, whether the strategy had been implemented effectively;

(44) Special Report No 8/2004 (in process of being published).

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and thirdly, whether the system for reimbursing to Member States
expenditure on compensating farmers and slaughtering their ani-
mals was adequate, rapid and non-discriminatory. In as far as some
of the lessons learned from previous epidemics might be relevant to
the strategy for preventing and controlling FMD, the Court exam-
ined Commission action before, during and after the crisis.

4.108. The report emphasises that, before the 2001 crisis, the
Commission had not revised its strategy in the light of changes in
risk factors.

4.108.
In 1990 the Commission defined the overall strategy of the
Community as follows: ‘Maintain the FMD- and infection-free status of
the Community without practising prophylactic vaccination’.

This strategy has since been supported by Member States, the European
Parliament and the relevant industries. It is science-based, operates on
established international standards and balances the risk of virus introduc-
tion with the technical and economical possibilities to react to the occur-
rence of the disease.

Furthermore, the Commission feels that, although this strategy is not for-
mally updated, it incorporates enough regular scientific information to be
operational (1).

As far as an assessment of the Commission’s action before the crisis is con-
cerned, the report of the British National Audit Office on FMD notes under
9c: ‘if contingency plans were not sufficient to deal with an outbreak on this
scale, it is unrealistic to expect that any could have coped with all the prob-
lems and difficulties that arose or that the authorities could have forecast
the unprecedented nature of the 2001 outbreak’.

Whilst at the time of FMD crisis in 2001 not all measures in preparation
were ready for implementation, due credit or acknowledgement as regards
the progress which has been achieved by the Commission since the estab-
lishment of the single market in 1993 is not given in the present report.

(1) Following the outbreaks of FMD in Italy and Greece, to which the Court refers
below, the Commission together with the Member States analysed in the Stand-
ing Veterinary Committee the epidemiological situation and the effects of the
control measures applied; based on the output of working groups involving all
Member States, a report was prepared in 1998 outlining the principles of a
future FMD control policy. The Scientific Committee also prepared a report on
emergency vaccination in 1999. Each year the Commission coordinates the posi-
tion of Member States in the General Session of the OIE, including positions on
the FMD chapter of the Animal Health Code. Member States, together with the
Commission as observer, discuss biannually the FMD situation in the world and
Europe within the framework of the European Commission for the Control of
FMD at the FAO. Taking into account the experience of past crises Council
Directive 2001/89/EC summarised the lessons to be learned from the classical
swine fever epidemic in parts of the EC in 1996/97 and provided ample oppor-
tunity to discuss key strategies for the control and eradication of major infectious
livestock diseases. More recently, and in the light of the 2001 outbreak, the
Community strategy defined in 1990 was unanimously reconfirmed by the Inter-
national Conference in December 2001, by the Resolution of the EP in Decem-
ber 2002, in the Commission proposal for a new Directive submitted to the
Council in December 2002, and finally by the Council adopting Directive
2003/85/EC following an opinion of the European Parliament, the European
Economic and Social Committee, and the Committee of the Regions.

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4.109.
It also shows that in the absence of comprehensive evalu-
ation and inspections by the Commission before 2001, some weak-
nesses in the prevention and control arrangements were not cor-
rected in time, especially as regards protective measures at borders,
animal feed, contingency plans, sheep identification, and the mes-
saging system concerning livestock movements between Member
States (ANIMO). Parliament criticised the Commission for failing to
review Member States’ contingency plans before the crisis, but
acknowledged that the Commission acted very positively during
it (45). At the time of the crisis the Commission did, in fact, identify
very quickly the weaknesses of the arrangements and their imple-
mentation in the Member States, as regards the number of veteri-
narians, disease notification and rapid culling, but it was too late to
remedy them. More particularly, the Court observed that the effec-
tiveness of the arrangements that had been introduced relied heavily
on farmers notifying the disease immediately and complying with
movement restrictions.

4.109. The Commission is constantly analysing the animal health situ-
ation in Member States and third countries and in particular has taken
measures addressing the points raised by the Court as follows:

(a) The controls by the Commission in Member States

The Commission’s veterinary inspection services carried out missions in
Member States in relation to the implementation of Community legisla-
tion with regard to control measures for major epidemic diseases.

(b)

Provisions for the prevention and control of FMD

FMD is an exotic disease as regards the Community. In order to prevent
the introduction of the virus, the Commission has established a system of
import conditions and controls. In addition, the Commission in coopera-
tion with international organisations supports neighbouring countries in
their efforts to control and eradicate the disease.

The provisions of Directive 85/511/EEC together with specific measures
adopted by Comitology facilitated the eradication of FMD in 2001.

(c)

Protection of borders

There were strict rules in place before the 2001 outbreak. Some of these
provisions were reinforced during or shortly after the 2001 crisis.

(d)

Swill feeding

In 1980 feeding of swill to pigs was prohibited, unless such swill was col-
lected, processed and provided under specific conditions authorised and con-
trolled by the competent authorities.

(e) Contingency planning

The inspection of the implementation of the approved contingency plans
had started before the crisis.

(f)

Identification of small ruminants

Identification of small ruminants allowing the tracing of the holding of ori-
gin was already regulated by Directive 92/102/EEC.

(g) ANIMO system

The ANIMO system was very useful for the initial tracing of animals that
had been dispatched from the UK to other Member States during a period
of three weeks preceding the detection of the first outbreak. The problems
encountered relate to primarily to the rapid movement and re-certification
of fattening sheep.

(45) European Parliament resolution adopted on 17 December 2002,

paragraph 54.

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(h) Compliance with movement restrictions

Movement restrictions imposed in accordance with Community and
national legislation on disease control measures must be enforced by the
Member State concerned.

The Commission’s response and the decisions taken during the crisis were
deemed to be prompt and appropriate.

The Commission invites the Court to consider the declarations of the Coun-
cil during the crisis, as well as the conclusions of the International Confer-
ence on the prevention and control of FMD held on 12 and 13 Decem-
ber 2001 in Brussels.

Furthermore, the European Parliament’s Resolution of 17 December 2002,
which endorses the modified report mentioned in footnote (2), acknowledges
in paragraph 53: ‘The Commission responded to the crisis immediately and
took the necessary decisions. In the course of the crisis, it promptly adapted
and documented its decisions on the basis of the opinions of the standing
committee in the light of the events. No shortcomings have been identified
in the Commission’s management of the crisis. The high quality of the
Commission’s work in controlling the crisis has also been expressly stressed
by the national veterinary authorities of Member States concerned’.

4.110. The audit showed that the Community financing system
could be further improved. The compensation paid to farmers by
Member States was not always adequately defined at Community
level, even though it was reimbursed at a rate of 60 % of the amount
accepted as eligible by the Commission. In the absence of a better-
defined Community framework the Member States were able to
introduce a variety of systems that gave rise to variations in the
treatment of farmers within the Community.

4.110. The Commission does not have legal authority to harmonise at
Community level the indemnification paid by Member States to their live-
stock farmers in the event of an epidemic.

However, the Commission took care to harmonise the conditions for Com-
munity reimbursement of Member States, under which the amounts pre-
sented by the Member States were reduced by EUR 583 million (of a total
of 1 051 million).

4.111.
Since then, the recent revision of the Community regula-
tions has remedied many omissions. Nevertheless, the financial
framework was not revised and the Community measures are still
minimal in terms of the notification of the disease, supervision of
farms and speed of culling. There is thus a risk that Member States’
application of these measures could once again prove to be insuf-
ficient to contain a future epidemic, and yet still give rise to Com-
munity reimbursement.

4.111.
Financial framework: since 2002, the Commission has been
working on reviewing the arrangements for Community cofunding so that,
inter alia, improper overstatement of the value of animals, to which farm-
ers in the United Kingdom were particularly prone during the crisis, could
be curbed and the burgeoning costs of eradicating diseases reined in. A pro-
posal to this effect will be made soon.

From the veterinary point of view, it is important to note that:

First of all, there is no alternative to the system of notification of diseases.
The EU standards comply with international standards.

(2) Report on measures to control foot and mouth disease in the European Union in
2001 and future measures to prevent and control animal diseases in the Euro-
pean Union – European Parliament report of 28 November 2002 (FINAL
A5-0405/2002).

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4.112. The Court recommends that the Commission update its
evaluations and analyses of the strategy at a time when there is no
crisis. It is in favour of looking for ways of including farmers in the
control system, to induce them to notify the disease rapidly and to
comply with movement restrictions. Lastly, it calls on the Commis-
sion to clarify the financial framework as applied to epidemics of
animal disease and, as far as possible, reduce financial risk to the
Community budget.

Secondly, livestock holdings are under veterinary supervision and this super-
vision is being increased by stricter requirements for animal welfare,
on-farm investigations to ensure compliance with public health require-
ments (food-chain approach) and in the context of disease eradication or
control programmes.

Finally, the Commission has taken a number of measures to strengthen fur-
ther controls on the movement of animals.

Community legislation on animal health in general and disease control
measures in particular allows the Member States to implement the most
appropriate measures for rapid eradication of the disease concerned. The
measures laid down are minimum measures that may be or in other cases
must be supplemented according to the epidemiological situation.

The Commission wishes to point out that a large part of the overall costs
of an epidemic, including all indirect costs, is borne by the affected Mem-
ber State.

4.112. With regard to the general control strategy for major infectious
diseases there are no alternative strategies to the measures currently pro-
vided for in Community legislation. These measures aim at disease eradi-
cation while providing sufficient flexibility with regard to the instruments
employed. The control measures for CSF in wild boar and for bluetongue
are examples of this flexible approach.

By placing more emphasis on emergency vaccination in the event of major
epidemic diseases (CSF, bluetongue, AHS, FMD) Community legislation
provides for the instruments to limit the direct costs of disease control mea-
sures.

Decision 90/424/EEC provides a sensible incentive for producers to notify
animals showing suspicious clinical signs at the earliest opportunity (see
also 92). In addition, there are penal measures to be taken by Member
States in cases of non-compliance with control measures.

In agreement with the request of the European Parliament, the Commis-
sion launched a study on existing compensation schemes in Member States
and received the final report in October 2003. As a matter of follow-up
and based on dedicated budget arrangements, a further study should pro-
vide exact expert estimates and calculations to carry out an impact assess-
ment. These will be discussed with the Chief Veterinary Officers in Sep-
tember 2004 and will be presented to the International Conference on the
prevention and control of infectious animal diseases in December 2004.

Guidelines on the nature and scale of eligible expenditure are currently
being adopted in order to clarify the financial framework and reduce the
risks for the Community budget.

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Recovery of irregular payments under the common agricultural policy

4.113. Member States are obliged to notify the Commission when
they detect irregular payments over 4 000 euro made under the
common agricultural policy (CAP) and to attempt to recover such
payments (46). Where recovery is not possible the sums concerned
are written off and the losses are borne by the Community unless
non-recovery is due to the negligence of the Member State con-
cerned. There is provision for a ‘blacklist’ (47) to identify recipients
of irregular payments in excess of 100 000 euro in any one year.
Under separate arrangements (48) Member States report all debts to
the Community arising from the CAP and the progress of recovery.

(46) Council Regulation (EEC) No 595/91 (OJ L 67, 14.3.1991, p. 11).
(47) Council Regulation (EC) No 1469/95 (OJ L 145, 29.6.1995, p. 1).
(48) Commission Regulation (EC) No 296/96 (OJ L 39, 17.2.1996, p. 5).

4.113.
For the protection of its financial interests, Community legisla-
tion lays down reporting requirements as regards Community fields of
activity (3). The Member States must send regular reports of irregularities
which have been the subject of primary administrative or judicial findings
of fact. Regulation (EEC) No 595/91 organises the system of communi-
cations of irregularities in the field of the expenditure by the EAGGF –
Guarantee Section (European Agricultural Guidance and Guarantee Fund).

In order to facilitate exploitation of the information notified to the Com-
mission, the Community legislation contains a detailed list of the informa-
tion to be provided, in particular the provision which has been infringed,
the amounts in question, the practices used to commit the irregularity, and
the natural or legal persons involved (4).

Member States have the obligation to prevent and deal with irregularities
and to recover amounts lost as a result of irregularities or negligence (5).
Regulation (EEC) No 595/91 provides for the communication of all
irregularities above EUR 4 000 to the Commission, meaning that all
behaviour, intentional or not, that results in the infringement of a provi-
sion of Community law has to be communicated. The Commission has
taken different initiatives in order to ensure that cases should be identified
as a fraud or an irregularity.

The mutual notification and information system thus established is the
concrete expression of the mutual duties of sincere cooperation arising from
Article 10 of the EC Treaty (6), on which the Commission’s antifraud strat-
egy, defined in July 2000 (7), rests. This partnership between the Commis-
sion and the Member States is also the guiding principle behind the pro-
visions of secondary legislation.

As the Council has stressed on a number of occasions, it is essential that
the information supplied be consistent and of high quality if the Commis-
sion is to make the best use of it in stepping up the fight against fraud and
ensuring that cases are properly followed up (8), at both national and Com-
munity level.

(3) See in particular Article 3(1) of Council Regulation (EEC) No 595/91 of
4 March 1991 (OJ L 67, 7.3.1997), Commission Regulation
(EC) No 1681/94 and (EC) No 1831/94 (OJ L 191, 27.7.1994) for expen-
diture, and Article 6(5) of Council Regulation (EC, Euratom) No 1150/2000
for traditional own resources.

(4) Except for Council Regulation (EC, Euratom) No 1150/2000 implementing
Decision 94/728/EC, Euratom on the system of the Communities’ own resources
(OJ L 130, 31.5.2000), where this information is optional only.

(5) See Article 8 of Regulation (EC) No 2988/95 (OJ L 312, 23.12.1995) and

Article 8 of Regulation (EC) No 1258/1999 (OJ L 160, 26.6.1999).

(6) As confirmed by the Court in the Zwartfeld and Yugoslav maize (cases). Case
C-2/88 [1990] ECR I-3365, 13.7.90; Case C-68/88 Commission v Greece
[1989] ECR 2965.

(7) COM(2000) 358 final of 28.6.2000 and Action Plan 2001 to 2003

(COM(2001) 254 final of 15.5.2001).
(8) Including the accounting and recovery aspects.

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4.114. At the end of 2002 total irregular payments reported since
1971 totalled 3,1 billion euro. Of this sum 537 million euro had
been recovered from beneficiaries and 252 million euro written off
at the expense either of the Community or of the Member State
concerned. The remaining 75 % of reported irregular payments
were still ‘pending’, neither recovered nor written off. Most reported
irregular payments relate to intervention in markets: expenditure in
the fruit and vegetable sector and on export refunds accounts for
over half of the total.

4.115. The Court found that Member States provide information
about irregularities as required but do so with varying delays. There
are also inconsistencies in the data. There are discrepancies between
the data supplied by Member States and the figures in the database
drawn from them. The Commission’s database on reported irregu-
larities is not complete and accurate.

The experience gained and the improvements realised will contribute to
increasing the efficiency of the notification system and the reliability of the
data.

4.114. According to the Commission Report on the Protection of the
Financial Interests of the Community and Fight Against Fraud — Annual
Report 2002 hereafter ‘Commission Report 2002 on the fight against
fraud’, the highest amounts affected by the irregularities were reported in
the fruit and vegetable sector Member States were also informed of this
trend in several meetings as Article 280 Working Group, Cocolaf and the
Working Group ‘Irregularities and Mutual Assistance — Agricultural
Products’.

The electronic database storing the bulk of communications of irregulari-
ties transmitted by Member States has been subject to a thorough quality
check in 2003 by the Commission with the participation of Member States,
which resulted in an improved internal consistency of the data while at the
same time the figures were updated. The updated figures (see paragraph
30) outstanding at 31 December 2002 should read as follows: the total
irregular payments reported since 1971 represent EUR 2 983 million. Of
this sum, 603 million (20 %) have been recovered and 297 million have
been written off
still pending represents
EUR 2 083 million (70 %). These figures include also the updates which
the Commission received in the year 2003 and the financial impact of
Commission Decision 2003/481/EC (EUR 75 million).

(10 %). The amount

4.115.
Some Member States do not fulfil their obligation to report
within two months of the end of the quarter in which an irregularity was
detected and/or new information concerning an irregularity has become
known (Regulation (EEC) 595/91, Article 3 (1) and 5(1)). Among these
Member States, Germany and Spain account for more than 50 % of the
reported irregularities. The Commission has made Member States aware of
this problem by reporting this in the Commission Report 2002 on the fight
against fraud (paragraph 10.2.2) and discussing the problem in several
meetings as Article 280 Working Group, Cocolaf and the Working Group
‘Irregularities and Mutual Assistance – Agricultural Products’.

As regards inconsistencies, Member States have been informed of these and
were asked to update these cases by sending digital updates. In meetings
Article 280 Working group, Cocolaf and the Group ‘Irregularities and
Mutual Assistance – Agricultural Products’ explanation and ‘training’ con-
cerning ECR (Electronic Case Registry) database were given to Member
States. In general it can be said that Member States have improved the
reporting of irregularities, but not all obligations of Regulation (EEC)
No 595/91 are completely complied with.

As regards discrepancies, the Commission will continue its efforts to oblige
Member States to respect all provisions of Regulation (EEC) No 595/91
in order to receive within the delays foreseen, fully reliable data which con-
tain homogeneous information from all Member States.

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4.116. The low rate of recovery of irregular payments (a cumula-
tive recovery rate of only 17 % since 1971) is in part due to national
administrative delays and practices (suspension of action to recover
until related legal action concerning fraud has been completed,
absence of preferred creditor status for CAP debts, no disincentive
to frivolous appeals) and to the Commission’s reluctance to accept
offers of partial settlement.

4.116. The updated rate of recovery was established at 20,2 % in May
2004 (see paragraph 30).

The Commission is fully aware of the fact that the recovery rate in Member
States is not optimal and has undertaken to improve it, in particular with
the creation of the task force recovery (see also answer to paragraph 4.118).

Paying agencies and administrative bodies in charge of the recovery process
in some Member States (Italy, Greece) have always claimed that they had
to wait for the outcome of judicial criminal procedures before proceeding
with the recovery whereas the choice of a recovery process through a civil or
administrative procedure is in some cases possible and does not preclude the
launching of a parallel criminal judicial procedure.

Consequently the initial choice of the Member State (administrative proce-
dure, civil procedure, criminal procedure) will have consequences on the
recovery delay. For a limited number of Member States, administrative
recovery procedures can be launched only after a final decision in the crimi-
nal judicial procedure if any, bearing in mind that the latter might take 15
years or more.

In Italy, for the pre-1995 cases, 46 % were subject to a criminal procedure
whereas this percentage represented 18 % only for the cases posterior to
1995, which could be explained that the Member State decide to take the
necessary administrative steps as early as possible and as soon as there was
a notification of the irregularity.

In shared management, the Member State responsible is in direct contact
with the debtors. The Commission is not in a position to write off debts.
According to Regulation (EC) No 1258/1999 the Commission is legally
obliged to exclude all expenditure from Community financing where that
expenditure has not been executed in compliance with Community rules.
Accepting compromise settlements and/or partial payments should be
assessed on a case by case approach on the basis of national law and in
conjunction with the criteria as laid down in Article 8 of Regulation (EC)
No 1258/1999.

4.117. Only 10 % of reported irregular payments have been writ-
ten off, partly because Member States have put forward few cases
as irrecoverable, partly because the Commission has been slow to
take action on long-standing irregular payments. The Commission
had no adequate criteria for deciding whether sums written off
should be charged to the Member States or borne by the Commu-
nity and has inadequate information on whether write-off decisions
are carried out correctly.

Following the Communication of

4.117.
the Commission entitled
‘Improving the recovery of Community entitlements arising from direct and
shared management of Community expenditure’ of 3 December 2002
(COM(2002) 671 final), the Commission decided to set up a joint OLAF-
Directorate-General for Agriculture task force Recovery in order to clear the
burden of the past, i.e. all the irregularity cases prior to 1999 and still
open in order to prepare a decision on whether the Community or the Mem-
ber State bear the financial consequences.

As regards the Court’s observation on the absence of adequate criteria for
deciding whether sums written off should be charged to the Member States
or borne by the Community, the Commission wishes to point that it has
developed throughout time and on account of the acquired experience
applied four guiding principles and a number of procedural criteria docu-
mented in July 2002 (see also point 44).

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Since the creation of the Task Force Recovery in 2003, the Commission
services have drawn up a list of detailed criteria with which all the cases are
audited in order to have the amounts not recovered charged either to the
Community or the Member State.

4.118. Responsibilities for the treatment of irregular CAP pay-
ments are shared between OLAF and the Directorate-General for
Agriculture: formal and effective responsibilities differ; misunder-
standings occur. The Commission does not make systematic use of
the information it obtains about irregularities when managing and
proposing changes in the CAP.

4.118.
Following the allocation of responsibilities stated in Annex 2 of
Commission Document SEC(95) 249 dated 10 february 1995,
UCLAF/OLAF was to receive all communications notified by Member
States under Council Regulation (EEC) No 595/91 and was responsible
for the analysis and follow-up of the cases in question, including input of
the data concerned into the irregularity-data base.

OLAF responsibility in matters of recovery action related to cases of fraud
and irregularity includes the production of summary notes for each case
containing a snapshot of the procedures performed and the reasoning
behind the proposals for possible financial correction within the clearance
of accounts procedure undertaken under
the
Directorate-General for Agriculture as Authorising Officer. The clearance
procedure is conducted by the Directorate-General for Agriculture, but
throughout its different steps, this DG is assisted by OLAF (see also
point 4.121).

responsibility of

the

4.119. The ‘blacklist’ does not work. Only six Member States have
ever notified a company or individual under these arrangements
(37 entities in total) because they fear that placing a company or
individual on the blacklist may leave them open to legal redress and
possible damages.

The Commission always draws the legal consequences on the fraud proof-
ing and control capability of the existing CAP regulations, taking on board
in particular the follow-up recommendations of the Office.

The Commission considers that the allocation of responsibilities between
OLAF and the Directorate-General for Agriculture has been clearly defined:
the Commission
according to Annex 2 to the Communication of
SEC(95) 249 of 10 February 1995 OLAF is responsible in matters of
recovery on reported irregularities. Any decision to write off irrecoverable
amounts has to be taken by the Commission via the EAGGF clearance of
accounts procedure that is conducted by the Directorate-General for Agri-
culture, in which OLAF assists throughout its different steps.

4.119. On account of new communications, the number of Member
States making use of the blacklist has risen to seven. In total, an average of
44 notifications (the total number may fluctuate) were issued concerning
31 companies and 16 individuals.

Council Regulation (EC) No 1469/95 established, in the field of EAGGF
Guarantee, a system for identifying economic operators who present a high
risk for the Community Budget through a communication system via the
Commission. After eight years of application of this Regulation, it appears
that the number of communications is rather limited if not weak.

The Commission has extensively discussed the matter in the framework of
the Irregularities and Mutual Assistance/Agriculture products group and
is committed to presenting a Second Report to the European Parliament
and to the Council containing comprehensive assessment of the blacklist
Regulation and suggested options for action.

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4.120. The separate arrangements by which Member States report
all debts due to the Community in respect of the CAP have been
improved in recent years but still have a number of weaknesses. It
is not possible to reconcile the data produced with those for irregu-
lar payments.

4.121. The Court recommends the Commission to consider
changes in the arrangements for the reporting, recovery and writing-
off of irregular CAP payments to remedy the weaknesses set out
above. The division of responsibilities between OLAF and the
Directorate-General for Agriculture should be clearer. The Commis-
sion should consult with Member States on the future of the ’‘black-
list’.

4.120. There is a difference between the amounts contained in table 105
(receivable which is certain and not subject to any condition, receivable of
fixed amount expressed precisely in cash terms, receivable due and not sub-
ject to any payment time) for the EAGGF financial exercise and the
amounts embodied in the ECR data base (amount of quarterly reported
irregularities for one particular term, which can be at that stage mere esti-
mates subject to subsequent refinements).

The Commission has asked the Member States to undertake a tentative re-
conciliation of the ECR database with the data of Table 105, bearing in
mind that both sets of data will never coincide. Until now, first priority was
to improve the quality of the data. The data of ECR database has reached
now a level of reliability that it will be possible to compare the data.

4.121. Member States should shift in the near future to the electronic
format for reporting of irregularities. The electronic format will increase the
data quality, the on time reporting of irregularities and will avoid misun-
derstandings and misinterpretations.

The Commission is currently assisting Member States in this respect and is
also considering an increase of the threshold from EUR 4 000 to 10 000
in order to reduce the dataflow and focus on the most important cases.

The Commission has undertaken to bring forward draft proposals to modify
(EEC) Council Regulation No 595/91 and Council Regulation (EC)
No 1258/1999 to seek to remedy the weaknesses in reporting, recovery
and write off of irregular CAP payments.

The Commission considers that the allocation of responsibilities between
OLAF and Directorate-General for Agriculture has been clearly defined:
according to Annex 2 of
the Commission
SEC(95) 249 of 10 February 1995 OLAF is responsible in matters of
recovery on reported irregularities. Any decision to write off irrecoverable
amounts has to be taken by the Commission via the EAGGF clearance of
accounts procedure that is conducted by Directorate-General for Agricul-
ture, in which OLAF assists throughout its different steps.

the Communication of

Finally, regarding the suggested abolition of the blacklist, the Commission
while sharing the view of the Court that the system does not work well,
thinks there is room for improvement of the scheme and would rather see
the application of the tool by the Member States to be improved than sim-
ply abolished. There is certainly area for improvement, and the sheer exist-
ence of the regulation is designed to have a preventive impact which, admit-
tedly, diminishes if not effectively applied. In this context, it is worth
pointing out that clearance of accounts started to systematically include
aspects regarding the application of the blacklist in its audits.

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The introduction of a system of identification and registration of bovine
animals (SIRB) in the European Union (49)

4.122.
Identification and registration of bovine animals serve as
the basis for tracing beef and veal and form part and parcel of the
conditions to be met in order for the various premiums for bovine
animals to be paid. These premiums amounted to over 7 000 mil-
lion euro in 2002 and come to over 8 000 million euro in 2004.

4.123. The main objective of the audit was to evaluate the system
of identification and registration of bovine animals (SIRB) at the
level of the Commission (conception, monitoring of its introduc-
tion and follow-up) and of the Member States (operating system
allowing animals actually to be traced from birth to slaughter and
guaranteeing that all direct aid is paid correctly).

4.124. The SIRB that was introduced, which should have been
operational by 31 December 1999 at the latest, still evidenced cer-
tain weaknesses when examined by the Court. The main finding is
that the SIRB is unable to guarantee that bovine animals moved
within or outside the Community can be traced, and yet around
three million head of cattle are moved every year (some 4 % of the
livestock population).

(49) Special Report No 6/2004 (in process of being published).

4.124. The Commission takes note of the findings of the auditors dur-
ing their missions carried out from October 2001 to June 2002 in the four
Member States concerned. In 2002 FVO carried out missions on trace-
ability to all Member States and provided recommendations to address the
shortcomings found by the inspectors.

The Commission has noted the shortcomings in the management of pass-
ports for bovine animals which are traded within the Community. Accord-
ing to Article 6 of Regulation (EC) No 1760/2000 of the European Par-
liament and of the Council, Member States ‘may issue a passport for
animals from another Member State. In such cases, the passport accom-
panying the animal on its arrival shall be surrendered to the competent
authority, which shall return it to the issuing Member State… In the case
of death of an animal, the passport shall be returned by the keeper to the
competent authority within seven days after the death of the animal. If the
animal is sent to the slaughterhouse, the operator of the slaughterhouse
shall be responsible for returning the passport to the competent authority’.
The legislator, the Council and the European Parliament, laid down no
detailed implementing rules on this issue. Since the adoption of the Regu-
lation the Commission has provided clarification on this issue during dis-
cussions in several Commission working groups.

It is the responsibility of Member States to have in place a national data-
base for bovine animals and to ensure that the requirements are met. The
database must contain up-to-date information on all bovine animals and
all movements whereby the traceability is ensured.

Furthermore with regard to the traceability of animals in intra-Community
trade it should be noted that such animals must be accompanied by a
health certificate in accordance with Council Directive 64/432/EEC, which
includes information on the official individual identification of the animals
concerned.

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4.125. The general framework of the system was laid down by the
Parliament and the Council. The Commission was given the task of
implementing certain components of the system but responsibility
for implementing the system lies with the Member States. No pro-
cedure for exchanges of information between Member States regard-
ing movements of animals was introduced into the rules, as such
exchanges were compromised de facto because information formats
vary from one Member State to another. All attempts to reconcile
information from these different databases have failed. Member
States interpreted certain elements of the Community regulations in
different ways. The Commission has not been made responsible for
taking application measures with regard to the databases and the
monitoring of them, which partly explains the differences observed
between Member States.

4.125. Responsibility for the implementation of Regulation (EC) No
1760/2000 lies with the Member States. Bovine animals must be iden-
tified within a period determined by the Member State as from the date of
birth of the animal, at the latest at the age of 20 days and in any event
before the animal leaves the holding of birth (Article 4); births, deaths and
movements must be notified to the competent authority within a period
fixed by the Member State of between three and seven days (Article 7); and
passports must be returned to the competent authority by the last keeper
(Article 6).

However, the Commission has acknowledged the need for precision of the
deadline for notification by the keeper of births to the competent authority.
To this effect a Regulation (EC) No 911/2004 — has been adopted which
clarifies this issue.

4.126. The control and penalty systems in place are not adapted
to the holders of bovine animals, such as vendors, assembly centres
or abattoirs. Moreover, the information contained in the databases
such as late notifications or the rate of retagging is not used as a
control tool. Control practices also differ greatly from one Member
State to another.

4.127. As regards monitoring the implementation and follow-up
of the SIRB, the Commission has interpreted its role narrowly and
has not provided for any control over the setting-up of the data-
bases. Not a single uniform management rule has been laid down,
nor has any indicator of the quality of the way the data bases work
been defined. The procedures for determining whether the data-
bases are operational are unsatisfactory and the Commission’s role
has too often been confined to noting the technical existence of the
database without evaluating how it actually works on the basis of
precise management rules or predefined quality indicators.

4.126. The Commission takes note of the statement of the auditors that
the current provisions for controls and penalties are not adapted to the
activity of all categories of keepers. However, it should be noted that the
detailed rules laid down concern the minimum level of controls and the
minimum administrative penalties leaving the option open to Member
States to go beyond these requirements. For controls it is specified that the
minimum rate shall be increased immediately when it is established that
Community legislation regarding identification has not been complied with.
According to the detailed rules for controls, which were laid down in 1997
and codified by Commission Regulation (EC) No 1082/2003, the criteria
for selecting holdings for on-the-spot inspections must include proper com-
munication of the data to the competent authority.

4.127. The legislation places a clear obligation on the Member States
to put in place a national database for bovine animals, which should be
fully operational by 31 December 1999 and must be able to supply, at any
time, the identification number of all animals present on a holding and a
list of all movements to and from the holding. It is the responsibility of
Member States to ensure that such requirements are met. The limited role
of the Commission’s recognition of the fully operational character of the
national databases as laid down in Article 6(3) of Regulation (EC) No
1760/2000 is in line with the political choice made by the legislator of
having separate national databases in the different Member States instead
of a single Community database. It is also clear that harmonisation of the
characteristics of the national databases has not been considered a desir-
able objective by the legislator, which has left the Member States free to
design their own databases. Attempts made by the Commission to estab-
lish, if not harmonise, interoperability between the national databases have
been rejected by the Council of Ministers, as acknowledged by the auditors.

4.128. The Commission should have sufficient means available to
play a genuine role in controlling the system by establishing, inter
alia, uniform management rules, quality indicators and a format for
information exchange between national databases. Exchanges of
information between Member States, or even with non-Member
States, should be organised with a view to controlling intra- and
extra-Community flows.

4.128. With regard to the national databases, the Commission acknowl-
edges the need for established transparent criteria and benchmarks based
on shared standards. Despite the legal vacuum, the Commission services are
pursuing the review and consolidation of the criteria and benchmarks cur-
rently used.

C 293/142

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.129. The administrative controls in force in the various Mem-
ber States should also be compared and the cross-checks that are to
be carried out between the SIRB and IACS databases before the vari-
ous premiums are paid should be defined. The on-the-spot control
system should also be reviewed, including the penalty systems, and
a specific approach should be laid down for each type of holder of
bovine animals, and finally an approach that is entirely integrated
into the IACS should be made obligatory.

4.129. The Commission considers that to integrate the identification sys-
tem with IACS would, given the systems’ different objectives, jeopardise the
smooth operation of the animal premiums system and could be open to
legal challenges. The IACS concerns itself, inter alia, with animals for
which CAP premium has been claimed; therefore the only relevant ‘recon-
ciliation control’ to be made is to ensure that such animals appear in the
SIRB.

In drafting IACS legislation and interpretations thereof, due care has been
taken to ensure that aid reductions or exclusions are applied in proportion
to the offence and only where appropriate. The Commission believes that
regulatory controls should be as practical and efficient as possible, whilst
providing the necessary financial safeguards.

4.130. The Commission welcomes the report of the Court of Auditors,
but has difficulty in endorsing a number of the Court’s conclusions.

Sound financial management audit of the common organisation of the
market in raw tobacco (50)

4.130. The EU produces about 5 % of the world’s raw tobacco
making it the fifth largest producer. It exports more than half its
own production however, because the aroma and taste of most of
the tobacco cultivated is not in demand within the EU. This pro-
duction is predominantly of Virginia and Burley varieties of neutral
aroma and taste used as the main cigarette filler. Smaller quantities
of oriental varieties are also grown which have the required aroma
and taste in demand. Consequently, it imports from outside the EU
the tobacco which meets the aroma/taste requirements and takes
9 % of the world’s production making it the biggest importer. The
major EU producers are Italy, Greece and Spain who together
account for 87 % of total production. Production is characterised by
a large number of growers dedicating small individual areas to its
cultivation. Mechanisation is limited and production cost high. EU
growers cannot make a reasonable living without the EU aid as the
premium represents around 75 % of producers’
income from
tobacco production. Were EU tobacco production to cease, this
would not affect manufacturers of tobacco products who would
obtain supplies through increased imports.

4.131. The EU has been supporting its tobacco cultivation
through a common market organisation (CMO) since 1970 and the
annual budget is some 1 000 million euro. The market has been
reformed substantially, first in 1992, 1998 and again in 2004, in
efforts to provide appropriate income support within budgetary
limits, improve the response to market requirements and thus the
value of production. It was hoped that growers would become less
dependent on aid. Other measures are targeted towards facilitating
voluntary departure from the sector and alternative cultivation.

(50) Special Report No 7/2004 (in the process of being published).

30.11.2004

EN

Official Journal of the European Union

C 293/143

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.132. The Court has reported on the operation of the CMO on
three previous occasions. It concluded, in its last report in 1997,
that the measures adopted in 1992 had achieved no measurable
effect on the high level of subvention in relation to the value of pro-
duction, the areas planted, the level of employment or the EU’s mar-
ket situation.

4.133. The objective of this audit was to assess whether the
reforms introduced in 1998 were soundly based and well managed
by Member States. It also examined how the Commission had
monitored and evaluated implementation and whether the objec-
tives of the reformed CMO had been achieved.

4.134. As a result of its examination the Court concluded that the
process by which the Commission elaborated its proposals for the
1998 reform was based on unreliable data and its analysis of the
market was inadequate. Because of these failings the measures
adopted were largely inappropriate from the outset and proved to
be ineffective in many areas. There is no evidence that the CMO has
influenced EU production so as to reduce the mismatch of supply
and demand. The Court also found that the measures introduced
did not achieve significant improvements in the income from
tobacco cultivation or the market balance anticipated. The value of
production was also put at risk by anti-competitive behaviour, in
the form of price agreements, in the three largest producer states.

4.134. The Commission’s proposal for the 1998 reform was based on a
report presented in 1996. This report was based on the most reliable data
available at that time, which suffered from some limitations. The Commis-
sion does not consider that its market analysis was affected by this lack of
data. The reform did significantly reduce the production of the two lowest
quality groups of tobacco, thereby addressing the problem that the quali-
ties grown were not suited for the market demand. The alleged anti-
competitive behaviour within the tobacco sector is being followed up by the
Commission (see also point 4.139).

4.135. There were numerous failings in Member States to apply
the checks required by the regulations and the verification of key
controls and the pursuit of corrections through the clearance-of-
accounts process should have been extended. No clearance of
accounts decision has been taken as at June 2004.

4.135. The Commission’s clearance of accounts departments were not
inactive as regards tobacco. Based on their own risk analysis, and taking
into account certain preliminary remarks of the Court of Auditors, they
launched an investigation into tobacco in 2001 (audits in Greece, Italy,
France and Germany) plus another three audits in 2003 (Greece, Italy and
Spain). The procedures following the 2001 audits have been finalised for
Germany and France. For some of the other Member States, however, the
Commission is aware of some delays and will attempt to finalise its inves-
tigations as soon as possible.

The Commission notes the extended list of key controls now proposed by
the Court. However, the Commission defined the key controls to be carried
out in the tobacco sector in 2001 and is of the opinion that they cover the
essential controls laid down in the Regulation.

C 293/144

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.136. The Commission’s monitoring was unsatisfactory and the
evaluation of the CMO was delayed. The findings of the evaluation
carried out by external consultants were made public in a report in
October 2003 and are, on common issues, very similar to those of
the Court.

4.136. The Commission is of the opinion that its monitoring proved sat-
isfactory.

Article 26 of Regulation (EEC) No 2075/92 required the Commission to
submit a report on the functioning of the common organisation of the mar-
ket in raw tobacco to the European Parliament and to the Council before
1 April 2002. The Commission submitted the requested report (9) in
November 2002, seven months behind deadline.

In the meantime, the Commission had employed an external evaluator to
examine the CMO. This evaluation (10) was available in October 2003.
Furthermore, in preparation for a reform of the raw tobacco sector, the
Commission carried out an extended impact assessment (11) which was
completed on 23 September 2003.

In July 2002 the Commission published its mid-term
4.137.
review of the common agricultural policy and proposed a new strat-
egy for sustainable development across the agriculture sector which
would be based on decoupling aid from production and providing
support to farmers through a single farm payment scheme. The
audit also examined how this might affect the tobacco CMO.

4.138. The reform adopted by the Council in April 2004 (51)
envisages phased decoupling of the aid from production. Future
support for tobacco producers will be included in the single farm
payment scheme. There will also be a specific financial envelope for
the restructuring of tobacco-producing areas.

4.138. On 22 April 2004 the Council of Agriculture Ministers decided
to fundamentally reform the support for the tobacco sector. The 2004
Reform provides that, from 2010 onwards, tobacco aid will be completely
decoupled from production. Half of the aid will be transferred to the single
farm payment and the remaining half will be used for restructuring
tobacco-producing regions under the rural development policy. In a four-
year transition period, between 2006 and 2009, at least 40 % of the aid
will be decoupled and integrated in the single farm payment. Member
States may decide to retain up to 60 % as a coupled payment. The coupled
payment has to be granted in such a way as to ensure equal treatment
between farmers and/or according to objective criteria such as for tobacco
producers situated in Objective I regions or for tobacco farmers producing
varieties of a certain quality. Further criteria may be considered in the
future. The 2004 reform should in principle resolve all of the present dif-
ficulties.

(51) Council Regulation (EC) No 864/2004 (OJ L 161, 30.4.2004, p. 48).

(10) Evaluation of the common organisation of the market in raw tobacco. COGEA,

2003. Rome. 220 pp.

(11) Tobacco sector, Extended Impact Assessment. COM(2003) 554 final,

SEC(2003) 1023.

(9) Report to the European Parliament and the Council on the operation of the com-
in raw tobacco. SEC(2002) 1183,

the market

mon organisation of
6.11.2002.

30.11.2004

EN

Official Journal of the European Union

C 293/145

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.139. The Court welcomes the present reform, which should go
some way to addressing many of the weaknesses identified by the
audit, although this will take some time. The Court recommends
that the Commission pursue their investigations of the anti-
competitive behaviour in Member States and, if it is confirmed, take
appropriate action. The Member States’ failures to apply the checks
required by the regulations should also be pursued and corrections
applied where possible.

4.139. The Commission has issued Statements of objections concerning
alleged cartels in the raw tobacco markets in Spain and Italy (in December
2003 and February 2004 respectively). These statements of objections con-
tain the preliminary conclusions of the Commission’s investigations on
alleged anti-competitive behaviour by producer groups and processors in the
two Member States which started in October 2001 and January 2002
respectively. Issuing a statement of objections is a preliminary step in the
procedure that may lead to the adoption of a prohibition decision impos-
ing fines on the companies concerned.

As regards possible financial corrections the Commission refers to the ongo-
ing clearance of accounts procedure following the 2001 and 2003 audits.

C 293/146

EN

Official Journal of the European Union

30.11.2004

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30.11.2004

EN

Official Journal of the European Union

C 293/151

CHAPTER 5

Structural measures

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Objective and scope of the audit

The internal control environment at the Commission

Paragraphs

5.1-5.5

5.6-5.69

5.6

5.7-5.11

Risk analyses carried out by the Commission: Member States’ management and control
systems do not yet provide sufficient assurance of the legality and regularity of expen-
diture

5.8

Implementation of the internal control standards: generally satisfactory progress by the
structural measures Directorates-General

Follow-up to the Action Plan

Management of the 1994-1999 programme period

5.9-5.10

5.11

5.12-5.40

Improvements made to the financial control framework, although late in the programme
period

5.12-5.13

Management and control systems in the Member States: failures to respect regulatory
requirements

5.14-5.22

The Court’s substantive testing of transactions: final expenditure declarations contain sig-
nificant levels of error

Closure of 1994-1999 programmes: delays in the Member States…

… and problems for the Commission’s examination of files…

… have slowed the closure of the 1994 to 1999 programme period

Limited extent of Commission’s closure audits

Management of the 2000 to 2006 programme period

5.23-5.27

5.28

5.29-5.37

5.38-5.39

5.40

5.41-5.56

Further financial control requirements introduced into the regulatory framework

5.41

The Commission’s supervision of the Member States’ systems: limited assurance on the
legality and regularity of expenditure

5.42-5.46

The operation of the management and control systems in the Member States: failure to
respect regulatory requirements still to be found in the current programme period

5.47-5.54

The Court’s substantive testing of transactions: systems weaknesses corroborated as
errors persist in the current programme period

Annual activity reports and declarations of the Directors-General

Overall positive assurance on the legality and regularity of expenditure limited by seri-
ous reservations on the operation of the Member States’ management and control sys-
tems

Follow-up of observations from previous Statements of Assurance

Conclusions and recommendations

5.55-5.56

5.57-5.62

5.57-5.62

5.63-5.65

5.66-5.69

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Follow-up to observations in Special Report No 7/2000 on the International Fund for Ireland
and the Special Support Programme for Peace and Reconciliation in Northern Ireland and the
border counties of Ireland (1995-1999)

Scope of the Special Report and the main recommendations

The International Fund for Ireland

Assessment of financial needs

Paragraphs

5.70-5.86

5.70-5.71

5.72-5.76

5.72-5.73

Appropriate evaluation criteria for project applications consistently applied and adhered
to

5.74-5.75

Routine monitoring of the Community contribution in IFI projects and evaluation of the
projects’ merits

5.76

Special Support Programme for Peace and Reconciliation in Northern Ireland and the bor-
der counties of Ireland (1995 to 1999)

5.77-5.86

Further assistance to the implementing bodies ensuring consistent selection criteria for
local community projects and social groups as well as guidance and resources ensuring
assistance to the same projects and groups

Assessment of financial needs based on projected activity

Review of non-governmental bodies’ work

Documented project appraisals according to specific, written criteria

Introduction of appropriate control mechanisms

Assessment of synergy and coordination between IFI and Structural Funds

5.77-5.78

5.79

5.80-5.81

5.82

5.83-5.84

5.85-5.86

Principal observations in special report No 4/2004 on programming of Interreg III

5.87-5.97

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

5.1.
Structural measures support the economic and social devel-
opment of the European Union. The measures are financed by the
Cohesion Fund and the four Structural Funds: the European
Regional Development Fund (ERDF), the European Social Fund
(ESF), the European Agricultural Guidance and Guarantee Fund,
‘Guidance’ section, (EAGGF-Guidance) and the Financial Instrument
for Fisheries Guidance (FIFG). The Structural Funds co-finance
socio-economic development programmes in the Member States
and the Cohesion Fund co-finances projects to improve the envi-
ronment and develop transport infrastructure in Member States
whose per capita GNP is less than 90 % of the Union average (1).

5.2.
For the 2000-2006 period, the total budgeted expenditure is
230 177 million euro (2). Graphs 5.1 and 5.2 give a breakdown
of the expenditure committed and paid in 2003. Most of the
expenditure is directed towards three priority policy objectives:

— Objective 1: promoting the development and structural adjust-
ment 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 modernisation of
policies and systems of education, training and employment.

Community Initiatives account for just over 5 % of Structural mea-
sures expenditure in 2003. These are programmes of Community
interest carried out in and by the Member States at the initiative of
the Commission to supplement actions implemented under the
main programmes.

(1) In 2003: Greece, Spain, Ireland and Portugal.
(2) 210 579 million euro for the Structural Funds and 19 598 million euro

for the Cohesion Fund (at 2003 prices).

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Graph 5.1 — Breakdown of commitments by budgetary area in 2003

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

Graph 5.2 — Breakdown of payments by budgetary area in 2003

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.3.
Structural Funds assistance takes the form of ‘operational
programmes’ which are made up of large numbers of operations or
projects, whereas Cohesion Fund assistance is based on contribu-
tions to individual projects (3). The measures are implemented
through the co-financing of national and regional programmes and
individual projects (4). Each programme or project must be
approved by the Commission and is accompanied by an indicative
financial plan which specifies the amount of Community aid and
the Member State’s contribution. For the 1994 to 1999 period the
Commission approved 1 104 Structural Funds programmes and
920 Cohesion Fund projects. For the 2000 to 2006 period there
are 470 Structural Funds programmes and 450 Cohesion Fund
projects (5).

For the 1994 to 1999 and previous programme periods, con-
5.4.
tributions for structural measures were paid in the form of advances
and final payments, the latter constituting the ‘closure’ of the pro-
grammes or projects. Community financing in the 2000 to 2006
programme period takes the form of a single initial advance pay-
ment of 7 % of the total contribution to the programme or project,
followed by the periodic reimbursement of expenditure declared by
the Member States and final payments. These reimbursements are
called ‘interim payments’. For the Structural Funds, each payment
by the Commission concerns a given Fund and a given programme.

5.5.
Structural measures are subject to the principle of ‘shared
management’. This means that, while the Commission implements
the Community budget on its own responsibility, management and
control of the measures is shared by the Commission and the Mem-
ber States and the latter are required to cooperate with the Com-
mission to ensure that expenditure is made in accordance with the
principles of sound financial management (6). Four Directorates-
General of the Commission are concerned; the Directorate-General
for Regional Policy (DG REGIO) for the ERDF and the Cohesion
Fund, the Directorate-General for Employment and Social Affairs
(DG EMPL) for the ESF, the Directorate-General for Agriculture
(DG AGRI) for EAGGF-Guidance and the Directorate-General for
Fisheries (DG FISH) for the FIFG. DG REGIO has a coordinating
role for matters concerning all the Funds, such as the development
of management initiatives or the issue of technical guidance to
Member States.

(3) The Commission may also carry out direct innovatory and technical

assistance actions, up to a budgetary limit of 0,65 %.

(4) For ease of reference, the single term ‘programme’ is used throughout the
text to refer generally to Structural Funds assistance. A programme may
receive assistance from more than one Fund.

(5) These are the figures before the approval of programmes and projects for

the new Member States from 2004.

(6) Article 274 of the Treaty establishing the European Community.

5.5. The Commission would refer to its communication of 6 Septem-
ber 2004 on the respective responsibilities of the Commission and the
Member States for shared management (COM(2004) 580).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT
OF ASSURANCE

Objective and scope of the audit

5.6. The objective of the audit was to contribute to the Court’s
Statement of Assurance on the general budget through a specific
assessment for the Structural measures area as a whole. For that
purpose, the audit examined in particular the operation of the
supervisory and control systems at the Commission and in the
Member States, and assessed to what extent the internal controls
built into these systems give assurance on the legality and regular-
ity of the underlying transactions. On the basis of a random selec-
tion of programmes and projects from the prior (1994-1999) and
current (2000-2006) programme periods, the Court performed
tests of underlying transactions as an independent check and in
order to obtain further evidence on the operation of the funds. The
audit focused on:

— the internal control environment at the Commission;

— the management of the 1994-1999 programme period;

— the management of the 2000-2006 programme period;

— the Annual Activity Reports and declarations of the Directors-

General;

— a follow-up to previous observations in recent Statements of

Assurance.

The internal control environment at the Commission

5.7.
In the context of the ongoing reform of the financial and
operational management and control systems of the Commission,
the audit examined the operation of internal controls at the Com-
mission, in particular the management of risks and the implemen-
tation of the internal control standards (see paragraphs 1.87-1.91).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.8. The Commission considers that the supervision and control it exer-
cises over the Member States are an adequate response to the risk of irregu-
larity in the underlying transactions. In a given year the Commission can
cover by its own audit work a limited number of Member States’ systems,
particularly having regard to other risks, such as the closure of the previous
programme period, to which the Court refers. The Commission has a mul-
tiannual audit strategy for its own audit work aimed at achieving a rea-
sonable assurance on the functioning of the systems during the programme
period.

Risk analyses carried out by the Commission: Member
States’ management and control systems do not yet provide
sufficient assurance of the legality and regularity of
expenditure

5.8. The main risks which may be identified to the legality and
regularity of expenditure for Structural measures arise from the
shared management by the Commission and the Member States, the
multiplicity of bodies and authorities — with different control
structures and practices — which intervene in the management pro-
cess, the large number of programmes each of which may contain
several thousand projects, implemented over a period of years, and
from weaknesses which may occur in the management and control
systems. Similarly to last year, the Court’s examination of the risk
analyses carried out by the Directorates-General responsible for
managing structural measures did not give rise to any observations.
The Commission again recognises the risk that it is unable to obtain
adequate assurance that operations carried out in the Member States
for the programme period 2000 to 2006 are legal and regular as the
management and control systems in the Member States do not in
all cases provide sufficient assurance of the legality and regularity of
expenditure. In 2003, the Commission continued to make improve-
ments to its internal control systems and to analyse the systems
descriptions submitted by Member States. The Commission’s desk
reviews and on-the-spot checks in the Member States of the man-
agement and control systems have identified a number of weak-
nesses, although the on-the-spot visits have covered only a limited
number of those systems (see paragraphs 5.42-5.46).

Implementation of the internal control standards: generally
satisfactory progress by the structural measures
Directorates-General

5.9. The Court’s examination focused on the implementation by
the structural measures Directorates-General of the eight internal
control standards (out of a total of 24) of particular importance for
the legality and regularity of expenditure (7). The Synthesis of the
2002 Annual Activity Reports required the implementation of all
the standards before the end of 2003.

For DG REGIO and DG EMPL, the implementation of the
5.10.
standards was generally found to be good. DG FISH had not fully
implemented two (8) of the standards and DG AGRI had yet to fully
implement one of them (see also paragraph 4.23). As regards Stan-
dard 17 ‘Supervision’, both DGs are developing or formalising pro-
cedures to complete its implementation.

(7) Standard 11 ‘Risk analysis and management’, Standard 12 ‘Management
information’, Standard 14 ‘Reporting improprieties’, Standard 17 ‘Super-
vision’, Standard 18 ‘Exception reporting’, Standard 20 ‘Recording and
correction of internal control weaknesses’, Standard 21 ‘Audit reports’
and Standard 22 ‘Internal audit capability’.

(8) Standards 17 ‘Supervision’ and 22 ‘Internal audit capability’.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.11.
Substantial progress has been made in the implementation of the
two actions concerning shared management. By September 2004 the Com-
mission had adopted communications on the legal responsibilities under
shared management (COM(2004) 580) and on the alignment of audit
methodology in this area (COM(2004) 3115); in December 2003 the
Commission also published revised audit manuals for the Structural and
Cohesion Funds. In the draft legislation for the Structural Funds in the
2007-13 period the Commission has also taken up the idea of annual dec-
larations by an independent audit body which was also mentioned in
action 17.

Follow-up to the Action Plan

5.11. The Court examined the follow-up given by the structural
measures Directorates-General to the action plan introduced by the
Commission to remedy weaknesses identified (two of the actions
concern aspects of shared management). These actions were con-
tained in the 2001 Synthesis Report, with a deadline for comple-
tion in 2004, and are still being implemented (see also
paragraphs 1.84-1.86).

Management of the 1994-1999 programme period

Improvements made to the financial control framework,
although late in the programme period

5.12. Commission Regulation (EC) No 2064/97 (9), which
entered into force in November 1997, was an important step in the
development of the management and control arrangements for the
Structural Funds. It introduced a set of common minimum require-
ments for the Member States’ management and control systems.
The principal elements are:

— the requirement for the Member States to put in place manage-
ment and control systems which provide satisfactory certifica-
tion of the validity of claims for payments;

— a sufficient audit trail, permitting the reconciliation of declara-
tions made to the Commission and the accounting records in
the Member States, as well as the identification of the alloca-
tion of the Community funding;

— a minimum level of independent checks (at least a 5 % sample),
additional to the day-to-day management checks of operations,
to verify the effectiveness of the management and control sys-
tems, the respect of Community requirements and the accuracy
of the expenditure declarations; and

(9) Commission Regulation (EC) No 2064/97 of 15 October 1997 estab-
lishing detailed arrangements for the implementation of Council Regu-
lation (EEC) No 4253/88 as regards the financial control by Member
States of operations co-financed by the Structural Funds (OJ L 290,
23.10.1997, p. 1). The Cohesion Fund systems are governed by Council
Regulation (EEC) No 1164/94 of 16 May 1994 establishing a Cohesion
Fund (OJ L 130, 25.5.1994, p. 1).

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— the requirement (under Article 8) for Member States to present
to the Commission, at the closure of each programme, a statement
drawn up by a person or organisation functionally independent of
the implementing service; this statement should summarise the con-
clusions of the checks made in the previous years and provide an
overall conclusion as to the legality and regularity of the operations
underlying the final declaration of expenditure.

5.13. The Member States had to develop their control structures
in response to all these requirements. However, the Regulation did
not enter into force until November 1997 and there were delays in
providing appropriate guidance. As the Court has previously
noted (10), this was too late to influence the way in which manage-
ment and control systems were originally set up; earlier implemen-
tation could have helped to avoid some weaknesses in Member
States’ systems.

5.13. The adoption of Regulation (EC) No 2064/97 substantially con-
tributed to strengthening control arrangements for the Structural Funds.
The Regulation required Member States to adapt their structures and
entered into force four years before the end of the eligibility period and over
five years before the final deadline for submitting closure dossiers. During
this period the Commission made significant efforts from the date of adop-
tion to provide guidance, answered Member States’ questions and carried
out audits to ensure correct transposition.

Management and control systems in the Member States:
failures to respect regulatory requirements

5.14. As part of the work towards the specific assessment of
structural measures expenditure, the Court examined the operation
of the management and control systems in the Member States on
the basis of a random sample of seven final payments made by the
Commission (in Germany, Spain, France, Ireland, Italy and Portu-
gal

(11).

Inadequate separation of functions

5.15.
For one of the programmes examined by the Court, a large
part of the independent checks on projects were carried out by the
same department responsible for proposing payments (12) and in
two other cases, some projects were checked by persons perform-
ing management checks or involved in the final declaration pro-
cess (13). This contravenes the fundamental control principle of the
separation of functions.

5.15. The Commission has been aware of the issue of independence of
bodies carrying out checks under Article 3 of Regulation (EC) No 2064/97
from its own systems audits carried out in 2001/2002. Guidance was
given to the independent bodies as to how to treat the matter in the closure
guidelines of the Commission.

For the cases concerned, based on the information on this point provided
by the independent body, the Commission considered that sufficient checks
had been carried out to meet the requirements of the Regulation.

(10) Court of Auditors, Special Report No 10/2001 concerning the finan-
cial control of the Structural Funds, Commission Regulations (EC)
No 2064/97 and (EC) No 1681/94 and Court of Auditors (OJ C 314,
8.11.2001), Annual Report concerning the financial year 2002, para-
graphs 5.16 to 5.21.

(11) 3 ERDF, 2 ESF, 1 EAGGF-Guidance and 1 Cohesion Fund.
(12) Ireland EAGGF-Guidance Objective 1 94IR16006.
(13) France (Pays de la Loire) ERDF Objective 2 970313015; Germany

(Thüringen) ERDF Objective 1 940209005.

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THE COMMISSION’S REPLIES

Weaknesses in the management checks of operations

5.16.
In one programme, where the organisation in charge of a
project had subcontracted the implementation of most of the
project to another body, the management checks were limited to an
examination of the invoices received by the organisation from the
subcontractor (14). The Court has previously highlighted the par-
ticular risks that subcontracted costs represent (15).

Weaknesses in the independent checks

5.17. The sampling basis used for the independent (5 % sample)
checks to verify the effectiveness of the management and control
systems and the expenditure declarations was not always clear. For
two programmes, risk factors were mentioned, but it was not clear
how they were applied (16). For another programme, a set of homo-
geneous measures were identified from which a random sample
could be drawn, but there were no specific risk factors associated
with these measures (17). In another case, no risk analysis was
made (18).

5.18.
For the programmes examined by the Court, the Member
State checks generally covered the whole period required by the
Regulation. However, the process of carrying out independent
checks under the Regulation did not start until 2000 or 2001 in
certain Member States (19).

5.16. As regards subcontracting, the Commission would refer to its reply
to paragraphs 5.20 and 5.23 of this report and to its reply to paragraph
3.66 of the 1999 annual report.

5.17.
In its guidance on closure statements the Commission made it clear
that the body issuing the statement must satisfy itself that the sampling
basis was adequate. The Commission checked the information given on this
aspect in its analysis of the statements.

For the Azores programme the statement indicated that the sample was
balanced across the measures of the programme and took account of the
level of financing involved.

For Ireland (EAGGF Guidance Section), based on the information avail-
able, and especially the confirmations of the independent body, the Com-
mission considered that sufficient independent checks had been carried out
to meet the requirements of the Regulation.

(14) Italy (Emilia-Romagna) ESF Objective 3 940009I3.
(15) Court of Auditors — Annual Report concerning the financial year 1999,

paragraph 3.66.

(16) Portugal (Azores) ERDF Objective 1 941209013; France (Pays de la

Loire) ERDF Objective 2 970313015.

(17) Germany (Thüringen) ERDF Objective 1 940209005.
(18) Ireland EAGGF-Guidance Objective 1 94IR16006.
(19) Court of Auditors, Special Report No 10/2001 concerning the finan-

cial control of the Structural Funds, paragraph 33.

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5.19. The Regulation indicates what the checks should cover,
such as the practical application and effectiveness of the manage-
ment and control systems, the correspondence of accounting
records with supporting documents, respect of Community require-
ments and the provision of appropriate national co-financing. For
three programmes, the checks failed in some cases to include spe-
cific aspects related to the eligibility of expenditure co-financed by
the Structural Funds (20).

5.19. The Commission is examining the Court’s findings in the light of
the replies of the authorities of the Member States concerned. It will take
account of the results for its closure audits. The Commission considers that
the instructions provided in Portugal on the content of the checks were com-
prehensive.

In two cases, the Member State checks were not carried out
5.20.
at the projects. In one case, on the grounds that projects had been
systematically subject to management control visits, the Member
State — referring to specific correspondence with the Commission
— carried out the independent checks entirely on documentation
without any visits to projects, in contradiction to the Commission’s
general guidance (21). In another case, a subcontractor, acting with-
out a formal contract, could not produce evidence for the amount
he had charged to the project promoter (22). In two other cases, the
checks were limited to the organisation managing the aid, with few
checks of invoices (23).

5.20. The Commission is examining the Court’s findings in the light of
the replies of the authorities of the Member States concerned. It will take
account of the results for its closure audits. Where the Commission has
found cases where Member States had not checked supporting documenta-
tion held by the final recipients of aid, it has required them to quantify the
expenditure affected and carry out further audit work if necessary.

For Ireland (EAGGF Guidance Section), based on the information avail-
able, and especially the confirmations of the independent body, the Com-
mission considered that sufficient checks had been carried out to meet the
requirements of the 1994-1999 Regulations.

Concerning the ESF case in Italy (Emilia Romagna) referred to in footnote
21, the guidance note sent by the Commission to the Italian authorities
states that the independent body may also base its work on duly docu-
mented checks already carried out on the spot, but those checks must of
course comply with certain conditions to be verified by the independent
body; in particular, they must have been carried out using appropriate
methods and with a sufficient degree of independence and reliability. The
Commission, which has complied with its own guidance notes, did not
therefore specify that the checks could not be carried out on the spot.

As regards the ESF subcontracting case in Portugal (Madeira) referred to
in footnote 22, the Commission is particularly vigilant on the question of
fictitious or unnecessary subcontracting whose aim is essentially to increase
the costs declared. The Commission has therefore introduced the rule on eli-
gibility sheet No 4, whereby subcontracting which is unjustified or does
not add value is not admissible.

(20) Ireland EAGGF-Guidance Objective 1 94IR16006; Germany (Thürin-
gen) ERDF Objective 1 940209005; Portugal (Azores) ERDF Objective
1 941209013.

(21) Italy (Emilia-Romagna) ESF Objective 3 940009I3.
(22) Portugal (Madeira) ESF Objective 1 947000P1.
(23) France (Pays de la Loire) ERDF Objective 2 970313015; Ireland EAGGF-

Guidance Objective 1 94IR16006.

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5.21. The checks did not in general cover projects in their entirety.
In some cases Member States included project costs in their calcu-
lations of the 5 % requirement which had not been audited on an
appropriate sampling basis (24). In one programme, projects not
audited were included in the calculation of the percentage coverage
of the checks, on the grounds that a systems audit had been carried
out and that the systemic error discovered in the audit of a single
project had been corrected for all the projects concerned. This sig-
nificantly inflated the percentage coverage reported (25). For another
programme, the checks had covered 28 % of the total expenditure.
However, the Court’s audit showed that only a part of them had
actually been carried out at projects by persons independent of the
managing department, and that these checks had mostly been con-
centrated on one of the three managing bodies (26).

5.21. The Commission is examining the Court’s findings in the light of
the replies of the authorities of the Member States concerned. It will take
account of the results for its closure audits. According to the information
contained in the closure statements, in all three ERDF cases the percentage
of total programme expenditure checked exceeded the minimum 5 %
requirement (7,9 %, 12,8 %, and 23,9 %).

Concerning the case referred to in footnote 25 (ESF Portugal Madeira), it
should be pointed out that the Portuguese authorities did indeed comply
with the regulatory minimum percentage of checks to be carried out.

For Ireland (EAGGF Guidance Section), see the response to paragraph
5.15.

Statements accompanying final expenditure declarations: underestimation of
errors by Member States

5.22.
For part of the sample of payments examined by the Court,
the expenditure declarations and accompanying statements pro-
vided by the Member States at the closure of programmes — attest-
ing the legality and regularity of the expenditure — contained sig-
nificant levels of error (see paragraphs 5.23-5.27). The closure
statements made by these Member States by contrast generally indi-
cate minimal levels of error (less than 1 %). This is due to the poor
quality and limited coverage of the checks performed, and because
for the cases examined the Member States have not attempted to
draw appropriate conclusions from the checks for the programme
as a whole (27).

5.22.
In its guidance to Member States on the Article 8 statement, the
Commission insisted that Article 8 bodies give an opinion on the quality
of the checks performed, indicate the rate of error found and point out and
quantify potential systemic problems. The Commission has required addi-
tional information or audit work from the Member States or proposed
financial corrections when the examination of Article 8 statements has
shown them to be deficient for any of these reasons.

For all cases the Commission will take the appropriate action once com-
plete information from Member States has been received and examined.

Concerning the ESF Portugal Madeira case referred to in footnote 27, dur-
ing the programming period the Portuguese authorities carried out inde-
pendent checks relating to the whole period; in addition, they did indeed
comply with the regulatory minimum percentage of checks to be carried out.
Abnormalities detected were also rectified, with verification of all projects
involving the same operator. The circumstances giving rise to errors were
reviewed and taken into account in the risk analysis for subsequent checks.

(24) Germany (Thüringen) ERDF Objective 1 940209005; Portugal (Azores)
ERDF Objective 1 941209013; France (Pays de la Loire) ERDF Objec-
tive 2 970313015.

(25) Portugal (Madeira) ESF Objective 1 947000P1.
(26) Ireland EAGGF-Guidance Objective 1 94IR16006.
(27) Portugal (Madeira) ESF Objective 1 947000P1; France (Pays de la Loire)
ERDF Objective 2 970313015; Germany (Thüringen) ERDF Objective
1 940209005.

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THE COMMISSION’S REPLIES

The Court’s substantive testing of transactions: final
expenditure declarations contain significant levels of error

5.23. A total of 139 projects from seven programmes (see para-
graph 5.14) were selected for substantive testing in the Member
States. This revealed a significant number of failures to respect the
ineligible expenditure and projects (28),
regulatory provisions:
expenditure without supporting documents (29), incorrect calcula-
tion of the Community contribution (30) and other failures (31).

5.23. The Commission is examining the Court’s findings in these cases
in the light of the replies of the authorities of the Member States concerned
and any additional information obtained where necessary. Once it has com-
pleted this examination it will take whatever action is necessary.

The Commission also confirms that, in the case of contractual relations,
once the services have been provided the subcontractor does not have to jus-
tify its invoicing provided that it complies with the terms of the contract.
Provided the subcontracting/provision of services adds value and that mar-
ket prices are charged, the profit is recognised and legitimate.

5.24.
For the sub-programmes of the three ERDF programmes (32)
audited in the Member States, the Court found irregularities indi-
cating significant overpayments.

5.24. The precise level of overpayments resulting from the errors identi-
fied by the Court will be determined in the Commission’s follow up of the
cases, taking full account of the arguments presented by the Member States.

(28) Ineligible expenditure and projects:

The declaration of projects which do not fit into the programme crite-
ria: Germany (Thüringen) ERDF Objective 1 940209005.
Declaration of expenditure incurred outside the eligible area or outside
the eligible period: France (Pays de la Loire) ERDF Objective 2
970313015; Portugal (Madeira) ESF Objective 1 947000P1.
(Azores) ERDF Objective 1
Declaring expenditure twice: Portugal
941209013; Ireland EAGGF-Guidance Objective 1 94IR16006; Ger-
many (Thüringen) ERDF Objective 1 940209005.
Failure to respect job creation criteria: Germany (Thüringen) ERDF
Objective 1 940209005.
Declaration of ineligible expenditure relating to the day-to-day manage-
ment tasks of the claimant public administration: Ireland EAGGF-
Guidance Objective 1 94IR16006.
Other ineligible expenditure: Ireland EAGGF-Guidance Objective 1
94IR16006.

(29) Expenditure without supporting documents:

Expenditure without adequate supporting documents: Ireland EAGGF-
Guidance Objective 1 94IR16006; France (Pays de la Loire) ERDF Objec-
tive 2 970313015; Portugal (Madeira) ESF Objective 1 947000P1.
Declaration of estimated rather than actual expenditure: France (Pays de
la Loire) ERDF Objective 2 970313015; Portugal (Madeira) ESF Objec-
tive 1 947000P1.
Failure to maintain a separate accounting system or adequate account-
ing codes to enable identification of the Community funding: France
(Pays de la Loire) ERDF Objective 2 970313015.
The allocation of a proportion of overhead costs to projects without any
underlying calculation supporting the amount attributed: Portugal
(Madeira) ESF Objective 1 947000P1.

(30) Incorrect calculation of the Community contribution:

Failure to take account of potential generation of revenue or other
income when calculating the rate of Community contribution to
projects: Portugal (Azores) ERDF Objective 1 941209013.
Exceeding the maximum public subsidy limit: Germany (Thüringen)
ERDF Objective 1 940209005.

(31) Other failures: Failure to provide information and publicity measures for
the participation of the Structural Funds: France (Pays de la Loire) ERDF
Objective 2 970313015; Germany (Thüringen) ERDF Objective 1
940209005; Portugal (Azores) ERDF Objective 1 941209013; Portu-
gal (Madeira) ESF Objective 1 947000P1.

(32) Germany (Thüringen) ERDF Objective 1 940209005; France (Pays de la
Loire) ERDF Objective 2 970313015; Portugal (Azores) ERDF Objec-
tive 1 941209013.

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THE COMMISSION’S REPLIES

5.25.
In addition to checking 1998 and 1999 transactions, during the
programming period the Portuguese authorities carried out independent
checks relating to the whole period.

5.26.
For Ireland (EAGGF Guidance), based on the information avail-
able, and especially the confirmations of the independent body, the Com-
mission considered that the programme could be closed. All the additional
elements raised by the Court following its on-the-spot audit will be fol-
lowed up as appropriate.

5.27. Article 2 of Regulation (EC) No 2064/97 provided that Member
States’ systems should check the accuracy and eligibility of expenditure.
Although the Regulation does not specify this requirement, national
administrative systems in many cases provided for controls at management
level. For the current period the Commission specified this requirement in
Article 4 of Regulation (EC) No 438/2001.
Notwithstanding the problems identified by the Court, the Commission
considers that the thorough checking of closure documentation, its closure
audits of a risk-based sample of programmes and the application of finan-
cial corrections for inadequate checks or individual errors provide a sound
basis for obtaining reasonable assurance on the expenditure cofinanced.

5.25.
For one of the ESF programmes, the independent checks by
the Member State had covered a sample of transactions from 1998
and 1999, leading to a correction in the declared expenditure, based
on an extrapolation of the results of the checks. The Court found a
higher level of error in the same sample (33). The differences stem
to a large extent from a different treatment of inconsistencies in the
national regulations and in their application.

5.26. The Court’s audit of the EAGGF measures within a multi-
fund programme (34) revealed a significant level of irregular expen-
diture. The audit tests were carried out on transactions throughout
the period of the programme and indicate that there were systemic
weaknesses. An indication of these weaknesses was already given in
the documentation submitted by the Member State with the request
for final payment.

5.27.
For none of the programmes examined did the management
and control systems fully satisfy the requirements of Regulation
No 2064/97. The Regulation does not contain specific require-
ments for day-to-day management checks and it is clear that the
additional independent 5 % sample checks alone cannot compen-
sate for any deficits in the management checks. The findings result-
ing from the Court’s audit of projects confirm that this affects the
legality and regularity of expenditure. The overall frequency and
impact of errors is similar to that found by the Court in previous
years.

Closure of 1994-1999 programmes: delays in the Member
States…

5.28. The original regulatory deadline for the submission by
Member States of final payment claims for programmes of the
1994-1999 period was 30 June 2002 (35). Member States did not
in general meet this deadline. Council Regulation No 1260/1999
(June 1999),
laying down general provisions on the Structural
Funds, stipulated that sums for programmes of the 1994-1999
period for which no request for final payment had been received by
31 March 2003 would be decommitted. This last date was inter-
preted as the de facto final deadline — after which funds would be
lost — but still caused problems for the Member States. In order to
respect this deadline,
in many cases Member States submitted
incomplete documentation. This necessitated supplementary
requests for information by the Commission and led to delays in the
processing of the claims.

(33) Portugal (Madeira) ESF Objective 1 947000P1.
(34) Ireland EAGGF-Guidance Objective 1 94IR16006.
(35) Council Regulation (EEC) No 2082/93 of 20 July 1993, Art. 21(4),
amending Regulation (EEC) No 4253/88 laying down provisions for
implementing Regulation (EEC) No 2052/88 as regards coordination of
the activities of the different Structural Funds between themselves and
with the operations of the European Investment Bank and the other
existing financial instruments (OJ L 193, 31.7.1993, p. 20).

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… and problems for the Commission’s examination of
files…

5.29. The Commission’s closure process consists mainly of
obtaining assurance as to the eligibility and regularity of expendi-
ture claimed by the Member States for payment. The Commission
verifies in particular the adequacy of the Article 8 statement (36),
the completeness of the final report and the correspondence of the
final declaration of expenditure to the final report and Article 8
statement. This includes whether all known irregularities have been
satisfactorily treated (including appropriate recovery procedures) in
respect of:

a)

b)

c)

the statement accompanying the request for final payment as
specified in Article 8 of Commission Regulation (EC)
No 2064/97 (the 5 % checks included);

the irregularities reported by the Member States (37) to the
Community anti-fraud office or detected by the office;

audits by other national bodies, by the Commission or by the
Court.

5.30.
For the ERDF, for the 858 programmes of the 1994-1999
period 317 (almost 40 %) of the Article 8 statements required fur-
ther enquiries by the Commission. In such cases, the Commission
needs to seek more information or requests the Member State to
carry out additional audits. Up to 31 March 2004 such additional
audits were done for 51 programmes. Where appropriate, the
Commission may propose the reduction or cancellation of the pay-
ments claimed by the Member State. The Commission had already
decided or proposed such action in 127 cases (almost 15 % of all
ERDF programmes of the 1994 to 1999 period) up to the same
date.

5.31. The Court examined the processing by the Commission of
Member States’ requests for final payments, taking a sample of
77 files out of 2 170 claims received by the Commission (38).

(36) Article 8 of Commission Regulation (EC) No 2064/97 of 15 Octo-
ber 1997 establishing detailed arrangements for the implementation of
Council Regulation (EEC) No 4253/88 as regards the financial control
by Member States of operations co-financed by the Structural Funds
(OJ L 290, 23.10.1997, p. 1).

(37) As required by Regulation (EC) No 1681/94.
(38) 33 ERDF (of which 2 closed), 27 ESF (of which 5 closed), 13 EAGGF-

Guidance (of which 5 closed), 4 FIFG (of which none closed).

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5.32.
In its guidance to Member States on closure issued in May 2003,
the Commission indicated that reservations by the Article 8 body should
be quantified and taken into account. The guidelines also covered the treat-
ment of irregularities and the implementation of the sample checks.

5.32.
For 33 ERDF programme files examined by the Court,
delays or interruption in the payment procedure were linked to the
Article 8 statement in 29 cases. The Commission had found that
the statements contained a number of reservations which were not
considered in the final expenditure declaration or the request for
payment:

a)

b)

c)

d)

irregularities, ineligible expenditure and other problems not
cleared (39);

differences between the irregularities notified by Member States
to the anti-fraud office and those shown in the Article 8 state-
ment and/or final declaration of expenditure (40);

unsatisfactory implementation of projects, in particular regard-
ing cost overruns, problems with tender procedures, non-
respect of environmental criteria, inconsistencies in construc-
tion works (41);

uncertainties concerning the independent 5 % checks carried
out or failure to make checks at the final recipients (42); the
statements did not always provide details on the risk analysis
underlying the sampling of projects for the 5 % checks (43). In
one case examined, the confirmation requested by the Com-
mission of the work carried out by the independent body —
including whether the 5 % checks took place at projects — was
left to the authority managing the programme (44); and

e)

need for clarification as to whether sums subject to recovery
were included in the final declaration (45).

(39) Brandenburg 940209002, Sachsen-Anhalt 940209003, Sachsen
940209004, Berlin West Objective 2 1997-1999 970213004, Sach-
sen Objective 1 DG V 940209015, Attikh 940809001, Western Greece
940809003, Tourismos-Politismos 940809016, Roads-Ports-Airport
940809019, Asturias 941109002, Canaries 941109003, Incentivos
Regionales 941109015, Medio Ambiente Local 941109024, Pais Vasco
Objective 2 1997-1999 971109007, Corsica 940313024, Guadeloupe
940313025, Guyane 940313026, Tourism MoP (Irl) 940409003,
Industrial Development (Irl) 940409007, Economic Infrastructure (Irl)
940409005, Sardinia 940509001, Puglia 940509002, Infrastrutture di
Trasporto Stradali 940509016, Calabria 940509011, Hainaut
941013001.

(40) Incentivos Regionales 941109015, Aragon Objective 2 1997-1999
971109001, Pais Vasco Objective 2 1997-1999 971109007, Guade-
loupe 940313025, Tourism MoP (Irl) 940409003, Industrial Develop-
ment (Irl) 940409007, Economic Infrastructure (Irl) 940409005, Infras-
trutture di Trasporto Stradali 940509016.

(41) Sachsen 940209004, Sachsen Objective 1 DG V 940209015, Western
Greece 940809003, Roads-Ports-Airport 940809019, Aragon Objec-
tive 2 1997-1999 971109001, Pais Vasco Objective 2 1997-1999
971109007, Guadeloupe 940313025, Sardinia 940509001, Puglia
940509002, Infrastrutture di Trasporto Stradali 940509016.

(42) Brandenburg 940209002, Sachsen 940209004, Sachsen Objective 1
DG V, Aragon Objective 2 1997-1999 971109001, Pais Vasco Objec-
tive 2 1997-1999 971109007; Zuid Oost Brabant Objective 2 1997-
1999.

(43) Zuid Oost Brabant Objective 2 1997-1999; Ricerca Objective 1 1994-

1999.

(44) Ricerca Objective 1 1994-1999.
(45) Brandenburg 940209002, Sachsen-Anhalt 940209003, Sachsen
940209004, Sachsen Objective 1 DG V, Corsica 940313024, Reunion
940313028, Hainaut 941013001.

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5.33. Concerning the list of independent bodies, the Commission pos-
sessed additional information which enabled the body’s independent char-
acter to be assessed. The independence of the services concerned was also
checked in audits
implementation of Regulation (EC)
No 2064/97, the findings of which were taken into account when exam-
ining the files for the 1994-1999 closure. As regards footnote 46, the
verification of the Article 8 declaration had not been started at the time of
the Court’s audit, because the final reports which were analysed in the first
instance had not been accepted for either of the programmes.

the

for

Regarding footnote 47, the Commission refers to its reply to paragraph
5.20.

With regard to footnote 48, it took eight months to deal with those cases
because of consulting other departments in order to ensure that irregulari-
ties were handled correctly.

5.34. The closure statements were of variable quality, despite the Com-
mission guidelines in that respect and the reminders to Member States to
follow the guidelines for the preparation of the closure statements.

In the cases where Agriculture Directorate-General considered that prob-
lems bearing a risk for EAGGF-Guidance
for
clarifications/further information were addressed to Member States before
the closure.

requests

existed,

5.33. The examination at DG EMPL showed that, concerning the
check of the independence of the bodies in the Member States draw-
ing up the Article 8 statements, the list of the certifying agencies
held by the Commission for this purpose was not exhaustive. For a
number of files, the Commission suspended the closure procedure
and requested clarification and further information from the Mem-
ber State regarding the independence of the body providing the
Article 8 statement or the content of the final expenditure declara-
tion. In two cases, the statements and final reports contained no
information on the control examinations carried out by the Mem-
ber State during the programmes, but the Commission did not ask
for any clarification (46). In five programmes examined, the 5 %
checks had not taken place at projects (47). In two cases, the Com-
mission took over eight months to request further information from
the Member State (48).

5.34. The audit of files at DG AGRI revealed that the documents
submitted by the Member States were of variable quality and, for
those cases examined, were insufficient to allow the programmes to
be closed (49). For example: there was no information on the period
covered by the checks (50); the sample of projects to be checked was
not made using risk analysis (51); there was insufficient indepen-
dence of the body making the 5 % checks and the checks were not
always made at the project and were made before the final pay-
ments to the projects (52).

5.35.
For five EAGGF-Guidance programmes examined by the
Court, the Member States failed to properly assess the financial
impact of control weaknesses found in the systems audits or in the
audit of projects (53). In other cases, the Commission withheld pay-
ment but failed to officially inform the Member State of the suspen-
sion of the procedure: in two of the programmes examined, the
Commission addressed an initial request for information only in
May 2004 (54).

(46) Germany 941001D1, Germany 943001D3.
(47) Italy 940019I1, 940013I2, 940012I3, 940022I1, 940017I1.
(48) Spain 940112ES1, 970234ES2.
(49) Spain 94ES06016, Italy 94IT06045, Portugal 94PT16004, Spain Inter-
Ireland
reg Z1 97EU16002, United Kingdom 94UK060160 5a,
94IR06009, France (Brittany) 94FR06016 5b, France (Guadeloupe)
Objective 1 94FR16002SPD, Sicily 94IT16033, Spain 94ES06032, Ger-
many 94DE06007, Italy 94IT06056, Austria 95AT06016.

(50) Spain 94ES06016.
(51) Spain 94ES06032, Italy 94IT16033.
(52) Ireland 94IR06009, United Kingdom 94UK06016.
(53) Spain (Andalusia) 94ES06016, Italy 94IT06045, France (Guadeloupe)
Objective 1 94FR16002SPD, Portugal 94PT16004, United Kingdom
94UK060160 5a.

(54) United Kingdom 94UK06016, Spain 94ES06016.

C 293/168

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Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.36.
For the FIFG, most of the programmes remain to be closed,
mainly because of the inconsistencies between the Fishing Fleet Reg-
ister and the reports produced by Member States, and the time
required by the examination of the closure documents. For one of
the programmes examined by the Court (representing 37,2 % of
FIFG contribution) the analysis of the 17 Article 8 statements was
not completed more than one year after the documents had been
received (55). The examination revealed the following weaknesses in
the Member States’ independent checks:

5.36. The FIFG likewise contributes towards achieving the objectives of
the common fisheries policy, including as regards compliance with the mul-
tiannual guidance programmes (MAGPs) for the fleet. It should therefore
be verified that the aid was granted in accordance with those requirements.

The Directorate-General for Fisheries decided to carry out on-the-spot
checks prior to the programmes’ financial closure, after which additional
information/checks were requested from the authorities concerned.

— there was insufficient information to assess whether the sam-

pling of projects was carried out as required (56);

The Commission requested the Member State to extend the sample and to
audit more projects in order to fulfil the requirements of Regulation (EC)
No 2064/97.

— management checks have been counted towards the indepen-

dent 5 % checks (57).

The Commission considers that the checks carried out meet the requirements
of Article 3 of Regulation (EC) No 2064/97.

5.37. The variable quality of the documentation submitted by the
Member States complicates their examination by the Commission
and makes further queries necessary. This increases the risk that the
final declarations contain ineligible expenditure.

5.37. The Commission only approved final payments after obtaining
reasonable assurance that the expenditure claimed, less any deductions or
financial corrections made as a result of the thorough checking of closure
documentation and further enquiries and audit work requested, was correct
and eligible. The checks took account of the audits on compliance with
Regulation (EC) No 2064/97 and previous project audit work. In this
way, the Commission took appropriate measures to address deficiencies in
the original closure documentation, as is shown by the number of cases in
which it held up payment until problems found in the documentary checks
were resolved. The risk of cofinancing irregular expenditure is further
reduced by the on-the-spot closure audits which have been in the Commis-
sion’s annual audit plans since 2002.

… have slowed the closure of the 1994 to 1999 programme
period

at

as

Funds

31 December 2003

5.38. Table 5.1 shows the closed programmes for each of the
Structural
at
31 March 2004 (58). The table shows that less than 10 % of the
programmes had been closed before 2003. Although the Commis-
sion had initially planned to close the bulk of the remaining pro-
grammes during 2003, only 331 out of 1 090 of the main pro-
grammes and 251 out of 1 080 Community Initiative programmes
were closed by the end of 2003.

and

5.38. The inability of the Commission to meet its original target is
because the bulk of final payment claims from Member States was received
shortly before the deadline of 31 March 2003. Because of the variable
quality of the closure documentation, in many cases additional enquiries
had to be made before the claims could be processed.

(55) Spain Objective 1 94ES14101.
(56) Italy 94IT14101.
(57) United Kingdom Objective 1 94UK16003.
(58) Note that where more than one Fund contributes to the same pro-
gramme, each Fund part of the programme is closed separately. Thus
the figures do not reconcile to the total number of programmes given
in paragraph 5.3.

30.11.2004

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Official Journal of the European Union

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Table 5.1a — Structural measures: European Regional Development Fund programmes 1994-1999 closed at
31 December 2003 and 31 March 2004

Total

Closed before 2003

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number of
closure requests
received by
31 March 2003

Closed during 2003

Closed at 31 March 2004

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number
of pro-
grammes

Total Community
contribution paid (EUR)

1 630 221 560

181

39

10 590 871 154

181

57 571 255 951

84

73

0

0

0

84

2

5 165 903 927

7 157 716 211

0

0

0

3 302 548 791

355 453 472

5

62

0

0

0

0

0

0

2 963 694 368

0

0

0

0

0

0

Objective 1

Objective 2
94-96

Objective 2
97-99

Objective 3

Objective 4

Objective 5 (a)

Objective 5 (b)

Objective 6

Community
Initiatives

Total

8

13

0

0

0

25

1

540 680 214

841 930 911

0

0

0

1 050 903 786

149 180 357

48

77

24

0

0

0

37

1

13 655 869 930

3 917 833 116

1 706 724 903

0

0

0

1 485 522 350

149 180 357

520

944

9 223 064 769

82 775 943 121

38

105

245 322 179

4 839 238 107

103

189

932 468 362

14 106 034 784

184

371

1 446 640 578

22 361 771 234

(1) Structural measures objectives have since been regrouped for the 2000 to 2006 programme period.
Source: Table prepared by the Court of Auditors on the basis of data provided by the Commission.

Table 5.1b — Structural measures: European Social Fund programmes 1994-1999 closed at 31 December 2003
and 31 March 2004

Total

Closed before 2003

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number of
closure requests
received by
31 March 2003

Closed during 2003

Closed at 31 March 2004 (2)

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number
of pro-
grammes

Total Community
contribution paid (EUR)

102

22 806 888 948

0

102

20

4 263 436 869

Objective 1

Objective 2
94-96

Objective 2
97-99

Objective 3

Objective 4

Objective 5 (a)

Objective 5 (b)

Objective 6

Community
Initiatives

Total

82

72

56

16

0

83

2

373

786

1 597 251 132

2 112 708 834

13 221 222 835

2 614 128 525

0

1 057 483 760

177 902 801

4 664 895 421

0

70

1

1

0

0

0

0

2

1 225 350 076

6 262 842

53 748 169

0

0

0

0

41 705 618

48 252 482 256

74

1 327 066 705

(1) Structural measures objectives have since been regrouped for the 2000 to 2006 programme period.
(2) Figures available are as at 15 April 2004.
Source: Table prepared by the Court of Auditors on the basis of data provided by the Commission.

0

9

9

3

0

5

1

0

103 030 011

748 564 221

121 340 718

0

51 049 826

104 798 749

20

70

10

10

3

0

5

1

4 263 436 869

1 225 350 076

109 292 853

802 312 390

121 340 718

0

51 049 826

104 798 749

66

113

526 991 851

5 919 212 245

119

238

733 794 136

7 411 375 617

84

73

0

0

0

84

2

520

944

82

72

56

16

0

83

2

373

786

C 293/170

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Official Journal of the European Union

30.11.2004

Table 5.1c — Structural measures: European Agricultural Guidance and Guarantee Fund, Guidance Section
programmes 1994-1999 closed at 31 December 2003 and 31 March 2004

Total

Closed before 2003

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number of
closure requests
received by
31 March 2003

Closed during 2003

Closed at 31 March 2004

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number
of pro-
grammes

Total Community
contribution paid (EUR)

69

14 301 716 000

Objective 1

Objective 2
94-96

Objective 2
97-99

Objective 3

Objective 4

Objective 5 (a)

Objective 5 (b)

Objective 6

Community
Initiatives

Total

0

0

0

0

66

84

2

167

388

0

0

0

0

5 544 906 000

3 163 701 000

288 794 000

1 156 618 000

0

0

0

0

0

8

0

0

2

0

0

0

0

0

17 989 829

0

0

6 659 147

24 455 735 000

10

24 648 976

69

0

0

0

0

66

84

2

167

388

4

0

0

0

0

22

21

0

36

83

565 075 313

0

0

0

0

403 297 357

693 559 284

0

126 223 742

1 788 155 696

6

0

0

0

0

31

30

0

45

112

667 787 313

0

0

0

0

481 336 186

856 877 069

0

161 625 841

2 167 626 409

(1) Structural measures objectives have since been regrouped for the 2000 to 2006 programme period.
Source: Table prepared by the Court of Auditors on the basis of data provided by the Commission.

Table 5.1d — Structural measures programmes 1994-1999 closed at 31 December 2003 and 31 March 2004 — FIFG

Total

Closed before 2003

Closed during 2003

Closed at 31 March 2004

Budgetary area (1)

Objective 1

Objective 2
94-96

Objective 2
97-99

Objective 3

Objective 4

Objective 5a

Objective 5 (b)

Objective 6

Community
Initiatives

Total

Number
of pro-
grammes

Planned Community
contribution in
Commission Decisions
(EUR)

18

1 797 039 031

0

0

0

0

12

0

2

20

52

0

0

0

0

850 431 000

0

8 260 000

127 103 242

2 782 833 273

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number of
closure requests
received by
31.03.2003

Number
of pro-
grammes

Total Community
contribution paid
(EUR)

Number
of pro-
grammes

Total Community
contribution paid (EUR)

0

0

0

0

0

1

0

0

0

1

0

0

0

0

0

2 060 003

0

0

0

2 060 003

18

0

0

0

0

12

0

2

20

52

1

0

0

0

0

1

0

1

4

7

32 744

0

0

0

0

21 655 834

0

3 523 447

2 245 131

1

0

0

0

0

2

0

1

6

32 744

0

0

0

0

23 715 837

0

3 523 447

13 212 790

27 457 156

10

40 484 818

(1) Structural measures objectives have since been regrouped for the 2000 to 2006 programme period.
Source: Table prepared by the Court of Auditors on the basis of data provided by the Commission.

30.11.2004

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.39. The figures for Objective 2 include 15 programmes cover-
ing the period 1994 to 1996 with outstanding commitments of
35,15 million euro which remained to be closed at 31 Decem-
ber 2003, five years after the end of the programmes.

5.39.
For these programmes, too, the majority of Member States
exceeded the deadline of 30 June 1999 for the submission of the final pay-
ment claim.

5.40. The level of closure audits carried out in 2003 reflects the alloca-
tion by each Directorate General of its audit resources, given its other audit
priorities of 2000-2006 Structural Fund programmes, the Cohesion Fund
and the systems for pre-accession aid. The Commission considers that the
threefold strategy which it has followed of ex ante compliance audits, desk
checks of closure documentation and closure audits reduces the risk of
irregular closure payments, despite insufficient verification by Member
States in some cases. The Commission applies financial corrections on a
wider scale when systemic errors have been identified.

Limited extent of Commission’s closure audits

5.40. As already indicated in the Annual Report 2002 (para-
graph 5.21), in most cases audits on underlying expenditure are car-
ried out by the Commission only after the final payments have been
made. DG REGIO had carried out ex-post audits on 17 programmes
by the end of 2003. DG EMPL has postponed most of its ex-post
audits to 2005. DG AGRI began its ex-post audits only in mid-
2004. DG FISH has elected to carry out audits (of which it has done
15), including on individual projects, before closing programmes, as
part of its analysis of closure documents. The number of errors
found by both the Court’s and the Commission’s audits underlines
the importance of in-depth verifications in the Member States of the
declarations made at the closure of programmes. In each case, the
results of these verifications should be extended to the whole pro-
gramme audited.

Management of the 2000 to 2006 programming period

Further financial control requirements introduced into the
regulatory framework

5.41. Commission Regulations (EC) Nos 438/2001 (59) and
448/2001 (60) lay down detailed rules for the implementation of
Council Regulation (EC) No 1260/1999 (61) and stipulate the man-
agement and control systems required for Structural Funds pro-
grammes for the 2000 to 2006 period. The Regulations are based
on the same principles as Regulation No 2064/97. They develop the
control framework and further specify certain requirements, in par-
ticular:

a)

the elements of the management and control systems to be put
in place, especially concerning

i)

the definition, allocation and separation of functions, and

(59) 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).
(60) Commission Regulation (EC) No 448/2001 of 2 March 2001 laying
down detailed rules for the implementation of Council Regulation (EC)
No 1260/1999 as regards the procedure for making financial correc-
tions to assistance granted under the Structural Funds (OJ L 64,
6.3.2001, p. 13).

(61) Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down
general provisions on the Structural Funds (OJ L 161, 26.6.1999, p. 1).

C 293/172

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

ii)

the differentiation between the controls carried out during
the implementation of programmes (‘the day-to-day man-
agement checks’) and the sample checks to verify the effec-
tiveness of the systems and the accuracy of expenditure
declarations (‘the independent 5 % sample checks’);

b)

c)

the declarations of interim and final expenditure which have to
be accompanied by a certificate drawn up by a person or depart-
ment functionally independent of any services that approve
claims;

the provision by the Member State of a certificate at the closure
of each programme, drawn up by a different person or depart-
ment independent of the managing authority, giving an opin-
ion on the checks carried out during the course of the pro-
gramme and on the legality and regularity of the expenditure;

d)

the responsibility of the Member States in the first instance to
make any necessary financial corrections.

The Commission’s supervision of the Member States’
systems: limited assurance on the legality and regularity of
expenditure

5.42.
In 2003 DG REGIO continued its checks on the manage-
ment and control systems. The assessment of the management and
control systems was concluded for most of the Member States (62).
By the end of 2002, the Directorate-General had carried out audits
of systems for ERDF in all Member States. Visits were made in 2003
to seven Member States for the ERDF and to all four Cohesion Fund
Member States, but as each programme may represent a different
system, it has achieved a limited coverage. The checks on ERDF
rarely included tests of projects.

5.43. The systems audits in the Member States by DG EMPL have,
by the end of 2003, covered 46 % of the total budgeted amount for
the ESF for the 2000 to 2006 period. This has led the Director-
General to express a reservation withholding assurance on the
shared management of the ESF, because this coverage is considered
insufficient and because of weaknesses found for part of the systems
audited in the Member States.

(62) The assessment was not completed for the Community Initiatives and a
final conclusion on the systems could not be reached for Greece, Spain,
United Kingdom (Northern Ireland) and for one programme in Portugal.

5.42.
Some Member States have systems with common elements which
are applicable across many programmes, while in others the systems are
relatively different for different programmes. The figures for programmes
audited on the spot underestimate the percentage of systems that have been
checked by the Commission given the overlaps which exist across pro-
grammes. In the first phase of ERDF system audits carried out in 2001-
2003 it was not possible to carry out tests of projects because little expen-
diture had been incurred. In the second system audit enquiry starting in the
second half of 2004 such tests will be carried out. By the end of 2003 the
Regional Policy Directorate-General had audited 27 % of programmes
involving the ERDF. In 2003 it carried out a total of ten audits of the
management systems for the Cohesion Fund and six project audits.

5.43. The 46 % of the 2000-2006 programming period budget audited
made it possible to cover all the Member States and a broad sample of the
different systems set up.

The audit strategy for the 2000-2006 period, based on the concept of a
single audit through mutual exchange of audit results (see reply to para-
graph 5.68), is designed to obtain at the end of 2004 reasonable assur-
ance regarding a significant number of management and control systems
with a view to covering around 70 % of the total 2000-2006 ESF budget
for the 15 Member States.

30.11.2004

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The reservation expressed relates to the shared management of the ESF (sys-
tems at national, regional and/or local level). The control system set up in
the Directorate-General for Employment worked well and detected effi-
ciently systems with serious weaknesses.

5.44.
For EAGGF-Guidance, DG AGRI has examined the manage-
ment and control systems for all 141 programmes, and carried out
audits covering 38 programmes. It has concluded its assessment of
the systems for 25 programmes. For the remaining 116 pro-
grammes, it is seeking further clarifications. By the end of 2003, the
assessment of the management and control systems was concluded
for programmes covering 7 % of the total budgeted amount for
2000 to 2006.

5.45. As concerns the FIFG, DG REGIO (for multifund pro-
grammes) and DG FISH have examined the management and con-
trol systems for all 50 programmes. DG FISH has carried out audits
of the 16 programmes (in 13 Member States) for which it has lead
responsability. By the end of March 2004 the Commission had con-
cluded its assessment of the management and control systems for
programmes covering 24 % of the total budgeted amount for 2000
to 2006.

5.46. Although the financial control framework has been rein-
forced since the previous programme period, these weaknesses in
the Commission’s assurance on the reliability of the management
and control systems in the Member States — and thus on expendi-
ture declarations and the legality and regularity of the expenditure
which it cofinances — still pose a problem.

The operation of the management and control systems in
the Member States: failure to respect regulatory
requirements still to be found in the current programme
period

5.47.
Similarly to its work on the previous programme period
(paragraph 5.14 above), the Court examined the operation of the
management and control systems in the Member States using a ran-
dom sample of 11 payments made by the Commission on the basis
of interim expenditure declarations by the Member States (in Bel-
gium (2), Germany, Greece, Spain (3), Italy (2), Netherlands and the
United Kingdom) (63). Annex 1 provides an overview of the results
of the Court’s examination.

(63) 5 ERDF, 4 ESF, 1 EAGGF-Guidance and 1 FIFG.

5.46. The Commission is continuing its efforts through guidance, dis-
semination of good practices, audit work and financial corrections where
appropriate to increase its assurance of the reliability of Member States’ sys-
tems and thus of the legality and regularity of expenditure declared.

5.47. The Commission is examining the Court’s findings in the light of
the replies from the Member States concerned. It will make any necessary
recommendations to improve the systems.

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Unclear definition, allocation and separation of functions

5.48. A lack of separation of functions was noted in several cases:

— for one programme, the body carrying out part of the checks
on the functioning of the systems also had competence tem-
porarily for authorising payments and the body responsible for
issuing the closure statement was also involved in the checks
underlying the certification of statements of interim expendi-
ture; the certifying body is thus not independent with regard to
the drawing up of those certificates (64);

— for one part of a programme, there was no separation between

the managing and the paying authorities (65);

— for two programmes, organisations with managing responsi-
bilities for the programme were also beneficiaries of Commu-
nity funds under the programme (66).

5.48. The body responsible for issuing the closure statement is function-
ally independent but had some conflicting tasks within the framework of
Regulation (EC) No 438/2001. The Member State has improved the seg-
regation of duties by designating another body to carry out the work under-
lying the Article 9 certification.

Concerning the Belgian non-Objective 1 FIFG programme, the Mem-
ber State has announced that the requisite measures will be adopted in
order to ensure separation between the managing authority and the paying
authority.

With reference to the Apulia programme, it may be legitimate for the same
body like a local authority to be a beneficiary and at the same time to have
management functions, provided it performs the latter functions indepen-
dently.

Weaknesses in day-to-day management checks

5.49. The management and control systems should include pro-
cedures to verify the delivery of the products and services cofi-
nanced and the reality of expenditure claimed and to ensure com-
pliance with the relevant rules. The Court identified a number of
weaknesses in the Member States’ systems, similar to those which it
found in previous years. In three cases, the weaknesses are serious:
failure to check compliance with rules on the eligibility of expendi-
ture for support from the Structural Funds and late introduction of
the controls so that
limited numbers of projects have been
checked (67). In one case, the procedures in place were insufficient
to ensure that the projects carried out complied with the terms of
the programme and with the applicable national and Community
rules. For the same programme, there were insufficient checks that
projects may receive a financial contribution from more than one
Fund at a time, which is excluded by the Regulations, or that
projects may receive public funding above the permitted limit (68).

5.49. As regards footnote 69, for the ESF Dutch case, it is inherent to
the declaration system implemented via Regulation (EC) No 1260/1999
that for the interim declarations of expenditure, all the control and verifi-
cation activities have not been finalised. It is then also not exceptional that
corrections to initially declared expenditure are made in a next interim
claim.

As regards the EAGGF Guidance Section (footnotes 68 and 70), an audit
mission on the Agriculture Directorate-General on the same programme,
which took place in early 2004, detected similar problems which are now
under discussion with the national authorities.

As far as the ERDF Spanish case is concerned, at the beginning of 2004
the Commission agreed with the Spanish authorities an action plan for
improvements in their management and control systems for ERDF, with
particular reference to management checks. The recommended improve-
ments are being implemented in Galicia.

(64) Netherlands ESF Objective 3 1999NL053DO001.
(65) Belgium FIFG Outside Objective 1 2000BE14FDO001.
(66) Italy (Puglia) ERDF Objective 1 1999IT161PO009; Spain (Galicia) ERDF

Objective 1 2000ES161PO011.

(67) Spain (Galicia) ERDF Objective 1 2000ES161PO011; Italy (Piemonte)
ERDF Objective 2 2000IT162DO007; United Kingdom (East Midlands)
ERDF Objective 2 2000GB162DO004.

(68) Spain (Andalusia) EAGGF-Guidance Objective 1 2000ES161PO003.

30.11.2004

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

For two other programmes, failure to properly check amounts
declared for projects led to unreliable amounts being declared to the
Commission, necessitating subsequent corrections and cancella-
tions (69). In two cases, checks performed were not documented (70).
In a final case, the checks were largely confined to compliance with
national rules and the content of the checks was unclear (71).

Weaknesses in the independent checks of management and control systems and
expenditure declarations

5.50. The Regulation requires Member States to organise indepen-
dent checks on projects, which, as for the previous programme
period, should cover at least 5 % of the total eligible expenditure
and be based on a representative sample of the projects approved
and on risk analysis.

5.51.
In many cases, the efforts put into the closing of 1994-
1999 programmes led to delays in the Member States in organising
the systems for independent checks for the 2000-2006 programme
period. The independent checks on the 2000-2006 management
and control systems and the legality and regularity of the expendi-
ture often did not begin until 2003 or even 2004, again reducing
the preventive effect of the checks. In some cases, the checks had
either not yet been started or were not very much advanced (72),
although the Regulation requires Member States to seek to spread
the implementation of the checks evenly over the programme
period.

5.51. The Commission, too, has noted the late start of independent
checks as one of the main problems with the systems in the 2000-06
period. In the guidance on sample checks in Annex 2 to the Structural
Funds manual it has been made clear that whilst the checks need not nec-
essarily cover 5 % of expenditure each year, they should start early enough
to have a preventive effect and avoid too heavy a workload at the end of the
period.

5.52.
For some programmes, the Member State failed to apply an
appropriate sampling basis for the checks of projects (73) or did not
set out sampling criteria (74).

5.52. The Commission has given guidance to Member States on sam-
pling methods in Appendix 4 to the Structural Funds audit manual.

(69) Germany (Thüringen) ESF Objective 1 1999DE161PO002; Netherlands

ESF Objective 3 1999NL053DO001.

(70) Netherlands ESF Objective 3 1999NL053DO001 (operational centre of
The Hague); Spain (Andalusia) EAGGF-Guidance Objective 1
2000ES161PO003.

(71) Italy (Puglia) ERDF Objective 1 1999IT161PO009.
(72) Belgium (Hainault) ERDF Objective 1 1999BE161DO001; Spain ESF
Objective 1 2000ES053PO311; United Kingdom (East Midlands) ERDF
Objective 2 2000GB162DO004.

(73) Spain (Galicia) ERDF Objective 1 2000ES161PO011; United Kingdom
(East Midlands) ERDF Objective 2 2000GB162DO004; Italy (Puglia)
ERDF Objective 1 1999IT161PO009.

(74) Spain (Andalusia) EAGGF-Guidance Objective 1 2000ES161PO003.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.53.
For several programmes, it was not possible to assess the
content of the independent checks as they had only just started. In
other cases, improvements are necessary in the quality of the audits
and reports, for example in the method of selection of items to be
checked during visits to projects (75). In a final case the checks car-
ried out before the Court’s audit visit were insufficient as there had
been practically no visits to projects (76).

5.53. Guidance on the requirements for independent checks is given in
Appendix 2 of the Structural Funds audit manual.

As regards footnote 76, for the ESF German (Thuringia) case, the Mem-
ber State has taken prompt corrective action and the final report on inde-
pendent checks indicates the completion of on-site audit visits for the year
2003 as well as a good coverage of Article 10(2) audits.

Failures to ensure an adequate audit trail

5.54. The Court’s audit revealed one case where there was no
audit trail (77). For this case, the amount considered by the Com-
mission as national contribution to a project combatting early
school leaving is based on the assumption that under the lump sum
financing system, the national contribution equals the Community
contribution by definition. The amount really contained for this
purpose in each lump sum amount, however, is neither identified
nor separately accounted for, so the real national co-financing rate
cannot be verified. On the expenditure side, the amounts declared
concern projects that do not correspond to the description of the
action in the ESF programme and notably include the full cost of
special curricula rather than the additional cost as the programme
description specifies. Costs of actions that do correspond to the
description are neither identified as such nor separately accounted
for. In addition, there were two other programmes where the audit
trail was incomplete (78).

5.54.
For the ESF Dutch case referred to under footnote 77, the schools
can decide autonomously on the allocation of the annual budget in line
with the national legislation which specifies the objectives and funding
mechanisms of the schools. The Regulation also states that the institution
needs to carefully account for the funding and expenditure and make sure
that these are identifiable in the ledgers (separate accounting obligation).
The Commission control work showed that this was the case in the sites it
visited. The Community contribution is not included in the lump-sum but
the national budget is used as matching funding for the ESF projects. Since
the national matching funding for the ESF projects have been identified
both in the school budget as well as in the application for ESF funding,
signed by the director of the centres, the part-financing and the audit trail
are clear.

Finally, the budget which is allocated annually to the various schools is
based on the headcount of n-2. Therefore, there is no link between the
headcount of n-2 and the schools’ actual expenditure in year n. This also
confirms that the national budget can be used autonomously.

As regards, the Belgium FIFG case, the Member State has reported that it
has taken the measures needed to ensure a full audit trail.

(75) Italy (Puglia) ERDF Objective 1 1999IT161PO009; Italy (Piemonte)
ERDF Objective 2 2000IT162DO007; United Kingdom (East Midlands)
ERDF Objective 2 2000GB162DO004.

(76) Germany (Thüringen) ESF Objective 1 1999DE161PO002.
(77) Netherlands ESF Objective 3 1999NL053DO001.
(78) Belgium FIFG Outside Objective 1 2000BE14FDO001; Italy (Piemonte)

ERDF Objective 2 2000IT162DO007.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.55. The Commission will complete its examination of the Court’s find-
ings and the replies from the national authorities and take appropriate
measures.

As regards footnote 79.4, for the Dutch ESF case, in an interpretative note
(No 108097 of 7 July 2001), the Commission accepts that where the
final beneficiary is not itself the final recipient of Community funds,
advance payments of grants are made by final beneficiaries to final recipi-
ents. However, expenditure declared by the final beneficiaries to the man-
aging or paying authority or intermediary body must relate to actual expen-
diture by the final recipients supported by receipted invoices or documents
of equivalent probative value.

Concerning the reference to Spain in footnote 80.1, the Commission refers
to its reply to paragraphs 5.20 and 5.23 on subcontracting.

Regarding the Court’s findings in respect of the Belgian non-Objective 1
FIFG programme, ‘declaration of costs unrelated to the programme or
projects concerned’, the Member State accepts the Court’s comment and the
Commission will make sure that the error is rectified.

The Court’s substantive testing of transactions: systems
weaknesses corroborated as errors persist in the current
programme period

5.55. A total of 109 projects from 11 programmes (see para-
graph 5.47) were selected for substantive testing in order to obtain
further evidence on the operation of the funds. This revealed a sig-
nificant number of failures to respect the regulatory provisions:
ineligible expenditure and projects (79), expenditure without sup-
porting documents (80), incorrect calculation of the Community
contribution (81) and other failures (82). Similar types of errors were
found in the 1994–1999 programmes examined.

(79) Ineligible expenditure and projects:

ERDF

Belgium

Objective

(Hainault)

Declaration of costs unrelated to the programmes or projects concerned: Neth-
erlands ESF Objective 3 1999NL053DO001; Belgium FIFG Outside Objective
1 2000BE14FDO001; United Kingdom (East Midlands) ERDF Objective 2
2000GB162DO004;
1
1999BE161DO001; Italy (Puglia) ERDF Objective 1 1999IT161PO009; Spain
(Andalusia) EAGGF-Guidance Objective 1 2000ES161PO003.
Declaration of expenditure incurred outside the eligible period: Netherlands
ESF Objective 3 1999NL053DO001; Spain (Andalusia) EAGGF-Guidance
Objective 1 2000ES161PO003; United Kingdom (East Midlands) ERDF Objec-
1
Spain
tive
2000ES161PO011.
Declaration of recoverable value added tax: Belgium (Hainault) ERDF Objec-
tive 1 1999BE161DO001.
The declaration of expenditure although funds had not been paid out to
projects by
ESF Objective 3
final beneficiaries: Netherlands
1999NL053DO001.

2000GB162DO004;

ERDF Objective

(Galicia)

the

2

(80) Expenditure without supporting documents:

Declaration of estimated rather than actual expenditure: Germany (Thüringen)
ESF Objective 1 1999DE161PO002; Spain ESF Objective 1 2000ES053PO311.
Expenditure without adequate supporting documents: Netherlands ESF Objec-
tive 3 1999NL053DO001; Germany (Thüringen) ESF Objective 1
1999DE161PO002; Spain ESF Objective 1 2000ES053PO311; United King-
dom (East Midlands) ERDF Objective 2 2000GB162DO004; Belgium (Hain-
ault) ERDF Objective 1 1999BE161DO001; Spain (Galicia) ERDF Objective 1
2000ES161PO011.
The allocation of a proportion of overhead costs to projects without any under-
lying calculation supporting the amount attributed: Netherlands ESF Objective
3
1
1999DE161PO002; Spain ESF Objective 1 2000ES053PO311; United King-
dom (East Midlands) ERDF Objective 2 2000GB162DO004; Spain (Galicia)
ERDF Objective 1 2000ES161PO011.
Failure to maintain a separate accounting system or adequate accounting code
to enable identification of the Community funding: Netherlands ESF Objective
3 1999NL053DO001.

1999NL053DO001; Germany

ESF Objective

(Thüringen)

(81) Incorrect calculation of the Community contribution: Failure to take account
of potential generation of revenue or other income when calculating the rate
of Community contribution to projects: Spain (Andalusia) EAGGF-Guidance
Objective 1 2000ES161PO003; United Kingdom (East Midlands) ERDF Objec-
1
Spain
tive
2000ES161PO011; Italy (Puglia) ERDF Objective 1 1999IT161PO009.

2000GB162DO004;

ERDF Objective

(Galicia)

2

(82) Other failures:

Failure to check that the appropriate national cofinancing was in fact made
available: Germany (Thüringen) ESF Objective 1 1999DE161PO002.
Failure to carry out an environmental impact assessment: Italy (Puglia) ERDF
Objective 1 1999IT161PO009.
Failure to provide information and publicity measures for the participation of
the Structural Funds: Netherlands ESF Objective 3 1999NL053DO001; Spain
(Galicia) ERDF Objective 1 2000ES161PO011.
Failure to respect Community rules on the award of public contracts: Belgium
FIFG Outside Objective 1 2000BE14FDO001; United Kingdom (East Midlands)
ERDF Objective 2 2000GB162DO004; Belgium (Hainault) ERDF Objective 1
1999BE161DO001; Spain (Galicia) ERDF Objective 1 2000ES161PO011; Italy
(Puglia) ERDF Objective 1 1999IT161PO009.
Failure to notify substantial modifications to a project: Germany (Thüringen)
ESF Objective 1 1999DE161PO002.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.56. The Commission is continuing to devote a large proportion of its
audit resources to checking Member States’ systems for the current period.
It refers to its replies under points 5.8. and 5.40. It has already made and
will continue to make use of its powers where necessary to suspend pay-
ments to programmes whose systems show serious weaknesses which place
Community funds at risk.

5.58.
For the previous programme periods the payments relate to the clo-
sure process for which the procedures applied were considered sufficient to
provide reasonable assurance. Given the nature of the reservations it was
not considered that quantification was appropriate.

5.56. The results of the substantive testing corroborated the weak-
nesses in the management and control systems in the Member States
described in paragraphs 5.48 to 5.54. There was no marked differ-
ence in the errors found in comparison to previous years. This con-
firms the previous observation of the Court (83) that the Commis-
sion should continue its checks in the Member States; and should
apply, where appropriate, the regulatory provisions permitting it to
suspend interim payments in cases of serious irregularities (84), or
when serious failings in the management or control systems are
found which could lead to systemic irregularities (85).

Annual activity reports and declarations of the Directors-General

Overall positive assurance on the legality and regularity of
expenditure limited by serious reservations on the
operation of the Member States’ management and control
systems

5.57. The annual activity reports and declarations by the
Directors-General are key elements of the Commission reform. The
Directors-General for structural measures reaffirm that they have
reasonable assurance that the systems in their Directorates-General
guarantee the legality and regularity of the underlying transactions.
Nevertheless, the Directors-General express a number of justified
reservations concerning the operation of the management and con-
trol systems in the Member States.

5.58. The reservations of the Director-General for Regional Policy
arise mainly from the results of desk controls and audits in the
Member States (based on the systems descriptions provided by the
Member States) carried out by his department, although limited
compliance checks or substantive tests have so far been performed
for the current period for the ERDF. The bulk of the reservations
contained in the 2003 declaration — which all concern the 2000-
2006 programme period — were also made in 2002. Thus, a res-
ervation is again expressed on the management systems of two
Member States (86) for the ERDF. Similarly, there is a reservation on
the operation of the control systems for the Cohesion Fund in three
Member States (87). A general reservation is maintained for the
ERDF Community Initiatives (URBAN and Interreg), as the analysis
of documentation received from the Member States has not yet
been completed. No reservation is made regarding previous pro-
gramme periods, for which 2 397 million euro were paid in 2003.
None of the reservations is quantified and no indication of materi-
ality is given.

(83) Annual Report concerning the financial year 2002, paragraph 5.24.
(84) Council Regulation (EC) No 1260/99, Article 38 (5).
(85) Council Regulation (EC) No 1260/99, Article 39 (2).
(86) Greece and Spain.
(87) Greece, Spain and Portugal.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.59.
For the ESF, the declaration of the Director-General for
Employment and Social Affairs contains a contradiction between
the global positive assurance on the legality and regularity of the
underlying transactions and the reservation made concerning
shared management and the operation of the systems in the Mem-
ber States. The Director-General notes that her department has not
yet been able to verify the modifications to the management and
control systems made by the Member States following the Commis-
sion’s checks which covered systems relating to 46 % of planned
expenditure for the 2000 to 2006 period (see paragraph 5.43). No
mention is made as regards the assurance concerning the ESF for
the 1994-1999 period, for which 768 million euro were paid
in 2003.The planned ex post checks of the payments will not take
place until the end of 2004 or in 2005.

5.59. Concerning the 2000-2006 programming period, the reservation
expressed relates to Member States’ systems in respect of which serious
weaknesses have been detected and corrective measures will have to be taken.
The Commission also refers to its reply to paragraph 5.43. regarding the
action plan for attaining the systems coverage objective.

For the 1994-1999 programming period, the Director-General did not
express a reservation regarding the ESF because the paid amount referred
to by the Court concerns cases regarded as non-problematic since they were
found to be satisfactory on the basis of in-depth document checking pro-
cedures.

In addition to expenditure audits, before 2003 the Directorate-General for
Employment carried out system audits on the application of Regulation
(EC) No 2064/97, the results of which were taken into account when clos-
ing the 1994-1999 programming period.

5.60. The Director-General for Agriculture had a reservation for
all EAGGF-Guidance payments made in 2003 to programmes for
the 2000-2006 period. The reservation was based on outstanding
queries raised by his department on the Member States’ systems
descriptions examined and on the preliminary findings of systems
audits in the Member States. No estimation was provided on the
impact of the weaknesses revealed by the audits.

5.61. The Director-General for Fisheries also had a reservation
concerning shared management and the operation of the systems in
the Member States due to the fact that, following preliminary find-
ings of system audits in the Member States, bilateral contacts are
still underway with nine of them. The reservation is not quantified
and no indication of materiality is given.

5.62. Although the Directors-General do not make any reserva-
tions for the period 1994 to 1999, the Court’s audit shows that sig-
nificant problems of legality and regularity persist in the closed pro-
grammes. The systems put in place in the Member States for the
current period also contain important weaknesses. Three structural
measures DGs have made general reservations on the systems.
DG REGIO has restricted its reservation to two Member States.

Follow-up of observations from previous Statements of Assurance

5.63. The previous audits of the Court concerning the manage-
ment and control systems for Structural measures have revealed
weaknesses both in the Commission and the Member States, which
have contributed to the declaration of ineligible expenditure and the
making of undue payments. Annex 2 summarises developments in
the main issues arising from the Court’s recent audits affecting the
legality and regularity of operations.

5.62. The absence of reservations on 1994-1999 programmes is justi-
fied given the rigorous procedures in place in the Directorates-General and
the closure audits which are being carried out to verify the reliability of the
closure statements. The scope of the assurance given by the Directorates
General for the 2000-2006 period in 2003 was in general wider. Each
Directorate-General took account of the level of audit work completed on
the systems for the 2000-2006 period and its own audit strategy in deter-
mining the scope of its reservations. The Regional Policy Directorate-
General took account in particular of its positive conclusions for most
Member States resulting from its assessment of the system descriptions.

5.63. The Commission refers to its replies to the observations in Annex
2 and at points 5.46 concerning the 2000-2006 period, 5.37 concern-
ing the 1994-1999 period and 5.62 regarding the scope of the assurance
given in Director Generals’ annual declarations.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.64. The Court reviewed the action taken by the Commission
concerning observations made under recent Statements of Assur-
ance. For the ESF, EAGGF-Guidance and FIFG the review did not
give rise to particular observations.

5.65. Concerning the ERDF cases, DG REGIO had followed up the
Court’s observations, although with delays in some cases in taking
a position and launching any appropriate recovery procedures.
There are, however, cases where no recovery procedures have been
initiated (88) or the recoveries made do not fully take account of the
Court’s observations (89).

Financial correction procedures are underway in both the North
5.65.
Rhine-Westphalia and the Piedmont cases. The Commission also intends
to close the airport infrastructure case in 2004, without a recovery in the
light of arguments presented by the Italian authorities and the results of a
legal analysis. The second Italian and UK cases were dealt with at the clo-
sure of the programmes and the Commission considers the corrections made
appropriate.

Conclusions and recommendations

5.66. The reform begun in 2001 has reinforced the internal con-
trol environment of the Commission. However, the declarations of
the Directors-General do not yet enable the Court to take assurance
from them.

5.66. Through its work to improve the content and widen the scope of
declarations and its monitoring of compliance with the standards on which
the declarations are based, the Commission is endeavouring to make the
annual declarations into a reliable indicator of its performance and its
strategy for dealing with the risks identified, in order that the Court can use
them as a basis for its assurance.

5.67.
Progress in closing programmes from the 1994 to 1999
programme period remains limited, largely due to the submission
by Member States of incomplete and inadequate documentation
with the claims for final payments and to the difficulties for the
Commission in processing the files. In the cases examined, the
Member States’ management and control systems did not fully
respect the regulatory requirements. Their checks of expenditure
were insufficient and the reliability of the statements provided with
requests for final payments is questionable. The Court found simi-
lar problems to those which it has already reported for the closure
of previous periods (90).

5.67. Based on the audit work carried out by the Commission in prepa-
ration for the closure, the examination of the closure documents presented
for the 1 104 programmes to be closed, and the results of closure audits
carried out, the Commission considers that the Member States have gen-
erally made serious efforts to comply with the requirements of Regulation
(EC) No 2064/97 and that the level of checks carried out by Member
States prior to closures is significantly higher than for the closure of previ-
ous periods.

The strategy adopted by the Commission for closing 1994-1999 pro-
grammes has reduced the risk that final payments are made for irregular
expenditure. In particular, as a result of its scrutiny of Article 8 declara-
tions it has asked Member States to clarify matters concerning the closure
process or to undertake further audit work where necessary. It has lauched
financial correction procedures in a number of cases based on its examina-
tion of Article 8 declarations and will do so in further cases on the basis of
its closure audits. The Commission will take account of the Court’s obser-
vations in its own audits and will follow up the Court’s findings of irregu-
lar expenditure in the programmes it audited and make appropriate cor-
rections.

(88) In one case, DG REGIO did not continue to take action (Nordrhein
Westfalen Objective 2 1992-1993); in two cases it has not taken a
definitive position, (Piemonte 1994-1996, Italy airport Infrastructure
1997-1999).

(89) Italy Aree attrezzate 1989-1993; Greater Manchester, Lancashire and

Cheshire Objective 2 1997-1999.

(90) Annual Report concerning the financial year 1996; Special Report
No 14/98 on the closure of the forms of ERDF assistance (OJ C 368,
27.11.1998).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.68. The regulatory requirements for the management and con-
trol systems were reinforced for the 2000 to 2006 period, but the
Court’s audit showed that the systems are affected by serious weak-
nesses. The testing performed by the Court revealed the existence of
the same type errors as found for the 1994 to 1999 period. Unless
significant improvements are made to the systems, repetition of the
problems encountered at the closure of the 1994 to 1999 period
will be unavoidable.

For structural measures, as an area of shared management
5.69.
between the Commission and the Member States, the key supervi-
sory and control systems governing the legality and regularity of
expenditure are in the Member States. However, the Commission is
responsible for the implementation of the budget. Given the numer-
ous weaknesses in these systems (see for example Annex 1), the
Commission should require improvements from the Member States.
The possibility to suspend payments should be used by the Com-
mission in cases of serious systems weaknesses. In the context of the
enlargement of the Community and the approach of the next pro-
gramme period, the Commission, in cooperation with the Member
States, should seek to further reinforce and rationalise the financial
control framework for structural measures. This should include a
clear and comprehensive audit and control strategy, as recom-
mended by the Court in its recent opinion on the single audit
model (91).

5.68. The Commission is following a multiannual strategy to address
these issues which in addition to including a level of audit work on the cur-
rent period commensurate with the risks, taking account of other priorities,
also involves applying the ‘single audit’ approach in order to maximise the
effect of its own and Member States’ audit work. This involves improved
exchange of control results with Member States within the present regula-
tory framework and coordination of audit work in order to avoid duplica-
tion and ensure a good coverage of systems considered as most at risk by
both Commission and national auditors. In addition, the Commission dis-
seminates guidance and good practice to Member States.

5.69. The standards of management and control required of Member
States are laid down in the regulations and the Commission seeks to ensure
that they are complied with. As part of the normal auditing procedures and
standards, the Commission addresses detailed recommendations to the
Member States whenever deficiencies are identified and follows up the
improvements requested. It uses its powers to suspend payments and apply
financial corrections to programmes where necessary when it concludes that
the weaknesses in their systems involve a serious risk to Community funds.
The Commission is closely examining the management and control sys-
tems in the new Member States for the current programme period. It has
already proposed a management and control framework for the next period,
which builds on the experience of the past by further reinforcing and clari-
fying the control responsibilities of the Member States whilst respecting the
requirements of proportionality.

FOLLOW-UP TO OBSERVATIONS IN SPECIAL REPORT
NO 7/2000 ON THE INTERNATIONAL FUND FOR IRELAND
AND THE SPECIAL SUPPORT PROGRAMME FOR PEACE AND
RECONCILIATION IN NORTHERN IRELAND AND THE
BORDER COUNTIES OF IRELAND (1995-1999)

Scope of the Special Report and the main recommendations

5.70. The Special Report focused on the legality and regularity of
the Community funding for the two programmes and, by means of
a broad sample of measures and projects, examined the efficiency
and effectiveness of procedures for the disbursement of funds.

5.71. The main recommendations for the International Fund for
Ireland (IFI) (92) and for the Special Support Programme for Peace
and Reconciliation (PEACE Programme) (93) are discussed below.

(91) Court Opinion No 2/2004
(92) Paragraphs 70 a), 70 c) and 70 d) of the Special Report.
(93) Paragraphs 71 a), 71 b), 71 c), 71 d), 71 e) and 71 f) of the Special

Report.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The International Fund for Ireland

Assessment of financial needs

5.72. Council Regulation (EC) No 2236/2002 of December 2002,
covering the Community contributions for 2003 and 2004,
requires an assessment of the Fund’s financial needs prior to each
payment to the IFI. The specific content of this assessment has been
agreed by the Commission and the IFI. It has also been agreed that
payments would be made by the Commission whenever the cash
balance falls to a level equivalent to or below two years’ payments
(to projects). While this represents a large reduction in the cash held
by the IFI compared with current levels, there still remains an
unduly large amount of cash available.

5.72. Although a legal requirement to assess the Fund’s financial needs
prior to payment was only introduced in the 2002 Regulation on the basis
of the Court’s recommendations in the Special Report and an audit by the
Commission in late 2000, the Commission had begun to adjust Commu-
nity payments to the current target in cooperation with the Fund’s Board
as early as 2000 under the previous regulation. The Commission acknowl-
edges that cash balances currently held in the IFI’s bank accounts exceed its
immediate needs. It will shortly be reassessing the Fund’s financial situa-
tion and expects the cash balance to decrease to the target level of two years
of payments to projects by the end of 2004. The interest on the cash bal-
ances is used for the activities of the Fund.

5.73. The requirement for an assessment prior to payment was
not introduced by Council Regulation (EC) No 214/2000 of
24 January 2000. The Commission opted instead for a change in
the system of advance payments from a single payment of 80 % of
the annual contribution to two payments of 40 %.

5.73. At the time of the preparation of the 2000 regulation, the Com-
mission had not yet received the formal recommendation made in the Spe-
cial Report. When it did so, it proposed the new requirement in the 2002
regulation. However, since 2000 at the Commission’s request the Chair-
man of the Board has signed a statement for every payment that if the
financial situation of the Fund is such that utilisation of the new funds is
not guaranteed or existing funds remain unused, the Fund will repay the
funds to the Commission.

Appropriate evaluation criteria for project applications
consistently applied and adhered to

5.74. The Commission has not issued any guidelines or instruc-
tions, although it has made recommendations during its audits.
Subsequent to these, the IFI has issued a Grant Procedures Manual
in early 2004 which deals with the evaluation of project applica-
tions.

5.74. The Commission points out that the Fund is an independent legal
entity operating under funding rules based on an international agreement
between two Member States and other donor governments. The Commis-
sion is an observer on the Fund’s board and can influence but not deter-
mine its policy.

5.75. While this manual gives some guidance as to which areas to
assess and where to find other potential funders’ opinions, the IFI
has not decided what its detailed evaluation criteria should be for
the achievement its own objectives. The general guidance contained
in the manual does not adequately cover all types of projects funded
by the IFI.

5.75. The Commission has encouraged the IFI to develop its criteria and
procedures for evaluating project applications and continues to do so. A
strategic review now under way should allow further progress to be made.

Routine monitoring of the Community contribution in IFI
projects and evaluation of the projects’ merits

5.76. The IFI regularly monitors the financial implementation of
projects, but does not undertake any regular monitoring of non-
financial information, precluding any evaluation of the merits of the
funded projects.

5.76. The Commission agrees that the IFI’s monitoring of the impact of
its activities could be improved. An assessment by outside consultants is
planned in 2004 to assist with the ongoing strategic review.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Special Support Programme for Peace and Reconciliation in Northern
Ireland and the border counties of Ireland (1995 to 1999)

Further assistance to the implementing bodies ensuring
consistent selection criteria for local community projects
and social groups as well as guidance and resources ensuring
assistance to the same projects and groups

5.77. The Programme identifies local community projects and
social groups and contains selection criteria, which are further
developed in the Programme complement (94). The managing
authority issued further guidance in early 2003 and at the end of
2003 and in early 2004. While this is in line with the recommen-
dation of the Court, much of the guidance has appeared rather late
in the life of the Programme.

5.77. The guidance was delayed by the setting up of the new adminis-
trative arrangements.

5.78. The resources allocated to technical assistance have been
increased from 18,8 to 50,5 million euro in December 2003.

5.78. The Commission encouraged the increase. Technical assistance is
essential for delivering the programme with the maximum involvement of
the local community and NGOs.

5.79. The PEACE I programme had taken up 98 % of its financial allo-
cation and the same allocation was agreed for PEACE II.

Assessment of financial needs based on projected activity

5.79. The financial allocation to the PEACE II Programme was
decided in March 1999 by the European Council and amounted to
500 million euro. However, the allocation was based on a simple
projection of the financial allocation made to the PEACE I Pro-
gramme.

Review of non-governmental bodies’ work

5.80. The Local Strategy Partnerships, the Intermediary Funding
Bodies and the County Council-Led Task Forces were formally
established in April 2002, at the end of 2001 and in mid-2002
respectively. Later, the managing authority carried out an assess-
ment (published in August 2003) concerning the examination of
whether the PEACE II Programme is being administered by each
Implementing Body in accordance with both the applicable guid-
ance notes and the contract entered into with the managing author-
ity.

5.81. The recommendation has been followed, but this review has
been undertaken late in the life of the programme. Moreover, the
authorities responsible for the implementation of the programme
should undertake a follow-up of the situation at regular intervals.

5.81. The implementing bodies had to be given time to settle down
before the review started. The managing authority intends to follow up the
lessons throughout the lifetime of the programme.

Documented project appraisals according to specific,
written criteria

5.82.
Project appraisal criteria form part of the Programme and
the Programme complement and have been developed further in
guidance notes issued by the managing authority. Checklists have
also been introduced.

(94) The Programme complement is an additional document, providing fur-

ther details on the implementation of the Programme.

C 293/184

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.83. The delay in setting up the new administrative arrangements led
to a delay in submitting descriptions of the systems.

The Commission is following up its audit in Northern Ireland and will
ensure that the weaknesses are corrected. The main deficiency sprang from
the late start of independent audits under Article 10 of Regulation (EC) No
438/2001.

Introduction of appropriate control mechanisms

5.83. Both Member States have submitted to the Commission
descriptions of their management and control systems for the
PEACE II programme in accordance with Commission Regulation
(EC) No 438/2001, although neither respected the deadline. The
Commission has satisfied itself that for Ireland the systems descrip-
tions meet the standards set out. However, this is not yet the case
for the United Kingdom. Furthermore, in December 2003 the Com-
mission performed a compliance audit in Ireland and Northern Ire-
land of the systems put in place as notified in the descriptions. The
audit revealed certain weaknesses and that the structures have been
put in place late.

5.84. The managing authority has subsequently issued a guidance
note on financial controls and checklists for the checks required by
the Regulation. Moreover, training seminars have been held for all
implementing bodies in 2004 concerning management and control
systems checks, verifications and other relevant management issues.

Assessment of synergy and coordination between IFI and
Structural Funds

5.85. The presence of the IFI as an observer on the Monitoring
Committee of the PEACE II Programme and of the Commission as
an observer on the IFI Board is the only element of coordination.
The managing authority is still not a member of the IFI Board. No
operational contacts ensuring regular and concrete coordination
between the IFI and the PEACE II Programme’s managing authority
or paying authority exist. Therefore, it is not possible to obtain any
intentional synergy effects between IFI and PEACE II Programme
activities.

5.85. The Commission agrees that there is a need for more systematic
arrangements to coordinate decisions on the participation of both the IFI
and PEACE II in projects in addition to existing coordination mechanisms.

The Commission will continue its efforts to help the IFI and Peace II man-
agement develop the synergies that are possible and will take forward some
practical proposals (e.g., common check lists) currently under discussion
between the two managing authorities.

5.86.
In relation to the issue of projects with multiple funding
sources, a formal arrangement or procedure assessing which of the
funding bodies is best placed to ensure the attribution of the fund-
ing and management of the project does not exist and is not envis-
aged in the near future.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORT No 4/2004
ON PROGRAMMING OF INTERREG III (95)

5.87. The Interreg Community Initiative was launched in 1990 in
an attempt to tackle the isolation of border areas. By proposing
cooperation between partners in different Member States, it contrib-
utes to the opening of borders. It was renewed for the periods
1994-1999 (Interreg II) and 2000-2006 (Interreg III). With com-
mitment appropriations of 4 875 million euro, Interreg III is the
most substantial Community Initiative.

(95) Special Report No 4/2004 (in process of being published).

30.11.2004

EN

Official Journal of the European Union

C 293/185

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.88. The Court’s audit of Interreg III covered the period from the
preparation of the Commission guidelines to the first decisions to
adopt beneficiaries’ projects. The objective was to answer the fol-
lowing questions:

a) Do the guidelines make it easier to attain the Initiative’s objec-

tives?

b) Did the Commission use a suitable procedure for examining
programme proposals, and were decisions taken within the
agreed deadlines?

c) Did the various partners cooperate as provided by the guide-

lines?

d) Was the initial analysis for each region consistent with the pri-
orities and measures of the corresponding programme, as
required by the guidelines?

e) Will it be possible to measure progress ex post?

5.89. The Interreg III guidelines focus on the procedures for
implementing programmes that seek to enhance cooperation. How-
ever, they were not made available until preparation of the pro-
gramme proposals had been underway for at least a year. The pro-
posed objectives are not targeted and cannot be measured or
quantified. There are no indicators with which to assess how much
overall progress has been made.

5.89.
In view of the large number of cross-border programmes, the many
different types of area concerned and the priority objective of developing
cross-border economic and social centres, the Commission opted in its
guidelines for a bottom-up approach. This is why the guidelines for
strands A and C refer to priority areas in relatively broad and non-
exhaustive terms. The added value is to be found in the development of
cross-border cooperation and in catalyst effect this produces. The indicators
should measure progress made in this field. However, the intangible nature
of a great many operations made it difficult to devise targeted indicators.

The main actors were familiar with the general points of the guidelines, and
the Commission had been in regular contact with them well before the
guidelines were published.

5.90.
Procedures by which the Commission could examine pro-
gramme proposals had been devised and put in place. However, the
assessment criteria were under-prepared and insufficient improve-
ments had been made in response to the significant shortcomings
identified in the proposals. The adoption of the programmes was
delayed, with the result that the process of cooperation between eli-
gible regions was interrupted and the available appropriations were
underutilised.

5.90.
Even though improvements are always possible, the Commission
believes that the procedural stages were adequately prepared and that the
main shortcomings had been corrected, as far as was possible given that
there had to be some negotiation. The delays were largely due to the time
taken to remedy these shortcomings given the need to secure the agreement
of all the Member States concerned. The delays had little impact on the
start-up of the programmes.

5.91. As advocated by the guidelines, the programmes were pre-
pared in the context of a consultation process. The partners from
the various Member States generally contribute to implementation
in a spirit of cooperation. However, there remain some obstacles to
setting up programme implementation structures that are genuinely
shared and to allocating the financial resources of the ERDF.

5.91. The creation of genuine joint management structures with their
own legal personality would facilitate implementation of cooperation pro-
grammes. The Commission has proposed a new legal instrument in the
package of draft regulations for the new period.

C 293/186

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.92.
From the point of view of consistency, the Strand A and B
programmes incorporate numerous analyses. However, these are of
little use. This is because the priorities and measures were estab-
lished on the basis of other concerns which are not elucidated in the
programmes. Neither were decisions made concerning the resolu-
tion of problems caused by the presence of a border, and the analy-
ses do not help to fix the starting points in terms of which progress
is to be measured. The first projects to be approved were prepared
and will be implemented in the context of cooperation between the
different partners concerned. However, because some projects are
limited to the sharing of experience, they do not always contribute
significantly to the resolution of problems specific to border areas.

5.93. The indicators are inadequate to the task of ex post evalua-
tion of the progress made. They do not correspond closely enough
to the objectives. Moreover, some indicators need to be clarified and
the information sources used to constitute them should be more
precise. In most of the cases examined the computer application
had still not been introduced.

5.94.
For the current period, the Court recommends that the sys-
tems of indicators applied to each programme be simplified and
improved in order to give a more valid measure of impact. The
project selection criteria should be strengthened so as to enhance
the added value of projects, i.e., the degree to which they contrib-
ute to the resolution of border-related problems.

5.95.
If the Initiative is renewed after 2006, the Commission
should launch a study to ascertain which problems are caused by
the existence of a border. Whatever the approach adopted, the study
would help in the setting of concrete objectives to be given priority
status in the Initiative and which give the Initiative itself added
value. Indicators therefore need to be defined for each strand. Sub-
sequently, setting detailed criteria for the Commission’s assessment
of programme proposals, would make it possible to adopt a proac-
tive approach towards the Member States. The analyses requested at
the level of each programme should be used to set specific objec-
tives and measure progress at that level.

5.92. The bottom-up approach brings out concerns not identified by
expert analysis but expressed by regional and local authorities which feed
into the strategy and choice of priorities. As the overall objective of the
cross-border CIPs is to contribute to the development of cross-border eco-
nomic and social centres, any project which facilitates cooperation on this
point can participate in the objective.

5.93. The Commission recognises that there is a difficulty in finding
suitable indicators due to the fact that the added value of the Interreg Ini-
tiative takes a variety of forms. The sets of indicators in individual Interreg
III programmes are, however, a promising start in this direction.

The Commission encouraged Member States to put in place IT project
management systems and databases to compile information for use with
indicators.

5.94. After the mid-term assessments, the Commission urged many pro-
gramme management authorities to improve the systems of indicators. As
part of the simplification drive, the Commission called on Member States
to simplify and reduce the number of their impact indicators.

5.95. The Commission considers that added value is greater if CIPs con-
tribute to creating cross-border economic centres rather than simply resolv-
ing problems still existing at borders. The choice of this approach affects
the possibility of laying down standard indicators, even if improvements are
possible in this field.

5.96. The guidelines and methodology documents should be
made available before work starts on preparing programmes, and
the ex ante assessor’s role and the content of the programme
complement need to be clarified.

5.96. The Commission will present the guidelines and methodology
documents well before the next programming period gets under way. The
Commission is reviewing the role of ex-ante evaluation in preparing the
new regulations.

30.11.2004

EN

Official Journal of the European Union

C 293/187

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.97.
Finally, in order to encourage cooperation the financial
resources allocated to the Initiative should no longer be assigned by
Member State, and the work begun on legal cooperation instru-
ments should be completed and the recommendations put into
effect.

5.97. The Commission will examine the Court’s recommendation when
preparing the next programming period. The Commission has proposed a
new legal instrument in the package of draft regulations for the new period.

C 293/188

EN

Official Journal of the European Union

30.11.2004

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C 293/189

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30.11.2004

EN

Official Journal of the European Union

C 293/191

CHAPTER 6

Internal policies, including research

TABLE OF CONTENTS

Introduction

Specific appraisal in the context of the Statement of Assurance

Audit objectives and scope of the audit

Assessment of the Commission’s supervisory systems and controls

Implementation of the Internal Control Standards

Preliminary assessment of the management and control system for FP6

Preliminary assessment of the management and control systems for the European Refu-
gee Fund in the area of freedom, security and justice

Results of the tests of underlying transactions authorised during the financial year

Analysis of the Commission’s ex-post financial audits

Review of the Annual Activity Reports and the Directors-Generals’ Declarations

Conclusions and recommendations

Paragraph

6.1-6.2

6.3-6.45

6.3

6.4-6.16

6.4-6.5

6.6-6.11

6.12-6.16

6.17-6.26

6.27-6.33

6.34-6.40

6.41-6.45

Follow-up of previous observations in Special Report No 2/2002 ‘Socrates’ and ‘Youth for
Europe’

6.46-6.59

Principal observations in Special Report No 1/2004 concerning FP5 (1998 to 2002)

6.60-6.70

C 293/192

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

6.1. The European Union’s internal policies focus on the imple-
mentation and development of the single market and cover four
complete subsections of the budget (in addition to small parts of
other subsections (1)):

— education, vocational training and youth (subsection B3);

— energy, Euratom nuclear safeguards and the environment (sub-

section B4);

— consumer protection, the internal market, industry and Trans-

European Networks (subsection B5); and

— research and technological development (subsection B6).

Graphs 6.1 and 6.2 show how the appropriations were spent in
2003.

6.2. Within the Commission, the responsibility for implementing
internal policies and managing the corresponding budget is spread
across 14 Directorates-General (2). The principal ones — in terms
of the funds managed — are the Directorates-General for Research,
for Energy and Transport, for Information Society, for Education
and Culture and the Joint Research Centre.

(1) Other agricultural operations, other regional operations, transport as well
as other measures concerning fisheries and the sea (Titles B2-5 to B2-9
of subsection B2), and public awareness of the common agricultural
policy (Article B1-382).

(2) Directorates-General for Research (RTD), Information Society (INFSO),
Energy and Transport (TREN), Enterprise (ENTR), Fisheries (FISH), Jus-
tice and Home Affairs (JHA), Education and Culture (EAC), Environment
(ENV), Health and Consumer Protection (SANCO), Competition (COMP),
Internal Market (MARKT), Economic and Financial Affairs (ECFIN),
EUROSTAT and the Commission’s Joint Research Centre (JRC).

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Graph 6.1 — Breakdown of commitments by budgetary area in 2003

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

Graph 6.2 — Breakdown of payments by budgetary area in 2003

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

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SPECIFIC APPRAISAL IN THE CONTEXT OF THE STATEMENT
OF ASSURANCE

Audit objectives and scope of the audit

6.3. The objective of the audit was to contribute to the Court’s
Statement of Assurance on the general budget through a specific
assessment for the internal policies area as a whole. For that pur-
pose, the audit examined in particular the operation of selected
supervisory systems and controls and assessed to what extent the
Commission’s internal controls give assurance on the legality and
regularity of the underlying transactions. The audit focused on:

— the Commission’s internal control environment for four out of
the fourteen Directorates-General in the internal policies area,
namely those for Research, for Information Society, for Justice
and Home Affairs and for Education and Culture;

— the management and control systems for the 6th Framework
Programme (FP6) for Research and Technological Develop-
ment (RTD) and for the European Refugee Fund (ERF) in the
area of freedom, security and justice;

— tests of a sample of commitments and payments authorised in

2003;

— the reports for the Commission’s financial audits; and

— the Annual Activity Reports and Declarations by the Directors-
General for the four Commission departments mentioned
above (3).

(3) Annual Activity Reports 2003 of Directorates-General for Research
(30 March 2004), for Information Society (6 April 2004), for Justice
and Home Affairs (31 March 2004) and for Education and Culture
(7 April 2004).

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Assessment of the Commission’s supervisory systems and controls

Implementation of the Internal Control Standards

Scope of the review of the implementation of the Commission’s internal control
standards

6.4. The Court reviewed the implementation of eight out of the
twenty-four Internal Control Standards (4)
in the Directorates-
General for Research, for Information Society, for Education and
Culture and for Justice and Home Affairs, all of which should have
been implemented by the end of 2003, and assessed whether the
Commission’s self-assessment is accurate (see Chapter 1, para-
graphs 1.80 to 1.84) (5).

Court does not share the Commission’s self-assessment in several areas

6.5. The Court’s verification work confirmed that
the four
Directorates-General generally complied with the requirements set
out in the Commission’s Internal Control Standards in the course of
2003, with the following exceptions:

6.5.

— At Directorate-General for Research Standards 20 ‘Recording
and correction of internal control weaknesses’ and 21 ‘Audit
reports’ were found to be sufficiently implemented, although
the adequate follow-up of the corrective actions drawn in rela-
tion to these standards (which had been decentralised to direc-
torate level) was not fully assured as of the end of 2003 (6). The
analysis also confirmed previous observations made by the
Court with regard to the insufficient compliance with Stan-
dard 12 ‘Adequate management information’ (7).

— Setting up the Unit ‘Coordination and integration of the internal con-
trol systems’ in DG RTD in February 2004 should help to improve
the follow-up of the corrective actions.

The Commission intends to complete the implementation of control
standard 12 in the course of 2004.

(4) Standard 11 ‘Risk analysis and management’, Standard 12 ‘Adequate
management information’, Standard 14 ‘Reporting improperties’, Stan-
dard 17 ‘Supervision’, Standard 18 ‘Recording exceptions’, Standard 20
‘Recording and correction of internal control weaknesses’, Standard 21
‘Audit reports’ and Standard 22 ‘Internal audit capability’.

(5) European Commission, COM(2000) 2203 dated 13 December 2000,
and action No. 78 of White paper, together with European Commission,
Synthesis of Annual Activity Reports 2002 of DGs and Services,
COM(2003) 391 final, 9. July 2003.

(6) This was corrected in February 2004 by the creation of a central unit to

monitor the implementation of corrective actions.

(7) Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies, paragraph 110.

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— DG INFSO considers that the baseline requirements are adequately
met but agrees with the Court that there is scope for improvement as
regards the effectiveness of the procedures related to standard 20
(Identification and correction of internal control weaknesses).

— The Commission proposes to eliminate the risk of errors in encoding
data relating to monthly budgetary implementation through more
extensive automation of data extraction.

— DG JAI had already noted the inadequate quality of the data of the
DWH (Data WareHouse) used for the establishment of the statistics
on payment delays and this point raised by the Court was commented
on by the Director-General of DG JAI in his 2003 annual report.
Measures have already been taken by the Commission in the context
of the implementation of the new integrated accounting system.

For the reasons explained above, the Commission is of the opinion that
Standard 12 has been adequately complied with.

— For Directorate-General for Information Society, the Court
considers that the baseline requirements are partially imple-
mented in two cases. As regards Standard 12 ‘Adequate Man-
agement Information’, this is due to the non- systematic use of
the planning tool IRMS (‘Integrated Resources Management
System’). As for Standard 20 ‘Recording and correction of
internal control weaknesses’, the new procedures are of a for-
mal nature, not clearly explained and therefore risk being not
sufficiently effective.

— Similarily, in the case of Directorate-General for Education and
Culture, the Court’s verification work revealed that the system
used to monitor budgetary implementation was not fully reli-
able, potentially leading to incorrect information being pro-
cessed.

— At Directorate-General for Justice and Home Affairs, although
reports were made as set out in the requirements, the financial
information regarding payment delays in the reports was not
reliable.

As a result, in the Court’s view, Standard 12 ‘Adequate manage-
ment information’ has not been complied with in 2003 by all four
Commission departments examined by the Court.

Preliminary assessment of the management and control
system for FP6

Scope of the preliminary analysis

6.6. 2003 was the first year of implementation of the 6th RTD
framework programme (FP6). With an initial budget (prior to
enlargement) of 17 500 million euro, it covers the period 2002 to
2006 (8). FP6 is implemented through specific instruments to

(8) The FP6 budget comprises 16 270 million for the European Commu-
nity (EC) section and 1 230 million euro for the Euratom section. This
budget will be increased with the contributions from third countries
signing a cooperation agreement with the Community to participate in
FP6. This budget includes 760 million euro and 290 million euro from
the EC and the Euratom sections respectively, intended to cover the direct
research activities carried out by the Directorate-General Joint Research
Centre.

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address targeted scientific areas and to support the development
and coordination of national research policies in the European
Union (9). Like the previous framework programme, indirect RTD
actions under FP6 are jointly managed by five Directorates-General
(i.e. Directorates-General for Research, for Information Society, for
Energy and Transport, for Enterprise and for Fisheries). Payments
for FP6 indirect RTD actions, mostly advances, amounted to
551,5 million euro (i.e. 9,7 % of 2003 payment appropriations for
Internal policies).

Regulatory framework adopted in time, but model contract finalized late

6.7.
For FP6, Regulation (EC) No 2321/2002 concerning the rules
for the participation of undertakings, research centres and univer-
sities and for the dissemination of research results was adopted on
16 December 2002 by the European Parliament and the Council,
completing the regulatory framework significantly earlier in the
framework programme cycle as compared to FP5 (10).

6.8. The Commission aimed to simplify the management of FP6
indirect RTD actions through the use of a single model contract,
covering all types of actions (with the exception of Marie-Curie fel-
lowships) (11). However, since the new contractual arrangements
provide for a large number of special clauses and specific annexes

(9)

In 2003, the five Directorates-General signed 507 contracts for FP6
indirect RTD actions (i.e. Networks of excellence, Integrated projects,
Specific targeted projects, Article 169 actions, Specific research projects
for SMEs, Actions to promote and develop human resources and mobil-
ity, Specific Actions to promote Research Infrastructure, Coordination
actions, Specific support actions, Integrated infrastructure initiatives) for
a total Community contribution of 1 945,7 million euro. This com-
pares to 846 contracts for FP5 indirect RTD actions, covering a total
Community contribution of 961, 0 million euro, signed in 1999, the
first year of the previous RTD framework programme (see Special
Report No 1/2004 on the management of indirect RTD actions under
the 5th Framework Programme (FP5) for Research and Technological
Development (1998 to 2002), together with the Commission’s replies:
paragraphs 59, 60, 132 and annex 3a and 3b)

(10) FP6 was adopted on 27 June 2002 by Decision No 1513/2002/EC of
the European Parliament and of the Council. The specific programmes
‘Integrating and strengthening the European Research Area’ and ‘Struc-
turing the European Research Area’ were adopted on 30 Septem-
ber 2002 by Council Decisions No 834 and No 835 respectively (see
Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies, paragraphs 11 to 15).

(11) Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies: paragraph 15.

6.8. The Commission considers the significant reduction in the number
of model contracts as a major simplification that will contribute to improve
the management of the Framework Programme and to reduce errors and
misinterpretations at the level of the final beneficiary. Minor modifications
to the initial version of the FP6 model contract were adopted in October
2003, and only a reduced number of the special clauses were approved in
December 2003. On the other hand, draft versions of the financial guide-
lines have been available on the Commission’s website since Summer 2003.
Overall, the Commission considers that final beneficiaries were not exposed
to uncertainty during the negotiation of contracts for FP6 indirect RTD
actions.

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for the different instruments, no real simplification was achieved.
Moreover, the complete version of the FP6 model contract for indi-
rect RTD actions was not available before December 2003 (12). Fur-
thermore, the financial guidelines, which clarify the eligibility crite-
ria for costs to be declared by the final beneficiaries, were formally
adopted only in January and subsequently modified in April
2004 (13). In the Court’s view, this late adoption created an unnec-
essary uncertainty (in particular for the negotiation of contracts for
FP6 indirect RTD actions) and thus created a risk for the legal and
regular implementation of FP6.

Late deployment of a common IT system for FP6, which is not being used by all
Commission departments

6.9. The Commission aimed to increase the effectiveness of its
internal controls in FP6 through the introduction of a common IT
system for the management of proposals, contracts and projects,
thereby addressing a previous recommendation by the Court (14).
However, this IT system will not be operated by all Commission
departments since Directorate-General for Energy and Transport
continues to use its own IT system for specific functions. Further-
more, during 2003 — the first year of the FP6 programme period
— some of the modules of the common IT system were not yet
operational. This reduced the effectiveness of internal controls
across FP6, in particular when assessing the legal and financial
viability of participants and evaluating and negotiating proposals. It
also diminished the reliability of the Commission’s management
information.

6.9. The Commission shares the Court’s view on the need for a common
IT system to manage the RTD framework programmes. The Directorates-
General operating these programmes collaborated in setting-up a joint IT
Management Office which became operational in 2004.

DG TREN has participated in the design of the common FP 6 IT system
and decided to use all of its modules except the contract module. At the
same time an interface has been set up to enable data exchange with the
common system.

The implementation of a common IT system represents major progress in
the set-up of the Commission’s systems for the management of the Euro-
pean RTD framework programmes.

by

C(2003)799/2

10 March 2003, modified

(12) Core model contract adopted by Commission decision C(2003)799/1
dated
dated
12 March 2003 and C(2003)3834 of 23 October 2003 (together
with Annex II ‘General conditions’, Annex III for ‘Integrated Projects’
and ‘Networks of Excellence’); Annex III for ‘Integrated Infrastructures
Initiatives’ adopted by Commission decision C(2003)2029 dated
2 July 2003; two sets of general Special Clauses adopted by Commis-
sion decisions DL/2003/3004 (dated 7 November 2003)
and
DL/2003/3188 (dated 27 November 2003); targeted Special Clauses
by Commission decisions DL/2003/3140 (for ‘International Organisa-
tions’) and DL/2003/3141 (for ‘Specific support actions involving Tran-
snational Access’), both dated 20 November 2003 and by Commission
decision DL/2003/3388 (for ‘Specific Support Actions for Infrastruc-
tures’) dated 10 December 2003.

(13) European Commission, ‘Guide to Financial Issues relating to Indirect
Actions of the Sixth Framework Programmes’, version April 2004.
(14) Special Report No 1/2004 on the on the management of indirect RTD
actions under the 5th Framework Programme (FP5) for Research and
Technological Development (1998 to 2002), together with the Com-
mission’s replies: paragraphs 42 to 45 and 114.

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6.10. The audit scope is sufficiently defined in the wording of the model
audit certificate attached to the Financial Guidelines for FP6. The auditors
have to certify that the costs claimed are in compliance with the eligibility
criteria as defined in the legal base, except for their necessity. The assess-
ment of necessity is subject to the scientific monitoring assured by the Com-
mission’s services with the assistance of external experts.

Further clarification needed for audit certificates

6.10.
In the Court’s view, the mandatory requirement that finan-
cial statements for FP6 indirect RTD actions must be certified should
in the long run significantly strengthen the Commission’s control
over expenditure for RTD framework programmes. These audit cer-
tificates are given by an independent external auditor or, in the case
of public bodies, by a competent public officer. However, the Com-
mission has not yet provided the necessary clarification to contrac-
tors and external auditors on the audit scope, the external auditor’s
reporting obligations and the Commission’s role in verifying the
adequacy of audit certificates for FP6 indirect RTD actions (15). In
the Court’s view, the main limitation of the FP6 certification system
is that the external auditors are not required to confirm whether the
costs incurred were necessary.

FP6 audit approach not agreed by all Commission departments

6.11.
In line with the Commission’s administrative reform,
ex-post financial audits have become one of the most important ele-
ments of the Commission’s control procedures for assessing the
legality and regularity of payments for FP6 indirect RTD actions. A
common audit approach for FP6, taking into account the modifi-
cations in the control environment in FP6 compared to the previ-
ous framework programme, was proposed by Directorate-General
for Research, but has not yet been agreed by all five Directorates-
General (16). In addition, this proposal does not set clear and mea-
surable targets for the audit coverage of FP6 (such as the objective
of auditing 10 % of all contractors during FP5), despite the recom-
mendation of the Court (17).

6.11. The Directorates-General operating RTD framework programmes
agreed in May 2004 the main principles of a common audit strategy for
FP6 and will put in place the mechanism for the implementation of the
common audit approach. They continue to collaborate intensively in order
to define more detailed principles and to exchange the results of their audits.

The Commission confirms the target of auditing 10 % of all contractors
during FP5. For FP6, the situation is entirely different as the introduction
of audit certificates is generalised and the Commission’s audit strategy will
focus on the qualitative assessment of the system based on audit certificates.

(15) Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies: paragraph 132.

(16) This approach provided for three types of audits to be carried out by (or
on behalf of) the Commission: ex-post financial audits to verify the reli-
ability of audit certificates accompanying financial statements for FP6
indirect RTD actions, compliance audits (so called ‘management audits’)
to provide assurance on the effective operation of the new instruments
(i.e. ‘Networks of Excellence’ and ‘Integrated projects’); and — ex-post
financial audits for those instruments for which an audit certificate is
not required, intended to confirm the eligibility of the costs declared (see
Directorate-General for Research, L4/RH/ER D (2003), Common Audit
Policy of the DG’s for FP6, dated 5 December 2003)

(17) Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies: paragraph 132.

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Preliminary assessment of the management and control
systems for the European Refugee Fund in the area of
freedom, security and justice

Scope of the preliminary assessment

6.12. The Directorate-General for Justice and Home Affairs car-
ries out programmes and activities in the area of freedom, security
and justice. In 2003 appropriations of 138,7 million euro were
committed against budget title B5-8 and payments amounted to
101, 8 million euro.

6.13. The ‘European Refugee Fund’ (ERF) (2000 to 2004), which
supports Member States in receiving and bearing the consequences
of receiving refugees and displaced persons, represented 28 % of the
total payments in this area in 2003 (18). It comprises three different
measures, namely reception, integration and voluntary repatriation.
The allocation of funds among the 14 Member States participating
in the ERF (19) comprises an annual fixed amount and a variable
amount in proportion to the number of refugees and displaced per-
sons received over the previous three years. In the period 2000 to
2002, the number of asylum applicants varied widely among Mem-
ber States. Given this fact and the different funding choices made by
the Member States for the three measures, there were large differ-
ences in the Community contribution per applicant and per Mem-
ber State.

6.14. The Court examined the management and control proce-
dures of the ERF and tested a sample of payments authorised in
2003 at the Commission, extending the verification to the final ben-
eficiary where appropriate.

(18) Council Decision 2000/596/EC of 28 September 2000 establishing a

European Refugee Fund (OJ L 252, 6.10.2000, p. 12).

(19) Denmark is not participating in the ERF programme (Recital 23 of

Council Decision 2000/596/EC)

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Operational procedures not yet documented at Directorate-General for Justice and
Home Affairs

6.15.
Internal Control Standard 15 ‘Documentation of proce-
dures’ states that all Commission departments should have fully
documented their financial procedures and produced up to date
operational manuals by 31 December 2002 (20). Contrary to what
was requested, a comprehensive manual for operational procedures
did not exist for any of the programmes managed by Directorate-
General for Justice and Home Affairs as at the end of 2003 (21).

6.15. The staff in charge of the management of the financial interven-
tion programmes has at its disposal the Vade-mecum of financial proce-
dures of the Directorate-General which contains numerous references con-
cerning operational provisions.

Discussions are already in progress to bring together in the manuals of
operational procedures for the programmes the various standard documents
already accessible in the common information technology repertories of each
programme.

Weaknesses in the ERF’s control system at different levels

6.16. The following weaknesses were identified by the Court’s
audit of the ERF at Commission, Member State and final beneficiary
level:

6.16.

— late adoption of implementing rules: Member States are respon-
sible for ensuring an adequate financial control environ-
ment (22). Although the ERF was set up in September 2000, the
Commission only defined the rules on eligibility of expenditure
in March 2001 and on management and controls in Member
States in December 2001. This left the national intermediate
managing bodies without clear instructions during the starting
phase of the programme (23);

— The Commission is aware that a delay has occurred in the adoption of
the various decisions concerning the implementing procedures, in par-
ticular as a result of the consultations needed with the Member States.

This is already the subject of measures by the Commission in the con-
text of the second phase of the European Refugee Fund.

(20) Article 15, baseline requirements by 31 December 2002 of Internal
Control and Risk Assessment 2002 (ICRSA) 2002, Summary of the
baseline
Standard requirements
(http://intracomm.cec.eu-admin.net/budg/document/crd/ics/baseline-
en-1.03-final.pdf).

internal

control

and

full

(21) In addition to guidelines prepared at technical level, which were not for-
mally approved by the hierarchy, the only manuals at Directorate-
General for Justice and Home Affairs were on financial procedures and
interdepartmental consultation (in particular ‘Vademecum des Circuits
financiers’, Unit C1, Human resources, budget, informatics, security;
‘Vademecum sur les procédures institutionelles’, July 2003, DG JAI.01).
(22) Article 7 in combination with Article 18 of Council Decision

2000/596/EC.

(23) Commission Decision 2001/275/EC of 20 March 2001, laying down
detailed rules for the implementation of Council Decision 2000/596/EC
as regards the eligibility of expenditure and reports on implementation
in the context of actions co-financed by the European Refugee Fund
(OJ L 95, 5.4.2001, p. 27). Commission Decision 2002/307/EC of
18 December 2001 laying down detailed rules for the implementation
of Council Decision 2000/596/EC as regards management and control
systems and procedures for making financial corrections in the context
of actions co-financed by the European Refugee Fund (OJ L 106,
23.4.2002, p. 11).

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— non-respect of eligibility criteria: the ERF supports measures for
the reception, integration and repatriation of refugees. Accord-
ing to the Council decision establishing the ERF, repatriation
shall be funded provided that the refugees concerned have not
acquired a new nationality and have not left the territory of the
Member State (24). The Court found that in Germany the latter
condition was not complied with;

— weak control environment in the Member States: since 2002 the
Commission has undertaken visits to all the Member States
concerned, in order to monitor the national management and
control systems for the ERF. Several monitoring reports point
to weaknesses in the Member States’ control environment, such
as management and control procedures which could not be
verified, inadequate documentation of the evaluation and selec-
tion of projects, non-compliance with the Community regula-
tion with regard to the eligibility of projects, an insufficient
verification of eligibility of costs by the intermediate bodies and
absence of the required sample checks. These shortcomings
show a need for increased additional ex- post financial audits
by the Commission in this field, in addition to the strengthen-
ing of Member States’ control environment (25);

— specific requirements on supporting documentation not respected by
the Member States: Member States’ management and control
systems are required to provide for an adequate audit trail. This
must allow the reconciliation of the ‘summary accounts’ (i.e.
the cost declarations by intermediate bodies to the Commis-
sion) with the individual expenditure records and supporting
documents kept at the various administrative levels and by the
final beneficiaries (26). The audit found that this was not always
possible (27);

— advance payments incorrectly declared as expenditure: when submit-
ting ‘summary accounts’ to the Commission, intermediate bod-
ies have to confirm that the costs declared were actually
incurred, were eligible and were recorded in the accounts or the
tax ledger of the final beneficiary. The Court’s audit showed
that advances granted by intermediate bodies to final benefi-
ciaries were declared to the Commission as costs incurred.

— On the basis of information provided by the Court, the Commission
has contacted the Member State about the project concerned and
financial adjustments will be made if necessary.

— The Commission organised in 2002 and 2003 monitoring visits in
all the Member States and verifications of project expenditure.

The monitoring visits showed that improvements were possible, and
the weaknesses were taken into account in the programming of the
ex-post audits.

— The Court’s findings have been sent to the Member State concerned
and, where appropriate, rectifications will be made. The Commission
will inform the Court once replies have been provided by the Member
State

— In 2002 the Commission specified the implementing procedures, in

particular as regards the definition of expenditure incurred.

The Court’s findings have been sent to the Member State concerned and,
where appropriate, rectifications will be made. The Commission will take
appropriate measures to remind the Member States about the provisions
contained in the implementing rules concerning the ERF.

In addition, the definition of the concept of ‘eligible expenditure’ has been
included in the Commission proposal for the second phase of the European
Refugee Fund (COM (2004)102 of 12 February 2004, Articles 20
and 23.

(24) Article 4(1)(c) of Council Decision 2000/596/EC.
(25) Annual Report concerning the financial year 2002, paragraph 6.43.
(26) Article 4 of Commission Decision 2002/307/EC as regards manage-
ment and control systems and procedures for making financial correc-
tions in the context of actions co-financed by the European Refugee
Fund.

(27) For one transaudited by the Court the interim report prepared by a final
beneficiary and forwarded to the national authority did not contain suf-
ficient information to justify the declared expenditure. Nevertheless the
amount was fully accepted and certified to the Commission on which
basis the Commission authorised the payment. Another final report
included amounts paid by a local office of the beneficiary in Kosovo
without any adequate supporting documentation in the file.

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Results of the tests of underlying transactions authorised during the
financial year

Scope of the testing

6.17. The Court’s audit assessed the legality and regularity of the
underlying transactions in the field of internal policies based on a
random sample at Commission level of ninety-three payments and
nine commitments. This sample included pre-financing, interim,
final and single payments, concerning actions implemented through
Commission decisions, grant agreements and procurement con-
tracts. Within this sample, fifteen payments based on declarations
of costs incurred were also tested at the final beneficiary.

6.18. This sample included eight payments and two commit-
ments for FP6 indirect RTD actions, and it was supplemented with
seventeen payments of budget title B5-8 ‘Area of freedom, security
and justice’, of which four were checked at the final beneficiary.

Weaknesses observed in the functioning of the Commission’s internal controls

6.19.
In a number of cases the scope and rigour of the controls
carried out by the Commission were insufficient. Examples include
the award of grants for which Commission decisions could not be
furnished, or improper contract management (including contract
amendments) and non-compliance with the financial procedures
applicable to the authorisation of payments. The Court notes that
the documentation of the controls operated was still inadequate in
a number of cases.

6.19.
In the cases to which the Court alludes, Community aid was not
granted without a decision having been taken. Its finding concerns an
archiving problem concerning a document dating back eight years; the
Commission considers that the disputed amendments are justified in all the
specific cases analysed by the Court.

Following the Court’s audit the correct application of the financial proce-
dures was reviewed by the Commission.

6.20.
In some cases the Commission also failed to respect award
and commitment procedures. In two other cases explicit reserva-
tions made by the Commission’s own internal control units on the
regularity of the selection of contractors and on the management of
service contracts did not lead to the appropriate corrective action.

6.21. When verifying the eligibility and accuracy of costs claimed
by the final beneficiary (or national authorities acting as an inter-
mediate body) and processing cost-claim based payments, inad-
equate or ineffective controls often led to overpayments by the
Commission.

6.20.
In the two cases mentioned by the Court the recommendations
made subsequently by the control units had effects which the Commission
judged appropriate.

6.21. When the Commission is processing payments based on cost
claims by final beneficiaries, desk controls are performed on these claims
according to the existing contractual provisions, whereas only a full finan-
cial audit at the level of beneficiaries can determine with certainty and exac-
titude the correctness of the claimed costs. As far as the desk controls are
concerned the Commission therefore agrees that their scope is limited and
that they cannot provide full assurance on the legality and regularity of the
cost claimed. The Commission has therefore significantly increased
its financial audits at beneficiary level over the last few years (see also
point 6.29).

C 293/204

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.22. As in previous years, payments by the Commission were
often made late. This finding is confirmed by the information con-
tained in the Annual Activity Reports 2003 of a number of
Directorates-General (28).

6.22. The Commission is closely monitoring the payment times indica-
tor and has made further progress.

In a number of cases payment delays are due to deferred availability of
appropriations at the beginning of the financial year, additional controls
or requests for new substantiating documents, which are not always cor-
rectly recorded as giving rise to an interruption in the reference period for
making the payment in question.

Concerns as to over declarations of costs by beneficiaries for indirect RTD actions

6.23.
In budget subsection B6 ‘Research and technological devel-
opment’, payments for FP6 indirect RTD actions made in 2003
were predominantly advances following the contract signature.
These transactions were not audited at the final beneficiary by the
Court. For cases related to previous RTD framework programmes,
several cost declarations stated rates of Community funding which
were not in line with those in the contract, without being detected
by the Commission’s internal controls. The Court reiterates its con-
cerns as to the legality and regularity of cost-claim based payments
authorised by the Commission for FP5 as a whole, given the fre-
quency and impact of errors in this area (29).

6.23. To address the problem of erroneous cost statements submitted by
beneficiaries, the Commission has adopted a number of corrective measures.
For FP5, the number of financial audits at beneficiary level has been sig-
nificantly increased. Moreover the Commission has made a concerted effort
to ensure consistency and uniformity of legal interpretations and applica-
tions by means of the Action Plan established further to the Commission’s
synthesis of the 2001 Annual Activity Reports (Communication from the
Commission to the European Parliament and the Council. Synthesis of the
Annual Activity Reports and Declarations of the Directors-General and
Heads of Service. COM (2002) 426 final, Brussels, 24.7.2002).

For FP6 the measures taken include a simplification of rules, the use of
audit certificates and the introduction of sanctions.

Previous observations for TEN-T confirmed by this year’s audit findings

6.24.
Similarily, for Trans-European Transport Networks (TEN-T)
in budget title B5-7, this year’s audit confirmed the observations
reported previously by the Court (30). In particular the audit found
that interim and final payments were often authorised by the Com-
mission without the specific preconditions stipulated in the finan-
cial implementing provisions being satisfied.

6.24. The Commission considers, as already indicated in its reply to the
ECA’s Annual Report 2002 (paragraphs 6.35 and 6.36) that the pre-
conditions for interim and final payments were met. The difference in the
interpretation of activities eligible for funding as studies will be addressed
by a revised definition of studies and works to be integrated into the TEN-T
handbook for beneficiaries.

Control weaknesses identified in the ‘Area of freedom, security and justice’

6.25. Concerning the budget title B5-8 ‘Area of freedom, security
and justice’, the Community regulation was applied incorrectly by
the intermediate bodies in the Member States. Requests for funding
submitted after the official deadline were accepted.

6.25. The Commission will remind the Member States of the provisions
of Decision 2000/596/EC.

(28) The Annual Activity Report 2003 for DG RTD, for example, states that
the time limits for the Commission are not respected in more than 60 %
of cases.

(29) Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies, paragraphs 90 to 100 and 129.

(30) Annual Report concerning the financial year 2001, paragraphs 4.27 to
4.30; Annual Report concerning the financial year 2002, para-
graphs 6.33 to 6.36.

30.11.2004

EN

Official Journal of the European Union

C 293/205

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Non-compliance with contractual requirements at final beneficiary level

6.26. The errors detected at final beneficiaries related mainly to
non-compliance with the contractual requirements. As in previous
years, the audit found that beneficiaries were overcharging costs,
mainly due to an incorrect calculation of the costs incurred for the
funded activity, or declaring ineligible costs, costs not actually
incurred or costs related to ineligible activities.

6.26. The type of errors identified by the Court’s audits at beneficiary
level is very similar to the errors found by the Commission’s own audits of
beneficiaries. For research the errors are mainly linked to the wrong appli-
cation of average rates for personnel costs and to calculation errors for indi-
rect costs. Certain contractual requirements, which have caused problems of
interpretation in the past, have been simplified in the FP6 contracts.

Analysis of the Commission’s ex-post financial audits

Slight increase in audit activities

6.27.
In internal policies, the Commission increasingly relies on
ex-post financial audits, as recommended in the Court’s opinion on
‘Single audit’ (31), which are to a large extent carried out by external
auditors on its behalf. As in previous years, the Court reviewed the
reports for the Commission’s ex-post financial audits in the inter-
nal policies area which were completed during the financial year.
Overall the number of completed audits increased from 511 in
2002 to 579 in 2003 in internal policies (see Table 6.1). Similarly,
the total number of contracts audited increased from 800 to 944.
Nevertheless, six out of the fourteen Directorates-General showed a
decrease both in audits carried out and the number of contracts
audited. For the first time since its creation in 1999, the Directorate-
General for Justice and Home Affairs carried out a limited number
of ex-post financial audits.

6.28. All audits carried out by Directorate-General for Health and
Consumer Protection in 2003 related to veterinary actions. These
audits led to financial adjustments in favour of the Commission of
some 95,5 million euro. Directorate-General for the Internal Mar-
ket carried out no inspections or financial audits during 2003.

6.27. Overall, audit activities for research actions were intensified. For
2002 and 2003, the audits reported were only related to research. In order
to reach the 10 % target established for FP5 contracts, DG TREN esti-
mates that on average 40 to 50 audits need to be performed each year, rep-
resenting 80 to 100 contracts. For the period 2002-2004, the average
targeted number of audits (40 to 50) and audited contracts (80 to 100)
for DG TREN will be reached.

During 2003 the JAI’s audit plan started to be implemented but, on
account of limited human resources, only a limited number of audits could
take place.

(31) Opinion No 2/2004 on the ‘single audit’ model and a proposal for a

Community Internal Control Framework.

C 293/206

EN

Official Journal of the European Union

30.11.2004

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30.11.2004

EN

Official Journal of the European Union

C 293/207

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Ex-post financial audits of indirect RTD actions — further action needed to
reach target set

6.29. 373 ex post financial audits relating to 589 contracts for
indirect RTD actions were closed during 2003 by the five
Directorates-General operating the RTD framework programmes
(see Table 6.2). As in previous years, Directorate-General for
Research performed most of the audits. The majority of the audits
carried out by (or on behalf of) the Commission during 2003 con-
cerned FP5 indirect RTD actions (320 of a total of 373 audits).

Table 6.2 — Directorates-General operating the RTD framework programmes — Summary table of audits closed in 2002
and 2003

Directorate-General in charge

Total number of audits closed

Total number of contracts audited

Ratio contracts/audit

RTD-related audits closed in 2002 and 2003 (1)

DG RTD

DG INFSO

DG TREN

DG ENTR

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

2003

2002

2003

2002

2003

2002

23

185

208

5

69

74

1

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25

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39

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373

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590

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1,6

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1,5

1,5

1,5

(1) The figures for 2002 have been modified, as compared to the Court’s Annual Report 2002, taking into account additional information made available by the Commission.

C 293/208

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.30. The Commission’s audit approach in the field of research
defines an overall audit target of 10 % of contractors during FP5 (32).
According to the information provided by Directorate-General for
Research, the number of audits completed in 2003 corresponds to
3,9 % of the auditable population of contractors as defined by the
Commission. As a result, the Commission’s audit activity is below
target for the fourth consecutive year (33). Unless the Commission
further increases its audit activities for FP5, the target is unlikely to
be met (34).

6.30. The Commission has set an overall audit target of 10 % of con-
tractors of FP5 to be audited.

The Commission has confirmed that it will continue its audits on FP 5 con-
tractors, as multiannual projects are ongoing and a new framework con-
tract with an external audit firm is set up for that purpose. The Commis-
sion expects the overall audit target for FP5 can be reached at the end of
corresponding activities.

The Directorates-General operating RTD framework programmes have
indicated their intentions in the context of the launch of the procurement
procedures for the framework contracts with external auditors.

By 2006/2007 the Commission plans to have audited a sufficiently large
number of contractors to reach the target set.

Commission statistics on ex-post financial audits show lower impact of errors for
the RTD framework programmes than does the Court’s audit

6.31.
For the contracts for FP5 indirect RTD actions audited by
the Court from 2001 to 2003, the Commission services proceeded
with financial adjustments averaging 21,6 % of the costs declared by
the beneficiaries. In the Court’s view, as indicated previously, this
rate can not be extrapolated to the total budget for FP5 (35). In com-
parison, the Commission’s statistics on ex-post financial audits
show an impact of errors for the Directorates-General operating the
RTD framework programmes which is significantly lower than
those resulting from the Court’s audits (see Table 6.1).

6.31. The Commission data on ex-post financial audits in question are
based on 333 concluded audits relating to 556 contracts for indirect RTD
actions. The significant number of audits by the Commission constitutes a
reliable basis for overall quantitative conclusions on the underlying system.

The Directorates-General operating RTD framework programmes have dis-
closed this data in more detail in their Annual Activity Reports.

(32) Written Commission reply to the questionnaire of the European Parlia-
ment Committee on Budgetary Control, paragraph 4.3, dated
21 December 2001. See also Court of Auditors’ Annual Report concern-
ing the financial year 1999, together with the Commission’s replies,
paragraph 4.23.

(33) The ratio was 9,2 % for the year 2000, 8,5 % for the year 2001 and
4,8 % for the year 2002. See also the Court’s Annual Report concerning
the financial year 2002, paragraph 6.46.

(34) The Commission’s service contract states that up to three contracts per
auditee can be requested from external audit firms for a fixed price and
the obligation to deliver the final audit report within six months. In
order to increase the audit coverage, the Commission could require the
audit firms to carry out more audits per assignment.

(35) Special Report No 1/2004 on the management of indirect RTD actions
under the 5th Framework Programme (FP5) for Research and Techno-
logical Development (1998 to 2002), together with the Commission’s
replies, paragraph 98.

30.11.2004

EN

Official Journal of the European Union

C 293/209

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Inadequate follow-up procedures for ex-post financial audits at the
Directorate-General for Education and Culture

6.32. The Court carried out an analysis of 43 audit reports (related
to 56 contracts for different programmes) completed in 2003 by
external audit firms on behalf of the Commission and their
follow-up by Directorate-General for Education and Culture. The
contracts audited covered cost declarations by final beneficiaries
amounting to 18,4 million euro, of which 14,3 million euro were
accepted by the Commission. In more than half of these cases, the
external auditors recommended a financial adjustment to the cost
declared and accepted by the Commission. This was mainly because
of the lack of adequate supporting documentation justifying the
costs incurred, the use of budgeted instead of actual costs, or the
declaration of costs outside the eligibility period.

Expenditure proved to be ineligible which only on-the-spot audits

6.32.
that DG EAC is endeavouring to step up made it possible to discover.

DG EAC’s audit programme focuses in particular on the inclusion of
projects which the DG considers to be potentially more risky or where the
analysis of breakdowns suggested that they might contain anomalies.

In addition, DG EAC is reinforcing the requirement for compliance by ben-
eficiaries with the contractual provisions. It is also working on a simplifi-
cation of these contractual provisions. These two factors should reduce such
anomalies with regard to beneficiaries. It should be noted that in some cases
they have less developed administrative structures in this area than in oth-
ers (small NGOs).

Furthermore, the Court’s examination of the audit files

6.33.
revealed other shortcomings such as:

6.33.

— incomplete audit reports accepted by the Commission;

— undue delays between the audit being carried out and the audit

findings reported to the Commission and;

— The audits examined by the Court correspond to a running-in period
for the procedure for carrying out this type of externalised audits. The
Commission recognises that certain non-fundamental elements may
not have been present in the initial audit report submitted to it. It
endeavours to accept and validate provisional audit reports drawn up
by audit firms only if they are in accordance with the conditions and
level of quality required by the framework contracts concluded between
the Commission and these companies.

— The Commission stresses that the delays noted by the Court between
the audits being carried out and the receipt of the final report by the
operational unit are partially due to the time limits allowed for the
audited contractors to react to the draft report.

The Commission will nevertheless endeavour to reduce the delays noted
by the Court.

— irregularities in the Commission’s management of contracts. — The audited projects were contracted out at a time when the contrac-

tual requirements vis-à-vis the beneficiaries were less well defined.

In some cases, the audited contractors also had other contracts with
the same Directorate-General or other Commission departments. In
these cases, the Commission’s follow-up procedures should provide
for verification of the extent to which other contracts are subject to
similar problems.

The Commission will endeavour to carry out a better cross-check of the
information arising from the audits carried out in respect of a particular
programme with the funding which the beneficiaires concerned may have
received under other programmes; the features of certain beneficiaries (recur-
rent beneficiaries, in particular) and certain projects are taken into account
when drawing up the programme of audits.

C 293/210

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Review of the Annual Activity Reports and the Directors-Generals’
Declarations

Scope of the review

6.34. The Court reviewed the Annual Activity Reports of 11
Directorates-General and conducted an analysis of the consistency
and plausibility of the information contained in the 2003 Annual
Activity Reports (AAR) at four Directorates-General, in parallel with
its assessment of the Commission’s supervisory systems and con-
trols (36).

General improvement in the presentation of the different aspects covered by
Annual Activity Reports

6.35. The Court noted a general improvement in the quality of
the reports as compared to 2002. In general the structure and con-
tent follow the guidelines issued by the Secretary-General and
Directorate-General Budget (37).

6.36. As in 2002, all eleven Directors-General have declared that
they obtained reasonable assurance as regards the legality and regu-
larity of the funds managed under their responsibility, although
some of them repeated reservations made in 2002. The Court con-
siders that overall the causes of the deficiencies were accurately
stated and, to the extent possible, appropriate corrective actions
were proposed. The implementation of the action plans can be
expected to address a significant part of the identified weaknesses
and should ensure an adequate follow-up.

Persistent weaknesses in the formulation of reservations by the Directors-General

6.37. The Court considers that the information contained in the
reports reflects to a large extent the reality of the situation as regards
the legality and regularity of the operations managed. Nevertheless,
persistent weaknesses in the formulation of reservations by the
Directors-General were noted. In the case of the Directorate-General
for Justice and Home Affairs, for example, last year’s reservations
relating to Standard 17 ‘Supervision’ and to the European Refugee
Fund should not have been removed, since corrective actions were
only partially implemented. The outcome of ex-post financial audits
in 2003 which resulted in the recovery of 0,22 million euro repre-
senting 6 % of the total amount audited should have been taken
into account to maintain a specific reservation. Another example is
the case of Directorate-General for Research, where the potential
material impact of the payment delays was not adequately assessed.

(36) Directorates-General for Research, for Information Society, for Justice

and Home Affairs and for Education and Culture.

(37) Secretary-General and the Directorate-General for Budget, ‘Circular on
annual activity reports for year 2003 to Directors-General and Heads of
Service’, SEC(2003) 1469 of 19 December 2003, amended by
SEC(2004) 147 of 19 February 2004.

6.37. According to the guidelines adopted by the Commission
(COM(2003) 28 final), failure to implement a control standard com-
pletely does not automatically result in a reservation in the annual activity
report.

With regard to the European Refugee Fund, the reservations expressed in
2002 were removed since corrective measures had been taken by the Com-
mission, e.g. the programme of monitoring visits relating to management
and control systems have been completed in all Member States. The DG
did not consider that the material impact justified a reservation.

The DG for Justice and Home Affairs is aware that efforts need to be inten-
sified in the field of ex-post audits. This is already happening in 2004 and
will also be the case in 2005.

DG Research’s 2003 annual activity report indicates the weakness con-
cerning payment delays. However, even if there was no evaluation of the
material nature of this weakness contained in the text of the report, the
impact on reasonable assurance was not regarded as material given the very
low rate of requests for delayed payment interest.

30.11.2004

EN

Official Journal of the European Union

C 293/211

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Modifications in the legal base insufficient to counter risks of over payments for
indirect RTD actions

6.38.
In 2002, the Commission defined a specific action in the
field of research, Action No 1, in order to address the reservations
and observations concerning the RTD framework programmes (38).
Following this, the five Directorates-General jointly managing the
RTD framework programmes adopted a common action plan, in
January 2003 (39), detailing the specific measures required to
address the risk of overpayment for indirect RTD actions, and
shared-cost RTD projects in particular (40).

6.39. According to the report from the Commission to the Coun-
cil and the Parliament on the situation as at 31 December 2003 of
the implementation of the Commission’s action plans 2001 (41), the
specific measures developed by the Commission in response to
Action No 1 of the 2001 Synthesis Report had been fully addressed.

6.39. The quoted Commission report indicates that the measures fore-
seen in the Action Plan have been put in place, but not all of its objectives
have been achieved. Some of the actions will only take full effect over time,
as in particular the introduction of sanctions.

Other Commission proposals have not been fully retained by the European
Parliament and the Council.

6.40. The Court, however, considers that the actions resulting
from the Commission’s action plan, as completed in 2003, together
with the modifications to the legal bases of the RTD framework
programmes for FP6 are still insufficient to address the risk of over-
payments for indirect RTD actions (42):

6.40.

— The FP6 cost reimbursement system is still structured around
three models, as was FP5, and the complete elimination of cost
categories in FP6 reduces the transparency of the financial
statements required for the declaration of eligible costs incurred
and reduces the potential for analytical checks;

— When drawing up FP6, the Commission took the initiative of thor-
oughly reforming the system with a view to achieving genuine sim-
plification for participants. The choice made for FP6 is based on a
combination of the five following principles:

— the definition of a strict cost eligibility framework,

— participants apply their own accounting rules and principles,

— systematic recourse to audit certificates,

— the obligation for consortiums to submit a management report
establishing a link between resources and scientific work and
results, and,

— a redeployment of resources in the monitoring of the scientific
quality of projects, with the assistance of external experts, in
accordance with the simplified procedures and in ex-post audits.

On this basis, the Commission considers that the system established
for FP6 is more rational and simpler to implement both for the par-
ticipants and for the Commission services. Consequently, it provides
better protection for the Commission’s financial interests.

(38) Synthesis of the Annual Activity Reports and declarations of the
Directors-General and Heads of Service, COM(2002) 426 final,
24 July 2002.

(39) European Commission, ‘Action Plan to address the issues identified in
certain Annual Activity Reports (2001) as weak points in the manage-
ment of research projects’, C(2002) 5558, 3 January 2003.

the organisational

(40) The common action plan adopted by the Directorates-General operat-
ing the RTD framework programmes covers, among others, the follow-
ing specific measures: as regards the implementation of FP5, the
improvement of
cooperation between the
Directorates-General through the creation of an inter-service group on
the financial management of contracts and a network of correspondents
reporting to this inter-service group, the improvement of the contract
management through better information for contractors, an increase in
the verification of cost claims (involving the implementation of desk
audits and the improvement of training on financial issues), and the
improvement of the IT systems; as regards FP6, the preparation of clear
financial guidelines for contractors, the requirement of audit certificates,
the development of a common IT system, the continuation of the audit
strategy applied for FP5 and the introduction of sanctions in the model
contract.

(41) COM(2004) 247 final, 5 April 2004, points 30, 32, 33 and 39.
(42) Special Report No 1/2004 paragraphs 42 to 45.

C 293/212

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— The definition of the scope of audit certificates is contained in the

model attached to the Guide on Financial Issues for FP6.

— The deployement of the common IT system is being addressed by the
common action plan and is being implemented by the respective DGs.
See paragraph 6.9.

Relating to the ‘desk audits’, checks continue to be carried out on sampling
related to substantiation of cost claims, particularly with respect to the time
sheets for personnel costs but sometimes including also subcontracting
(contracts, invoices), other costs and durable equipment (invoices), and in
certain cases overhead costs. In-depth controls via the request of substan-
tiation of claims by means of supplementary documentation are exercised
by the Directorates-General operating RTD framework programmes partly
in doutful cases and partly on random selection.

The Commission has made great efforts to achieve simplification with the
introduction of FP6. It will continue to develop the framework programme
monitoring model, including in the proposal for a future FP7, paying par-
ticular attention to the simplification of procedures.

6.41. The Commission considers that the FP6 model contract was com-
pleted sufficiently in time for the signing of contracts for indirect RTD
actions and therefore did not negatively impact the on implementation of
FP6 in 2003.

Compared with FP5, FP6 has significantly simplified and improved the
management rules with a view to reduce errors and misinterpretations and
in order to protect the financial interests of the Communities, notably by
introducing the obligation for beneficiaries to provide audit certificates.

— The principle of joint and several liability introduced in FP6 has
been limited at the request of the Council and the Parliament
to each participant’s share up to a maximum of the total pay-
ments received;

— The introduction of the requirement for the beneficiaries to
provide audit certificates with their financial reports has not
been accompanied by a definition of the essential aspects con-
cerning the scope and the extent of the audit work to be done;

— Other measures included in the common action plan for
research (such as the deployment of a common IT system for
all Directorates-General or the implementation of ‘desk audits’,
which was only initiated by the Directorate-General for Infor-
mation Society) were not implemented by all Directorates-
General.

In the Court’s view, the Commission should review from first prin-
ciples the rules for setting the Community financial participation
whilst allowing adequate control over expenditure in any future
RTD framework programmes. The changes to the cost reimburse-
ment models adopted by the European Parliament and the Council
are insufficient to address adequately the underlying problems lead-
ing to overpayments (43).

Conclusions and recommendations

6.41. The analysis of the Commission’s supervisory systems and
controls at the four selected Directorates-General revealed that sev-
eral elements of the Commission’s Internal Control Standards
reviewed were still not implemented at the end of 2003. The late
completion of the FP6 model contracts led to uncertainty for par-
ticipants. The incomplete deployment of the common IT system
during 2003 adversely affected the implementation of FP6. In the
Court’s view, these deficiencies were to some extent off-setting the
initial improvements achieved by the earlier adoption of the legal
framework and the simplification of the contractual structure. The
audit also identified weaknesses in the management and control sys-
tems for the European Refugee Fund in the area of freedom, secu-
rity and justice.

(43) Special Report No 1/2004, paragraphs 36 to 41 and 113 to 115.

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6.42. The testing of transactions for the internal policies area
revealed weaknesses in the Commission’s internal controls and a
high incidence of errors at the final beneficiaries, confirming the
Court’s previous concerns about the legality and regularity of the
underlying transactions. The audit of transactions also corroborated
the weaknesses identified by the Commission in the control proce-
dures applied by some Member States in the framework of the
shared management of the European Refugee Fund.

6.43. An analysis of the ex-post financial audits in the field of
internal policies, where RTD expenditure represents more than half
of the budget, again shows a considerable incidence of errors,
mainly due to over-declarations of costs by final beneficiaries which
were not detected by the Commission’s internal controls. The num-
ber of audits in 2003 was for the third year insufficient to achieve
the Commission’s own audit target for FP5. The Commission’s
follow-up of the findings of the ex-post financial audits is not rig-
orous enough, and the recovery procedures for undue payments of
the Community financial contribution were found to be inadequate
and slow.

6.42. Concerning the high incidence of errors at beneficiary level, the
Commission recalls its own reporting on actual audit results, but in par-
ticular on actions taken to further reduce the incidence and impact of such
errors both by preventive actions (simplification of rules and better com-
munication with beneficiaries), by more and better controls and by the
introduction of dissuasive penalties and sanctions.

6.43. Only one on-the-spot audit identified the errors in question. These
mistakes are made in two senses, some contractors overcharge, and other
undercharge their expenditure. The net impact (overstatements minus
understatements) on the Commission’s budget remains quite limited and
decreases over the years.

The Directorates-General operating RTD framework programmes differ
from the view held by the Court that the audit target for FP5 will not be
reached. The audit effort is continuous over at least four years and the Com-
mission considers that the achievement of the 10 % target can indeed be
expected by 2006/2007.

Extensive efforts have been made in each Directorate-General operating
RTD framework programmes to ensure the effective follow-up of audits and
the financial implementation of audit results including when necessary by
issuing recovery orders.

6.44. The quality and reliability of the information included in the
Annual Activity Reports 2003 improved, contributing to a more
accurate assessment of the legality and regularity of the activities
reported. Weaknesses persisted as regards the formulation of reser-
vations. The follow-up of the weaknesses stated in the Annual
Activity Reports for 2001 and 2002 in the four Directorates-
General reviewed by the Court was considered adequate.

6.45. The Commission is recommended:

6.45.

— to continue its efforts towards the achievement of the full
implementation of the Internal Control Standards for those ele-
ments where shortcomings were identified by the Court;

— Following the introduction of internal standards, the Commission

monitors the application of these measures.

— to assure the effective deployment of the common IT system
for FP6 proposal, contract and project management, and to
provide clarification to contractors and external auditors as
regards the preparation of audit certificates;

— The deployment of the common IT system is continuing according to
the established plan. The necessary information is sufficiently defined
in the model audit certificate attached to the Financial Guidelines for
FP6.

— to remedy the internal control weaknesses pointed out by the
Court for its activities in the area of freedom, security and jus-
tice, to further improve guidance to Member States on how to
achieve a harmonised control environment at national level
across the European Union (including controls carried out by
Member States in the framework of the shared management of
the European Refugee Fund) and to intensify, where appropri-
ate, its ex-post financial audits at the final beneficiary;

— The Commission will continue its efforts to provide guidance to the
Member States through guidelines, monitoring visits (cf point 6.16)
to the responsible authorities so that the management and control sys-
tem of the responsible authorities are satisfactory in each Member
State. Efforts will also be intensified in the area of ex-post financial
audits.

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— to provide, as far as possible, for effective and dissuasive sanc-
tion mechanisms and to generalise the use of audit certificates
within the internal policies area, as recommended in the Court’s
opinion on ‘Single audit’ (44); and

— to define for each of its main activities in the internal policies
area a coherent audit approach (stating measurable objectives
and targets) which takes the specificities of the different areas
into account, to carry out its ex-post financial audit activities
accordingly and to assure an adequate and timely follow-up of
the audit results.

— In the new financial regulation and its implementing rules, applicable
since January 2003, the possibility to use both sanctions and audit
certificates has been provided for.

The Commission will analyse the Court’s recommendations to genera-
lise the use of the instruments included under the Court’s opinion on
‘Single audit’ within the internal policies area.

— Following the Commission’s 2002 synthesis report (namely its action
on shared management), a network of audit units will be set up within
the Commission involved in shared management, with the possibility
to extend the network to the Directorates-General working in areas in
which implementation tasks have been delegated to beneficiary coun-
tries. In this context, the Commission is ready to analyse how the
experiences of the network can be used by the Directorates-General
dealing with activities in the internal policies area. As far as research
is concerned, the principles of a common audit strategy have been
agreed by the five Directorates-General operating the RTD framework
programmes.

Furthermore, a subgroup to the Internal Control Coordinators (ICC)
network has recently been set up to exchange experiences and best
practices as regards ex-post controls. However, it is to be noted that
the scope of this group does not currently cover activities carried out
under shared and indirect management (the subgroup was set up fol-
lowing the 2002 synthesis report’s ‘Co-financing’ action).

FOLLOW-UP OF PREVIOUS OBSERVATIONS IN SPECIAL
REPORT NO 2/2002 ‘SOCRATES’ AND ‘YOUTH FOR EUROPE’

Scope of the Special Report and main audit findings

6.46. The Special Report focused on the management system
operated by the Directorate-General for Education and Culture for
the programmes ‘Socrates’ and ‘Youth for Europe’
(1995 to
1999) (45), identifying in particular:

— weaknesses in the design of programmes and their manage-

ment systems;

— deficiencies in the implementation of the actions and projects
covered by both programmes, including delays due to complex
administrative and financial procedures;

(44) Opinion No 2/2004 on the ‘single audit’ model and a proposal for a

Community Internal Control Framework.

(45) Special Report No 2/2002 on the Socrates and Youth for Europe Com-
munity action programmes, together with the Commission’s replies; see
in particular paragraphs 10 to 21, 25 to 36, 39 to 56, 75 to 83 and 91
to 102.

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6.47. The current programmes, Socrates II and Youth, were adopted at
the beginning of 2000 before the Court formulated its observations, and
cover the period 2000-2006. Compared with Socrates I and Youth for
Europe, they already reflect rationalisation and simplification efforts which
the Commission intends to continue for the following period (2007-
2013). The Commission confirms that it has stepped up its control over
the national agencies and the BAT. In addition, in 2001 it internalised
the payments previously made by this BAT.

— inadequacies in the Commission’s internal control system; and

— shortcomings in the Commission’s programme evaluation.

The Court’s audit observations were explicitly supported in the
European Parliament’s report on the discharge for the general bud-
get for the 2001 financial year (46).

Action taken by the Commission

Programme design and the management system

6.47. The ‘Socrates’ (47) and ‘Youth for Europe’ (48) programmes
are divided into a large number of centralised and decentralised
actions to address the different policy objectives. Centralised actions
are managed by the Directorate-General for Education and Culture
together with an external technical assistance office (TAO), whereas
National Agencies in the Member States implement the decentra-
lised actions. The Special Report concluded that the policy objec-
tives were too ambitious in respect of the resources allocated to the
programmes, that the number of actions was overly large given the
target population and that the Commission had unduly delegated its
responsibilities to the TAO. The legal bases for the current program-
ming period (2000 to 2006) being unchanged since the completion
of the audit, the Court’s observations on the programme design
(i.e. policy objectives and number of different actions) remain
valid (49). Nevertheless, by modifying the responsibilities and by

(46) Report concerning discharge in respect of the implementation of the
general budget of the European Union for the 2001 financial year (Com-
mission) 26 March 2003, paragraphs 47 to 55.

(47) The Community Action programme Socrates was established by Deci-
sion No 819/95/EC of the European Parliament and of the Council of
14 March 1995 (OJ L 87, 20.4.1995) and amended by Decision No
576/98/EC of 23 February 1998 (OJ L 77, 14.3.1998). The second
‘Socrates’ programme established by Decision No 253/2000/EC of
24 January 2000, (OJ L 28, 3.2.2000) covers all aspects related to the
different educational phases: Action 1 ‘School education (Comenius)’;
Action 2 ‘Higher education (Erasmus)’; Action 3 ‘Adult education and
other educational pathways (Grundtvig)’; Action 4 ‘Teaching and learn-
ing of languages (Lingua)’; Action 5 ‘Open and distance learning; infor-
mation and communication technologies in the field of education (Min-
erva)’; Action 6 ‘Observation and innovation’; Action 7 ‘Joint actions’;
Action 8 ‘Accompanying measures’.

(48) The original ‘Youth for Europe’ programme supported informal educa-
tional activities (Action 1 ‘Youth for Europe’; Action 2 ‘European Vol-
unteers System’; Action 3 ‘Initiatives in favour of young people’;
Action 4 ‘Joint actions’; Action 5 ‘Accompanying measures’; Action 6
‘Third countries’). The scope of the actions was slightly reduced in 2000
when the ‘Youth Community action programme’ was launched.

(49) Decision No. 253/2000/EC of the European Parliament and of the
Council of 24 January 2000 establishing the second phase of the
‘Socrates’ Community action programme in the field of education.

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6.48. The Commission confirms its intention of setting up an executive
agency on the basis of Framework Regulation (EC) 58/2003 which the
time limits for the introduction of the general framework and the resulting
obligations for the creation of executive agencies did not make it possible
to establish before 2005.

6.49. The Commission stresses that the respective rights and obligations
of the Commission and the Member States were defined in the common
provisions at the beginning of the current generation of the Socrates and
Youth programmes.

6.50. The Commission intends to continue its efforts concerning the defi-
nition of measureable indicators. The Socrates II programme committee has
adopted guidelines concerning indicators for the final evaluation of the pro-
gramme. Where the Youth programme is concerned, the Commission is
working on the preparation of indicators as mentioned by the Court and
provided for in the programme’s interim evaluation report.

providing clearer guidance for the TAO, the Commission addressed
the Court’s concerns to some extent (50).

Programme implementation

Since 2000 the selection procedures for centralised actions
6.48.
are exclusively carried out by the Commission and are no longer
entrusted to the TAO. An executive agency (51) or a similar body (52)
is in the process of being set up, thus responding to one of the
Court’s recommendations. However, this agency or body (contrary
to what was foreseen in the initial proposal made by the Commis-
sion to the European Parliament) is planned to become operational
only in 2005, in part as a result of delays caused by concerns
expressed by the European Parliament on the Commission’s policy
of outsourcing of activities. In the meantime, a TAO continues to
provide administrative support to the Directorate-General for Edu-
cation and Culture. The service contract with the current TAO now
clarifies the respective responsibilities of the Commission and the
TAO (53).

6.49. The key principles of the Commission’s administrative
reform are decentralisation and the taking of responsibility by man-
agement departments, accompanied by increased transparency and
accountability (54). The audit revealed inadequacies in defining
operational objectives and an absence of relevant and measurable
indicators, which are essential
for creating transparency and
accountability. The audit also concluded that the respective rights
and obligations of the Commission and the Member States in the
implementation of these programmes should be further defined.

6.50.
In 2001, an initial set of indicators were defined by the
Directorate-General for Education and Culture in the work pro-
gramme of ‘Socrates’ and ‘Youth’: ex-ante indicators will be part of
the contract between the Commission and National Agencies, while
ex-post indicators will be included in the final activity report to be
submitted by the National Agencies (55). Although a significant
improvement has been made in this area, further effort is needed to
comply with the requirements of the Commission’s Internal Con-
trol Standards (56).

(50) Directorate-General for Education and Culture, ‘Annual Activity Report

2002’, 14 April 2003: part 3, point 2(a).

(51) Council Regulation (EC) No 58/2003 (OJ L 11, 16.1.2003).
(52) Such as a body pursuant to Article 185 of the Financial Regulation
applicable to the general budget (see Council Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 (OJ L 248, 16.9.2002): articles 54 to
56).

(53) See for example Contract No 2003-3007/001001, Article 9.
(54) European Commission, ‘A new Framework for Resource Management
and Internal Auditing in the Commission’, 22 February 2000, Chapter
4.

(55) See for example: Terms of Reference, Tasks to be carried out by the
National Agencies for the implementation of the Socrates Programme
level, Period: 1 April 2003 to 31 December 2004,
at national
SOC/COM/02/061; indicators concern among others the number of
staff working for Socrates, number of applications received, etc.

(56) European Commission, ‘Standards for Internal Control within the Com-
mission’s services’ (SEC(2000) 2203 of 2 February 2001 (second ver-
sion dated 18 December 2001).

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6.51. A recent evaluation report of the ‘Youth’ programme, cov-
ering the period 2000 to 2003, criticised the quality of the projects
and partnerships, the specific difficulties of trans-national actions,
the insufficient transparency of the selection procedures and the
overly complex and incoherent administrative procedures (given
the type of proposals submitted) at the level of National Agen-
cies (57). Since 2002, following a recommendation by the Court, all
proposals for centralised actions under ‘Socrates’ must be evaluated
by external experts. These experts are selected by the Commission
from a reserve list established on the basis of an open call for appli-
cations (58). For the ‘Youth’ programme, the selection procedure for
decentralised actions is still not sufficiently transparent (59).

6.51. The Commission is endeavouring to improve the quality of projects.
The external evaluation report concluded that quality had improved between
the previous and current Youth programme. The specific difficulties con-
cerning transnational activities mainly concern obtaining visas for young
people from third countries, a matter not directly connected with the imple-
mentation of the programme and which can only be resolved with the help
of other political sectors such as internal affairs. Various actions were
recently undertaken to improve the transparency of the selection of decen-
tralised actions by the national agencies. In addition progress has been
made with regard to simplification in the context of the financial rules in
force, in particular through the introduction of a flat-rate system.

Commission’s internal control system

6.52. The Operating Agreements concluded between the Com-
mission and the National Agencies require the certification of
National Agencies’ final statements of accounts before submission
to the Commission. For decentralised actions, the Commission has
introduced a system of mandatory certification of expenditure
claims or cost statements (for grants of more than 50 000 euro)
submitted by National Agencies. Since 2000, all final reports and
cost statements submitted under both programmes to the Commis-
sion must be accompanied by an audit certificate (‘certification
report’) established by an external auditor or a competent public
official, confirming the reality, necessity and eligibility of costs
declared to the Commission (60).

6.53.
In early 2001 the Commission informed the National Agen-
cies of the scope and content of these audit certificates, and addi-
tional instructions were provided to the Directors of the National
Agencies in 2002. Further guidelines were made available in 2003,
indicating minimal requirements in terms of materiality and confi-
dence level, type of audit work to be carried out, documentation of
audit work, format and content of the contradictory report between
auditor and auditee and the right of access by the Commission to
the auditor’s working papers.

(57) European Commission, ‘Evaluation intermédiaire du Programme Jeun-
esse 2000-2006 (couvrant la période 2000-2003)’, 8 mars 2004,
COM(2004) 158 final, point 4 and recommendations.

(58) European Commission, ‘Call for applications EAC/60/02 with a view to
constituting a list of experts to assess the proposals received in connec-
tion with the “Socrates” Community action programme in the field of
education and other actions in the field of education’ (OJ C 211,
5.9.2002).

(59) European Commission, ‘Evaluation intermédiaire du Programme Jeun-
esse 2000-2006 (couvrant la période 2000-2003)’, 8 mars 2004,
COM(2004) 158 final.

(60) In early 2004, following an internal reorganisation, a specific function
within the financial unit of the Directorate-General for Education and
Culture was entrusted with assessing the National Agencies’ certification
reports.

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6.54. The introduction of an expenditure certification procedure is part
of the measures taken by the Commission to step up the auditing of the
national agencies. For example, as the Court observes, the Commission did
not immediately accept most of the audit certificates for 2003. The Com-
mission is endeavouring to improve the operation and utilisation of the
results of this certification. However, it considers that the certification of
accounts is only one means among others of ensuring effective auditing of
payments authorised by the national agencies and has stepped up other
methods of controlling these agencies (audit inspections, monitoring inspec-
tions, report processes).

6.56 and 6.57. As the Court observes, the Commission has stepped up
its efforts with regard to programme evaluation, acting on the recommen-
dations in Special report 2/2002.

6.54. However, most of the audit certificates for 2003 were not
immediately accepted by the Commission, or were accepted only
subject to material reserves. In some cases, the certification reports
submitted by the National Agencies to the Commission revealed
inadequate supporting documentation to justify the costs incurred
for the decentralised actions (61). This indicates that controls car-
ried out by National Agencies were insufficient in scope and rigour.
It also shows that the definition of the scope and extent of the audit
work to be carried out by (or on behalf of) the National Agencies
for the submission of the audit certificates must be improved by the
Commission. Considering the current poor quality of the certifica-
tion reports for both programmes, there remains a risk that these
reports will be insufficient to ensure effective control over payments
to National Agencies.

Improvements in the Commission’s programme evaluation

6.55. The legal bases of ‘Socrates’ (62) and ‘Youth’ (63) require pro-
gramme evaluations. The Special Report noted the lack of a genu-
ine control and evaluation culture on the part of the managing bod-
ies, both at national and Community level.

6.56. The Commission has since embarked on an overall strategy
of systematically carrying out ‘ex-ante’,
‘mid-term’ and ‘ex-post’
evaluations (64). For its programme evaluations, the Commission
has also increased its efforts to provide methodological support for
evaluations, including the setting up of an ‘evaluation support net-
work’ for all Directorates-General.

6.57. Moreover, in line with the recommendation made by the
Court to reinforce the overall policy of monitoring and evaluation,
the Commission has contracted several evaluations targeted at spe-
cific aspects,
in addition to a global programme evaluation of
‘Socrates’ (65) or ‘Youth’ (66).

(61) See for example the certification reports of the French National Agency
of 11 February 2004 or the reports by the Luxembourg National Agency
of 10 February 2004.

(62) Decision No 253/2000/EC of the European Parliament and of the Coun-
cil of 24 January 2000 establishing the second phase of the ‘Socrates’
Community action programme in the field of education; Article 14
‘Monitoring and Evaluation’.

(63) Decision No 1031/2000/EC of the European Parliament and of the
Council of 13 April 2000 establishing the ‘Youth’ Community action
programme; Article 13 ‘Monitoring and Evaluation’.

(64) Communication COM(2002) 276 of 5 June 2002.
(65) European Commission,

‘Interim evaluation report on the results
achieved and on the qualitative and quantitative aspects of the imple-
mentation of the second phase of the “Socrates” Community action pro-
gramme in the field of education, 8 March 2004’, COM(2004) 153 final.
‘Evaluation intermédiaire du Programme
Jeunesse 2000-2006 (couvrant la période 2000-2003)’, 8 mars 2004,
COM(2004) 158 final.

(66) European Commission,

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Conclusion and recommendations

6.58. The Commission has addressed a number of deficiencies
identified by the Court in the Special Report. In some areas, such as
the programme design and its management structure, the Commis-
sion has had only limited room for manoeuvre due to a legal base
which will continue to apply until 2006. In other areas, the
follow-up of this Special Report revealed continuing shortcomings,
some of which were also referred to in the 2002 and 2003 Annual
Activity Reports of the Directorate-General for Education and Cul-
ture (67).

In particular the Commission is recommended to take fur-

6.59.
ther corrective action in the following areas:

6.59.

— The Commission should take into account the Court’s remarks
on simplifying the programme design and management struc-
ture when making a proposal for a future ‘Socrates’ or ‘Youth’
programme.

— On 14 July 2004 the Commission proposed simplified architecture
programmes compared with the current generation of the next period
of financial perspectives 2007-2013.

— The Commission should continue to develop relevant and mea-
surable indicators in line with the guidelines on defining objec-
tives and indicators established by the Secretariat-General of
the Commission (68). These indicators should be periodically
reported to senior management, allowing for a benchmarking
between different directorates and programmes. In particular,
they should also cover the efficient and effective functioning of
internal controls.

— The Commission’s administrative procedures, from the prepa-
ration of a proposal to the closure of an action, should be fur-
ther simplified. Using an electronic system for the submission
and processing of proposals by National Agencies should allow
for additional simplification and efficiency gains.

the audit certificates (i.e.

— In order to further clarify the scope and extent of audit work
to be carried out by (or on behalf of) the National Agencies for
the submission of
‘certification
reports’), the Commission should provide specific guidance to
National Agencies. Moreover, the Commission should define a
strategy on how to verify at the level of each Member State that
the audit certificates submitted by the National Agencies were
produced in compliance with the minimum requirements
defined for the scope and extent of the audit work.

— It is endeavouring to develop measurable indicators, including con-

cerning internal control.

— It will continue to simplify the management of actions (greater use of
flat rates, introduction shortly of an electronic grant application sub-
mission tool).

— It will strengthen the validity of the arrangement launched with the
certification obligation for the accounts of national agencies. The
guidelines referred to by the Court in point 6.52 are already available
to the national agencies.

(67) Directorate-General for Education and Culture, ‘Annual Activity Report

2002’, 14 April 2003.

(68) See DG Budget — Central Financial Service, ‘Standards for Internal Con-
trol within the Commission’s services and the baseline for implementa-
tion by the 31 December 2001’, 18 December 2001.

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— In addition, it will evaluate the programmes in due course in terms of
effectiveness (implementation, results) and efficiency (administrative
and financial aspects) and ensure appropriate follow-up arising from
these two aspects.

— The Directorate-General for Education and Culture should also
commission evaluations on relevant administrative issues, in
particular aiming at proposals to simplify the administrative
and financial aspects of the ‘Socrates’ and ‘Youth’ programmes.
The results of these evaluations should be communicated in
due time to the European Parliament, Council and National
Agencies to allow for an in-depth discussion of these aspects so
that the conclusions can be taken into consideration for the
setting-up of the successor programmes.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORT NO 1/2004
CONCERNING FP5 (1998 TO 2002)

6.60. The Court’s audit focused on the 5th Framework Pro-
gramme covering research, technological development and demon-
stration activities (FP5) of the European Community (EC) which was
adopted by the European Parliament and Council in December
1998 with a total budget of 13 700 million euro (69). The annual
funding provided for the seven thematic and horizontal pro-
grammes in the period up to 2002 accounts for approximately a
quarter of the public funding for research projects in the European
Union.

6.61. Research activities financed under FP5 are carried out
through contracts with third parties and partly financed by the
Community budget. Both the implementing regulation and the
model contracts were adopted late. The large number of different
model contracts unnecessarily increased the complexity of the con-
tract management processes.

6.61.
Some delays have occurred, mainly in connection with the adop-
tion of a legal basis for FP5. However, most of the documentation has been
produced, thus enabling negotiations with participants to be started. The
number of different model contracts has been reduced significantly in FP6,
with only one model contract for all indirect RTD actions (except for Marie
Curie actions). Specific annexes take account of the specificities required for
the main instruments.

6.62.
Financial contributions from the Community budget are
based on the reimbursement of costs actually incurred and duly jus-
tified. The complexity of the rules for fixing the Community’s finan-
cial participation hinders the effective management of financial and
administrative aspects by the Commission and is an unnecessary
complication for participants. The introduction of the flat-rate cost
reimbursement system in FP5, which aimed at simplification, pro-
vided an incentive for participants to change to a more advanta-
geous funding mechanism.

6.62.
FP5 cost reimbursement systems reflect the provisions of the legal
basis. The Commission has initiated an in-depth reform of the contractual
and financial arrangements for Community research programmes as part
of FP6.

(69) Special Report No 1/2004.

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6.63. A Commission proposal to simplify cost systems for FP6
(2002 to 2006) in line with previous recommendations by the
Court was rejected by the Council and the Parliament. The rules for
setting the Community’s financial contribution that were subse-
quently adopted by the Council and the European Parliament only
partially address the Court’s concerns. The Court welcomes the
introduction of visible and dissuasive sanctions and the requirement
for the certification of financial statements by an external auditor in
FP6.

6.63.
FP6 introduced major simplifications for the implementation of
research actions. The Commission’s proposals were to a large extent based
on the Court’s recommendations, but they were amended by the Council
and the European Parliament.

The cost reimbursement system set up for FP6 is simpler to implement both
for the participants and for the Commission services. Consequently, it
should provide better protection for the Community’s financial interests. In
addition to the sanctions provided for in the model contract and the FP6
participation rules, possibilities are also indicated in Article 114 of the new
Community Financial Regulation.

6.64. The seven specific programmes of FP5 are managed jointly
by five Directorates-General. The fragmentation of programmes
results in the dilution of responsibilities, duplication of functions
and increased need for co-ordination and consultation. Moreover,
the basic concept of programmes composed of key actions is not
adequately reflected in the Commission’s organisational structure.

6.64. The organisational structure established by the Commission has
made it possible to develop synergies between research and other Commu-
nity policies. Responsibilities have been defined accordingly, and common
tools gradually made available. Furthermore, the joint management of pro-
grammes by different Directorates-General is facilitated by a number of
co-ordination mechanisms.

For FP6, the establishment of management tools, including centralised sup-
port functions, illustrates the Commission’s concern to ensure greater coor-
dination between its services.

6.65. The management procedures were all established in compliance
with the rules and objectives of the framework programme. The time limit
up to the signature of contracts is used to guarantee the quality of the essen-
tial selection and negotiation phases.

Measures to further reduce the duration of the procedures have been renewed
in FP6 and provide a useful complement for the new procedures for the
entry into force of contracts established by the FP6 participation rules.

In line with recommendations in the White Paper on Commission Reform,
the Commission has addressed the specific difficulties as regards staff policy
in the research domain.

Simplified procedures and better planification should make it possible to
even out the caseload under FP6, improving internal control and speeding
up processes.

6.65.
FP5 experienced significant organisational problems and
delays during the starting phase, beginning with the late adoption
of the Decision by the Council and Parliament. Because of legal
requirements, the Commission’s internal rules and certain adminis-
trative practices, the process took eight to nine months, from the
receipt of proposals to the Commission’s signing of a contract for
indirect RTD actions. The Commission continued to face difficul-
ties in employing staff with the required profiles as well as prob-
lems in recruiting permanent officials. By the end of 2001 approxi-
mately 2 000 staff members were employed on FP5-related
activities, about a third of them for the administration of proposals,
contracts and projects for indirect RTD actions. On average only
four to five working days per year were available for the scientific
monitoring of each indirect RTD action. The procedures and admin-
istrative practices for the selection of indirect RTD actions, together
with the cyclical nature of the submission of project deliverables
defined in the model contracts, led to an uneven caseload at Com-
mission level. The resulting bottlenecks were not conducive to the
efficient operation of the management system and also contributed
to administrative delays and deficiencies in internal controls.

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6.66. The Council Decisions adopting the specific programmes
set ceilings for administrative expenditure of between 6,5 % and
9,8 % of the total expenditure for each specific programme. These
ceilings were respected for all programmes. An alternative method
of measurement, comparing the expenditure devoted to indirect
RTD actions with the total budget, indicates that 837, 4 million
euro (6,4 % of the total expenditure for FP5) was spent on the man-
agement of RTD Framework Programmes over the entire duration
of FP5. The Commission monitors its resource allocation through
the Activity Based Budgeting (ABB) system. Both for methodologi-
cal reasons and due to the Commission’s implementation of the
Activity Based Budgeting system, this is not the most appropriate
way of measuring the operating cost of the RTD framework pro-
grammes.

6.67. The Commission did not develop a common or integrated
IT system despite the management system being essentially the
same for all the services implementing indirect RTD actions. The IT
systems deployed by the Commission for the proposal, contract and
project management were inadequate, not least because of insuffi-
cient investment. Improvements were noted towards the end of the
FP5 programme period, but technical and operational problems
persisted in most Directorates-General.

6.68. Whilst the RTD Framework Programmes need to be imple-
mented using a common set of principles and procedures, the Com-
mission’s administrative reform aims at the decentralisation and
empowerment of services. The contradictions between these
approaches lie at the root of many of the difficulties experienced by
the Directorates-General in their joint management of FP5. The
complexity of the intervention mechanisms and rules for the Com-
munity’s financial participation makes efficient co-ordination
within the Framework Programme even more important. The tests
of the most important controls for a sample of contracts for indi-
rect RTD actions showed that not all had been operated effectively.
Other controls were found to be lacking. Overall the level of con-
trol differed considerably between the different Directorates-General
operating FP5.

6.69. The testing of the legality and regularity of cost claim based
payments for FP5 indirect RTD actions at beneficiary level revealed
a significant incidence of errors, mainly due to an overdeclaration
of costs by final beneficiaries. No overall improvement was noted
as compared with audit work related to previous Framework Pro-
grammes.

6.66. The Commission has implemented FP5 within the budget adopted
by the European Parliament and the Council. The alternative method pro-
posed by the Court is not required by the rules.

The staff allocation is presented in the Annual Management Plan in accor-
dance with the newly introduced Activity Based Budgeting (ABB) since
2002, but 2004 will be the first year where the General Budget will be
officially based on this new system. The Activity Based Budgeting meth-
odology further increases the transparency of the Commission’s budgetary
management.

6.67. The progressive integration of IT systems has improved signifi-
cantly throughout the FP5 programme period. Moreover, IT support in
FP5 compares favourably to that in FP4.

Specific deficiencies identified by the Court are addressed by the Commis-
sion in the development of a common IT system for FP6.

6.68. The Commission considers that there is no contradiction between
the administrative reform objectives and the need to implement principles
and procedures common to the various research Directorates-General. The
strengthened responsibilities at decentralised level are no obstacle to their
being well defined and effective collaboration established.

Following the Court’s audit, both in the perspective of FP6 and in the
framework of the financial reform in progress, the Commission has already
improved several aspects of its internal control mechanisms. An action plan
common to the Directorates-General concerned was implemented by the
Commission in 2003.

6.69. The Commission acknowledges the problem, which is due to the
fact that the Community’s financial contribution is paid on the basis of eli-
gible costs incurred, as declared by final beneficiaries. The exactitude of
these costs and their conformity with the contractual provisions cannot be
completely and accurately verified by the Commission prior to the autho-
risation of payments. Only a financial audit at the beneficiary level can
determine with certainty and exactitude the correctness of the costs claimed
and their conformity to the contractual provisions.

In order to reduce the frequency of errors, the Commission has increased the
ex-post audits and drawn up an action plan following the synthesis report
of the 2001 annual activity reports which has been implemented and is
regularly monitored. In addition in FP6, audit certificates from beneficia-
ries will be required.

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6.70. The management information systems and reporting to
Directors and (deputy) Directors-General still need to be improved.
In none of the five Research Directorates-General were there pro-
cedures and practices to ensure that management-level information
was prepared on time or accessible in a standardised format. In
2002 the management reporting for the framework programmes
did not yet fully comply with the requirements defined in the Com-
mission’s internal control standards.

6.70. The Commission’s internal reporting to Directors and (deputy)
Directors-General is characterised by the different roles and responsibilities
functions within the
of decentralised and centralised management
Directorates-General and FP5 programmes. Within each Directorate-
General senior management meetings are the driving force behind the man-
agement and supervision information system.

In addition to the formal internal reporting to management, the Commis-
sion produces, as required by the legal basis, an extensive reporting to exter-
nal users such as programme committees, external advisory groups or
monitoring panels.

The Commission’s Internal Control Standards were in effect only for part
of the period covered by the Court’s audit but they have been fully imple-
mented now. The deployment of the common IT system for FP6 will help
to improve management reporting.

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ANNEX 1
Internal policies (including research) — Assessment of key aspects previously observed

Observations

Action taken in 2003

Action to be implemented

1.a Supervisory and control systems — ex-post audits of final beneficiaries participating in RTD framework programmes

In 1998 the five Directorates-General operating the RTD
framework programmes jointly formulated an audit approach,
setting themselves for FP5 a target of auditing 10 % of the
contractors (see Annual Report 2001 and 2002). These audits are
to a large extent carried out by external audit firms on behalf of the
Commission.

The Court found that:

— the definition of ‘auditable population’ used by the Commis-
sion results in significantly less than 10 % of indirect RTD
actions or cost declarations being audited during the pro-
gramme period (see Annual Report 2002);

— the Commission is unable to achieve its own target of audit

coverage (see Annual Reports 2001, 2002, 2003);

— the Commission has not adopted an common audit

approach for FP6;

In 2003, completion of [333] audits,
mainly FP5 indirect RTD actions, still
falling short of target.

Proposal for common audit approach
in 2004, but
formally
adopted.

still not

Commission should define for FP6 a measurable objective, which
can realistically be achieved.

A common audit approach for FP6 should be formally adopted by
all five Directorates-General.

— the contiuity of the Commission’s audit activity depends on
providing for the possibility to subcontract ex-post finan-
cial audits (expiry of framework contract with external audit
firm in 2003).

Award procedure for a new frame-
work contract (for FP5 indirect RTD
actions) launched in October 2003,
but not yet signed.

A new framework contract for FP6 should be signed to provide
adequate external support to the Commission to implement its
audit approach for FP6.

1.b Supervisory and control systems — ex-post audits of final beneficiaries participating in TEN-Transport actions

Regular on-the-spot checks for the monitoring of TEN-T actions
are performed by the Commission. These controls are however
not complemented by ex-post financial and technical audits
(where appropriate, carried out by DG TREN or external experts)
(see Annual Report 2001 and 2002).

The Court found that

— TEN-T actions were not covered by Directorate-General for

Energy and Transport’s audit propramme.

No audit programme for TEN-T audits
was established in 2003.

An audit programme including TEN-T remains to be established
and implemented.

2. Supervisory and control systems — verification of the eligibility of costs for TEN-Transport actions

For TEN-T actions, eligible and ineligible costs are defined in the
legal basis and the Commission Decisions (Annual Reports 2001
and 2002).

The Court found that:
— these definitions are insufficiently specific to establish the

actual costs incurred by the beneficiary;

— these definitions differ from those applied to similar infra-
structure projects co-financed through Structural Measures;

— the use of different funding rates for studies and for works
carries the risk that beneficiaries may maximise funding by
wrongly allocating costs to studies; and

— the absence of standardised cost statements forms compli-

cates the Commission’s verification work.

As from 2002, the standard text of the
TEN-T Commission Decision has been
substantially revised, it was inspired
by the Cohesion Fund decision and
provides more details of eligible cost.

A new model Commission Decision
has been adopted in 2003, including:
— a clarification of eligible costs;

— a modified definition of studies

and works; and

The definition of studies and works is still insufficiently clear and
precise.

— a table indicating the ‘Break-
down of estimated eligible costs
during the period of pro-
grammed activities’ which could
be used by beneficiaries for the
reporting of costs incurred.

The model cost statement should be a separate form (stating the
costs incurred and supporting information from the beneficiaries).
Its use should be mandatory. The beneficiary should date and sign
the cost statement, thereby confirming the reality, eligibility and
accuracy of the costs declared. The cost statements should be cer-
tified by an external auditor, or in the case of public bodies, by a
competent public officer.

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ANNEX 2
Supervisory systems and controls

Area: Internal Policies (including Research)
System: 6th Framework Programme (FP6) for Research and Technological Development and European Refugee Fund (ERF)

FP6

Commission

Intermediate level

Beneficiary

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

B

B

B

N/A

B

—

—

—

—

—

B

C

N/A

N/A

B

B

B

N/A

N/A

B

ERF

Commission

Intermediate level

Beneficiary

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

B

B

C

B

B

B

B

B

B

B

N/A

B

C

N/A

B

B

B

C

B

B

A Works well, few or minor improvements required
B Works just well enough but improvements desirable/necessary
C Works, but not at a satisfactory level
N/A Not applicable

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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

Humanitarian Aid Office

EuropeAid Cooperation Office at central level

Supervisory systems and controls at the level of the Delegations

Audit of transactions

Audit of transactions carried out at central level

Audit of transactions carried out at the level of Delegations

Implementing organisations

Analysis of Annual Activity Reports and the Statements of the Authorising Officers by
delegation

Conclusions

Recommendations

Paragraph

7.1-7.2

7.3-7.53

7.3-7.6

7.7-7.32

7.7

7.8-7.11

7.12-7.25

7.26-7.32

7.33-7.39

7.33-7.34

7.35-7.36

7.37-7.39

7.40-7.48

7.49-7.51

7.52-7.53

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INTRODUCTION

the Western Balkans,

7.1. This chapter deals with the external aid financed from the
general budget. The main areas of interest are food aid/food secu-
rity, humanitarian aid, NGO cofinancing and financial and techni-
cal cooperation with Asia, Latin America, the Mediterranean coun-
tries,
the New Independent States and
Mongolia. The Directorates-General for External Relations and
Development are responsible for formulating policies for develop-
ment cooperation and for formulating country/regional strategies
and multi-annual programming, whereas the EuropeAid Coopera-
tion Office (EuropeAid) is responsible for the implementation of
development cooperation. The Humanitarian Aid Office (ECHO) is
fully responsible for humanitarian aid. The aid that is provided
through the European Development Funds (1) appears only as a
token entry in the general budget, as it is financed separately.
Graphs 7.1 and 7.2 show how the funds were spent in 2003 for
financial perspective Heading 4 (see paragraphs 2.40 to 2.41 for
observations on budgetary management).

7.2.
In 2003 the devolution process, by which functions and tasks
were redistributed from the Commission’s headquarters to its Del-
egations, was completed for the geographic programmes (2) for the
Delegations located in the countries which received funds from the
Union’s general budget. Also in 2003 the new Financial Regula-
tion (3) entered into force. The internal audit function, required by
the new Financial Regulation, was already introduced in 2002. As
the Commission Regulation (4) on the related implementing rules
was adopted at the end of December 2002, the consequent modi-
fications in the EuropeAid Cooperation Office’s manuals and guide-
lines could only be completed, translated and communicated to the
Delegations during the first half of 2003. The most important con-
sequences in 2003 for the supervisory systems and controls were
the abandonment of the function of centralised financial controller
and — as a consequence — the strengthening of the role of the
finance units and the introduction of ex ante and ex post verifica-
tions under the responsibility of the authorising officer.

(1) See separate report on the EDFs.
(2) Programmes financed by budget lines which are focused on certain geo-
graphic regions (like Asia, Latin America, Mediterranean countries, East-
ern Europe and Balkan) in contrast to budget lines which finance certain
types of operations (e.g. Food aid, NGO co-financing).

(3) Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002

(OJ L 248, 16.9.2002).

(4) Commission Regulation (EC, Euratom) No 2342/2002 of 23 Decem-

ber 2002 (OJ L 357, 31.12.2002).

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Graph 7.1 — Breakdown of commitments by budgetary area in 2003

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

Graph 7.2 — Breakdown of payments by budgetary area in 2003

NB: For more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

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SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT
OF ASSURANCE

Scope and nature of the audit

7.3. The overall objective of the specific assessment was to pro-
vide a conclusion as to the legality and regularity of transactions in
the External Actions field (Heading 4 of the general budget finan-
cial 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 at the
Commission headquarters, Delegations and implementing organi-
sations, 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.

7.4. This audit was carried out at the Commission headquarters,
at six Delegations (Albania, Indonesia, Morocco, Peru, South Africa
and the Ukraine) and at 13 implementing organisations. The areas
mentioned in paragraph 7.1 were reviewed and tested. For Albania
and Ukraine the Court’s audit was limited to a preliminary assess-
ment of the systems without direct testing. Reconstruction aid for
Kosovo and the Federal Republic of Yugoslavia is the subject of a
separate annual audit of the European Agency for Reconstruction.
Furthermore, the audit included the verification of a limited num-
ber of transactions under the International Fisheries Agreements.

7.5. Regarding the supervisory systems and controls the Court
focused its review on the internal control standards relating to the
risk analyses made by the relevant services, the information struc-
tures and reporting in the context of financial monitoring and con-
trol, and the internal audit functions of the EuropeAid Cooperation
Office and the Humanitarian Aid Office.

7.6. The Court was hindered in its work because, at the moment
of drafting its report, it had not received full information from Euro-
peAid Cooperation Office’s headquarters on the reports provided to
them by the Delegations which are taken into account for the
preparation of the EuropeAid Cooperation Office’s Annual Activity
Report and the Director General’s statement.

7.6. The Commission will endeavour to ensure that this procedure oper-
ates smoothly in the future.

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Supervisory systems and controls

Internal control standards

7.7.
In 2002 both the EuropeAid Cooperation Office and the
Humanitarian Aid Office completed the framework for the imple-
mentation of the internal control standards as defined by the Com-
mission on 13 December 2000 (5). The introduction of the stan-
dards was supported by issuing or updating instructions and
guidelines and extensive training programmes, in particular on the
administrative and financial procedures. In 2003 the latter have
been substantially updated and revised as a result of the introduc-
tion of the new Financial Regulation.

Humanitarian Aid Office

Risk assessment

7.8. The Humanitarian Aid Office carried out a satisfactory risk
self-assessment, concluding that many risks in the area of humani-
tarian aid were beyond its control, with the exception of the quality
of the implementing partners. Consistent with the previous years,
efforts to reduce the risks were concentrated on the selection pro-
cedure for implementing partners together with a tight system of
audits of those selected.

7.8. The risk was reduced by several other measures which include: moni-
toring by the technical assistants (ECHO experts), the use of a specific
monitoring tool, the progressively increased use of specific indicators to
measure the achievement of the objectives of the project.

Audit of implementing partners

7.9.
In 2002 the Humanitarian Aid Office started a comprehen-
sive approach of auditing the implementing partners. This system
was fully operational in 2003. The audits assessed aspects such as
the organisation, procedures and internal controls of the imple-
menting partners as well as the accounting and finance systems, the
management culture and staff recruitment systems. Detailed testing
was done of expenditure of projects implemented by the partners.
However, it is noted that in 2003, apart from a field visit to a
UNHCR project in Sierra Leone, no international organisation
(mainly UN-bodies) have been subject to such testing.

(5) SEC (2000) 2203.

7.9. The Commission (ECHO) did not carry out audits at the head-
quarters of international organisations in 2003 as the new Framework
Partnership Agreement (FPA) was being established. At this time nego-
tiations with the UN organisations leading to the Financial and Admin-
istrative Framework Agreement (FAFA) were being finalised (completed on
29 April 2003). The FAFA in turn resulted in the revision of the FPA
for international organisations.

Further to the above the Commission services (EuropeAid and ECHO)
started to review the UN’s control systems used in the management of EU
funded projects. The on the spot verifications of these systems and expen-
diture records, at the UN headquarters, started in 2004. The International
Red Cross family was audited in the first half of 2004.

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7.10.
In 2003 audits were completed on 136 implementing part-
ners, representing 535 projects. The Court reviewed 16 audits,
which were of good quality. The most important problems revealed
by these audits were: weak tendering procedures (7 cases out of
16), weaknesses in accounting systems, reconciliation problems,
financial reporting (7 out of 16) and weak stock controls (3 out of
16). The most frequent reasons for disallowing expenditure were:
lack of justification of expenditure in the form of supporting docu-
ments and ineligility of expenditure. Only one case of non-respect
of tendering rules was found because most of the audits did not
carry out testing of tendering. The nature of the observations made
in these audit reports and the errors found on the expenditure cor-
responds largely with the Court’s audit findings on implementing
organisations (see paragraphs 7.38 and 7.39).

7.11. The implementing partners committed themselves to imple-
ment the recommendations made to improve their systems. The
amounts which were disallowed will be deducted from payments
for on-going or new projects. These results show that audits of
implementing organisations are an effective instrument of supervi-
sion and control.

EuropeAid Cooperation Office at central level

Follow-up of 2002 observations

7.12.
In its Annual Report on 2002 (paragraphs 7.6 and 7.37) the
Court observed that an overall risk assessment remained to be car-
ried out, that questionnaires for the processing of commitments and
payments were not systematically used, and that a system of report-
ing on recovery orders and on weaknesses of internal controls was
lacking. In 2003 the situation improved in that the EuropeAid
Cooperation Office finalised its risk assessment in October 2003
and questionnaires were found to be used systematically in all Del-
egations visited by the Court. However, apart from an in-depth
review of the recoveries carried out by the section ‘Analysis of finan-
cial management and controls’ (FMC), a satisfactory monitoring of
and reporting on recoveries by the units ‘Finance, contracting and
audit’ of all of the Directorates was not in place (see paragraph
7.23). Equally, there is no evidence that the system which ensures
that staff report on internal control weaknesses was functioning
correctly.

7.12. The Commission takes note of the Court’s observations concerning
progress made by the EuropeAid Cooperation Office in 2003 in compari-
son to 2002, regarding risk assessment and the systematic use of check-
lists.

Regarding recovery, the efforts made during the most recent exercise have
resulted in a fall in the amount to be recovered that had accumulated at the
end of 2002 by almost 100 claims, representing nearly EUR 10 million.
These results are partially obscured by the sudden appearance of a new
RAR during 2003 (an increase of 50 claims worth EUR 2 million). At
the beginning of the 2003 exercise, the number of claims not resolved
by their due date stood at 614 (for a total of EUR 64 038 938,27),
while by the end of the exercise it had fallen to 567 (for a total of
EUR 56 542 997,78) The number of outstanding claims therefore fell by
7,65 %, and their total dipped by 11,7 %.

Regarding the reporting of internal control weaknesses by staff, the Com-
mission will study ways of improving its functioning.

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Risk assessment

7.13. The risk assessment finalised in October 2003 gives a pre-
sentation of risks as applicable to donors of external assistance. It
focused on the risks related to partner countries, risks related to
development organisations and risks associated with budget sup-
port. The assessment indicated which types of action are under-
taken to counter the risks, which are mainly in the form of better
development aid approaches and procedures or better dialogue with
development partners. The actions on financial risks, as described
in the risk assessment, focus on the internal audit unit and on the
strengthening of external audits of implementing organisations in a
global way. In its annual management plan 2004, the EuropeAid
Cooperation Office has formulated a number of more concrete
actions in this respect, which should create the basis for a coordi-
nated and comprehensive system of supervision and controls.

Information and reporting

7.14.
In particular, in the situation where the management and
implementation of the development actions is devolved to a large
extent towards the Delegations, monitoring on the basis of an
adequate information and reporting system by the headquarters in
Brussels is essential. This principle, laid down in the risk analysis by
the EuropeAid Cooperation Office in December 2002 was con-
firmed by the risk self-assessment completed in October 2003.

7.15. Most of the financial information which is used for moni-
toring purposes is obtained from the EuropeAid Cooperation
Office’s Common Relex Information System (CRIS). In 2003 the
quality of information in CRIS was improved,
in particular in
respect of monitoring the progress of project implementation. The
financial information focuses on decisions, contracting, commit-
ments and payments. The system did not provide information on a
project-by-project basis on audits carried out, their outcome and
action taken.

7.15. The introduction of new tools (such as CRIS Audit) will contrib-
ute to further improving the flow of information on audit results at central
level. Data in relation to audits launched by Headquarters and Delega-
tions are registered in CRIS Audit.

Information relating to audits to be provided by beneficiaries before intro-
ducing requests for payments (certification audits) will be encoded at two
stages, once when the contract is concluded and second, when the certificate
or the audit report is presented. The procedural steps, as well as the appro-
priate fields in CRIS, are envisaged but still need to be developped. It is not
intended, however, to register information on certification audits to the
same extent as data relating to external audits launched by headquarters
or delegations.

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Financial monitoring

7.16. At present financial monitoring at the headquarters is pri-
marily carried out by the ‘Finance, contracting and audit’ units. For
this purpose the units dispose, among others, of the following
instruments:

— financial information provided by the CRIS system and addi-

tional information from the Delegations;

— audits of Delegations;

— audits of implementing organisations either launched by Com-
mission services or provided by implementing organisations.

In addition, optional ex ante controls (see paragraph 7.20) have also
been carried out.

7.17. All finance units carry out an analysis of a number of finan-
cial indicators such as amounts of commitments and payments and
amounts remaining to be spent on projects. Each of the Director-
ates’ finance units is free to decide what aspects are to be monitored.
A common analysis of information needs and a common overall
methodology could considerably strengthen the financial monitor-
ing.

7.18. The finance units of two of the five Directorates managing
devolved operations carried out audits of their Delegations in the
form of a review of their financial systems for processing transac-
tions, their contracting system and their supervisory systems and
controls, completed by an audit of transactions processed by the
Delegations. They found that the financial systems at this level func-
tioned correctly. This important instrument of audit of Delegations
should be used by all Directorates.

7.17. The Commission recognises that a common overall methodology
on the use of management information could strengthen the monitoring of
the implementation and the performance against pre-defined targets and
objectives.

7.18. The devolution of the management of external aid has involved a
considerable transferral of tasks and responsibilities to delegations, and
hence major changes in the quantity, nature and organisation of work done
in the delegations. Given the scale of the expected changes, a verification
exercise was systematically carried out before devolution was held to be
operational in a delegation, in order to:

— confirm with the head of delegation that the conditions necessary to

begin devolved operations are in place,

— supply the subdelegated authorising officer in question (the director at
headquarters) with sufficient information to form an opinion about
each delegation’s capacity to perform in a devolved manner within
acceptable levels of efficiency and risk, with particular regard to train-
ing and levels of staff expertise,

— provide the head of delegation and the director in question with an
opinion on the conformity of the systems that have been created, and
on the extent to which transactions conform to the rules in force.

Some directorates have made additional assessments primarily in cases
where devolution took place in the first wave (2001).

Directorates where devolution took place later will consider when to carry
out such assessments.

30.11.2004

EN

Official Journal of the European Union

C 293/235

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.19. The Commission shares the Court’s views on progress made in
2003. As regards information on audits launched by delegations, since the
inclusion of reporting tables in the EAMR (external assistance manage-
ment reports), such information has become more regularly available.

Moreover, CRIS AUDIT (a module of CRIS) has been made available for
encoding audits both in headquarters and delegations. The use of this mod-
ule requires appropriate training. This training started in May 2004.

7.20. CRIS AUDIT is a second level ex ante optional control function,
implemented on an interim basis as a measure to accompany the changes
ensuing from the entry into force of the new financial Regulation, in the
expectation of the creation of a centralised ex post verification system at
EuropeAid level.

Audit of implementing organisations

7.19.
In 2003 about 100 audits of implementing organisations
were launched by the various Directorates of the EuropeAid Coop-
eration Office as part of the 2003 audit programme. Most audits
were still underway in early 2004. These audits were initiated in
addition to about 350 audits carried out on behalf of the Delega-
tions and an unknown number of audits contracted directly by
implementing organisations for their own purposes of reporting
and discharge. In 2003 considerable progress has been made in
terms of the number of audits in comparison to the previous year
(250 audits in total in 2002). In terms of planning and coordina-
tion of audits an audit programme for 2003 has been established
but only for the 100 audits launched by headquarters. In most cases
headquarters’ services did not have the information on a continu-
ous basis on the audits launched by the Delegations. Comprehen-
sive information on audits is not yet incorporated in the EuropeAid
Cooperation Office’s CRIS financial information system. First steps
for creating an audit module have been taken.

Ex ante control sections

7.20. Within each of the Directorates a section was created to
carry out optional (see paragraph 7.16) ex ante controls on top of
the normal ex ante verifications foreseen by Article 60 of the Finan-
cial Regulation. This was done as an intermediary measure after the
abolition of the function of the Financial Controller. The Court
received information on the ex ante financial controls from half of
the Directorates. Due to staffing problems, ex ante controls were
absent for long periods of the year. In one Directorate all transac-
tions were checked; in the other two about 310 transactions were
checked out of a total of 3 500. These checks include those on pay-
ments authorised by headquarters or by Delegations to implement-
ing organisations on the basis of the latter’s payment requests,
which are supported by financial overviews of expenditure incurred.
At that stage no underlying supporting documents, such as invoices,
are checked. One out of the three above Directorates presented a
report with an analysis of the results of the ex ante controls. Oral
explanations were given by the other two Directorates. It showed
that the ex ante controls detected mainly formal short-comings,
which is in line with the results of the Court’s own audit of trans-
actions at the level of the Commission’s headquarters and Delega-
tions.

C 293/236

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Internal audit capability

7.21. The internal audit capability unit in 2003 completed the
assessment of the internal control standards and carried out reviews
of the control systems of three specific areas. The unit also carried
out in March 2004 an update of its reviews of the internal control
standards, making highly relevant recommendations on undertak-
ing more detailed risk analyses and on improvements of the super-
visory systems and controls. Apart from the above audit tasks the
unit also carried out workload assessments both at the level of head-
quarters and at the level of Delegations. Although the workload
assessments have produced interesting results as a first step of
assessing staffing needs, it is questionable whether this type of work
should be carried out by the internal audit capability unit, particu-
larly considering the very limited staff resources available. The inter-
nal audit capability unit’s priority should be geared towards evalu-
ating the systems which should ensure the legality and regularity of
transactions and towards assisting the Director General in formu-
lating a well-founded annual statement, in particular on the quality
of the control procedures.

7.21. The Communication which set up Internal Audit Capabilities
identified for them three objectives: two relate to the control of risk and
internal control system, the third with making recommendations to improve
efficiency and effectiveness of operation and ensure economy in the use of
resources. The workload assessments carried out both in EuropeAid and
ECHO respond to this third objective. Human resource management had
been identified as a risk by EuropeAid in their risk self-assessment and the
Communication on devolution of January 2004 required Relex IACs to
jointly audit workload assessment in devolved Delegation to ensure the
number of staff can carry the new increased workload. ECHO too consid-
ered it necessary to assess the comparative workload carried out by its units
on the basis of work flows. In all cases adequate and relevant methodolo-
gies were developed, which can now be utilised by management. Workload
assessments are considered by management at EuropeAid and ECHO as
part of an IAC’s role in providing a helping hand on matters related to the
economy, efficiency and effectiveness of the performance of the DG (see
Paragraph 1.3 of Communication for the provision of IAC in each Com-
mission Service).

Ex-post verifications

7.22. On the basis of a large sample of transactions the section
‘Analysis of financial management and controls’, responsible for ex
post verifications, has carried out reviews, in particular to arrive at
a comprehensive overview of the situation of recoveries and
uncleared advances. Given the similarity of work carried out by this
section and the monitoring of the Directorates’ finance units, it was
foreseen in the section’s mission statement that it should contrib-
ute to a more homogeneous methodology for a system of ex post
verification by the finance units. So far, the finance units in the
Directorates did not give priority to a coordinated approach. Fur-
thermore, despite the potential complementarity of the work car-
ried out by the section ‘Analysis of financial management and con-
trols’ and the internal audit capability unit, there is no evidence of a
coordination and an exchange of information between the two enti-
ties.

7.22. With the setting up on 1 February 2004 of a new unit in charge
of both monitoring the implementation of the internal control framework
and transaction control, EuropeAid believes that it has created conditions
that will ensure better coordination and complementarity between the dif-
ferent actors in internal control.

30.11.2004

EN

Official Journal of the European Union

C 293/237

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.23. An overview of controls was produced in 2004 in the framework
of the follow-up of the 2002 discharge procedure which explains the func-
tions of the various controls. The Commission will examine how the imple-
mentation of its overall strategy can be improved.

Overall supervisory and control functions

7.23. The previous paragraphs show that several services at head-
quarters carry out certain supervisory and control functions, on top
of those done by the Delegations. An overview is presented in Table
7.1. Now that the devolution process is virtually complete at the
level of the Delegations, there is a need to review these activities in
a comprehensive manner. By more clearly defining the overall strat-
egy for supervision and control, the Commission would be in a
position to explain:

a)

how the control functions of the different services should link
together and should provide the level of assurance required;

b) what the specific objectives should be, and

c) what and how much detailed work they need to do taking into
account, the audits or controls carried out by other services or
audits provided by implementing organisations themselves. An
example requiring such clarifications is the three different kinds
of ex post verifications carried out by the finance units, by Del-
egations and by the section ‘Analysis of financial management
and controls’. In this context the finance units should system-
atically review recoveries and uncleared advances instead of the
section ‘Analysis of financial management and controls’ carry-
ing out ad hoc reviews as done for 2003 (see paragraph 7.12).
Information on recoveries and uncleared advances should be
systematically presented to and monitored by management at
headquarters and Delegations.

7.24. Most of the checks and controls shown in the table are car-
ried out on transactions processed by the EuropeAid Cooperation
Office’s headquarters and Delegations. Where the claims are accom-
panied by a report by an external auditor certifying the expenditure
in question or have been the subject of field audit by staff of the
Commission, it is possible to assess whether underlying transactions
undertaken by the other implementing organisations are legal and
regular in substance. In other cases, where the Commission relies on
documents provided by implementing organisations, it can only
check that the payment claim is plausible within the terms of the
contract or financing agreement and the budget foreseen. These
verifications revealed a low incidence of error, as confirmed by the
Court’s audit (see also paragraphs 7.34 and 7.36).

C 293/238

EN

Official Journal of the European Union

30.11.2004

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30.11.2004

EN

Official Journal of the European Union

C 293/239

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.25. The IAS in-depth audit on EuropeAid provided a reasonable
assurance that its internal control system is generally adequate.

Where appropriate, the in-depth audit made recommendations to further
improve the internal control system of EuropeAid.

Internal Audit Service

7.25. The Commission’s Internal Audit Service carried out in
2003 an in-depth audit on the EuropeAid Cooperation Office’s sys-
tem of internal control. The audit found that the internal control
systems at the level of the Commission’s headquarters and Delega-
tions had been considerably strengthened and were as a whole
adequate. However, it criticized the lack of coherence between the
multitude of control systems, as well as the underdevelopment of
the audit cells within the Directorates’ finance units. It also recom-
mended significant improvements of the CRIS financial information
system and of the Delegations’ management reporting system. In
general, this is in line with the Court’s findings (see paragraphs
7.15-7.20, 7.22-7.24 and 7.48). The Internal Audit Service’s work
did not include audits of implementing organisations.

Supervisory systems and controls at the level of the Delega-
tions

Indonesia,
7.26. The Court visited six Delegations (Albania,
Morocco, Peru, South Africa and the Ukraine) to assess the super-
visory systems and controls and to audit a number of transactions
for which the EuropeAid Cooperation Office was the Authorising
Officer by delegation.

The Commonwealth of Independent States and the Western Balkans

7.27. The management of the implementation of external aid was
devolved to the Delegation in Ukraine in 2003 and the prescribed
supervisory systems and controls were in place throughout the year.
The preliminary assessment of the supervisory systems and controls
at the Delegation indicated that the procedures carried out were
generally sufficient.

7.28. The management of the implementation of external aid was
devolved to the Delegation in Albania at the beginning of 2003.
However, due to special circumstances, the devolution process still
remains in a very early stage so that the Court could carry out a lim-
ited review only. This preliminary assessment did not indicate any
major weaknesses in the procedures carried out.

Asia, Latin America, Mediterranean countries (MEDA) and South Africa

7.29. The management of the implementation of external aid was
fully devolved to all four Delegations audited (Indonesia, Morocco,
Peru and South Africa) in 2003 and the prescribed supervisory sys-
tems and controls were in place throughout the year. The review of
the supervisory systems and controls at the Delegations indicated
that the procedures carried out were generally sufficient to ensure
that the transactions processed by the Commission were legal and
regular.

C 293/240

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.30.
In the countries visited by the Court, 12 external audits of
the implementing organisations were reviewed. This review,
together with the results of the checks carried out at some projects
which had been subject to these external audits, indicated that the
external audit reports were of satisfactory quality in relation to what
was foreseen in their specific terms of reference. Some of the terms
of reference that were not provided or approved by the Commis-
sion did not specifically include compliance with EU funding
requirements and, in particular, contracting procedures. In three out
of the four cases when the terms of reference covered the compli-
ance with EU funding requirements, the audits revealed irregular
expenditure.

7.31. Two of the Delegations visited (South Africa and Morocco)
had developed a specific approach for following-up external audit.

7.30. The conditions for audits required by financial agreement and/or
contracts as well as their scope and objectives are established by those legal
documents. EuropeAid is continuously improving those documents. For
example the use of professional auditors for certain contract types has
become mandatory as from 2003. However, the variety of types of opera-
tions and their legal frameworks requires targeted improvements usually
undertaken on the occasion of a revision of those texts. It is certainly a pri-
ority for EuropeAid to improve reliance on audits provided by implement-
ing organisations, being an important element within the wider control
framework of external aid.

7.31. The follow-up of audit results is part of the line-management func-
tions in delegations and headquarters. Each audit report should be given
appropriate attention and follow-up. Certain information will be provided,
however, by CRIS Audit, in particular on audits undertaken within the
framework of the annual audit plans and other audits launched by head-
quarters and delegations.

7.32. Generally, the use of and procedures for the appointment of
external auditors are provided for in the project financing agree-
ments. Such provisions are often worded vaguely. The absence until
May 2003 of clear guidelines from the Commission such as stan-
dard terms of reference leaves the implementing organisation with
a wide scope for taking a variety of approaches for the selection and
source of remuneration of external auditors and the setting of their
objectives.

7.32. The Court refers here to ‘certification audits’, these are audits
required by financial agreement and/or contracts. Improvements have been
made in this respect by introducing specific requirements as to the guide-
lines and the terms of references and the professional quality of auditors
and/or by establishing the need for approval of the auditor by the delega-
tion.

Audit of transactions

Audit of transactions carried out at central level

7.33. A sample of 22 payments was selected from large contrac-
tors in addition to 2 from non-devolved projects visited on-the-
spot. Large contractors are those organisations that received the
highest total funding during the year.

7.34.
In 10 out of 24 cases (mainly international organisations)
the Commission made payments on the basis of supporting docu-
ments provided by the implementing organisations. In the remain-
ing 14 cases, the checks of payments also involved detailed verifi-
cations, among other, at the project level either by Commission
staff or external auditors.

7.34. All the payments audited by the Court have been made in full
compliance with the relevant contractual provisions and were legal and
regular.

30.11.2004

EN

Official Journal of the European Union

C 293/241

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Audit of transactions carried out at the level of Delegations

7.35.
For each Delegation visited, a sample of transactions was
audited at that level. These included 41 payments and 6 tenders in
total.

7.36. The work carried out by the Court during the course of the
audits in beneficiary countries on payments made to projects for
which the Delegations were responsible revealed only a low level of
irregularities. This is in part due to the same matters detailed in
paragraph 7.24.

Implementing organisations

7.37. The Court carried out on-the-spot audits of 13 projects at
the level of the implementing organisations, where a sample of 215
transactions in total was checked with the aim of confirming the
functioning of their internal control systems.

7.38. The Court’s audits of the projects revealed, in 6 out of 13
implementing organisations visited on-the-spot, weaknesses in their
internal controls for ensuring compliance with contractual require-
ments. In most cases this involved a failure to adhere to the Com-
mission’s prescribed contracting procedures and maintain proper
supporting documentation.

7.38. The Commission’s monitoring and control systems aim at ensur-
ing the compliance of contract partners (NGOs, public ‘project manage-
ment units’, etc.) with the contractual requirements. Checks and audits of
the contract partners’ internal control systems are carried out on the basis
of risk assessments since in many cases a detailed examination of their over-
all internal control systems would be disproportionate on top of normal
checks concerning legality and regularity of payments.

The Commission agrees with the Court that the observance of tender and
procurement procedures by project management units and NGOs remain
an area of concern. With the devolution of projects stricter controls can be
applied on the spot by the respective delegations. Moreover, since June
2003,
in line with the revised grant contract provisions, the project
accounts are subject to an audit before the final payment is made.

7.39. A significant number of irregularities were found in the
transactions examined at the level of the projects. The most fre-
quent types were irregular contracting procedures (encountered in
5 projects out of the 13 audited on-the-spot), insufficient support-
ing documentation (5 out of 13) and ineligible expenditure (5 out
of 13).

7.39.
In addition to the improved controls outlined in reply to 7.38 the
Commission has taken action to rectify the specific irregularities indicated
by the Court.

C 293/242

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Analysis of Annual Activity Reports and the Statements of the Authoris-
ing Officers by delegation

7.40. The Court reviewed the Annual Activity Reports and the
statements by the Director General of the EuropeAid Cooperation
Office and the Director of the Humanitarian Aid Office. The review
concentrated on the parts of the reports which dealt with the Com-
mission’s follow-up of recommendations given by the Court of
Auditors, the Commission’s internal auditors and of the actions for-
mulated in the Commission’s action plan (attached to its Synthesis
of Annual Activity Reports on 2002 (6)) as well as on the internal
control standards. The Court examined whether and to what extent
the statements regarding the control procedures set up to ensure the
legality and regularity of underlying transactions made by the Direc-
tor General and the Director were justified and based on sufficient
evidence.

7.41.
In general, it was found that the information presented in
the reports was accurate and that it fairly reflected the activities car-
ried out on the follow-up on action plans and on the implementa-
tion of the internal control standards. Both the Humanitarian Aid
Office and the EuropeAid Cooperation Office have taken appropri-
ate actions to remedy short-comings identified in 2002 and to com-
plete and improve the internal control standards. It is also indicated
correctly in the EuropeAid Cooperation Office’s report that the
implementation of the internal control standards at the level of Del-
egations is underway. Responding implicitly to the Court’s recom-
mendations in its 2002 Annual Report (paragraph 7.44), the Euro-
peAid Cooperation Office also indicated in its report that steps are
undertaken to have audits of operations carried out more system-
atically.

7.42. Action 2 of the Commission’s 2001 action plan stipulated
that the external relations services should examine the possibilities
of organisational synergy between them and carry out an analysis
of risks related to their activities, in particular concerning direct
budget aid. As mentioned in the Commission synthesis of the
Annual Activity 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 with external aid and, in particular, budget support was
carried out in 2003 (see also paragraph 7.12).

(6) Synthesis of Annual Activity Reports of Directors General and Heads of
Service; Communication from the Commission, COM(2003) 391 of
9 July 2003.

30.11.2004

EN

Official Journal of the European Union

C 293/243

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.43.
In the Annual Activity Reports an appraisal should be given
on the internal control systems. Whereas the Humanitarian Aid
Office has given a description of the key systems in place together
with an assessment of the various elements, the EuropeAid Coop-
eration Office limited its contribution to a description of the ele-
ments of the systems without indicating whether and to what extent
the systems function adequately.

7.43. There was in early 2004, an evaluation of the current effective-
ness of the various controls, and the declaration of the Director-General of
EuropeAid took this into account. An overview of controls was produced in
2004 which explains the functions of the various controls.

7.44. 2003 was the first time that Delegations were required to
report to the headquarters (in their January 2004 reports) on the
external audits carried out and that the Delegations were explicitly
asked to report on legality and regularity aspects and on actions
taken in this respect. Although this was an important improvement
as compared to 2002, in practice a very limited number of Delega-
tions gave more than global information on legality and regularity
issues and the quality of information on external audits varied con-
siderably.

7.44. Based on past experiences, the information on audits is now part
of the EAMR reports. The Commission agrees with the Court that the
inclusion of audit information has been an improvement. It is expected that
the completeness and the quality of the information will further improve
over time.

The reports are intended to be an overview; they do not give detailed infor-
mation on every project concerned.

7.45. The Annual Activity Report gives a description of internal
control systems (see paragraph 7.43), mainly focusing on transac-
tions between the Commission and the implementing organisa-
tions, which function generally satisfactorily. However, although
the system of audits of implementing organisations has improved
since 2002, the use and follow-up of audit reports were not yet
adequate for the purpose of deriving assurance concerning the legal-
ity and regularity of transactions managed by those organisations.
In July 2004, the Commission adopted an audit strategy.

7.45. The key elements of the overall strategy were already applied in
2003, including the annual audit plans, methodological tools, training etc.
In July 2004 the overall strategy was formalised in a single document.
Improvements have been made through modifications to standard legal
texts (7.30), the development of a series of tools (framework contract,
methodological guide, training) and the establishment of the annual audit
programmes for 2003 and 2004 based on a common methodology and a
risk analysis.

External audits are not the only source of assurance available. Other sources
should also be included, such as optional ex ante controls, ex post trans-
actional control, missions on the ground and monitoring reports.

These controls were considered adequate for the purpose of deriving overall
assurance in the context of the Director-General’s Declaration.

Regarding the use and follow-up of audit reports, the introduction of new
tools (such as CRIS Audit) will contribute to further improve the flow of
information on audit results at central level, notably to feed back the audit
strategy and the selection of transactions to be included in the audit plan.
However, as mentioned earlier, the follow-up of audit results is part of the
line-management functions in delegations and headquarters. The level of
audit programming in fact matches that of project authorisation, enabling
more effective use to be made of the results. Audits are therefore completely
integrated into the whole project management cycle.

C 293/244

EN

Official Journal of the European Union

30.11.2004

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.46. The CRIS financial information system and the internal
reporting systems do not yet provide sufficient information on the
results of audits of expenditure made by implementing organisa-
tions.

7.46. The Commission intends to extend the functions of CRIS to pro-
vide for the encoding of audit requirements and implementing organisa-
tions compliance with those requirements.

7.47. The statement given by the Director General of the Europe-
Aid Cooperation Office included a reservation on the partnership
modalities of an Association of NGOs for food aid and food secu-
rity. The statement does not provide sufficient information on the
underlying problem and does not specify what the financial impact
could be. At the moment of drafting this report the Commission
was examining this problem and could therefore not make further
information available.

7.47. After the problem behind the reservation was identified in 2003,
several measures were taken to protect the financial interests of the Com-
munity, ensure the continuity of NGO operations and respect the Commis-
sion’s legal commitments.

This inquiry is still on-going, and the Commission will keep the Court
informed of any relevant developments.

7.48. The Director General of the EuropeAid Cooperation Office
declared, following the standard formulation, that he had obtained
reasonable assurance that the control procedures put in place give
the necessary guarantees concerning the legality and regularity of
the underlying transactions, based on his own judgement and on
information available to him. This statement is justified for the sys-
tems which ensure the legality and regularity of payments made by
headquarters and Delegations to the implementing organisations.
However, the Court found that the systems which supervise the
legality and regularity of expenditure underlying the financial
reports presented by implementing organisations are not yet
adequate enough.

7.48. The Commission agrees that all the system components of inter-
nal control can and should be improved. All the necessary supervisory and
control systems were in place in 2003 to enable the Director-General to
give reasonable assurance as to the legality and regularity of transactions
carried out by EuropeAid in 2003.

In its replies to the preceding points, the Commission clarified which aspects
of the audit system were in need of further development. The steady progress
made by EuropeAid in this area is acknowledged by the Court. Audits are
a supplementary assurance, in addition to the conformity and ‘reality
checks’ carried out entirely by the services of the Commission, before the
payment orders in the framework of the financial circuits set up in accor-
dance with the requirements of the new financial Regulation, when the pay-
ment instruction is issued. Such extra assurances also include the audit of
the Annual Audit Plan, ex post transactional monitoring, missions on the
ground, and monitoring reports.

While efforts must be made to continually improve external audit systems,
as part of a set of checks on the legality and regularity of operations, the
very diversity of the risks means they cannot be controlled by any isolated
element of the verification system, but require the smooth articulation of its
different components.

Conclusions

7.49. 2003 was the year in which the new Financial Regulation
entered into force and the devolution process for the geographical
programmes was completed. The extent to which a balanced com-
bination of checks, reviews, inspections, audits by external firms
and internal audits has been established varies markedly between
the different Delegations and between the Directorates in the Euro-
peAid Cooperation Office.

7.49. As part of the reform of the management of external aid, the Com-
mission is aiming to devolve all geographical and thematic programmes in
78 delegations before the end of 2004. On 31 December 2003, devolu-
tion was already in place for the management of geographical programmes
in 61 delegations, covering all CARDS, TACIS, MEDA, ALA and EPRD
programmes. The devolution of thematic lines, which began in 2003, will
be carried out for the most part in 2004. A varying combination of checks,
reviews, inspections and audits can be used to meet the differing require-
ments of services in respect of progress made towards to devolution, and is
consistent with that process.

30.11.2004

EN

Official Journal of the European Union

C 293/245

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.50. The Court’s audit revealed few errors affecting transactions
at the level of the Commission’s headquarters and at the level of its
Delegations (see paragraphs 7.34 and 7.36). However, weaknesses
in the internal controls, and a relatively high number of irregulari-
ties, were detected at the level of the project implementing organi-
sations (see paragraph 7.39). It underlines the necessity to have a
comprehensive approach to the supervision, control and audit of
these organisations.

7.50. Over recent years, the utilisation of standard contractual docu-
ments (contracts, grants and financing agreement) has helped improve the
level of control by the Commission. Payments and the verification of sup-
porting documents are made as requested by the financial regulations. Con-
tract provisions for ‘certification audits’ have also been improved (see replies
to paragraphs 7.30 and 7.32). Moreover, the external audit strategy has
been strengthened through the establishment of annual audit plans, — on
the basis of a risk assessment, — of audits to be launched by headquarters
and delegations (see also reply to 7.45).

7.51. The Annual Activity Reports of the Humanitarian Aid
Office and of the EuropeAid Cooperation Office gave descriptions
of the internal control systems in place. However, in the case of the
EuropeAid Cooperation Office, the Court cannot derive assurance
from the report and the statement (see paragraphs 7.19 and 7.45)
since essential supervisory systems and controls for the legality and
regularity of underlying transactions at the level of implementing
organisations were not yet fully operational.

7.51.
Essential supervisory systems and controls for EuropeAid were
operational in 2003. These controls were considered as adequate for the
purpose of deriving overall assurance in the context of the Director-
General’s declaration.

Please refer also to the replies to 7.45 and 7.48.

Recommendations

7.52. An audit strategy should be established on the basis of a risk
analysis, in combination with contractual requirements applying to
the implementing organisations as also indicated in the internal
audit capability unit’s most recent report on EuropeAid’s internal
control standards (see paragraph 7.21). The Delegations should sys-
tematically transmit their audit programmes, the audits performed
and their results to the headquarters in Brussels as foreseen from
2004 onwards. This should also include the audits contracted by
implementing organisations. The supervision carried out by Euro-
peAid’s headquarters should focus on the information provided by
the Delegations which should be verified during headquarters audits
of the Delegations (see paragraph 7.18). Audits of implementing
organisations launched by headquarters should in principle be lim-
ited to projects and programmes the implementation of which is
the direct responsibility of headquarters, in other words, the ‘non-
devolved’ activities. Until such a system is fully functioning, the
Director General’s annual report should reflect this.

7.52. The key elements of the overall strategy were already applied in
2003, including the annual audit plans, methodological tools, training etc.
In July 2004 the overall strategy was formalised in a single document.
Reporting on audits is now a mandatory part of the external assistance
management reports (EAMR) of the Delegations. The introduction of new
tools (such as CRIS Audit) will contribute to further improve the flow of
information on audit results at central level, notably to feed back the audit
strategy and the selection of transaction to be included into the audit plan.

However, the current systems are considered as adequate for the purpose of
deriving overall assurance in the context of the Director-General’s declara-
tion.

The Commission can agree that in principle audits of devolved activities
should be launched by the delegations concerned. However, there is a need
for Headquarters to be able to launch audits of devolved activities either as
ad hoc audits or for the purpose of supervision.

7.53. The EuropeAid Cooperation Office should more clearly
define its overall strategy for supervision and control, by which the
function and tasks of the services at headquarters and the Delega-
tion should be clarified (see paragraph 7.23). In this context the
management information system should be further developed to
facilitate the supervision and control (see paragraphs 7.14, 7.15 and
7.46).

7.53. The Commission agrees that it would be useful to formalise and
consolidate its overall strategy in a single document.

Regarding the management information system the Commission will work
on further developing CRIS (see reply to 7.17).

C 293/246

EN

Official Journal of the European Union

30.11.2004

ANNEX

(a) Court’s assessment of supervisory systems and controls in 2003

Overall concept

Procedures and manuals

Functioning in practice

Internal audits

Management reporting

Humanitarian Aid
Office

EuropeAid
Cooperation Office

Delegations

A

A

A

B (2)

A

B

A

B (1)

B (2)

B (1)

—

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 organisations implementing projects
funded by EuropeAid

Quality of audits

Quantity of audits

Definition of terms of reference

Commission’s involvement in appointing auditors

Inclusion of tender procedures in the audit scope

Reporting of results of review of accounting system

Evidence of follow-up

A

B (1)

B (2)

B (2)

B (2)

C

B

(1) Nevertheless the number of audits increased as compared to 2002.
(2) For external audits launched by the Commission, the terms of reference and involvement in appointing the auditors are satisfac-

tory, but when the audits are launched by implementing organisations, improvements are necessary.

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

C

30.11.2004

EN

Official Journal of the European Union

C 293/247

(c) Key areas followed up by the Court of Auditors in 2003

Humanitarian Aid Office

EuropeAid Cooperation Office

Execution risk analysis

Carried out
previous years

analysis

as

in

Reporting systems

Maintained good standards.

Carried out the risk analysis as in previous
years as well as the specific risk analysis
outstanding in 2002 (Action Plan, action
No 2)

Reporting systems are improving as compared
to 2002, but need further development

Delegations

—

Delegations report regularly

Concept
controls

external

audits

and

Started concept in 2002, fully
implemented in 2003.

Started concept in 2002, further developed in
2003, strategy document in 2004.

Execution external audits and
follow up

Audits carried out and followed
up.

More audits carried out; terms of reference and
follow-up to be improved.

—

—

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CHAPTER 8

Pre-accession 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

The management and control systems

Phare

ISPA

Sapard

Audits by the Commission or on its behalf

Phare

ISPA

Sapard

Tests of transactions

Phare payments

ISPA payments

Sapard payments

Annual Activity Reports

The Directorate-General for Enlargement

The Directorate-General for Regional Policy

The Directorate-General for Agriculture

Conclusions

Recommendations

Principal observations in Special Reports

Special Report No 2/2004 ‘Has Sapard been well managed?’

Paragraph

8.1

8.2-8.44

8.2

8.3-8.29

8.3-8.17

8.3-8.8

8.9-8.14

8.15-8.17

8.18-8.29

8.18-8.22

8.23-8.26

8.27-8.29

8.30-8.34

8.30

8.31-8.32

8.33-8.34

8.35-8.39

8.35-8.36

8.37-8.38

8.39

8.40-8.43

8.44

8.45-8.59

8.45-8.53

Special Report No 5/2004 ‘Phare support to prepare Candidate Countries for Managing the
Structural Funds’

8.54-8.59

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INTRODUCTION

8.1. This chapter deals with the pre-accession aid for countries
preparing for accession to the European Union. Heading 7 of the
Financial Perspective contains the appropriations for the pre-
accession instruments (Phare, ISPA and Sapard) for the 10 Central
and Eastern European candidate countries, eight of which became
Member States on 1 May 2004 (1), and pre-accession assistance
programmes for the three Mediterranean candidate countries (2).

— The Phare programme (3), implemented by the Directorate-
General for Enlargement, provides support for institution-
building and investment.

— ISPA (4), implemented by the Directorate-General for Regional
Policy, has been set up to facilitate accession in the fields of
environment and transport

— Sapard (5), implemented by the Directorate-General for Agri-
culture, 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
(3 393 million euro) and spent (2 240 million euro) in 2003 (see
paragraphs 2.42-2.46 for observations on the budgetary manage-
ment).

(1) The Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slov-
enia, Slovakia, Bulgaria and Romania, . On 1 May 2004 these countries,
with the exception of Bulgaria and Romania, became Member States of
the European Union.

(2) Cyprus and Malta (which became Member States of the European Union
on 1 May 2004) and Turkey. These assistance programmes were rela-
tively insignificant in terms of payments in 2003.

(3) Poland, Hungary and Restructuring in the East, Council Regulation (EEC)

No 3906/89.

(4) Instrument for Structural Policies for Pre-Accession, Council Regulation
(EC) No 1267/1999. For the countries becoming Member States on
1 May 2004 this instrument is transformed into the Cohesion Fund.
(5) Special Accession Programme for Agriculture and Rural Development,

Council Regulation (EC) No 1268/1999.

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Graph 8.1 - Breakdown of commitments by budgetary area in 2003

NB: for more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

Graph 8.2 — Breakdown of payments by budgetary area in 2003

NB: for more detailed information see Diagrams III and IV of Annex I.
Source: 2003 annual accounts.

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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 pre-
accession aid for the year 2003 was to contribute to the establish-
ment of the Court’s Statement of Assurance through a conclusion
on the legality and regularity of the transactions recorded under
Heading 7 of the Financial Perspective (6). The audit comprised an
appraisal of the supervisory systems and controls (including reviews
of audits carried out by the Commission or on its behalf, and/or of
the resulting audit reports), tests of transactions and a review of the
Annual Activity Reports of the Directors General concerned. The
audit was carried out at the Commission’s central services in Brus-
sels and at Commission Delegations and national authorities in nine
candidate countries (7). Most of the work on Sapard was carried out
as part of the integrated Sapard audit undertaken in 2003 (8).

Supervisory systems and controls

The management and control systems

Phare

8.3. The bulk of the Phare funds are disbursed through contracts
concluded and payments made by Implementing Agencies in the
candidate countries. Other contracts are concluded and managed
directly by the Directorate-General for Enlargement in Brussels (cen-
tralised management) or by the Commission Delegations in the can-
didate countries (devolved management).

Systems in the candidate countries

8.4.
In late 2000 the Commission launched the concept of a fully
decentralised implementation system for Phare (as well as for ISPA
— see paragraph 8.9) — known as the Extended Decentralised
Implementation System (EDIS). Under EDIS the Commission will
waive the ex ante control of tendering and contracting by its Del-
egations, which continued in 2003 to constitute an essential ele-
ment of the control system. The Commission will decide on full
decentralisation on an agency by agency basis, following an analy-
sis of the capacity of the Implementing Agencies.

8.4. The possibility of moving to a fully decentralised implementation
system was provided for
in the Coordination Regulation ((EC)
No 1266/1999) but no legal regulatory requirement to actually do so was
stipulated. However, in order to encourage the candidate countries, in late
2000 the Commission launched a working document elaborating the con-
cept of a fully decentralised implementation system for Phare (see reply of
the Commission to point 8.9) — known as the Extended Decentralised
Implementation System (EDIS).

(6) Excluding the programmes for the Mediterranean countries.
(7) Phare: The Czech Republic, Lithuania, Hungary, Poland, Bulgaria and
Romania. ISPA: Estonia, Latvia, Lithuania, Poland and Slovenia. Sapard:
Poland, Bulgaria and Romania.

(8) The key observations from this audit are presented in paragraphs 8.45

to 8.53.

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8.5. The EDIS process has been further delayed (9). No EDIS
accreditations were granted in 2003. By the end of 2003 only six
countries (10) had submitted applications. The major delay has been
caused by the slow implementation of the public sector internal
control reforms in the candidate countries as well as the fact that the
Commission was initially late in setting sufficient pressure.

8.5. There was no formal legal requirement regarding EDIS until the
Commission inserted Article 33 in the Act of Accession in order to impose
it. Consequently, prior to this juncture, beyond the substantial encourage-
ment, guidance and assistance proactively provided by the Commission, it
is not clear what level of additional pressure could have been imposed on
the sovereign accession countries that would have accelerated the process.

8.6. The process of preparing for EDIS in the candidate countries
has strengthened the systems in place in 2003 for the management
of Phare funds. However, the Commission’s verification audits in
late 2003 and early 2004 found some weaknesses in these national
systems, such as not yet finalised operational agreements between
the Central Finance and Contracting Unit (CFCU) and line minis-
tries, lack of staff resources and training, and manuals not yet
adopted.

8.6. The Commission has required that the candidate countries resolve
the most important system weaknesses identified in the verification audits
prior to a Commission EDIS accreditation decision. The accreditation deci-
sion itself then requires that further systems improvements should be made
within specific timeframes to deal with other weaknesses identified in the
verification audits. In fact the first six such accreditation decisions have
already been taken and the remaining four are anticipated before the end
of 2004.

Co-Financing

8.7. The Phare Guidelines (11) 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. The following improvements have been made in the sys-
tems for monitoring and controlling co-financing from 2003
onwards:

a)

b)

the National Funds (12) have to report on the co-financing situ-
ation each time they send a request for funds to the Directorate-
General for Enlargement;

the terms of reference for external auditors performing closure
audits require them to examine whether procedures are in place
to monitor co-financing and whether applicable co-financing
conditions have been complied with.

8.7. Co-financing is monitored during implementation. However, in a
decentralised environment, assurance of absolute compliance with many
requirements, not only co-financing, can only be obtained when closure
audits are carried out.

(9) See Annual Report concerning the financial year 2002, paragraph 8.4.
(10) The Czech Republic, Latvia, Lithuania, Hungary, Slovenia and Slovakia.
(11) SEC(1999) 1596. These guidelines are binding since they are referred to
in Article 8 of Council Regulation (EEC) No 3906/89 and are part of
the Financing Memorandum concluded between the Commission and
the candidate country concerned.

(12) National Funds have been set up in all candidate countries to channel
the flow of all three pre-accession instruments, both receipts from the
Commission and distribution of funds to implementing agencies.

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However, several Implementing Agencies do not verify that paral-
lel (13) co-financing declared by national authorities represents
incurred expenditure complying with the requirements of the
Financing Memorandum for the Phare programme concerned.
While it is the duty of the joint and sector monitoring committees
to monitor the co-financing, it remains unclear whether recipients
have complied with the parallel co-financing requirements, until the
final declarations of expenditure are made by the National Autho-
rising Officers and closure audits are carried out.

8.8. Unlike for Structural Funds, the Commission has not laid
down a clear set of rules to define eligibility for Phare parallel
co-financing. This has sometimes led to situations whereby the
national co-financing has consisted of expenditure incurred prior to
the Financing Memorandum, and national
the signing of
co-financing being provided so late that the projects concerned
were delayed.

8.8.
Indeed, the possibility for parallel co-financing for Phare allowed
candidate countries greater flexibility than the structural funds on eligibil-
ity in meeting their co-financing obligations. This was at a time when the
financial cost of preparing for accession was a considerable burden for these
transition economies. The Commission considers that the situations men-
tioned were exceptional and not systemic. Moreover, as of 2002 the Phare
Programming Guide made joint co-financing mandatory except in duly jus-
tified instances and joint co-financing has the same eligibility rules as
Phare.

ISPA

Systems in the candidate countries

8.9. The ISPA Regulation (14) prescribes that candidate countries
should have established, by no later than 1 January 2002, an
adequate management and control system (15). In 2003 ISPA was
being implemented through a system whereby procurement docu-
ments are checked in advance (ex ante approval) by the Commis-
sion Delegations in these countries. As for Phare (see para-
graph 8.4) the Commission could waive this requirement on the
introduction of EDIS. Meeting the minimum criteria under EDIS
would have ensured compliance with the management and control
system requirements of the ISPA Regulation.

8.9.
EDIS accreditation would have ensured compliance with the man-
agement and control system requirement for ISPA, but was not the only
means of meeting this requirement: it was and, unlike the case with Phare
(see reply of the Commission to point 8.4), remained optional. With Com-
mission support the candidate countries were making progress in improv-
ing their systems for ISPA throughout the implementation period indepen-
dently of EDIS. In the meantime, the ex ante approval of procurement
documents by delegations reduced the risk to EU funds.

(13) Parallel co-financing implies that the partners finance different project ele-
ments, possibly at different times, and related payments are separately
made. The other form is joint co-financing, which implies that each
project element is simultaneously co-financed and payments are made
simultaneously by the partners.

(14) Article 9(1) of Council Regulation (EC) No 1267/1999, of
21 June 1999, establishing an Instrument for Structural Policies for
Pre-accession (OJ L 161, 26.6.1999, p. 73).

(15) As Community regulations are not directly applicable in candidate
countries these requirements were included in Annex III to the Financ-
ing Memorandum. A Financing Memorandum is signed for each project
following the Commission Decision.

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8.10. Although it is the responsibility of the candidate countries
to set up systems that comply with the ISPA requirements, the
Commission did not take sufficient measures to ensure that these
requirements were respected by the candidate countries within the
time limits. At 31 December 2003, two years after the deadline,
no country had achieved compliance with the minimum system
requirements for all the national authorities and bodies involved in
the management of ISPA (16). Ensuring that reliable internal con-
trol systems were set up would have reduced the risk resulting from
the removal of the EC Delegations’ ex ante control by the time of
accession, when such systems are to be used in the management of
the Structural and Cohesion Funds.

8.11. Notwithstanding the above, the countries made significant
efforts to create management structures where they previously did
not exist and at the same time to attempt to establish the necessary
internal control mechanisms for the effective and transparent man-
agement of ISPA funds. However, at the time of the Court’s audit in
early 2004 some of these had only recently been set up. Thus,
although they appear to be conceptually sound, it is too early to
determine whether they are also functioning properly.

8.10. As well as laying down the requirements in the Financing Memo-
randum attached to each aid award decision, the Commission provided
extensive support and guidance and from 2001 onwards audited the sys-
tems, taking care to ensure that any deficiencies found were corrected. Before
accession a number of implementing bodies in several accession countries
achieved EDIS accreditation and the audit work confirmed that many of the
bodies met the requirements.

During the run-up to accession the Commission monitored the setting up
of the systems to manage the Structural and Cohesion Funds, for which the
experience with ISPA and the other pre-accession instruments was a good
basis. It refers to the Chapter 21 monitoring report (COM(2003) 433)
and the detailed sections on management and control systems in new Mem-
ber States’ Structural Fund programmes, which were largely negotiated in
2003 and approved just after accession. The Commission is continuing its
work to ensure that appropriate systems are in place, in order to reduce the
risk to which the Court refers. The progress made towards EDIS accredi-
tation is being taken into account in this process.

8.11. The Commission has audited the operation of the systems for
managing ISPA/Cohesion Fund projects. For the Structural Funds it plans
to start doing so in 2005 after first assessing the new systems’ compliance
with the requirements of the regulations. It is also monitoring the audit
work done by the new Member States themselves.

8.12. A common concern for the majority of the bodies visited
were the difficulties they were facing in attracting and keeping quali-
fied personnel. Staff were often recruited without the specific expe-
rience required. Both the Commission and the candidate countries
recognise that there is a need for a continuous programme of
human resources development and training. In addition, national
structures are often heavily dependent on outsourcing work to for-
eign experts for project preparation and management. Action plans
which further develop the national structures in order eventually to
minimise this dependence have not yet been implemented.

8.12.
Full complements of staff and adequate training were among the
matters the Commission emphasised in the run-up to accession. It is look-
ing closely at the new Member States’ plans in these areas during its scru-
tiny of their systems. In many of the new Member States the problem of
attracting and keeping qualified staff is exacerbated by relative pay levels
between the public and private sectors. For ISPA projects, because of the
inexperience of national administrations, there was often no alternative but
to outsource some of the work to consultants. The implementation of ISPA
in itself provided for valuable learning by doing experience since the pre-
accession instrument is closely modelled on the Cohesion Fund. Technical
assistance funds under ISPA were also intensively used to support training
and and know-how transfer.

(16) Only for the transport sector in Estonia and the road sectors in Hun-
gary and Lithuania did the Directorate-General for Regional Policy con-
sider it appropriate to start the formal validation procedure for granting
EDIS.

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The ex ante control of the EC Delegations

8.13. Obliged to perform ex ante controls, the EC Delegations
were significantly involved at each stage of the tendering and con-
tracting process. The significant number of anomalies detected by
the EC Delegations (17) show that the ex ante approval of the EC
Delegation thus far has been an indispensable element of control in
the procurement process.

In general, there was an improvement in 2003 in the way
8.14.
the EC Delegations documented their work. Checklists were intro-
duced and notes were in most cases kept in the files examined
clearly describing the issues raised during the ex ante control. In
addition, it was notable that the EC Delegations have a heavy work
load which they carry out under significant time pressure. Never-
theless, the Court noted:

8.14.

a)

in some cases a lack of documentation describing the work per-
formed, the issues raised and how these issues had been
resolved (18);

a)

Following the Court’s audits the Delegations have introduced stricter
requirements for recording the work performed and how issues were
resolved.

b) often, the provision of ex ante approval had taken too long.
The main cause of delays was the poor quality of the documen-
tation submitted during the tender process. In some cases
though, it was also due to resource constraints in the Delega-
tions;

c)

the approval by the EC Delegation of the evaluation reports on
two different tenders at approximately the same period of time,
although in one case the Evaluation Committee rejected a ten-
der on the grounds of the nationality of the contract manager
and in the other the same contract manager was accepted.

c) The initial approval of the two reports by the EC Delegation did not
affect the outcome of the tender process, as in the first case the
Delegation ordered a re-evaluation by a new evaluation committee
and a different firm was selected.

Sapard

In the Sapard countries, accredited paying agencies reim-
8.15.
burse expenditure incurred by beneficiaries. The paying agencies
receive these funds through a central treasury fund (National Fund).

(17) Tender dossiers had to be resubmitted a number of times (in one case
seven times) prior to their approval and in 3 out of the 12 tendering
procedures examined, the evaluation reports were not endorsed by the
EC Delegation, and the evaluation had to be repeated.

(18) Not all the official correspondence exchanged as a result of the exami-
nation of the different versions of the tender dossiers, submitted to the
Delegations for approval, were filed.

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Since the Court’s audit the three remaining audit certificates and

8.16.
reports have been received and reviewed by the Commission.

In accordance with the international agreements (19) signed
8.16.
between the Commission and the Sapard countries, each of the
countries is required to provide the Commission annually with a
certificate on the accounts and an audit report by a certifying body.
Based on a review of the seven available reports by certifying bod-
ies, and discussions with their representatives in the four Sapard
countries visited, the Court found that these audits provide the
Commission with reasonable assurance as to the legality and regu-
larity of the expenditure. However, the three remaining reports
could not be reviewed by the Court because they were not received
by the Commission before the deadline (30 April 2004).

8.17. The Court also reviewed the procedure descriptions and
checklists used by the Sapard paying agencies and checked a num-
ber of files to test that the systems in candidate countries were
working as documented. Notwithstanding the errors found by the
Court (see paragraph 8.33), the Sapard systems included the key
concepts, procedures were well documented, and the systems as
described on paper were generally working in practice.

Audits by the Commission or on its behalf

Phare

Commission systems audits

8.18. The decentralised system of management was introduced in
the candidate countries without any systems audits at that time. In
order to rectify this, a programme of systems assessments was
launched by the Directorate-General for Enlargement. Only a lim-
ited number of audits were performed before the resources were
fully directed towards completing the EDIS process. This meant that
the systems audits could not contribute to the Commission’s assur-
ance as to whether the decentralised system of management was
producing transactions that were free of material errors in terms of
reality, legality and regularity.

8.18. The decentralised system of management (DIS) was introduced
without any systems audits because there was no legal requirement under
the old Financial Regulation to do so. Due to the nature of the EDIS pro-
cess it was only possible to undertake a limited number of systems audits
before 2002. This was explained in detail in DG Enlargement’s reserva-
tions in its 2002 and 2003 annual declarations. Under the new financial
regulation the Commission carried out systems audits prior to decentrali-
sation in Turkey and will apply this approach in all new beneficiary coun-
tries.

Closure audits

In 2001, the Directorate-General for Enlargement adopted
8.19.
a strategy to contract external auditors to carry out closure audits
on a risk-based sample covering some 60 % of the value of the
Phare programmes up to and including the programme year 1999.

(19) Multiannual financing agreements, Section A, Article 6.

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8.20. By April 2004, 86 closure audits launched by Head Quar-
ters covering programmes amounting to a total of 971 million
euro had been performed. A further 56 audits were launched by
Delegations. The total of 142 closure audits cover approximately
42 % of the total value of the Phare programmes up to and includ-
ing the programming year 1999. By April 2004, 63 closure audit
reports (excluding audits launched by the Delegations and previous
services) covering programmes amounting to 761 million euro had
been approved by the Directorate-General for Enlargement. By
March 2004, the Commission had issued recovery orders for
1,9 million euro (20).

8.21. Based on its detailed examination of nine audit reports
selected at random and further information available at the Com-
mission the Court concluded as follows:

a)

Four of the closure audit reports examined were not delivered
on time. This was caused by difficulties in obtaining informa-
tion from the beneficiaries and lack of resources in the
Directorate-General for Enlargement;

b) The closure audits were generally of good quality and revealed
a number of financial findings, such as payments including
VAT, payments made after the disbursement deadline and
shortcomings in the procedures for awarding contracts. In
some cases original supporting documents could not be found.
However, not all of these financial findings lead to amounts
which can and should be recovered.

Audits by National Funds in candidate countries

8.22. According to the Memoranda of Understanding between
the Commission and the National Fund in each candidate country,
the National Funds have an obligation annually to report on planned
audits and to summarise audit findings. However, for 2003 the
Commission has not used the summaries of findings for the pur-
pose of deriving assurance concerning the legality and regularity of
Phare transactions.

ISPA

Commission systems audits

8.23. The Directorate-General for Regional Policy carried out
audits in all ISPA candidate countries in 2003 and at the beginning
of 2004. The main objectives of the audits were to assess to what
extent the candidate countries had established management and
control systems complying with regulatory requirements (21) and to
follow up and monitor the progress made towards EDIS.

(20) The figures are as reported by the Directorate-General for Enlargement.
(21) Article 12(2) of Council Regulation (EC) No 1266/1999 and Annex III

of the Financing Memorandum.

8.22.
Indeed, the Commission has not used the summaries of findings
for the purpose of deriving assurance because of the limited scope of these
reports.

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8.24. The objective of the Court’s work was to examine the extent
to which the Directorate-General for Regional Policy had carried
out its work in an effective manner. The work mainly included a
follow-up of the findings reported in Chapter 8 (ISPA part) of the
2002 Annual Report (22).

8.25. There has been a notable improvement compared to last
year in the audit planning document and in the audit checklists
used. However, the checklists used for EDIS need to be expanded in
order to address better the functioning of the internal control sys-
tems.

8.25. The EDIS checklists were devised at a time when the systems in
many of the candidate countries were at an early stage of operation. The
limited testing of the internal control systems was due to the fact that in
several areas the systems had not operated long enough for conclusions to
be drawn. The Commission intends to review the set of checklists on this
point in 2004.

8.26. Although there has been an improvement compared to last
year, in some cases the audit work carried out was not adequately
documented; and in one out of the three audits examined the appli-
cable audit checklists were only partly filled in. In these instances it
was therefore not possible to determine whether:

i)

the audit work was thorough and complete, and

ii)

all significant findings had been included in the audit report.

8.26. The Commission agrees, that there is room for improvement in the
referencing between the observations in the audit report and the audit work
performed. The Commission is making efforts to standardise audit meth-
odologies for areas of the budget under shared management. In the case
specifically referred to by the Court, despite the incomplete checklists, the
audit report sets out the work done and the reasons for the Commission’s
findings. It therefore offered a solid basis for the audit opinion.

Sapard

Audits by the Commission

8.27. The Commission undertakes audits at three stages: systems
audits before payments are made, compliance audits to review
whether systems are operating as intended and clearance of
accounts audits at the end of a financial year. In general these audits
provided reasonable assurance as to the legality and regularity of the
expenditure.

8.28. However, the Court identified shortcomings in the clearance
of accounts audits undertaken in 2003. For three of the eight coun-
tries where the Commission undertook clearance audits, key docu-
ments were not reviewed and approved, and for four others the
audit evidence was insufficiently documented.

8.29. The clearance audits form the basis for the Commission’s
decision to clear the accounts of the Sapard agencies and the Sapard
euro bank accounts. The Commission was unable to meet the
required deadline and the decision was taken one month late, on
31 October 2003. The decision also cleared the bank balance in
Romania, for which no Commission audit was carried out. Checks
should have been carried out to confirm the bank balance of
37,6 million euro and the interest received.

(22) Annual Report concerning the financial year 2002, paragraphs 8.14

to 8.22.

8.28. The Commission has ensured that key documents are reviewed but
accepts that evidence of verifications made, and of review/supervision, could
be improved.

8.29. There are no financial consequences arising from the delay cited by
the Court. For Romania, as there was no expenditure during 2002, the
Commission reviewed the certification report sent by the national authori-
ties (Romanian Court of Auditors). This report contained a section on the
confirmation of the Sapard euro account. This was considered sufficient by
the Commission in order to take its decision.

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Tests of transactions

Phare payments

8.30. The Court’s audit in candidate countries of 39 Phare (23)
payments made by the Implementing Agencies (out of a total
sample of 76 (24)) revealed seven errors. These errors, mostly of a
formal nature, included an early release of retention funds, advances
on a contract above the level permitted, problems with recording
time spent on service contracts and two small amounts of ineligible
expenditure. Furthermore, in two cases the Court could not obtain
evidence confirming that declared parallel co-financing represented
incurred expenditure complying with the requirements of the rel-
evant Financing Memorandum (see paragraph 8.7).

ISPA payments

8.31. The audit of a sample of 17 ISPA payments revealed a high
frequency of errors (14 in 13 payments). Seven cases related to
failure to observe regulatory provisions relating to the tendering
and contracting procedures (two of which could have had a signifi-
cant effect on the outcome of the tenders concerned); three cases
related to failure to observe the regulatory requirement for carrying
out an environmental
is
approved; in two cases the rate of assistance did not adequately take
into account the project’s potential to generate income and; in two
cases ineligible expenditure relating to the purchase of machinery
and equipment was declared to the Commission.

impact assessment before a project

(23) Tendering and contracting procedures were examined only for those
payments (13) made under the relatively new Economic and Social
Cohesion grant scheme. A wider examination of tendering and contract-
ing procedures was carried out for the Statement of Assurance audit of
2002. See Annual Report concerning the financial year 2002, para-
graphs 8.38 to 8.43.

(24) The remaining payments, which were audited at the level of Commis-
sion and the European Bank for Reconstruction and Development,
revealed no errors.

8.30. The Commission is of the opinion that in two of the seven cases,
the release of the retention funds and the payment of the advances, the
reported formal errors are a matter of judgement. In any case, the errors
detected regarding ineligible expenditure are so small that they cannot be
considered material.

8.31. A number of the errors reported by the Court do not have a finan-
cial impact and are of a formal nature.

With regard to tendering and contracting procedures (seven errors), the
Commission agrees that the regulatory provisions must be complied with
and is committed to a transparent evaluation of bids and proper document-
ation. However, it does not consider five of the alleged errors material.

As regards environmental impact assessments (three errors noted), although
the Commission allowed in some cases this requirement to be completed
after submission of the application (for example, as already stated by the
Commission at point 8.44 of the Court’s Annual Report for 2002, in
cases where design and build contracts are used it is simply not possible to
carry out a full EIA before the project is submitted for approval), it ensured
that EIA procedures had been fully complied with before actual work com-
menced.

The Commission considers that the rates of assistance decided in the cases
to which the Court refers (two errors) were appropriate, having regard to
all relevant considerations including potential revenue and the affordability
for the population served. It recognises, however, that scope exists for stan-
dardising the methods for determining co-financing rates and is working
in this direction.

The Commission accepts the two errors concerning ineligible expenditure
and has taken steps to correct the declarations concerned.

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In addition, the rules (25) prescribe that except in duly jus-
8.32.
tified cases, assistance granted to a measure where substantial work
has not begun within two years from the date of signature by the
Commission shall be cancelled (which may be considered unrealis-
tic, particularly in the case of large infrastructure projects). The
Commission decided to accept the launch of the first works tender
as evidence of the start of substantial work in the case of infrastruc-
ture projects. In the Court’s view this interpretation is not in line
with the intention of the ISPA Regulation.

Sapard payments

8.33. The audit reviewed a sample of 26 payments made in 2003
and covering the main measures implemented at the time of the
audit. A high number of errors was found in 13 payments, for
which the main explanation is that staff in Sapard countries were
still inexperienced. The errors relate to non-compliance with pro-
cedures (26) (10 cases), financing of VAT (4 cases, see below) and
non-observance of the requirement to meet EU hygiene standards
(3 cases).

8.32. As the Court itself notes, for large infrastructure projects, a two-
year deadline after grant approval for starting the works can be unrealistic.
The Commission therefore considers that the launch of a works tender is a
sufficient assurance that projects will be implemented on schedule.

8.33. The Commission will examine the impact of VAT once the pro-
gramme has been completed. An assessment will be made in the frame-
work of the clearance of accounts procedure, and the appropriate conclu-
sions will be drawn. However, it does not consider that, at this stage, the
VAT identified is ineligible for financing.

The Commission has carried out audits in all 10 Sapard countries. In some
cases it has also identified that the documentation of checks needs to be
improved and has made appropriate recommendations.

Regarding the requirement to meet EU-hygiene standards, the Commis-
sion has also identified certain problems with the respect of minimum stan-
dards in the Sapard countries. It has made recommendations for improve-
ments in systems and controls.

Where necessary the findings will be followed up under the clearance of
accounts procedures.

8.34.
Four of the payments reviewed concern the measure for the
‘development and improvement of rural infrastructure’ in Poland.
All four payments included VAT which, in the Court’s opinion, is
ineligible (27). Although the ineligible amount in the sample is small
(around 11 500 euro), the charging of VAT to Sapard is done sys-
tematically in Poland. The total amount of payments made to

8.34. As far as VAT is concerned, the Court of Auditors raises two dif-
ferent issues. VAT is eligible for EU co-financing if it is irrecoverable, in
exactly the same way as for Structural Fund expenditure. The only differ-
ence is that, under Sapard, it should, as an additional criterion, not bear
disproportionately on any part of the programme. It is too early to assess
whether this is the case.

(25) Article 8(2) of Regulation (EC) No 1267/1999 and Annex III.1 of the

Financing Memorandum.

(26) In three cases, the requirement that the expenditure should have been
incurred was not complied with because Sapard payments were made
against unpaid invoices; in three cases the procedure for private pro-
curement to submit three bids for each item costing more than
10 000 euro was not respected; in two cases the limit of public aid
stipulated in the Sapard programme was exceeded; and in two cases the
approval procedure for checklists was not followed.

(27) For further details, see paragraphs 38 to 40 of the Sapard Special Report

No 2/2004 (OJ C 295,30.11.2004).

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beneficiaries in Poland booked by the Commission in its 2003
accounts is 79,6 million euro, and the VAT included in this is esti-
mated by the Court to be 4,0 million euro, which represents 1,5 %
of all Sapard payments made by the Commission in 2003 (includ-
ing advance payments). In April 2004 the Polish National Autho-
rising Officer informed the Director-General for Agriculture that the
certifying body would give an adverse opinion on the 2003
accounts because of another issue related to the eligibility of VAT.

The Commission will examine the impact of VAT once the programme has
been completed. An assessment will be made in the framework of the clear-
ance of accounts procedure, and the appropriate conclusions will be drawn.

Regarding the issue raised by the Polish National Authorising officer, the
Commission is addressing this with the Polish Authorities.

Annual Activity Reports

The Directorate-General for Enlargement

8.35.
In his Declaration in the Annual Activity Report, the
Director-General for Enlargement, as in 2002, makes the following
reservations concerning the control procedures put in place to give
the necessary guarantees concerning the legality and regularity of
the underlying transactions:

a)

there is an inherent risk in the decentralised systems;

b)

there are gaps in systems and transaction audits; and

c)

there are uncertainties regarding claims on financial interme-
diaries.

8.36. The problem of co-financing is mentioned in the Report in
the context of management and internal control systems. There is
weak control of parallel co-financing (see also paragraph 8.7) and
there is a risk that co-financing requirements are not being met by
the candidate countries. The Court considers that this problem
seems important enough to merit a reservation in the Declaration
in the 2003 Annual Activity Report.

8.36. The control of parallel co-financing at the beneficiary level should
be improved by the implementing agencies and while there is indeed a risk
of co-financing requirements not being met there is only a limited risk of
this being undetected and of remedial actions not being taken. Neverthe-
less, the Commission will further consider a reservation as this issue matures
and in the light of developments.

The Directorate-General for Regional Policy

8.37. The Director-General’s Declaration in the 2003 Annual
Activity Report for the Directorate-General for Regional Policy
includes the reservation concerning ISPA that he does not have rea-
sonable assurance that the candidate countries effectively operate all
the key elements of the management and control systems in accor-
dance with the provisions in Regulation (EC) No 1267/1999, with
the exception of the bodies for which the Commission is taking an
EDIS decision in three candidate countries and for one other can-
didate country as a whole (Slovenia).

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8.38. Although weaknesses revealed by the Commission’s audits
are mentioned in section 4.1.3 of the report, it would have been
more useful if the Report had included a detailed analysis by can-
didate country of the elements which needed to be completed in
order for the provisions of the Regulation to be complied with. This
would have demonstrated the Commission’s exposure to risk in this
area. In addition, although Slovenia was exempt from the general
reservation on ISPA,
it should be noted that the audit of the
Directorate-General for Regional Policy did not include an exami-
nation of the tendering and contracting systems, so this exemption
should not be understood as full compliance with the requirements
of Article 9(1).

The Directorate-General for Agriculture

8.39. No reservations relating to Sapard have been included in the
Directorate-General for Agriculture’s 2003 Annual Activity Report.
The Court considers that this is correct, because the errors identi-
fied are below the Commission’s materiality threshold. However,
the Director-General should have included a comment on this issue
in the annual activity report, since the Court reported on the prob-
lem of VAT in Poland to the Commission in December 2003 and
he had no information on the extent of this problem in the other
Sapard countries.

Conclusions

8.38.
Section 4.1.3 of DG REGIO’s Annual Activity Report 2003
summarises the material shortcomings identified in the audit work during
2003 in the accession and candidate countries and thereby justifies the
reserves entered by the Director-General. The same approach was used in
justifying the reserves for Member States concerned in relation to their
management of ERDF and the Cohesion Fund. As far as Slovenia is con-
cerned, the Commission agrees with the Court’s observation. The scope of
DG REGIO’s audit of procurement procedures was limited, due to the ex
ante controls carried out by the EC Delegation.

8.39. DG AGRI did not refer to the VAT issue in Poland in the Annual
Activity Report (AAR) because it does not consider, based on expenditure
levels so far, that the financing of VAT in that country has a dispropor-
tionate effect on the Sapard programme and is thus ineligible under MAFA
rules. Furthermore, in the interests of brevity and clarity, control issues
which are not considered to have a material impact on the declaration are
generally not mentioned in the AAR.

8.40.
In its 2002 Annual Report (28) the Court concluded that the
supervisory systems and controls in the area of pre-accession aid
needed strengthening. Although progress has been achieved by
both the Commission and in the candidate countries in certain
areas, further efforts need to be made. The number of errors
detected during the Court’s audit of transactions in 2003 indicated
system weaknesses and the need to further improve the supervisory
systems and controls in order to limit the risk of irregular payments.

8.40. A number of the errors reported by the Court do not have a finan-
cial impact and are of a formal nature.

The Commission is aware of the need for further improvement in the man-
agement and control systems in the new Member States and the accession
countries. It continues to support these improvements, inter alia, through
its own audit work.

8.41.

In the case of Phare supervisory systems and controls:

8.41. By the end of September 2004 six countries have been accredited
and the rest are in advance stages of the process.

— weaknesses were identified by the Commission’s verification
audits which mean that EDIS accreditation has been delayed;

— there was inadequate control of parallel co-financing by candi-

date countries; and

— in addition to the gaps in the Commission’s audits mentioned
in the Director-General’s Statement, approval of final closure
audit reports was too slow.

Finalisation of the audit reports could be speeded up. However, this partly
depends on the resources allocated to the Directorate-General and partly on
the time taken by the beneficiaries to reply to queries from the auditors.

(28) See Annual Report concerning the financial year 2002, paragraph 8.45.

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8.42.
In the case of ISPA, although the countries made significant
efforts to create management structures and put in place internal
control mechanisms, at 31 December 2003 no country had
achieved compliance with the minimum system requirements for all
the national authorities and bodies involved in the management of
ISPA. In addition, the Commission did not take sufficient measures
to ensure that the regulatory requirements were respected by the
candidate countries within the time limits. The ex ante approval by
the EC Delegation was an indispensable element of control in the
procurement process, and its removal following accession means
that the tendering and contracting procedures would become a
high-risk area.

8.42. Before accession a number of implementing bodies in several acces-
sion countries had achieved EDIS accreditation and many of the bodies in
the countries were considered to meet the requirements. As well as laying
down the requirements in the Financing Memorandum attached to each aid
award decision, the Commission had provided extensive support and guid-
ance and from 2001 onwards had been auditing the systems and taking
care to ensure that any deficiencies found were corrected. EDIS accredita-
tion was not the only means of meeting the requirement for effective man-
agement and control systems for ISPA.

The Commission is continuing its work to ensure that appropriate systems
are in place for managing the Structural and Cohesion Funds. Public pro-
curement is a risk area also for the old Member States. Procurement was a
key part of the numerous training activities initiated, led and implemented
by DG REGIO to improve the administrative capacity of the candidate
countries. The Commission refers to its replies to points 8.10 and 8.12.

8.43.
In the case of Sapard, except for the weaknesses identified
in the Commission’s clearance audits and the high frequency of
errors found in Sapard countries, the supervisory systems and con-
trols generally worked in practice.

8.43. The Commission has ensured that key documents are reviewed but
accepts that evidence of verifications made, and of review/supervision, could
be improved.

The errors identified by the Court will be followed up as necessary.

Recommendations

8.44. The Court recommends that:

8.44.

— concerning Phare, the Commission should:

Concerning Phare:

a)

do all in its power to ensure that the weaknesses in sys-
tems in candidate countries revealed by its verification
audits are addressed;

a) This is already being addressed, inter alia, through the EDIS process.

See reply to point 8.6.

b)

take measures to ensure that Implementing Agencies verify
co-financing at the time of declaration;

b) This is already being addressed, inter alia, through the EDIS process.

c)

speed up the finalisation of closure audit reports; and

d)

assess whether or how the audits carried out by National
Funds in candidate countries could be utilized for the pur-
pose of deriving assurance concerning the legality and
regularity of Phare transactions.

— concerning ISPA, the Commission should:

Concerning ISPA:

a)

continue its systems audits, so as to ensure that reliable
systems have been created for the management of the
Structural and Cohesion Funds;

a) The audit strategy of DG REGIO provides for continued system audits
in which special attention will be given to compliance of the systems
with the requirements of the Structural and Cohesion Funds.

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b)

for the two countries which will carry on benefiting from
ISPA (29), set a specific timetable, with milestones, to
ensure that the management and control requirements of
the Regulation are observed in due time before their acces-
sion; and

b)

Following the system audit carried out in Romania in 2003 and sev-
eral meetings with the Romanian authorities in early 2004, an action
plan has been agreed in which the specific recommendations of the
Commission relating to identified deficiencies in the management and
control systems will be addressed according to a specific timetable. A
similar approach is being followed for Bulgaria.

c)

intensify its ex post audits of projects to take account of
the removal upon accession of the ex ante control of ten-
dering and contracting procedures by the EC Delegations.

c) The audit strategy of DG REGIO includes ex post audits of
ISPA/Cohesion Fund projects covering tendering and contracting pro-
cedures and giving priority to projects where interim payment claims
have been submitted.

— concerning Sapard, for the clearance of accounts audits that are

Concerning Sapard:

to be undertaken in 2004, the Commission should:

a)

remedy the weaknesses identified by the Court;

a) The Commission will further improve its evidence of verifications

made, and of review/supervision.

b)

ensure that audits are carried out for all countries for
which amounts are cleared in its decision and;

b) A systematic audit programme has been carried out in 2004. This
programme includes a mixture of desk audits and controls on-the-
spot, as appropriate.

c)

take appropriate action to recover the ineligible VAT.

c) As stated in its reply to point 8.33 the Commission will examine the
impact of VAT once the programme has been completed. However, it
does not consider that, at this stage, the VAT identified is ineligible
for financing.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORTS

Special Report No 2/2004 ‘Has Sapard been well managed?’

8.45. The Special Accession Programme for Agriculture and Rural
Development (Sapard) is the first external aid programme which is
implemented in a decentralised manner. The objectives of the pro-
gramme (30) are to contribute to the implementation of the Com-
munity acquis and to solve problems for the adaptation of the agri-
cultural sector and rural areas in the 10 countries which benefit
from Sapard aid (31). In 2003, the Court performed an audit which
aimed at answering the question: ‘Has Sapard been well managed?’

(29) Bulgaria and Romania.
(30) As

specified in Council Regulation (EC) No 1268/1999 of
21 June 1999 on Community support for pre-accession measures for
agriculture and rural development in the applicant countries of central
and eastern Europe in the pre-accession period (OJ L 161, 26.6.1999,
p. 87).

(31) These 10 countries are: The Czech Republic, Estonia, Latvia, Lithuania,

Hungary, Poland, Slovenia, Slovakia, Bulgaria and Romania.

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8.46. The audit found that management has been of mixed qual-
ity. The Commission’s decentralized management for Sapard did
not guarantee that implementation problems were actively and sys-
tematically identified and followed up and that best practices were
applied in all the Sapard countries. This is because the Commission
views its responsibility under a system of decentralised management
as monitoring the implementation of Sapard.

8.46. The Court concluded that the Commission’s option for decentra-
lised implementation was correct given the likely large numbers of projects
to be financed. According to the Commission, a key feature of the system
set up is that the countries concerned first identify problems. In such
instances the Commission has consistently provided guidance and advice to
the Sapard countries.

8.47. There were substantial delays in getting Sapard underway,
some of which were caused by a failure on the part of the Commis-
sion to plan as early as possible and, since the start of Sapard in the
countries concerned, by overly heavy administrative procedures.
Consequently, budgets were systematically over-estimated and large
proportions of available funds remained unused. In the first four
years of implementation, only 323 million euro (14,8 %) of the
available budget of 2 183 million euro was paid to final beneficia-
ries, more than half of which was paid in the last quarter of 2003.
As a consequence of the delays and implementation problems, the
main objectives have not been achieved in the pre-accession period.

The Commission considers that it has allocated a sufficient number of
qualified staff, in the Sapard unit as well as in the services responsible for
overseeing the accreditation process and carrying out audits, to ensure
proper monitoring and financial management and control of the use of
Community funds in the Sapard countries.

8.47. While the main elements of the Commission’s proposal on the
Sapard Regulation, ((EC) No 1268/1999), were maintained, the text of
the proposal was subject to ongoing discussions (including discussions on
budget headings) until the final stage of adoption of the Sapard Regula-
tion. As long as the legal uncertainty remained the Commission was not
in a position to draw up the final legal provisions for the implementing
arrangements. Following adoption of the Regulation, a working group pre-
pared the basic provisions for the financial management of Sapard within
a few months. These were adopted by the Commission on 26 Janu-
ary 2000.

Whenever it was made aware of ‘heavy administrative procedures’, the
Commission advised the countries concerned by correspondence, during
bilateral meetings and at the Monitoring Committee meetings. However,
the exact procedural choice (subject to respect of MAFA rules) remains with
the country concerned.

The Sapard budgets for 2000 to 2004 were drawn up on the basis of the
most reliable information available at that time. The sizeable challenges
posed by the need to set up an entirely new system, and the lack of expe-
rience of the Sapard countries in this area, meant that implementation took
time, but in most cases no longer than could be reasonably expected.

Payment applications received indicate that payment execution has now
reached cruising speed.

According to the Sapard regulation, the objectives of the programme are to
contribute to the implementation of the acquis communautaire concern-
ing the common agricultural policy and related policies, and to solve
priority and specific problems for the sustainable adaptation of the agri-
cultural sector and rural areas in the countries.

An essential part of the first objective is to establish a good administrative
capacity enabling the demanding tasks of rural development policy imple-
mentation to be carried out according to the principles of sound financial
management. This is in line with the European Parliament resolution
accompanying the 1999 discharge.

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THE COMMISSION’S REPLIES

The Commission believes that the large number of projects contracted (over
13 000) will contribute substantially to the achievement of the second
objective. Nevertheless, a final and balanced analysis concerning the impact
of the programme (and, in particular, achievement of the objectives) can
only be made when the programme has been implemented in full.

8.48. The Commission considers institution building to be one of the
fundamental elements of the acquis and a pre-condition for the respon-
sible use of EU funds.

Phare provided assistance to the Sapard countries to set up structures able
to implement the acquis, including implementing arrangements for Sapard.
Yet the main task of setting up implementation systems to transfer the EU
funds was up to the management of Sapard through the procedures of con-
ferral of management and accreditation of measures. The Sapard countries
could gain experience from running Sapard to protect the financial inter-
ests of the Community after accession, when EAGGF expenditure in the
new Member States is expected to be EUR 4 billion in 2005 and
rising.

8.49. The Commission considers that increasing production capacity at
project level is compatible with improving standards and the need for
restructuring to improve market efficiency.

8.50. The Commission is aware of the problem of lack of own resources
and of the difficulties in obtaining credit. To address this issue, the Com-
mission, with the aid of Phare funds, is supporting a project to improve
access to credit for SMEs in Sapard countries, which should help widen
access to Sapard. This project has recently been extended with a specific
subwindow focusing on credit institutions serving farmers and small rural
businesses. It also encourages the candidate countries to use national credit
schemes as far as they are respecting Community competition rules and aid
intensities of the Sapard regulation.

In order to facilitate the application of national credit schemes the Com-
mission in its recent proposal for a modification of Regulation (EC)
No 1268/1999 included a specific provision in this respect.

8.51. Although the Commission has also identified weaknesses in some
cases and has made recommendations for improvements, it considers that
the situation has improved since the Court’s audit. Where necessary these
recommendations will be followed up under the clearance of accounts pro-
cedures.

8.48. The Commission did not report on how well Sapard
achieved the objectives as specified in the Council Regulation, but
focused on institution building. This is one of the objectives of the
Phare programme and not a specific objective of Sapard. Institution
building has been positive, because national administrations were
provided with hands-on experience for the management of EU
funds after their accession.

8.49. The first results of completed projects show that the money
for agricultural processing has generally been spent on projects
which increase the quantity of agricultural production more than
on projects which improve its quality (meeting quality and health
standards and protection of the environment).

8.50. The audit found that potential beneficiaries lack financial
resources, had difficulties in obtaining credit and were faced with
heavy administrative procedures. The result of this was that Sapard
favoured the financially strong and the better organised with suffi-
cient capital or access to loans. For smaller farms and firms which
have the greatest efforts to make in meeting standards, and to mod-
ernise and increase efficiency, this was a major handicap.

8.51. The rules and the checks for private procurement and for
general costs were found to be insufficient. General costs of up to
12 % of total eligible costs may be charged to the project, which at
the time of the audit were largely consultants’ fees. The Court’s audit
found that there was typically no justification or explanation for the
fees charged, and that no checks were made that the costs were in
relation to the services provided or indeed that the services were
provided in the first place. Effective checks to prevent the accep-
tance and payment of overstated invoices were not systematically
made for private procurement and for general costs.

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The Commission has found that the level of expenditure on general costs is
limited and that the issues mentioned by the Court are restricted to a few
Sapard countries. For the countries concerned, the Commission has recom-
mended that the national authorities implement a system allowing them to
check that the amounts paid for this purpose are within reasonable limits
in absolute value, and proportionate to the services effectively supplied, in
comparison to average costs charged for similar services.

With regard to checks to prevent payment of overstated invoices, in most
cases the Commission has obtained evidence that justifications are given if
the cheapest offer is not chosen. It will recommend that this is done by
Sapard agencies systematically. On the basis of its detailed examination of
payments in 10 Sapard countries so far, the Commission did not find wide-
spread failures of the Sapard control and management system.

8.52. The audit also found that in one of the countries VAT was
systematically being charged as an eligible cost to public bodies. In
the Court’s opinion, due to the high amounts involved, this bears
disproportionately on parts of the programme, which makes it
ineligible under the terms of the international agreements con-
cluded between the Commission and the country concerned (see
paragraphs 8.33-8.34).

8.52. The rule on the eligibility of VAT for EU co-financing applies to
the Sapard countries as well as to the Member States receiving support
under the Structural Funds. MAFA rules apply. The Commission will
examine the impact of this after the programme has been completed. An
assessment will be made in the framework of the clearance of accounts pro-
cedure, and the appropriate conclusions will be drawn.

8.53. The report recommended that the Commission consider
whether the practice of prior approval of the systems by the Com-
mission based on audits, which has ensured that good systems were
set up in Sapard countries, should be applied more generally.

8.53. The current regulations governing EAGGF Guarantee state clearly
that the Member States are responsible for accrediting paying agencies.
Prior accreditation by the Commission would result in it taking responsi-
bility for the systems established by the Member States. This runs counter
to the principle of shared management in which the Member States imple-
ment Community policies and the Commission verifies the respect of these
rules, with the possibility to make financial corrections in cases of non-
respect.

The Commission remains confident that the current system remains effec-
tive.

Special Report No 5/2004 ‘Phare support to prepare Candidate
Countries for Managing the Structural Funds’

8.54. Assistance in the preparation of candidate countries for
managing the Structural Funds has been an important objective of
the Phare programme since 1998. An increasingly high priority has
been assigned to this objective by the Commission because it wished
to ensure that the countries concerned would be able to benefit fully
from the large allocations available to them following accession.
The Court carried out an audit to examine how well the Commis-
sion had used Phare, the largest pre-accession instrument, to pre-
pare countries for managing the two biggest Structural Funds, the
European Regional Development Fund (ERDF) and the European
Social Fund (ESF).

8.54.
In 1997 Phare became accession driven with the objective of pre-
paring candidate countries for membership across all 31 chapters of the
‘acquis communautaire’. The first preparatory projects for Structural
Funds and related negotiation chapters were institution building in nature
and began in 1998. Only in 2000 did Phare begin with investment
projects under the title of Economic and Social Cohesion (ESC) that had a
twofold provision: assistance for preparing for Structural Funds and an ini-
tial impact on development disparities. The indicative target for Economic
and Social Cohesion was 35 % of annual national programmes as of
2001. The timeframe for enlargement and hence the related timeframe for
preparation was estimated to be around five to six years.

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THE COMMISSION’S REPLIES

8.55. The audit concluded that the Phare programme had had a
more limited impact on preparing candidate countries than had
been planned in the Commission’s policy documents. This was in
part due to the inexperience and insufficient institutional develop-
ment in the candidate countries which could not be fully addressed
within the timeframe available before the accession.

8.55.
Even if not all initial ambitions were realised within a timeframe
reduced by rapid accelerations in the negotiations, this was primarily due
to the inherent difficulties and delays in designation of the future institu-
tions responsible for managing Structural Funds. In certain instances,
insufficient institutional stability significantly impeded the impact of pre-
paratory pre-accession assistance. Nevertheless, the evidence to date is that
the main objectives were indeed realised as reflected in the negotiations
themselves and follow-up monitoring reports and in all subsequent pro-
gramming developments to an extent never achieved before.

8.56. The overall approach followed by the Commission was not
as effective as it could have been, partly because a new pre-accession
instrument modelled on the ERDF and ESF was not established,
whilst the initial approach which the Commission required candi-
date countries to follow in setting up Phare economic and social
cohesion programmes differed from the approach of the Structural
Funds.

8.56. No previous enlargement had such extensive preparations for
Structural Funds using three pre-accession instruments. Through Phare and
the other pre-accession instruments prerequisite planning processes were
stimulated and overall planning capacity established. As a result the Coun-
cil was able to close negotiations on the main Structural Funds related to
chapter (21) in 2002 on the basis of legislative alignment and designa-
tion of structures, and the accession countries were able to submit draft
Structural Funds Development Plans already at the beginning of 2003,
thereby ensuring early approval and launch in 2004 of Structural Funds
Programming Documents for the 2004 to 2006 period. This has never
been achieved before. While not all early ambitions were realised in a time-
frame compressed by rapid acceleration in the negotiations, the ESC ini-
tiative — among others — had a very significant impact on the negotia-
tions themselves and on institutional developments.

Furthermore, in the late 1990s the decision to establish only two new pre-
accession instruments reflected a complete consensus and was fully endorsed
by the European Parliament and the Council. It was evident in 1999 that
the scale of the preparations required was enormous and the demands on
the administrations of the candidate countries were considerable. They were
unable to take on the challenge of a sophisticated multiannual planning
exercise coupled with complex implementation arrangements as well as
support a second movement to the ex post control arrangements as apply
in the Structural Funds. Therefore it was prudent to opt for a more phased
approach under Phare in order to avoid overloading the limited resources
of the candidate countries as well as avoiding a potential interruption of
pre-accession assistance delivery.

8.57. The Extended Decentralised Implementation System, which
was intended to give candidate countries experience before the
accession in financial management procedures similar to those in
force for the Structural Funds, had not been introduced by
May 2004. The delays encountered in introducing a system of
ex-post control also made it more difficult to use grant schemes, the
main mechanism for implementing the Structural Funds. Further-
more, very little progress was made in introducing multi-annual
programming, a procedure employed under the Structural Funds.

8.57.
It was foreseen from the outset that extending decentralised man-
agement (EDIS) and multiannual programming ‘could not start until
2002 at the earliest’ (Phare 2000 Review). It transpired that 2002 was
the year that negotiation closed and consequently there has been a com-
pression of the timeframe. EDIS is a complex and lengthy process not a
one-off event and the countries have been working on this process, for sev-
eral years. The determining factor for moving to ex post controls is over-
whelmingly the acceding countries’ ‘ownership’ of the process to establish
their own safe management and control systems.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

8.58. Most countries allocated somewhat less than the target fig-
ure of 35 % of their national programmes to the economic and
social cohesion programmes, which were intended to play an
important role in preparing them for the ERDF and ESF, mainly due
to insufficient absorption capacity and competing priorities. Also,
the effectiveness of institution building projects for preparing for
the ERDF and ESF was generally reduced by frequent changes in
responsibilities for regional development between ministries in can-
didate countries and delays in designating managing and paying
authorities and setting up regional structures.

8.58. Although the objective of allocating approximately 35 % of Phare
national programmes to ESC was indicative only ‘to be applied with flex-
ibility on a country-by-country basis’, (Phare guidelines Decision 1999),
the 2001 to 2003 figures indicate that the average of around 35 % has
been maintained. The insignificant dip in percentage terms in 2002 due
to the action plans on administrative and judicial capacity was fully com-
pensated in 2003 allocations. In 2003, which was beyond the audit
period, there was a deliberate focus on ESC. Several countries devoted well
over 35 % of their 2003 funds to investment in the ESC. The average was
39 %. Given that only the first year of ESC (2000 projects) are finishing
implementation, the evidence available makes it difficult to base reason-
able doubts on absorption capacity on such limited data as well as taking
into account the fact that countries had competing priorities in their prepa-
rations for accession.
In addition there were both investment and
institution-building allocations in other horizontal chapters that had an
indirect bearing on preparing for managing Structural Funds.

8.59. There is a significant need for more institution-building sup-
port in the areas of managing the Structural Funds after the acces-
sion. Considerable resources should be devoted to the ex-post con-
trol of Structural Fund operations in the new Member States. A clear
strategy should be put in place identifying the different steps that
still need to be taken for preparing the current and future candidate
countries for managing the Structural Funds. The Commission
should increase its efforts to bring Phare closer to the Structural
Funds by giving future managing authorities the status of Phare
implementing agencies, providing the assistance in the framework
of an ex-post control system, and introducing multi-annual plan-
ning based on National Development Plans.

8.59. After accession the new Member States will continue to receive a
great deal of direct support from the Structural Fund Directorates-General
to help them manage programmes effectively, just as they have in framing
the programmes and designing their delivery and management systems.
The new Member States have all set up audit services to fulfil the financial
control requirements laid down by Regulation (EC) No 438/2001 and the
Commission will monitor their work in the period ahead and will itself test
the systems. The lessons learned are already being taken into account and
the EDIS roadmaps for Bulgaria and Romania and the revised Phare
guidelines already outline the strategy. Designation of implementation
agencies is a sovereign decision for the candidate countries themselves and
the Commission has no mandate to dictate such a decision. Actually, in the
progression of EDIS accreditation, the process is the other way round. Phare
implementing agencies, in order not to lose the experience they acquired,
should become (or be integrated into) the Structural Funds managing and
implementing bodies.

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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

Audit objectives

Audit methods applied

Risks

Parliament

Supervisory systems and controls

Observations concerning transactions

Paragraph

9.1-9.68

9.1

9.2-9.68

9.2-9.6

9.2-9.3

9.4-9.5

9.6

9.7-9.17

9.7-9.14

9.15

Annual activity reports and declarations of the authorising officers by delegation

9.16-9.17

Council

Supervisory systems and controls

Observations concerning transactions

Annual activity reports and declarations of the authorising officers by delegation

Court of Justice

Supervisory systems and controls

Observations concerning transactions

Annual activity reports and declarations of the authorising officers by delegation

Court of Auditors

Supervisory systems and controls

Observations concerning transactions

Annual activity reports and declarations of the authorising officers by delegation

Economic and Social Committee and Committee of the Regions

Supervisory systems and controls

Economic and Social Committee

Supervisory systems and controls

Observations concerning transactions

9.18-9.24

9.18-9.22

9.23

9.24

9.25-9.29

9.25-9.27

9.28

9.29

9.30-9.34

9.30-9.32

9.33

9.34

9.35-9.38

9.36-9.38

9.39-9.46

9.40-9.42

9.43-9.45

Annual activity reports and declarations of the authorising officers by delegation

9.46

Committee of the Regions

Supervisory systems and controls

Observations concerning transactions

9.47-9.53

9.48-9.50

9.51-9.52

Annual activity reports and declarations of the authorising officers by delegation

9.53

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Commission

Supervisory systems and controls for administrative expenditure

Observations concerning transactions

Paragraph

9.54-9.64

9.54-9.60

9.61-9.62

Annual activity reports and declarations of the authorising officers by delegation

9.63-9.64

Overall conclusion and recommendations

Audit of the satellite bodies

Audit of the European Schools

9.65-9.68

9.69-9.79

9.80-9.82

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THE COURTS OBSERVATIONS

ADMINISTRATIVE EXPENDITURE OF THE INSTITUTIONS AND
COMMUNITY BODIES

Introduction

9.1. Heading 5 of the financial perspective, ‘Administrative expen-
diture’, contains the Institutions’ and other bodies’ administrative
appropriations (Part A of the budget in the case of the Commis-
sion). These appropriations are managed directly by each Institu-
tion or body and are used to pay the salaries, allowances and pen-
sions of persons working for the Community Institutions, as well as
rent, purchases and miscellaneous administrative expenditure.
Expenditure in 2003 was 5 305 million euro, as further specified
in Table 9.1. The total number of posts assigned to each Institution
by the 2003 initial budget is shown in Table 9.2.

Table 9.1 — Payments by Institution

Payments against carry-overs and appropriations for the financial year (million euro)

European Parliament

Council

Commission

Court of Justice

Court of Auditors

European Economic and Social Committee

Committee of the Regions

European Ombudsman

Source: Annual accounts of the European Communities.

2002

1 035

394

3 438

145

76

76

44

4

Total

5 212

2003

986

410

3 546

148

84

81

46

4

5 305

Table 9.2 — Authorised staff by Institution

Authorised staff (permanent and temporary posts, initial budget)

European Parliament

Council

Commission

Court of Justice

Court of Auditors

European Economic and Social Committee

Committee of the Regions

European Ombudsman

Source: General budget of the European Union.

2002

4 338

2 701

22 453

1 129

575

514

250

27

Total

31 987

2003

4 960

2 919

22 534

1 140

605

525

252

31

32 966

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THE COURTS OBSERVATIONS

Specific assessment in the context of the Statement of Assurance

Introduction

Audit objectives

9.2. The objective of the 2003 DAS audit concerning administra-
tive expenditure was to enable the Court to assess

a)

b)

the reliability of the consolidated accounts for the year ending
31 December 2003 (dealt with in Chapter 1); and

the legality and regularity of the transactions which underlie
them.

9.3. The Court’s audit also aimed to assess how the Institutions
implemented the most important provisions laid down in the new
Financial Regulation.

Audit methods applied

9.4. The audit appraised the legality and regularity of the transac-
tions underlying the accounts of the administrative expenditure of
the Institutions. It comprised the following activities:

a)

b)

c)

d)

evaluating the operation of the supervisory systems and con-
trols set up by the Institutions in order to comply with the new
Financial Regulation, i.e. the implementation of adequate con-
trol structures and procedures, complying with minimum stan-
dards adopted by each Institution, and implementing an inter-
nal audit function;

substantively testing a number of transactions from across the
whole area of administrative expenditure and an additional
number of transactions for each smaller Institution;

considering the annual activity reports produced by the Insti-
tutions’ authorising officers by delegation.

a follow-up to observations from past Annual Reports
(Table 9.3).

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Table 9.3 — Follow-up to observations from past annual reports

Observations

Action taken

Further action needed ?

Promotion of staff without competition.

Annual Report concerning 2001, paragraph 7.17:

Based on footnotes to the establishment plans, the Parliament
and the Court of Auditors pay staff of a given category the
remuneration corresponding to a higher category. This is not
in accordance with the Staff Regulations, which state that an
official may be promoted from one category to another only
on the basis of a competition.

The 2003 establishment plan for the Parlia-
ment, but not for the Court of Auditors,
showed a provision for promoting one addi-
tional person from one category to another
without competition (ad personam promo-
tion).

No, as the new Staff Regulations have com-
pletely modified the structure of staff catego-
ries. In consequence, the question of being
promoted to a higher category without having
passed a competition is not relevant any more.

Thus the establishment plan for the Parlia-
ment allowed the Institution to continue, in
2003, to promote persons who had not
passed a competition, even though this did
not conform with the Staff Regulations.

Weightings for Members of the Institutions

Annual Report concerning 2001, paragraph 7.18:

Weightings were applied to the transfer of part of the emolu-
ments of Members of the Institutions to a country other than
the country of employment.

Scales for mission expenses

Annual Report concerning 2001, paragraph 7.20:

The scales used by the Parliament to pay mission expenses
to staff of categories C and D were higher than those pro-
vided for in the Staff Regulations.

Additional pension scheme for Members of the European Parlia-
ment

Annual Report concerning 2002, paragraphs 9.17 and 9.20:

If the additional pension scheme for Members of the European
Parliament is to continue, a sufficient legal basis has to be cre-
ated as soon as possible.

There should be clear rules established in the scheme to define
the liabilities and responsibilities of the European Parliament
and of the members of the scheme in the case of a deficit.

Council Regulations (EC) No 1292/2004 and
(EC) No 1293/2004 state that the rules on
transfers are applicable to the members of
Institutions.

No, as the new legal situation resolves the
problem.

The Parliament’s practice did not change in
2003.

No, as the new legal situation resolves the
problem.

The new Staff Regulations applying as of
1.5.2004 state that the same scales apply to
all members of the staff.

The additional pension scheme continues
and no sufficient legal basis has been created.

Yes, a legal basis should be created.

No such rules have been established.

Yes, appropriate rules should be established.

Observations

Additional pension
scheme for
members of the
European
Parliament

REPLY OF THE EUROPEAN PARLIAMENT

Action taken

During recent years, Parliament’s administrative units
have been actively involved in drafting a single Statute
for members which included, among other things, a
single pension scheme for members of the European
Parliament and, consequently, the abolition of the cur-
rent additional pension scheme. As it is now clear that
the Statute will not enter into force for the new legisla-
tive term, the Court of Auditors’ opinion No 5/99 has
been taken up again and proposals will be submitted to
the new Bureau with a view to defining the respective
powers and responsibilities of Parliament and the not-
for-profit association incorporated under Luxembourg
law and managed by an elected Executive Committee.
On the basis of the results of an actuarial study to be car-
ried out at the start of 2005, after the deadline for join-
ing the pension scheme expires, the level of financing
required for the Fund will be known and, depending on
the position, measures might be envisaged to put the
financing of the Fund back on a balanced footing.

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THE COURTS OBSERVATIONS

9.5. The Court’s overall DAS conclusion for the area of adminis-
trative expenditure is reported in paragraph 9.68. The audit results
concerning each Institution are set out in the sections of this chap-
ter in the same order in which the Institutions are listed in the 2003
general budget.

Risks

9.6. Overall risk is low in the field of administrative expenditure.
This is because of the absence, firstly, of ‘delegation risk’, as admin-
istrative expenditure is directly managed by the Institutions and
Community Bodies, unlike most programme expenditure, which is
carried out on behalf of the Commission by national bodies or
agencies. Secondly, ‘subsidy risk’ is absent as nearly all administra-
tive expenditure involves transactions related to the employment of
staff and the purchase of works, goods and services rather than
subsidies/project funding. Past audits by the Court show that the
errors found were mostly of a formal nature and not due to grave
weaknesses in the control environment.

Parliament

Supervisory systems and controls

In December 2002 the Parliament adopted the basic docu-
9.7.
ments necessary to implement the new Financial Regulation (here-
after ‘the Financial Regulation’) (1). These included the new internal
rules for the implementation of the budget, charters for the internal
audit services, the authorising officers and the accountant, mini-
mum standards for internal control and a specific code of profes-
sional standards. The computerised system used in managing bud-
getary revenue and expenditure (FINORD) was adapted to the new
rules. However, the authorising officers could not set up fully opera-
tional control systems from the date of entry into force of the Finan-
cial Regulation (1 January 2003).

9.8. The decentralisation of the controls was a difficult task as the
financial and internal control procedures had previously been highly
centralised and dependent on the work carried out by the Financial
Controller. During 2003, the Parliament was able to implement
new control methods, based on decentralised ‘Internal Control
Frameworks’, including ‘Minimum Standards for Internal Control’
(MSIC), a ‘Central Financial Service’ and an internal audit function.
However, the authorising officers were not able to fully apply all the
MSIC. This was recognised by the authorising officers themselves in

9.7 and 9.8.

REPLY OF THE EUROPEAN PARLIAMENT

In 2003, because of the new Financial Regulation, the institution’s finan-
cial and internal control procedures went from being what the Court
describes as ‘highly centralised’ to being highly decentralised, with no lead
time between adoption of the relevant texts and their entry into force. As a
result, the institution faced great difficulties in finding the required num-
bers of additional, financially-qualified staff, in providing suitable training
for all concerned and in organising the necessary central support. The weak-
nesses identified by the Court are attributable to these circumstances which
reflect the ‘teething pains’ inherent in any major upheaval undertaken at
short notice.

In March 2004 the principal authorising officer by delegation drew con-
clusions from the experience of 2003 in the form of a declaration and of
an accompanying Action Plan. The Action Plan is designed to tackle the
issues of an institution-wide nature which the Court has also identified in
its observations. Rightly described by the Court as ‘ambitious’ (see point
9.11 below), the Action Plan is to be implemented as far as possible dur-
ing 2004. In addition, as the Court points out, departmental action plans
have been developed by the Internal Auditor in agreement with the respon-
sible authorising officers by delegation.

(1) Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on
the Financial Regulation applicable to the general budget of the Euro-
pean Communities (OJ L 248, 16.9.2002).

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THE COURTS OBSERVATIONS

a self-assessment of the level of implementation of the MSIC car-
ried out while preparing the annual activity reports at the beginning
of 2004. At that time, none of the MSIC had been fully complied
with by all the authorising officers. The implementation of certain
MSIC, as MSIC 5 (sensitive posts), MSIC 7 (setting of objectives),
MSIC 14 (reporting improprieties) and MSIC 20 (recording and cor-
rection of internal control weaknesses) was only at an initial stage.
The implementation of MSIC 9 (annual management plan), MSIC 15
(documentation of procedures), MSIC 17(supervision), MSIC 11
(risk analysis and management), and MSIC 19 (continuity of opera-
tions) needed to be reinforced. An action plan aims to correct the
weaknesses noted (see paragraph 9.11).

9.9. The standardised control system formerly existing under the
responsibility of the Financial Controller was replaced by ten Inter-
nal Control Frameworks, based on ex ante verification of each trans-
action and maintaining certain elements of the previous system, like
the possibility of withholding approval and overruling. However,
the absence of uniform definitions of errors, of common ways of
documenting and classifying errors, as well as different forms of
reporting the results of the controls make it difficult to draw any
general conclusions concerning the materiality of the errors noted
by ex ante controllers. The authorising officers did not introduce
any ex post controls. Considering the incomplete implementation
of the Internal Control Frameworks, ex post controls are necessary.

9.10. Moreover, the Court’s audit identified weaknesses at the
level of the ex ante controls on staff salary payments. Key controls
formerly carried out by the Financial Controller in the field of staff
remunerations, were not replaced by equally effective checks. This
was due to problems with the availability of a new computer sys-
tem.

9.9.

REPLY OF THE EUROPEAN PARLIAMENT

Abolition of the terms of ‘withholding approval’ and ‘overruling’ is being
considered as part of the current review of the Internal Rules. Under the
draft revised rules, the ex ante controllers will establish whether or not the
transactions concerned comply with the relevant rules. As regards the ques-
tions relating to errors, the former Financial Controller made available, to
the authorising officers in late 2002, the typology of errors used by him.
However, authorising officers were under no obligation to use that typol-
ogy and several sought to develop definitions of their own. As a result,
problems arose later when it came to comparing and aggregating the data
on errors. This issue has therefore been included in the abovementioned
Action Plan of the principal authorising officer by delegation. As regards
the comment on the absence of ex post controls, the authorising officers
have devoted their attention primarily to the instalment of an effective
ex ante verification function. Given the nature of the operations dealt with
by the Parliament and the absence of both delegation and subsidy risks, this
will continue to be the case in the upcoming two years, until such time as
the level of ex ante verification is harmonised and stabilised at the level of
the Institution. Meanwhile the need for fully developed ex post verification
will be evaluated on the basis of a more developed risk- and control self-
assessment by the respective authorising officers. However, those of the
authorising officers whose services handle a large volume of similar recur-
rent administrative operations have started to introduce an ex post verifi-
cation function.

9.10.

REPLY OF THE EUROPEAN PARLIAMENT

DG Personnel met technical difficulties in transferring the IT resources used
by the former Financial Controller’s services for ex ante checks on the pay-
roll. This limited its ability to effect meaningful checks for a significant
period during the first half of 2003. The deficiencies in relation to payroll
controls as a result of those difficulties were recorded by the ex ante check-
ers involved and acknowledged in the annual Cnd interim reports submit-
ted by the authorising officer. However effective payroll checks will have to
be viewed increasingly in the future as a sustained and cumulative effort
over many months, with ex post checks supplementing an integrated sys-
tem of operational ex ante checks which guarantees the legality and regu-
larity of the monthly payment orders.

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THE COURTS OBSERVATIONS

9.11. The Parliament was able to carry out a self-assessment of the
level of implementation of the MSIC (paragraph 9.8), activity reports
and internal audits identified the main weaknesses of the new sys-
tems and action plans were drawn up to correct them. In particu-
lar, departmental and central action plans were drawn up in order
to address weaknesses detected by the Internal Auditor. In his
annual declaration the Secretary General acknowledged the exist-
ence of weaknesses and approved an ambitious action plan aiming
at the complete implementation of the MSIC without delay.

9.11.

REPLY OF THE EUROPEAN PARLIAMENT

See answer to points 9.7 and 9.8.

9.12. Certain provisions of Article 81 of the Financial Regulation
and of Article 104 of the Commission Regulation laying down
detailed rules for the implementation of the Financial Regulation
(hereafter: ‘the implementing rules’) (2) were not fully implemented
by the authorising officers. They concern the distinction to be made
in the accounts between different types of payments, the definition
of the nature of the supporting documents required for each type
of payment and the keeping of these documents. The Parliament’s
accounts do not allow for the identification of the different types of
payments made (payment of the entire amount due, pre-financing,
interim payments or payment of the balance of the amount due).
The nature of the supporting documents required for each type of
payment was not defined. Failure to keep and archive supporting
documents in an appropriate way makes internal and external veri-
fications particularly difficult and interrupts the audit trail. In most
cases the Court’s auditors were able to obtain the supporting docu-
ments needed to verify the regularity of the payments, but could not
ascertain whether these documents had been examined by the ex
ante controllers.

9.12.

REPLY OF THE EUROPEAN PARLIAMENT

As regards the ‘distinction to be made between different types of payments’,
given the exclusively administrative nature of expenses managed by the Par-
liament, most of the payments are ‘payments of the entire amount due’ at
‘the time they are made’. Nevertheless the possibility of introducing changes
to the accounting systems to indicate the distinction between the different
types of payments will be examined. As regards supporting documents, the
Secretary-General issued guidelines on 1 April 2003 on the keeping of
original supporting documents by authorising officers. The Guidelines pro-
vide that each authorising officer by delegation should adopt a reasoned
decision appointing ‘archive agents’. Further work on this aspect of finan-
cial management is foreseen under the Action Plan of the principal autho-
rising officer by delegation and, in the last few months, steps have been
taken in several directorates-general to bring about the necessary improve-
ments.

9.13.
Pursuant to Article 67(1)(f) of the implementing rules,
imprest transactions should be settled by the authorising officer no
later than the end of the following month, so that the accounting
balance and the bank balance can be reconciled. In respect of travel
and subsistence allowances for Members, this deadline was gener-
ally not respected throughout 2003. At the end of the year around
11 million euro paid to the Members from an imprest account in
September, October and November had not yet been charged to the
budgetary accounts.

9.13.

REPLY OF THE EUROPEAN PARLIAMENT

In 2003, the time taken to regularise imprest transactions was between 8
and 10 weeks in the period up to 1 July. A temporary reduction in the
number of staff in charge of these operations led to an increase in the time
taken since extra staff were appointed on 2004, processing times have
returned to their previous levels. It is difficult to reduce processing time to
less than two months because of the way in which the work is organised
and this would still hold true even if there were a substantial increase in
the staff responsible for imprest account controls. To reduce the time taken,
each transaction would have to be settled when the payment is made
through the imprest account on the basis of the supporting documents
received and amounts would have to be recovered systematically in respect
of any missing document whatsoever. Each incomplete file would then have
to be processed a second time once the missing document was received.
What happens now is that the Member is asked provide the missing docu-
ment before settlement; although this increases the time taken for settle-
ment it actually reduces the overall time required to process the relevant file.

(2) Commission Regulation (EC, Euratom) No 2342/2002 of 23 Decem-
ber 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).

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THE COURTS OBSERVATIONS

9.14. Article 11 of the Parliament’s internal rules for implement-
ing its section of the budget allows for the possibility of making
payments using a standing order. In this case, expenditure is made
without previous validation and authorisation by the authorising
officer. After the payment has been made, the authorising officer
issues a ‘regularisation order with a view to charging the amount
against the budget’ (Article 11, paragraph 4, of the internal rules).
To conform with the Financial Regulation expenditure must be vali-
dated and authorised before payment.

9.14.

REPLY OF THE EUROPEAN PARLIAMENT

For some types of expenditure (e.g. rents, utilities) the supplier insists on
payment by standing order or direct debit. The Parliament’s internal pro-
cedures permit such payments only in circumstances where the competent
authorising officer is unable to negotiate an alternative payment arrange-
ment. This condition has been written into the draft revised version of the
Internal Rules. Furthermore, the Administration will consider possible
alternative payment conditions with a view to bringing its Internal Rules
and procedures more fully into line with the Financial Regulation.

Observations concerning transactions

9.15. The transactions audited were substantially legal and regu-
lar. Non-compliance with formal requirements was noted in certain
cases, but this did not imply that wrong amounts were paid.

9.15.

REPLY OF THE EUROPEAN PARLIAMENT

Parliament notes the Court’s conclusions.

Annual activity reports and declarations of the authorising officers by delegation

9.16. According to Article 60(7) of the Financial Regulation ‘the
authorising office by delegation shall report to his/her institution on
the performance of his/her duties in the form of an annual activity
report’. Each of the ten authorising officers by delegation presented
three activity reports (two relating to the first and second quarter of
the year and an annual one accompanied by a declaration) concern-
ing the year 2003. The reports include a chapter on management
and internal control issues, a summary of the self-assessment of the
implementation of the MSICs, and comments on the shortcomings
identified. Although the reports are useful instruments for the pur-
pose of increasing the accountability of the authorising officers for
the financial management of the resources assigned to them, they
are extremely heterogeneous; their presentation and structure
should be harmonised. It is also necessary to improve the informa-
tion and reporting systems supporting the content of the reports by
ensuring that a risk analysis is carried out and that registers of con-
tracts and documented procedures are established. More detailed
information should also be given on the results of the controls car-
ried out.

9.16.

REPLY OF THE EUROPEAN PARLIAMENT

The early periodic activity reports required by Parliament’s Internal Rules
were drawn up in the absence of firm guidelines as to structure and con-
tent. However, for the annual activity reports required by the Financial
Regulation, the central financial services made efforts, in consultation with
the services concerned, to achieve a substantial degree of harmonisation.
Those efforts are continuing, as shown by the Action Plan of the principal
authorising officer by delegation which covers several points mentioned by
the Court.

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9.17. The information presented in the reports is useful to under-
stand the way the supervisory systems and controls linked to the
legality and regularity of transactions worked, but the information
at the basis of these reports has to be improved to be a relevant
source for the Court’s statement of assurance. All the authorising
officers by delegation, except one, certified that they were ‘reason-
ably certain… that the control procedures established afford the
requisite guarantees as to the legality and regularity of the underly-
ing transactions’. One authorising officer omitted this declaration,
without formulating any reservation. Though no authorising officer
expressed reservations, three commented in their declarations about
the lack of qualified staff and the need to adapt to the new Financial
Regulation the rules concerning expenditure made by Members of
Parliament and political groups, taking into account the observa-
tions formulated by the control bodies, including the Court of Audi-
tors. Other authorising officers also commented in their activity
reports on the difficulties encountered in fully implementing the
new Financial Regulation and the Internal Control Frameworks.

Council

Supervisory systems and controls

9.18. The Financial Regulation was implemented gradually dur-
ing the first half of the year 2003. The authorising officers by del-
egation put in place internal management and control procedures.
These control procedures, based on ex ante verifications, respect the
required segregation of the duties of initiation and verification of
each operation. These procedures were not documented in writing
for all activities, in particular, not for staff remuneration.

9.19. According to the Council’s own internal rules for imple-
menting its section of the budget, each authorising officer by del-
egation had to ensure that a document describing the management
and control procedures applied under his authority was drafted and
made available to all the staff. The only documents of this kind
existing at the end of 2003 concerned the procedures applied by the
Units responsible for Information Technology and Buildings, and
by the Legal Service.

9.20. Although the Council’s charter for the staff who verify
transactions lays down the possibility of carrying out ex post veri-
fications, no such verifications were made. Ex post verifications, as
mentioned in Article 47(4) of the implementing rules, would pro-
vide the authorising officers with supplementary assurance about
the correct execution of operations financed from the budget.

9.17.

REPLY OF THE EUROPEAN PARLIAMENT

As regards the question of staffing for posts of a financial nature, this is
covered by the Action Plan of the principal authorising officer by delega-
tion.

9.18 and 9.19.

REPLY OF THE COUNCIL

The conclusion of the Court that not all control procedures are documented
in writing was also drawn in the internal evaluation and report on the
annual reports established by the authorising officers for 2003. Following
this observation, authorising officers who have not yet established a docu-
ment describing the management and control procedures, have been invited
to do so before 1 December 2004.

In order to facilitate this exercise and to ensure coherence between different
authorising officers, a standard format for such a document has been devel-
oped.

9.20.

REPLY OF THE COUNCIL

Though used, the instrument of ex post verification (verification after the
payment) has not been applied systematically in 2003.

Although the GSC considers that ex post verification is in particular use-
ful for operational expenditure, it nevertheless foresees to develop a meth-
odology that might be used by its verifying agents for ex post analysis in
the future.

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9.21. The actions required by the Financial Regulation and the
implementing rules were implemented to a certain extent. The fol-
lowing actions were, however, not carried out by 31 Decem-
ber 2003:

9.21.

REPLY OF THE COUNCIL

The actions identified by the Court will be adopted by the GSC before the
end of 2004.

a)

b)

c)

the setting up of minimum control standards (Article 60(4) of
the Financial Regulation),

the definition of a code of professional standards for the
accounting officer and imprest administrator (Article 60(5) of
the Financial Regulation),

the drafting of a charter describing the tasks, rights and obli-
gations of the accounting officer and imprest administrator
(Article 44 of the implementing rules).

9.22.
In 2003 the internal auditor carried out various sound
financial management audits, as well as an audit of the Council’s
financial statements for the financial year 2002. As these audits do
not concern the legality and regularity of transactions underlying
the 2003 accounts, their results are not directly relevant to the
Court’s specific appraisal on the legality and regularity of adminis-
trative expenditure.

Observations concerning transactions

9.23.
Legal services were contracted without any tendering pro-
cedure, although their value exceeded the threshold above which a
tendering procedure was required.

Annual activity reports and declarations of the authorising officers by delegation

9.24. The authorising officers by delegation base their declara-
tions, among other things, on the results of ex post controls. How-
ever, no documentary evidence of ex post controls existed.

9.23.

REPLY OF THE COUNCIL

The GSC fully accepts the observation of the Court concerning a commit-
ment for legal services.

It should however be noted that the legal service of the SGC has started a
tender procedure in order to establish a framework contract for the type of
legal services mentioned (legal assistance in the area of anti-dumping).

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Court of Justice

Supervisory systems and controls

9.25. At the Court of Justice some of the most important require-
ments of the Financial Regulation or the implementing rules were
not fully implemented. The lack of compliance with the Financial
Regulation concerned:

a)

b)

c)

adoption of minimum control standards and the analysis of the
risks associated with the management environment and the
nature of the actions financed (Article 60(4) of the Financial
Regulation),

drafting of charters describing tasks, rights and obligations of
the financial actors (Article 44 of the implementing rules),

the definition of the scope of the mission of the internal audi-
tor and the objectives and procedures for the exercise of the
internal audit function (Article 109(2) of the implementing
rules).

9.26. A ‘verification unit’ under the authority of the internal audi-
tor was entrusted with the task of verifying ex ante all the autho-
rising officers’ operations. The internal auditor also took on the
task, formerly carried out by the Financial Controller, of validating
every transaction in the computerised accounting system. This task
is not compatible with the independence with which the internal
auditor should perform his audit duties and is contrary to the spirit
of the financial reform.

9.25.

REPLY OF THE COURT OF JUSTICE

With a view to ensuring the implementation, within the institution, of the
provisions of the new Financial Regulation, adopted by the Council on
25 June 2002, and of the provisions of the implementing rules, adopted
by the Commission on 23 December 2002, the Court approved a new
internal financial regulation on 22 January 2003. That basic legal con-
text was to be supplemented by rules to be included in the various provi-
sions and charters referred to by the Court of Auditors. None the less, before
those rules were fixed, it was judged timely to consider the operation in
practice of the new system, more especially as, having regard to its size and
its very particular duties, there was available to the institution for the appli-
cation of the new provisions only an extremely limited number of persons
with thorough knowledge of financial systems and backgrounds.

All the documents cited by the Court of Auditors have as from now been
adopted.

The minimum rules of internal audit applicable within the institution were
committee on
in that manner approved by
31 March 2004. Of those, rule No. 7 refers to the analysis of risks men-
tioned in Article 60(4) of the Financial Regulation.

the administrative

The financial actors’ charters of duties, described in Article 44 of the imple-
menting rules, just like the internal auditor’s charter of duties, were also
approved by the administrative committee on 31 March 2004. It ought to
be noted that the latter charter defines, in accordance with Article 109(2)
of the implementing rules, the internal auditor’s mission and the objectives
of that function and the procedures for its exercise.

9.26.

REPLY OF THE COURT OF JUSTICE

In the new administrative unit set up in accordance with the Court’s spe-
cific requirements, the functions of ex ante verification of financial opera-
tions and those of internal audit are clearly separated.

Ex ante verification of financial operations is carried out by verification
officers whose activities are governed by the‘code of professional rules for
members of staff appointed to verify financial operations’.

Those officers are called upon, in particular, to give an opinion, favourable
or otherwise, on any file put before them.

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The circumstance that, where a favourable opinion is given, the verification
officers (or indeed, the departmental secretariat, if necessary) approve the
operation in the electronic system of monitoring appropriations is due sim-
ply to the fact that, for technical reasons, it was not possible to alter that
system in this respect when the new provisions of the Financial Regulation
entered into force. The paper route followed by financial operations, in the
course of which documents are approved or signed by the various persons
involved, is quite in keeping with the new Financial Regulation and places
ultimate responsibility on the authorising officer by delegation or by sub-
delegation. The role and responsibilities of the verification service are there-
fore not to be confused with those of the former financial controller.

The procedures just described, which do not involve the internal auditor as
such, in no way influence the independence of the latter, whose obligations
and responsibilities are defined by the ‘internal auditor’s charter of
duties’adopted by the Administrative Committee of the Court, as indicated
in response to paragraph 9.25.

9.27.

REPLY OF THE COURT OF JUSTICE

During the year in question the internal auditor has paid particular atten-
tion to the grafting of the new administrative unit onto the Court of Jus-
tice’s organisation. It was planned to carry out an audit of the manage-
ment of the appropriations allocated to visitors, spread over several budget
headings, but it proved impossible for it to be completed in 2003.

9.28.

REPLY OF THE COURT OF JUSTICE

The purchase of
licences for operating software for the automated
‘servers’ and electronic mail was made by choosing the best offer of those
requested from the distributors authorised by the main company to retail
its products on the Belgian and Luxembourg markets. Experience has
shown that the prices thus obtained were competitive. Henceforth, in deal-
ing with future contracts of this kind, for example, a single product sold
through a network of authorised distributors, particular attention will be
paid to observance of the procedures applicable relative to the contract
thresholds.

9.29.

REPLY OF THE COURT OF JUSTICE

The authorising officer by delegation’s annual report of activities was sent
to the competent authorities on 2 July 2004. It is advisable to state that
the Financial Regulation does not impose any deadline for the presenting
of the annual report of the institutions’ activities except in respect of the
Commission, for the date of 15 June fixed by Article 60 concerns the Com-
mission alone.

9.27. The internal auditor did not carry out his work programme
for 2003, apparently due to lack of staff and to the time spent on
ex ante control.

Observations concerning transactions

9.28. A contract concerning the purchase of site licences for the
use of software was negotiated by restricted procedure without the
prior publication of a notice. Pursuant to Articles 15(2) and 17 of
Council Directive 92/50/EEC of 18 June 1992 relating to the coor-
dination of procedures for the award of public service contracts (3),
a notice should have been sent to the Publications Office and pub-
lished in the Official Journal.

Annual activity reports and declarations of the authorising officers by delegation

9.29. As at the beginning of June 2004, the annual activity reports
required by Article 60(7) of the Financial Regulation had not been
presented.

(3) OJ L 209, 24.7.1992.

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Court of Auditors

Supervisory systems and controls

9.30. Article 44 of the implementing rules requires that each
Institution provide each financial actor with ‘a charter describing in
detail his tasks, rights and obligations’. Charters were drawn up and
decided upon by the Court on 18 December 2003. The same was
the case for the minimum standards adopted by the Institution pur-
suant to Article 60(4) of the Financial Regulation.

9.31. The internal auditor of the Court examined the set-up and
functioning of the system of ex ante verification, as well as the
financial system relating to the carrying out of the Court’s building
policy. These audits by the internal auditor did not result in any par-
ticular recommendation.

9.32. The Court of Auditors is audited by an independent exter-
nal audit firm which has issued a ‘certificate concerning the regu-
larity and fairness of the financial statements at 31 December 2003’,
accompanied by a report. The report states that, in the auditor’s
opinion, ‘the current internal control rules ensure that the opera-
tional objectives are achieved satisfactorily, the financial statements
are reliably drawn up and the legal framework is complied with’.
The certificate and the report will be published in the Official Jour-
nal.

Observations concerning transactions

9.33. No observations arose from the audit of transactions under-
lying the accounts of the financial year 2003.

Annual activity reports and declarations of the authorising officers by delegation

9.34. An annual activity report, as required by Article 60(7) of the
Financial Regulation, has been made by the Secretary-General con-
cerning the most important budgetary areas.

Economic and Social Committee and Committee of the
Regions

9.35. The following observations concern problems noted both at
the Economic and Social Committee and at the Committee of the
Regions. To avoid repetition in the chapter, these problems are set
out in this section, which deals with both Committees.

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Supervisory systems and controls

9.36. The following rules concerning the supervisory systems and
controls were not complied with:

9.36.

(a)

the accountant was not provided with a charter describing in
detail his tasks, rights and obligations, as required by Article 44
of the implementing rules;

(a) REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The accountant charter was adopted in 2004.

REPLY OF THE COMMITTEE OF THE REGIONS

On 3 May 2004, the delegate authorising officer approved a Deci-
sion (No 088/04), establishing the Charter of the missions and
responsibilities of the CoR’s Accountant and the sub-delegate accoun-
tants. The provisions of the Charter cover as well the question of the
professional standards of the Accountant.

The delay in approving such a Decision was due to the fact that some
measures foreseen in the calendar for the implementation of the new
Financial Regulation had been delayed in 2003 because of other pri-
orities.

(b) no minimum control standards were adopted.

(b) REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

A set of minimum internal control standards was adopted in 2004.

REPLY OF THE COMMITTEE OF THE REGIONS

Whereas it is true that there is not yet a comprehensive document enu-
merating the system of minimum control standards in place in the
Committee of the Regions, several control standards were adopted:
check-up lists; description of procedures; performance indicators; pro-
cedures for the appointment of budget line managers; follow-up of
financial matters by the Committee on Financial and Administrative
Affairs; draft vade-mecum on tasks, functions and procedures; regu-
lations on reimbursement of members; regulations on representation
expenses; decisions on ‘whistleblowers’ and on relations with OLAF;
instructions of service; training programmes for financial actors; writ-
ten descriptions of financial circuits, etc.

In December 2003 the delegate authorising officer requested the
Internal Auditor to carry out an audit on the control environment in
the Committee of the Regions.

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9.37.
In the area of procurement, several requirements of the
Financial Regulation and the implementing rules were not complied
with. No report on negotiated procedures was sent to the budget-
ary authority (Article 54 of the implementing rules), and the list of
contractors for contracts with a value of less than 50 000 euro was
not published on the Internet (Article 119 of the implementing
rules). A database of tenderers or candidates excluded from taking
part in procurement procedures (Article 95 of the Financial Regu-
lation) was not established at the Committee of the Regions.

9.38.
For staff remunerations, personnel data were input manu-
ally and separately in both the personnel database and the payroll
system. As there was no computer link between the two systems,
an automatic reconciliation of data was not possible. On the other
hand, a systematic and periodic reconciliation was not made manu-
ally. The administration found a large number of differences
between the payroll according to the system used in 2003 and the
new system, introduced in May 2004.

9.37.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

It is correct that no report on all negotiated procedures has been sent to the
budgetary authority and that no list of contractors for the contracts with a
value of less than EUR 50 000 has been published on the Internet. How-
ever, regular progress reports on the buildings situation were established
and sent to the budgetary authority. Also, the procedures from the new
Financial Regulation on the pre-information notices related to larger con-
tracts were respected. It should also be noted that an internal audit on the
acquisition procedures of the ‘Belliard 68’ building was started in 2003
and was finalised in 2004. The obligations to send a report on all nego-
tiated procedures to the Budgetary Authority and to publish the list of con-
tracts with a value less than EUR 50 000 on the Internet have been incor-
porated in the EESC’s annual internal budget closing procedures.

9.37.

REPLY OF THE COMMITTEE OF THE REGIONS

Concerning the report on negotiated procedures, it will be sent to the bud-
getary authority before the 30 September.

As regards the list of contractors for contracts with a value of less than
EUR 50 000, it will be published on the CoR internet before 15 October.

As far as the database of tenderers is concerned (Article 95 of the Finan-
cial Regulation), the new version of SI2 has finally been installed on
18 September this year, and will allow the exclusion of third parties (not
possible until now).

9.38.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

In 2003 and the years before, no financial data were stored in the person-
nel management system, which was used solely for operational pur-
poses. The financial data on staff were stored exclusively in a separate pay-
roll system. There was no need for reconciliation between these two systems.

A new personnel management system and a new payroll system (NAP,
running at the Commission) were launched in early 2004. Contrary to the
old payroll system, the new payroll system uses financial data from the
(new) personnel management system. Initially, there were a substantial
number of discrepancies between the old and the new payroll systems. Most
of those were due to timing differences between the former payroll proce-
dure and the new payroll procedure. All these discrepancies have been
explained and resolved in 2004.

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9.38.

REPLY OF THE COMMITTEE OF THE REGIONS

Regarding the procedures involved for the salary system, it has to be noted
that personnel data was input manually in the new personnel database
(Centurio, an application created by the IT service of the joint services of
the CoR and the Social and Economic Committee, which is also used by
the Court of Justice), in accordance with the administration’s decision to
implement this new system. The decision was made in order to facilitate the
transition to the new payroll system (NAP). It is none the less true that
prior to the launch of NAP on April 2004 there was no possibility to link
the old payroll system with the personnel database, the reason being tech-
nical incompatibilities (the two systems are separated by nearly 30 years of
age) and the personal data had to be input manually.

The situation has also been made more difficult this year by the entry into
force of the new staff regulations, a whole new set of parameters having had
to be integrated in both systems.

As soon as the NAP is fully operational, the administration will examine
the eventually still existing differences.

Economic and Social Committee

9.39. The following observations only concern problems at the
Economic and Social Committee.

Supervisory systems and controls

9.40. The following rules concerning, in general, the supervisory
systems and controls were not complied with:

9.40.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

(a)

the imprest account administrator was not provided with a
charter describing his tasks, rights and obligations in detail, as
required by Article 44 of the implementing rules;

(b) a written description of the specific control procedures applied
to the different areas of expenditure was not drawn up.

(a) The imprest account officer charter was adopted in 2004.

(b) The EESC adopted its internal financial rules, compliant with the new
Financial Regulations on 8 January 2003. These rules include for-
mal procedures for the nomination of the financial actors, the verifi-
cation procedures and detailed internal procedures for all main bud-
getary operations. It should be noted that the EESC has formalised
and put into place a sound verification process, requiring validation
of operations by an independent verifying agent. This model would
normally only be used for operations in a high-risk environment.
However, the EESC chose to apply a conservative approach and has
adopted this model for all of its budgetary operations (an extensive list
is drawn up in the EESC’s internal rules, Article 19), including those
in a low-risk environment.

The EESC has documented its recruitment procedures in a vademecum.

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Details and rigorous procedures for the management of the inventory
were adopted in October 2003.

In 2004, a decision on the recognition of the electronic signature in
the budget management information system SI2 was adopted. It
includes a description of all related operational procedures (user reg-
istration, maintenance, reporting, etc.).

The internal audit on compliance with the new Financial Regulations
recommended the introduction of, or improvements to, several inter-
nal control procedures. The enhancement of the documentation of
internal control procedures is part of the implementation plan of the
internal auditors’ recommendations.

The establishment of written procedures is not, as such, a requirement
of the Financial Regulation, but it has been integrated into the EESC’s
internal control standards (standard 15), which were adopted on
1 July 2004.

9.41 and 9.44.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

During 2003, severe staffing problems were encountered in the verifying
section and, hence, priorities had to be determined. As a consequence, the
reconciliation of imprest transactions had to be delayed. In order to be able
to close the books at the end of 2003, thorough verification was postponed
until 2004. A detailed ex post verification was carried out during the first
quarter of 2004. The correcting actions resulting from it are being com-
pleted in 2004.

9.41 to 9.43 and 9.45.
COMMITTEE

REPLY OF THE ECONOMIC AND SOCIAL

Following earlier recommendations by the Court, the EESC has abolished
the imprest account for the payment of members’ allowances as of the
beginning of 2004.

9.43.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

According to Article 6.(6) of the Implementation Rules of 23 Decem-
ber 2002, appropriations for allowances for members cannot be carried
over. Therefore, the EESC believed that it had to put payments, made by
the imprest account officer at the very end of 2002 (for meetings held in
2002) and which were settled in early 2003, on the 2003 budget.

9.41. The Court’s examination of a sample of imprest account
payments showed that the deadline for the settlement of imprest
transactions by the authorising officer (the end of the following
month, pursuant to Article 67(1)(f) of the implementing rules) was
generally not respected.

9.42. The internal auditor made an extensive audit of the enforce-
ment of the Financial Regulation, identifying some weak points in
the control systems for most budget lines. The audit report was pre-
sented in November 2003. At the end of 2003 the weaknesses iden-
tified by the internal auditor were being handled by the administra-
tion.

Observations concerning transactions

Payments of travel allowances made from the imprest
9.43.
account towards the end of 2002 for meetings held in 2002 were
charged to the appropriations of the following budget year, in
breach of the budgetary principle of annuality. Similarly, 2003
expenditure was charged to the 2004 budget.

9.44.
For all the payment orders regularising payments made
from the imprest account between mid October 2003 and the end
of the year only a superficial verification was made.

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9.45.
In three cases, the travel allowance paid to Members of the
Economic and Social Committee was twice the amount set out in
the Committee’s own rules. These cases concerned flights from Ber-
lin to Brussels, whose scheduled duration was less than or equal to
one and a half hour. The Committee’s rules lay down that a double
travel allowance is paid for travels by plane lasting more than one
and a half hours. It appeared from the audit that the rules were gen-
erally not being complied with when the journey had started in Ber-
lin and some other cities.

9.45.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

For the cities referred to, the duration of the flight used to be more than one
and a half hours, but has now become slightly less than that. In a few cases,
these changes were not taken into account. As soon as the Court had made
its remarks, corrective action was taken: the authorising officer by delega-
tion has formally instructed all financial actors involved to apply the regu-
lation in the strictest manner. All the members potentially involved have
been informed of this measure. The EESC can therefore state that the
present situation is in order.

Annual activity reports and declarations of the authorising officers by delegation

9.46. The annual activity report required by Article 60(7) of the
Financial Regulation was presented at the end of July 2004. This
report includes a declaration on the procedures ensuring the legal-
ity and regularity of the transactions underlying the accounts.

Committee of the Regions

9.47. The following observations are about further problems only
concerning the Committee of the Regions.

Supervisory systems and controls

9.48. The following rules concerning the supervisory systems and
controls were not complied with:

9.48.

REPLY OF THE COMMITTEE OF THE REGION

(a) no risk analysis was performed in order to introduce the most
appropriate control procedures (Article 60(4) of the Financial
Regulation);

a) This question is now being dealt with in a comprehensive manner. The
internal Auditor has already produced in 2004 two audits related to
this issue.

(b) except for a vademecum concerning the imprest account, no
written description of the specific control procedures regulat-
ing expenditure was drawn up.

b) Apart from the vade-mecum concerning the imprest account, there are
many other written rules that address the question of the specific con-
trol procedures of expenditure, such as the Missions Guide which
describes in great detail this type of control procedures concerning any
expenditure deriving from missions by officials. The same applies to
the written procedures on invoicing between the Committees on the
expenditure managed by their joint services (of both the CoR and the
European Economic and Social Committee), the written procedures for
recruitment of new officials, etc. The performance indicators set up in
2003 for each budget heading, and the instructions to elaborate them,
allow for a better follow-up of the way expenditure is carried out. Dur-
ing 2003 the Committee of the Regions established (written) finan-
cial circuits which reflect the principles of the new Financial Regula-
tion, thus separating the functions of initiating and ex ante verifying
agents. To ensure the compliance with the new Financial Regulation,
written checklists were published for the execution of expenditure by
the joint services of both Committees.

The CoR envisages to complete before the end of the year the minimum
control standards adapted to the specificities of its expenditure.

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9.49. The follow-up of the entitlements of officials and other staff
to the various allowances and benefits provided in the Staff Regu-
lations was insufficient. The data requested annually by the admin-
istration from the staff should have been checked more carefully.
The payment of allowances, as well as transfers to countries other
than the country of employment of amounts exceeding the expa-
triation allowance, should have been suspended when members of
the staff had not returned within a reasonable time the information
forms they had to fill in.

9.50. The internal auditor did not carry out most of his 2003
annual work programme. In particular, an audit of the implemen-
tation of the new Financial Regulation, included in the work pro-
gramme, was not completed.

Observations concerning transactions

9.51.
Payments of travel allowances made from the imprest
account towards the end of 2002 for meetings held in 2002 were
charged to the appropriations of the following budget year, in
breach of the budgetary principle of annuality.

9.52.
Some imprest account payments were not settled by the
authorising officer by the end of the following month as requested
by Article 67(1)(f) of the implementing rules.

9.49.

THE COMMITTEE OF THE REGIONS’ REPLY

Concerning the follow-up of the officials’ entitlements to the different allow-
ances and benefits provided in the staff regulations, every year in Septem-
ber a form is sent to each official with the purpose of updating personal
data. Each official fills this form even if his/her family situation is
unchanged. A reminder is sent to every official that did not respond and if
the information is still not sent to the personnel unit on a reasonable time
deadline the person in charge verifies every case and especially those who
might not have the right to receive such allowances; after which the person
in charge asks the official again for the requested forms to be filled. Nev-
ertheless, like in the case indicated by the Court of Auditors, some officials
have failed to update the required information.

In the future systematic controls will be carried out concerning the follow-up
of the special conditions of every official — more particularly in the field of
transfers to third countries of amounts exceeding the expatriation allow-
ance — and the suspension of every allowance or transfer until the official
concerned provides the requested documents.

The necessary changes will be introduced as of September this year to
improve the follow-up of the above-mentioned entitlements.

9.51.

THE COMMITTEE OF THE REGIONS’ REPLY

Due to delays in the presentation of supporting documents for the partici-
pation of three alternates in a commission meeting the corresponding pay-
ment order could not be assigned to the 2002 budget. Since the payments
from the imprest account were finally accepted in 2003, these were charged
to the 2003 budget.

In the future the CoR will treat these allowances as reportable expenditure.

9.52.

THE COMMITTEE OF THE REGIONS’ REPLY

The verifying officer of the CoR’s own services at that time was alone, and
had too much work which resulted in some delays in the presentation of
verified dossiers to the authorising officer. A second verifying officer could
only be recruited at the end of the year, thus allowing the speeding-up of
the ex-ante financial verification of the imprest account payments before
signature by the authorising officer.

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THE COURTS OBSERVATIONS

Annual activity reports and declarations of the authorising officers by delegation

9.53. The annual activity report required by Article 60(7) of the
Financial Regulation was presented at the beginning of June 2004.
This report includes a declaration as to the procedures ensuring the
legality and regularity of the transactions underlying the accounts.
The report informs on certain problems which the verifying staff
faced in 2003 and on measures to be taken in 2004 in order to bet-
ter comply with the requirements of the Financial Regulation.

Commission

Supervisory systems and controls for administrative expenditure (4)

9.54. Unlike the other Institutions, the Commission did not wait
for the entry into force of a new Financial Regulation before setting
up new supervisory systems and controls. These systems, estab-
lished within the framework of the Commission’s reform, already
responded to a large extent to the main requirements of the new
Financial Regulation. This explains why the conformity of the sys-
tems operating in 2003 with the requirements of the Financial
Regulation is higher at the Commission than in the other Institu-
tions.

9.55. The 24 Internal Control Standards adopted by the Commis-
sion in 2000 have been subsequently made more concrete and split
into 74 ‘baseline requirements’. An annex to the activity reports of
Directors and Directors-General
indicates how many ‘baseline
requirements’ have been implemented by each Commission depart-
ment. Concerning administrative expenditure the Court finds that
at the end of 2003, most of the ‘baseline requirements’ relative to
control activities, audit and evaluation had been implemented.

9.56. The Court has examined the supervisory systems and con-
trols giving delegated and sub-delegated authorising officers the
assurance that the requirements of legality and regularity are com-
plied with when implementing expenditure. The operation of sys-
tems concerning staff remuneration, information technology, infra-
structure and management of services in Brussels, publications,
Commission’s Delegations and interpreting services has been
appraised.

(4) The Commission departments responsible for most of the administra-
tive expenditure are the following: Directorate-General ‘Personnel and
Administration’, Directorate-General for Translation, Directorate-General
for Interpretation, Directorate-General
‘Press and Communication’,
Directorate-General for External Relations, Office for Infrastructures and
Logistics — Luxembourg, Office for Infrastructures and Logistics —
Brussels, Office for the Administration and Settlement of Individual
Entitlements, European Personnel Selection Office, Publications Office.

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THE COURTS OBSERVATIONS

9.57. With the exception of staff expenditure, the authorising
officers decided, in accordance with Internal Control Standard No
17, that ex post verifications of operations should be carried
out. However, no evidence was found that ex post verifications had
been carried out with respect to expenditure relative to the Com-
mission’s Delegations and to publications. In the other fields of
expenditure ex post controls were carried out, but they were not
based on the examination of transactions selected through a risk
analysis.

9.58. Concerning the system dealing with the staff remunerations,
discrepancies between the database containing the staff personal
data and the computer system used for the monthly calculation of
the remuneration were identified and corrected before a new sys-
tem was set up in October 2003. However, a systematic verifica-
tion of new data introduced into individual files existing in the data-
base was not made until shortly before the end of 2003.

9.57.

REPLY OF THE COMMISSION

The Annual Activity report of DG RELEX draws attention to the absence
of an effective system of ex post control related to the delegations’ expen-
diture. In the light of this, an action plan has been drawn up which envis-
ages the implementation of an ex post control system before the end of
2004.

The Publications Office (OPOCE) has introduced ex post control based on
sampling in 2004. The delegated authorising officer has decided to focus
on second-level ex ante checks prior to introducing ex post control in
2004.

Regarding other administrative expenditure, DG ADMIN and the Office
for infrastructures and logistics in Brussels (OIB) decided, when early in
2003 the ex post controls were started, to select the transactions by uni-
form sampling so as to avoid prior biases and prejudices. They intend to
include risk factors after 24 months of operation, i.e. as from 2005.

The DG for Interpretation (SCIC) also used uniform sampling in 2003 for
freelance interpreter payments. However, from 2004 the sampling is based
on monetary sampling units (MUS). The intention for later in 2004 is to
supplement this with targeted sampling based on risk factors.

As regards staff expenditure, the reply to paragraph 9.58 gives the neces-
sary details.

9.58.

REPLY OF THE COMMISSION

As the Court states, the existing discrepancies between the two systems were
identified and corrected before the new system – NAP – entered into pro-
duction, on the basis of verified data on staff, through a component-wise
comparison of the old and new salary slips.

Unlike the previous salary system – VAP –, NAP draws its data directly
from the personnel management system SYSPER, i.e. by IT interface, and
no longer requires double data entry, which previously was at the same time
an opportunity for control and a source of errors. The verification work-
flows had to be adapted, which was done before the end of 2003.

Some ex post checking was already carried out on data for the Luxem-
bourg population in 2003. The Brussels population will be checked in late
2004, when a global ex post control programme will become operational.

Both the comparisons made in the context of the migration to the NAP
and the checks made in Luxembourg have shown that the number of errors
is very small in relation to the vast amounts of data concerned, and that
errors are not systematic.

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THE COURTS OBSERVATIONS

9.59. The Court noted weaknesses in the supervisory systems and
controls set up by the Publications Office. In particular, precisely
defined responsibilities were not formally allocated to the staff
charged with initiating and verifying financial operations, no action
was undertaken to tackle the specific risk, identified by the Publica-
tions Office, that errors in invoices would not be detected, and
documentation of procedures was not complete.

9.60. The reporting obligation laid down in the Commission’s
charter for authorising officers by sub-delegation was not imple-
mented at the Publications Office.

9.59.

REPLY OF THE COMMISSION

The Commission shares the Court’s views on the definition of responsibili-
ties: a system of regular (monthly) updates was set up in November 2003.

As regards documentation of procedures, the Office drew up a list of the
key procedures to be documented at the end of 2003. This documentation
has been completed in 2004. Secondary procedures will be documented by
the end of June 2005.

9.60.

REPLY OF THE COMMISSION

Though the procedure has not been formalised, the Management Commit-
tee has been receiving regular (quarterly) operating reports for a number of
years. Monthly budget statements are made at central level, and the sub-
delegated authorising officers report on programmes, operations and results,
inter alia for the purposes of drafting the Office’s AAR and annual man-
agement report. The Office will introduce the report, as provided for in the
Charter for authorising officers by subdelegation.

Observations concerning transactions

9.61.
For the payment of a large number of invoices concerning
information technology services, infrastructures and management
of services in Brussels and publications, the deadlines laid down in
the contracts were exceeded. Pursuant to Article 106(5) of the
implementing rules, non-compliance with the deadline for payment
allows the creditor to demand interest.

9.61.

REPLY OF THE COMMISSION

It should be noted that after the introduction of a shorter payment delay in
the new Financial Regulation, the contractual delays in the existing con-
tracts concluded before 31 December 2002 under the previous Financial
Regulations, were not changed. The major part of the contracts used by the
Informatics Directorate and the Office for infrastructures and logistics in
Brussels (OIB) during 2003 had been signed before that date, and hence
had a payment delay of 60 days.

On this basis, the number of payments carried out after the contractual
delay was actually 10,8 % for the Informatics Directorate, around 18 %
for OIB and 3 % for the DG for Interpretation (payments other than pay-
ments to freelance interpreters).

With a view to reducing the proportion of late payments the Commission
has drawn the attention of the operational services to the requirement of
swift payment.

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THE COURTS OBSERVATIONS

9.62. Towards the end of 2003 the Publications Office paid
invoices whose amount exceeded the value of the services actually
provided during the year. The surplus was fully recognised by the
suppliers by way of credit notes received by the Publications Office
in 2004. In this way, the cancellation of appropriations committed
in 2002 as a ‘frontloading’ of expenditure expected to be made in
2003 was avoided. The procedure applied by the Publications Office
is not covered by the provisions of the Financial Regulation and
infringes Article 97(1) of the implementing rules, according to
which expenditure has to be validated on the basis of services actu-
ally rendered. The Court finds that the correct payment procedures
should have been applied.

Annual activity reports and declarations of the authorising officers by delegation

9.63. Generally, the annual activity reports of the Directors-
General and Directors who are authorising officers for most of the
administrative expenditure give a clear and thorough view of the
activities and achievements of the Directorates-General and Offices
for which they are responsible.

9.64.
Some of the authorising officers report that not all the Inter-
nal Control Standards had been fully implemented, in particular
with respect to the detailed documentation of all procedures
applied, but all of them declare that ‘the control procedures put in
place give the necessary guarantees concerning the legality and
regularity of the underlying transactions’. The Director-General for
External Relations adds to his declaration a reservation concerning
the insufficient implementation in the Commission’s Delegations of
the Internal Control Standards Nos 16 (‘segregation of duties’) and
17 (‘supervision’).

Overall conclusion and recommendations

9.65. Considerable efforts have been made by the Institutions to
adapt their supervisory systems and controls to the requirements of
the new Financial Regulation. Nevertheless, the required changes
were not entirely achieved by most of the Institutions, where weak-
nesses were noted which pose a risk as to the legality and regularity
of the underlying transactions (5).

(5) Namely as regards the effective implementation of internal control stan-
dards, insufficient ex post controls and insufficient implementation of
the internal audit function.

9.62.

REPLY OF THE COMMISSION

The Office recognises the materiality of the error detected.

9.65.

REPLY OF THE EUROPEAN PARLIAMENT

Reply from the internal auditor:

‘As far as the second part of the second sentence and the footnote are con-
cerned, the Court does not specify in which of the institutions it found weak-
nesses with the internal audit. No observations to this effect have been
made concerning the European Parliament’s internal audit either in para-
graphs 9.7 to 9.17 of this report which relate to Parliament, or in the
statement of findings preliminary to the annual report which were received
by Parliament earlier, nor were such observations made by the staff of the
Court when those preliminary findings were examined.’

Parliament supports its internal auditor’s reply. It draws attention to the
importance of his work in the self-assessment of the level of implementa-
tion of the MSIC carried out by Parliament and to which the Court refers
in paragraph 9.11. Self-assessment allowed action plans to be drawn up
in order to address weaknesses detected.

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THE COURTS OBSERVATIONS

9.65.

REPLY OF THE COMMISSION

Implementation of reform is a continuous process. Therefore, the Commis-
sion invests much effort and interest in enhancing continuously these prac-
tices. On the other hand, supervision is really executed and effective in the
services, evidencing of these supervision needs more focus. The Commission
is organising specific workshops on this issue in the second half of 2004.

9.66.
Except for the cases noted in paragraphs 9.23, 9.28, 9.45
and 9.62 the Court’s audit shows that the sample of underlying
transactions examined was not materially affected by errors.

In 2003, for the first time, the authorising officers by del-
9.67.
egation of the Institutions produced annual activity reports as
required by Article 60 of the Financial Regulation (6). These reports
provide useful information as regards the functioning of supervi-
sory systems and controls. However, their contents should be
improved so as to allow the Court to consider them as a source of
information for its own Statement of Assurance.

9.67.

REPLY OF THE COMMISSION

The Commission is already in its third year of experience in this domain.
The Court also acknowledges the continuous enhancements done by the
Commission. The current AAR are useful source of information on the
internal control systems of the DG’s.

9.67.

REPLY OF THE COURT OF AUDITOR

The Court departments concerned have noted the recommendation and
incorporated it in their action plans for the further setting-up of the pro-
cedures required under the new Financial Regulation.

9.68. Although for administrative expenditure taken as a whole
the transactions examined by the Court were not materially affected
by errors, the Court notes that there are risks to the legality and
regularity of the underlying transactions. This is due to the fact that
the supervisory systems and controls which replaced the former
Financial Control in 2003 have not yet met basic requirements of
the new Financial Regulation in all the Institutions. The Court rec-
ommends that attention be specifically paid to the enforcement of
all the requirements set out in the new Financial Regulation.

9.68.

REPLY OF THE COMMISSION

The Commission undertook a readiness assessment by the end of 2002,
which indicated that services were ready for launching the new Financial
Regulation specificities as acknowledged by the Court in paragraph 9.54.

9.68.

THE COURT OF AUDITORS’ REPLY

See reply to paragraph 9.67.

(6) At the Commission similar reports had already been produced in previ-

ous years.

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THE COURTS OBSERVATIONS

AUDIT OF THE SATELLITE BODIES

9.69. The Court’s annual audit of the EU’s satellite bodies (SBs) is
the subject of specific annual reports (7). The principal data on the
SBs are set out in Table 9.4.

9.70. The SBs’ budgets totalled 778,0 million euro in 2003, as
against 852,2 million euro (8) in 2002. Their combined staff, as
shown in their establishment plans, increased from 2 037 employ-
ees in 2002 to 2 204 in 2003.

Table 9.4 — Budgets and staff numbers in 2002 and 2003 — Satellite bodies (SBs)

Headquarters

Year of
establishment

European Centre for the Development of
Vocational Training

Thessalonica

1975

European Foundation for the Improvement of
Living and Working Conditions

Dublin

European Environment Agency

Copenhagen

Budget
(million euro)

European Training Foundation

European Monitoring Centre for Drugs and
Drug Addiction

European Agency for the Evaluation of
Medicinal Products

Translation Centre for the bodies of the
European Union

Community Plant Variety Office

Office for Harmonisation in the Internal
Market

European Agency for Safety and Health at
Work

European Monitoring Centre on Racism and
Xenophobia

European Agency for Reconstruction

Eurojust

European Aviation Safety Agency

European Maritime Safety Agency

European Food Safety Authority

1975

1990

1990

1993

1993

Turin

Lisbon

London

Luxembourg

1994

Angers

Alicante

Bilbao

Vienna

Thessalonica

The Hague

Brussels

Brussels

Brussels

1994

1994

1995

1997

2000

2002

2002

2002

2002

2002

14,2

17,4

25,2

16,8

10,4

61,3

23,6

10,5

154,7

13,2

6,2

495,9

2,8

—

—

—

2003

14,7

16,8

27,5

17,2

10,5

84,2

29

11,1

157,4

14,6

6,6

358,6

8,1

4,7

4,5

12,6

778,0

Authorised staff

2002

2003

83

88

106

123

59

251

158

33

715

31

28

316

46

—

—

—

83

88

111

104

63

287

158

33

675

33

30

317

53

80

40

49

2 037

2 204

In the process of publication in the OJ.

(7)
(8) The smaller figure is explained by the reduction in the activities of the European Agency for Reconstruction.

Total

852,2

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THE COURTS OBSERVATIONS

9.71. The financial year 2003 saw the introduction of the new
framework financial regulation (9), on the basis of which the SBs
were to draw up and adopt their own financial regulations.

9.72. During the year, after obtaining the Commission’s opinion,
all but three of the SBs had adopted their new financial regulations.
Those SBs which were unable to adopt specific financial regulations
provisionally applied the framework financial regulation (10) or
their specific draft regulation pending the Commission’s opin-
ion (11). All the SBs included the provisions of the framework finan-
cial regulation, with minor adjustments due to the nature of their
activities. The only notable exception was the European Agency for
the Evaluation of Medicinal Products, which chose thresholds for
procurement procedures which departed from the standards laid
down in the framework financial regulation.

9.72.

REPLY OF THE COMMISSION

As regards the financial regulation of the European Medicines Evaluation
Agency (EMEA), the Commission demanded that the Agency align itself
closely on the framework financial regulation. A new text was adopted with
the Commission’s approval in June 2004.

Since late 2003 the European Agency for Reconstruction (EAR) has also
obtained the Commission’s approval, adopting its financial regulation on
4 June 2004.

9.73. The implementation of the principles of the framework
financial regulation entails restructuring the SBs’ internal control
systems, in particular following the replacement of financial con-
trol and the introduction of an internal audit capability. This restruc-
turing requires the staff responsible for financial matters to adapt to
the new situation and retrain; this particularly affects the authoris-
ing officers, whose responsibility has increased. For two thirds of
the SBs, the systems introduced by the staff responsible for finan-
cial matters have not yet been evaluated or audited by an internal
audit unit.

9.74. As regards the accounts, the main change is the introduc-
tion of the principle of accruals-based accounting, which requires
working methods to be altered and accounting tools to be adapted.
In order for the accounts of the institutions and other bodies of the
EU to be consolidated by the financial year 2005, the SBs’ account-
ing rules are to be adopted by the Commission’s Accounting Officer
pursuant to Article 133 of the general Financial Regulation, a
requirement which is reiterated in Articles 85 (keeping of the
accounts) and 90 (keeping of the inventory) of the framework
financial regulation.

9.74.

REPLY OF THE COMMISSION

As part of the Commission’s accounting system modernisation project an
Accounting Standards Committee was set up to assist in the preparation
of the future EC accounting rules. Following a consultative process of the
agencies on the EC accounting rules, these will be adopted by the Commis-
sion’s Accounting Officer before the end of 2004 and are thus applicable
to all bodies falling under Article 185 of the Financial Regulation.

(9) Commission Regulation (EC, Euratom) No 2343/2002 of 23 Decem-
ber 2002 on the framework Financial Regulation for the bodies referred
to in Article 185 of Council Regulation (EC, Euratom) No 1605/2002
on the Financial Regulation applicable to the general budget of the Euro-
pean Communities (OJ L 357, 31.12.2002, p. 72).
(10) Eurojust and the European Agency for Reconstruction.
(11) The European Agency for the Evaluation of Medicinal Products.

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THE COURTS OBSERVATIONS

9.75. As the Commission had not yet finalised standards for
switching from the cash-accounting principle to the accruals-based
accounting principle, the SBs adopted various approaches for draw-
ing up their annual accounts for the financial year 2003. The major-
ity of SBs kept to the previous principles, while some presented
their accounts using the accruals-based accounting principle and the
remaining SBs only applied the accruals-based accounting principle
to transactions for which they possessed the necessary information.
In addition, with the exception of Eurojust, those SBs which applied
the accruals-based accounting principle did not reprocess the data
for 2002, which makes it difficult to compare one financial year to
another. Table 9.5 shows how far the new framework financial
regulation has been implemented.

Table 9.5 — Application of the framework financial Regulation as at 31 December 2003

Agency

Financial Regulation in force

Own
regulation

Framework
financial
regulation

Internal audit
capability

Application of the principle of accrual-based
accounting

full

reduced

none

European Environment Agency

European Agency for Reconstruction

European Agency for Safety and Health at Work

European Centre for the Development of Vocational
Training

Translation Centre for the bodies of the European Union

European Foundation for the Improvement of Living and
Working Conditions

European Agency for the Evaluation of Medicinal Products

European Training Foundation

Community Plant Variety Office

European Monitoring Centre for Drugs and Drug Addiction

Office for Harmonization in the Internal Market

European Monitoring Centre on Racism and Xenophobia

European Food Safety Authority

Eurojust

European Maritime Safety Agency

European Aviation Safety Agency

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

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9.77.

REPLY OF THE COMMISSION

The responsability for the preparation of annual accounts in compliance
with the future EC rules rests with each individual accounting officer of
these Agencies, including the use of appropriate accounting tools.

The Commission has already taken steps to ensure that the Agencies will
be prepared for the future accounting requirements. It arranges regular
meetings with the accountants of the Agencies to discuss accounting mat-
ters, in particular to provide updates on the progress of the modernisation
project, as well as informing them what will be required now, and in the
future (the last meeting was held on 11 June 2004). The Agencies are also
represented on the Accounting Standards Committee and in early June
2004 all Agencies were consulted on the new EC accounting rules, having
already completed a questionnaire in April to help them to identify the gaps
between current accounting practices and future requirements. They have
also been given access to the first draft of the Commission’s on-line
accounting manual. For accounting matters, the Commission have a des-
ignated contact point for Agencies to answer their questions.

9.79.

REPLY OF THE COMMISSION

In response to a request from the Agencies the Commission has confirmed
to them that the current accounting system (SI2) will continue to be avail-
able to them until the end of 2005 while its replacement (ABAC) will also
be made available to them in 2005 if they so wish. All documentation and
software relating to the future IT systems (including SAP) will be at the dis-
posal of the Agencies.

THE COURTS OBSERVATIONS

9.76. As well as problems with implementing the principles of the
new framework financial regulation, the fixed-asset inventory sys-
tems of many SBs have shortcomings which introduce an element
of uncertainty to the evaluation of the fixed assets shown in their
balance sheets.

9.77. The Commission must take the necessary steps to ensure
that, pursuant to Articles 85 and 90 of the framework financial
regulation, the SBs have the accounting rules and methods needed
to produce their accounts according to the principles set out in their
new financial regulations and ensure that the consolidation of the
accounts planned for the financial year 2005 is successful.

9.78.
For two SBs, the Court qualified its opinions on their
accounts or on the legality and regularity of the underlying trans-
actions (12). The Court had not yet adopted its report on the Euro-
pean Agency for Reconstruction at the time of adoption of its
Annual Report.

9.79. As for the SBs, they should compare experiences more often
so as to identify the best current practices and the most effective
tools in order to improve their management and achieve economies
of scale. They should concentrate on IT tools such as the budgetary
accounting system or the fixed-asset inventory system in order to
make the budgetary accounts more consistent with the general
accounts in the context of their adaptation to the principles laid
down in the framework financial regulation. In terms of best prac-
tice, the degree of consistency between the work programme, the
establishment plan and the budget at the European Monitoring Cen-
tre on Racism and Xenophobia is worthy of note. In operational
terms, this consistency is a direct and transparent reflection of the
Centre’s powers as defined in its basic regulation. In terms of tools,
the European Training Foundation has an effective IT system for
managing and monitoring procurement procedures, which is use-
ful for averting potential irregularities.

(12) The Court expressed qualified opinions in its reports on the European
Agency for the Evaluation of Medicinal Products and the European
Monitoring Centre on Racism and Xenophobia.

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THE COURTS OBSERVATIONS

AUDIT OF THE EUROPEAN SCHOOLS

9.80. The Court’s audit of the European Schools is the subject of
a specific annual report (not published in the Official Journal),
which is submitted to the Board of Governors of the European
Schools. At the start of the 2003 school year, the Schools had
19 248 pupils. As at 31 December 2003, the Schools employed
1 640 staff. The Schools’ budget of 201,4 million euro was financed
principally by a Commission grant (114,8 million euro) and by con-
tributions from the Member States (44,1 million euro).

9.81.
For the financial year 2003, the audit concerned the con-
solidated accounts of the Schools as drawn up by the Office of the
Secretary-General of the Board of Governors and the accounts of
the Brussels III and Luxembourg Schools. The audits did not bring
to light any anomalies likely to affect the Court’s opinion of the
Schools’ accounts.

9.82. The audits carried out during the financial year 2003 high-
lighted shortcomings in the management of the calculation of the
weighting which ensures that teachers on secondment receive equal
salaries. Of the 9 000 files submitted, 2 416 have not yet been pro-
cessed because they are incomplete. 475 of these files date from
1990-1994 and are very unlikely to be settled. Some Schools have
introduced a rigorous system for managing weighting files, as a
result of which the Office’s backlog is now relatively small. The
Schools should be given clear and specific instructions with a view
to promoting the best practices observed elsewhere and avoiding
excessive delays in the handling of files.

9.82.

REPLY OF THE COMMISSION

Considerable progress has been made in recent years in reducing the back-
log. Some delay is inherent in the procedure. The Office of the Secretary
General of the Board of Governors will take the following further measures:

— review the staff resources allocated for this work;

— examine the older cases with a view to writing off those with little

chance of a successful outcome;

— seek to resolve the difficulties experienced in obtaining suitable tax

documentation from certain Member States;

— ensure that best practice is built on to establish a uniform and pro-

active approach in all schools.

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CHAPTER 10

Financial instruments and banking activities

TABLE OF CONTENTS

Introduction

Financial instruments in favour of small and medium-sized enterprises

Introduction

The Court’s audit

Overall observations on the programmes

Reporting data on employment

Reporting data on financial participations

Observations on the specific measures

Small and medium-sized enterprise guarantees

Calls on guarantees

Commitment fees

Equity guarantees

State aid rules

European Technology Facility (ETF) — Start-up Facility

Valuation methods

Seed Capital Action

Joint European Venture

Conclusions

Guarantee Fund for external actions

The European Coal and Steel Community in liquidation

Introduction

ECSC in liquidation financial statements

IT weaknesses

Readaptation aid

Paragraph

10.1-10.4

10.5-10.27

10.5-10.7

10.8

10.9-10.11

10.9-10.10

10.11

10.12-10.23

10.12-10.16

10.12

10.13-10.14

10.15

10.16

10.17-10.19

10.17-10.19

10.20-10.21

10.22-10.23

10.24-10.27

10.28-10.29

10.30-10.34

10.30

10.31

10.32

10.33-10.34

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

10.1. The Community financial instruments related to the bank-
ing activities are the following:

— loans granted from budget resources 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);

— participation in special operations, such as the provision of

venture capital.

10.2. These financial instruments operate both in the Member
States and, to a greater extent, outside the Union in the framework
of external policies. Their main aims are to boost economic devel-
opment, improve infrastructure and create jobs. The European Coal
and Steel Community in liquidation is involved in similiar transac-
tions (see paragraphs 10.30-10.34).

10.3. Many of the measures derived from these instruments are
managed by banks or financial institutions under mandate from the
Community, mainly by the Community’s specialist financial insti-
tutions, i.e. the European Investment Bank (EIB) and the European
Investment Fund (EIF). As regards their activities in connection with
the management of Community expenditure and revenue, three tri-
partite agreements governing the Court’s rights of access to infor-
mation are currently in force. Two of these agreements were con-
cluded with the EIB and one with the EIF. The Commission is party
to all these tripartite agreements, as it holds final responsibility for
implementing the budget (see Annex 1).

(1) For example, the European Bank for Reconstruction and Development

(EBRD).

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10.4. The Court’s audit covered:

— financial instruments in favour of small and medium-sized
enterprises — three of these instruments are managed by the
EIF (2) and one is directly managed by the Commission;

— the application of the Guarantee Fund for External Actions (see

Table 10.1), and

— the activities of the European Coal and Steel Community in liq-

uidation (ECSCiL) (see Table 10.2).

Table 10.1 — Guarantee Fund situation (1)

Financial year

Total guarantee outstanding at
31 December (2)

Total Fund resources at
31 December (3)

Coverage (%)

(million euro)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

6 017

5 882

6 715

7 960

9 834

12 052

14 069

15 577

15 358

15 211

294,2

300,9

557,4

861,8

1 280,7

1 313,1

1 431,6

1 774,4

1 645,5

1 592,1

4,9

5,1

8,3

10,8

13,0

10,9

10,2

11,4

10,7

10,5

(1) Council Regulation (EC) No 2728/94 provides that the Guarantee Fund must reach an appropriate 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 financial year on a provisional basis. At the end of a financial year, the Fund’s assets may
exceed the target amount. In this case repayments apply.
Including default interest incurred but not paid at 31 December.

(2)
(3) After deduction of EIB fees not paid at 31 December.
Source:

Commission.

(2) The EIF was established in 1994 with the task of ‘contributing to the pur-
suit of Community objectives’. As of 2000 the EIB owns over 60 % of the
EIF’s shares, the European Commission owns 30 % on behalf of the EU;
the remainder is held by public and private financial institutions. As of
2001 the EIF provides venture capital and small and medium-sized enter-
prises portfolio guarantees for financial intermediaries.

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Table 10.2 -— ECSC in liquidation balance sheet and outstanding commitments of the ECSC operating budget at
31 December 2003

ECSC in liquidation Balance Sheet at 31 December 2003

Assets

23 July 2002

31 December 2002

31 December 2003

Loans and advances to banks (including
balances with central banks)

Loans and advances to customers

EUR
million

155,62

682,42

Bonds and other fixed income securities

1 528,90

Shares and other variable income securities

Tangible assets

Other assets

Prepayment and accrued income

28,00

0,00

6,02

47,57

%

6,36

27,87

62,44

1,14

0,00

0,25

1,94

EUR
million

113,57

628,95

1 551,46

18,77

0,01

3,30

73,04

%

4,75

26,33

64,94

0,79

0,00

0,14

3,06

EUR
million

133,43

361,66

1 485,91

15,75

0,00

3,28

56,46

%

6,49

17,59

72,25

0,77

0,00

0,16

2,75

Total assets

2 448,53

100,00

2 389,10

100,00

2 056,49

100,00

Liabilities

Amounts owed to credit institutions

779,12

31,82

Accruals and deferred income

22,56

0,92

ECSC operating budget (outstanding
commitments)

Provisions for liabilities and charges

Budget for financing coal and steel research

Reserves and surplus

400,92

586,01

240,00

419,92

16,37

23,93

9,80

17,15

714,36

29,90

49,77

2,08

342,56

554,74

240,00

487,67

14,34

23,22

10,05

20,41

434,05

34,27

222,47

247,15

293,00

825,55

21,11

1,67

10,82

12,02

14,25

40,14

Total liabilities

2 448,53

100,00

2 389,10

100,00

2 056,49

100,00

Outstanding commitments of the ECSC operating budget at 31 December 2003

Amounts at
31 December
2001

Amounts at
23 July
2002

Payments
from
24 July
2002 to
31 December
2002

Annulations
from
24 July to
31 December
2002

(million euro)

Amounts at
31 December
2002

2003
payments

2003
cancella-
tions

Amounts at
31 December
2003

Readaptation

Research

Interest subsidies (Article 56)

Social measures coal (Rechar)

128,96

174,02

25,01

52,93

132,61

180,83

16,84

70,64

Total

380,92

400,92

10,97

14,70

0,80

20,62

47,09

0,40

7,42

0,00

3,45

121,24

158,71

16,04

46,57

35,13

56,14

0,20

6,50

10,35

3,46

4,64

3,67

75,76

99,11

11,20

36,40

11,27

342,56

97,97

22,12

222,47

Source: ECSC in liquidation Financial Statements at 31 December 2003.

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FINANCIAL INSTRUMENTS IN FAVOUR OF SMALL AND
MEDIUM-SIZED ENTERPRISES

Introduction

In 1998 (3) the Council established measures to support
10.5.
innovative and job-creating small and medium-sized enterprises
(the Growth and Employment Initiative). The policy in favour of
small and medium-sized enterprises was further developed by a
Council Decision in 2000 (4) establishing a Multiannual programme
for enterprise and entrepreneurship, and in particular for small and
medium sized enterprises (2001-2005).

10.6. The Growth and Employment Initiative and the Multiannual
Programme include the following measures in favour of small and
medium-sized enterprises:

— Small and Medium-sized Enterprise Guarantee Facility, managed by
the EIF, providing guarantees or counter-guarantees to inter-
mediaries (5) for loans granted by financial institutions to small
and medium-sized enterprises;

— European Technology Start-up Facility (ETF), managed by the EIF,
providing equity investments in venture capital funds invest-
ing in small and medium-sized enterprises;

— Seed Capital Action, managed by the EIF, providing subsidies to

venture capital funds; and

— Joint European Venture, managed by the Commission, providing
subsidies for the establishment of joint ventures of small and
medium-sized enterprises.

(3) Decision 98/347/EC of 19 May 1998 (OJ L 155, 29.5.1998, p. 43).
(4) Decision 2000/819/EC of 20 December 2000 (OJ L 333, 29.12.2000,

p. 84).

(5) These intermediaries, which conclude guarantee contracts with the EIF
are either institutions granting loans or mutual and national credit guar-
antee schemes.

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10.7. When the EIF manages the measures on behalf of the Com-
mission, the funds are operated outside the general budget in sepa-
rate trust accounts. Cash is transferred from the general budget and
accounted for as budgetary expenditure at the date of transfer. The
trust accounts are interest-bearing and the interest earned in addi-
tion to other income, such as capital repayments and dividends, is
also added to the trust accounts (6).

The Court’s audit

10.8. The overall audit objective was to obtain assurance that the
Commission is implementing the programmes in line with the
terms of the Council Decisions and to verify the regularity of the use
of the funds. The focus was on the following topics: use of appro-
priations, the management of funds and the control of funds.

Overall observations on the programmes

Reporting data on employment

10.9. Under Council Decision 98/347/EC of 19 May 1998 the
Commission is required to report annually to both the European
Parliament and the Council on the implementation of the measures,
including their immediate effects on the creation of employment
and the prospects for the creation of employment in the long
term (7). Furthermore, the Council Decision also foresees an evalu-
ation of the programme within 48 months at most from the date
of its adoption. This evaluation (8) was carried out on the basis of a
survey of beneficiary companies and transmitted to the European
Parliament and to the Council in December 2003.

10.10. As far as employment creation figures are concerned the
Commission relies for its annual report (9) to the European Parlia-
ment and the Councilon information communicated by the inter-
mediaries to the EIF.

(6) The amounts in the trust accounts are recorded in the Community bal-
ance sheet under item VII ‘short term assets’, subheading ‘Sundry debt-
ors’.

(7) Article 7 of Council decision 98/347/EC of 19 May 1998.
(8) COM(2003) 758 Final of 8 December 2003.
(9) The latest report issued is COM(2003) 480 Final of 5 August 2003.

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Reporting data on financial participations

10.11.
Inaccuracies have been detected in the information pro-
vided in EIF reports to the Commission concerning the share of
Community participation, the legal structures of venture capital
funds and the net asset values (10).

10.11. The Commission is generally satisfied with the quality of the
reports received from the EIF. The EIF has corrected the inconsistencies and
errors detected by the Court, none of which had any material impact on the
information given to the budgetary authorities or on the Community finan-
cial statements.

10.12. The principle applied consistently by the Commission across
Member States is that it shares with intermediaries, on a pari passu basis
(Like Risk Like Reward), the final losses on the guaranteed loans, as fore-
seen in the Council Decision.

The Commission considers it has to respect the principles set out in the
Council Decision which states that the ‘financial criteria governing the eli-
gibility of SME financing for guarantees under the SME Guarantee Facil-
ity will be determined individually for each intermediary on the basis of
their activities, with the aim of reaching as many SMEs as possible. These
rules will reflect market conditions and practices in the relevant territory.’

Differences in the specific conditions of the guarantees or the type of guar-
antee systems that intermediaries have put in place may lead to differences
in the guarantee benefits.

Observations on the specific measures

Small and medium-sized enterprise guarantees

Calls on guarantees

10.12. Total calls on guarantees for the SME Guarantee facil-
ity (11) amounted to 57,2 million Euro as per 31 December 2003.
In Germany (by far the largest beneficiary) all charges, including
defaulted interest, were included in the amounts called down by the
intermediaries from the EIF guarantee. In other Member States vis-
ited the defaulted amounts were claimed without charges. In the
contracts between the EIF and the intermediaries, the Commission
should endeavour to provide similar guarantee benefits in all Mem-
ber States.

Commitment fees

10.13. According to the agreements between the EIF and new
(12) commitment fees have to be paid by the inter-
intermediaries,
mediaries to the European Investment Fund (13) if the guaranteed
loan volume is lower than forecast, in order to encourage interme-
diaries to use the measure. The fee set by the European Investment
Fund is 0,3 % per annum calculated on the basis of the difference
between portfolio volume (14) and fixed target volumes (15).

(10) Since 2002 these participations are included in the Community balance
sheet under item IV B 1 (Financial fixed assets, other financial fixed
assets, subscriptions and participations).

(11) SME guarantee facility under the Growth and Employment Initiative and

under the Multiannual Programme.

(12) Intermediaries that are new for participation in the SME guarantee facil-
ity, new contracts with intermediaries that participated already in the
past are not concerned.

(13) The fees are allocated to the trust accounts, they are not income of the

EIF.

(14) In the case of loan guarantees the loan volume, and in the case of

counter-guarantees the guarantee volume.

(15) The method has been changed recently in that the commitment fee is
now calculated on a lower basis taking into account the percentage of
the guarantee part and not the whole loan volume.

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10.14. However, in the case of two intermediaries (one in France
and one in Italy) payment of these commitment fees was not
required in the guarantee letters (contracts). The Court is not con-
vinced by the explanations provided by the Commission.

the Growth and Employment

10.14. The two intermediaries referred to under point 10.14 were
approved under
Initiative (G & E).
Under G & E, the EIF may charge commitment fees, where practicable. In
the EIF’s professional opinion, it was not judged practicable to charge com-
mitment fees for these two intermediaries as they cover their losses directly
from Member States’ budgetary resources.

Equity guarantees

10.15. The audit showed that an equity guarantee had been
extended by an intermediary to a fund in which the European
Investment Fund already had a direct investment. The terms of the
agreement between the EIF and the intermediary stipulate that:
‘Guarantees may only be included in the portfolio […] provided that the
guarantee has not been extended by the intermediary to a venture capital
fund in which the European Investment Fund is a direct investor’. The EIF
is invited to review the adequacy of the information made available
to intermediaries.

State aid rules

10.15. Consistent with the terms of the agreement, the equity guarantee
in question was never included in the EIF portfolio. The Commission takes
note of the Court’s invitation to the EIF.

10.16. The selection criteria for guarantee agreements with inter-
mediaries require compliance with State aid rules (16) and interme-
diaries must declare that they are in compliance with these rules at
the beginning of each scheme. However, the Commission does not
ascertain compliance with the rule during the life period of the
guarantee schemes.

10.16. The State aid rules, as applicable to guarantees under the SME
Guarantee Facility, do not provide for the Commission to ascertain com-
pliance during the life period of guaranteed loans.

The EIF is already contractually required to resubmit to the Commission a
request for approval in case of a substantial modification to a guaranteed
scheme.

European Technology Facility (ETF) — Start-up Facility

Valuation methods

10.17. At the end of 2003 the net investments in venture capital
funds in the context of the ETF start-up facility amounted to
64,6 million EUR. The current net asset value of the participation
was 38,9 million euro at the end of 2003.

(16) Council Regulation (EC) No 994/98 of 7 May 1998 and Commission
Regulations (EC) No 69/2001 and (EC) No 70/2001 of 12 January 2001.
The Fiduciary and Management Agreement between the Commission
and the EIF requires a corresponding declaration by the intermediaries.

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10.18. The four venture capital funds to which the Court refers had con-
tractual obligations to apply the guidelines of the European Venture Capi-
tal Association (EVCA), and disclosed information in accordance with
these guidelines. The reference to EVCA guidelines is clearly stated in the
funds’ contractual documentation, annual reports or in their quarterly
reporting to the shareholders. The other case involved an investment that
took place before the EVCA valuation guidelines were released in March
2001, so the contract does not refer explicitly to EVCA. However, the fund
describes its valuation methodology which does not materially deviate from
EVCA and has been validated by the fund’s external auditors.

10.19. The Commission contractually requires that funds into which the
EIF invests under the EC mandated programmes apply the valuation guide-
lines of the European Venture Capital Association (EVCA), which are cur-
rent industry standard. Funds under older agreements that were entered into
before the release of the EVCA guidelines in March 2001 have either
adopted these guidelines or do not materially deviate from these principles.
The valuations are audited by external auditors and further reviewed by the
EIF.

10.18. The Court’s audit has shown that the majority of venture
capital funds audited had no clear, precise rules on the valuation of
their investments (17).

10.19. The Commission should ensure that the venture capital
funds, in which the EIF invests, apply recognized industry standards
including common and reliable valuation methods, such as the
EVCA (18) guidelines, in order to ensure transparency and to pro-
vide a fair view of their investment portfolios.

Seed Capital Action

10.20. The Seed Capital Action was set up by Council Decision
2000/819/EC. The relevant Fiduciary and Management Agreement
between the Commission and the European Investment Fund pro-
vides for subsidies of 100 000 euro per person for up to three addi-
tional staff for venture capital funds, business incubators or their
respective management companies. A total of 5,6 million euro was
committed by the Commission up to the end of 2003.

10.21. The market has shown practically no interest in this mea-
sure. Out of seven funds initially interested, only two concluded
contracts for these subsidies. No payments have been made.

10.21. An external evaluation of MAP is currently being carried out,
which includes an evaluation of the Seed Capital Action.

Joint European Venture

10.22. The Joint European Venture provides financial contribu-
tions of up to 100 000 euro to small and medium-sized enterprises
for the setting-up of new transnational joint ventures within the
EU (19).

(17) Out of five venture capital funds visited on the spot only one had
detailed guidelines and justification for all valuations of investments
made.

(18) European Venture Capital Association.
(19) Council Decisions 98/347/EC of 19 May 1998 and 2000/819/EC of
20 December 2000. Subsidies are provided for preparation and, in case
of an establishment of joint venture, for investments made, but may
together not exceed 100 000 euro per case.

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10.23. However, the measure has not proved attractive for small
and medium-sized enterprises and to date only 44 joint ventures
have been created. The Commission is proposing to phase out this
programme which ‘is expensive, slow and complicated to adminis-
ter’ (20).

10.23.
Following an evaluation of the Joint European Venture (JEV) and
the other financial instruments of the Growth and Employment Initiative
(1998-2000) as at 29 May 2002, the Commission submitted on
8 December 2003 a proposal for a decision of the European Parliament
and of the Council to amend the multiannual programme for enterprise and
entrepreneurship (2001-2005) and to phase out JEV. This proposal was
adopted by Decision No 593/2004/EC of the European Parliament and
of the Council of 21 July 2004 and JEV will be closed on 29 Decem-
ber 2004 to new applications for financial contributions submitted by the
financial intermediaries.

Conclusions

10.24. There is a need for improvement of reporting quality, in
particular in respect of the data used for valuation of European par-
ticipations in the Funds (see paragraph 10.11).

10.24. The Commission is generally satisfied with the quality of the
reports received from the EIF. All funds in which the EIF invests are already
contractually required to provide data for valuation in accordance with
EVCA Guidelines, which are current industry standard. Financial state-
ments including valuations are audited by the venture-capital funds’ exter-
nal auditors. Valuations thus reported are reviewed by the EIF to ensure
that they do not materially deviate from EVCA Guidelines.

10.25. Consistent principles should be applied in respect of calls
on guarantees in the various Member States (see paragraph 10.12).

10.25. Consistent rules are already being applied in respect of guarantee
calls, as pointed out in the reply to point 10.12.

10.26. As regards the valuation of investments in venture capital
funds, there is a need for closer checks on the application of recog-
nised industry standards (see paragraphs 10.18 and 10.19).

10.26. The Commission points out that it already contractually requires
the EIF and the venture-capital funds in which the EIF invests, to apply
EVCA Guidelines, which are the recognised industry standard, and that
these standards are generally applied.

10.27. The Commission has proposed the abolition of the ‘Joint
European Venture’. It should also review the ‘Seed Capital Action’
measure. (See points 10.20-10.23).

10.27. An external evaluation of MAP is currently being carried out,
which includes an evaluation of the Seed Capital Action.

GUARANTEE FUND FOR EXTERNAL ACTIONS

10.28. The Community budget is particularly exposed to credit
risk as regards the guarantees for loans granted by the EIB to third
countries. The purpose of the Guarantee Fund for External Actions
is to reimburse the EIB in the event of a beneficiary’s defaulting and
to avoid direct calls on the Community budget.

(20) Proposal for a decision of the European Parliament and of the Council

(COM 2003/758 of 8 December 2003).

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10.29. The audit procedures applied by the Court to the accounts
of the Guarantee Fund did not reveal any issues concerning the
existence and valuation of the assets held by the Fund (see
Table 10.1).

THE EUROPEAN COAL AND STEEL COMMUNITY IN
LIQUIDATION

Introduction

10.30. On 23 July 2002 the Treaty establishing the European
Coal and Steel Community (ECSC) expired. A Protocol annexed to
the Treaty establishing the European Community transferred the
ECSC’s assets and liabilities to the European Community. The net
worth of these assets, referred to as the European Coal and Steel
Community in Liquidation (ECSC in liquidation), is to be allocated
to research in sectors related to the coal and steel industry. The
European Commission is entrusted with winding-up the financial
operations still in progress when the ECSC Treaty expired (21).

The ECSC in liquidation Financial Statements

10.31. The ECSC in liquidation financial statements have retained
the same structure as that used prior to the expiry of the ECSC
Treaty and have been examined by an external auditor. As in pre-
vious years the Court examined the work carried out by the exter-
nal auditor. By doing so the Court took assurance on the fact that
the Financial Statements of the ECSC.i.L fairly present its net worth
and financial situation as at 31 December 2003.

IT weaknesses

Some IT weaknesses mentioned in the Court’s Annual
10.32.
report concerning the financial year 2002 were only partially
resolved (22). The Commission should take the necessary steps to
remedy the problems that are still outstanding.

10.32. The IT weaknesses mentioned by the Court in the 2002 report
have all been addressed and the issue of ‘physical and logical security’ has
been resolved. With regard to the ‘Plan de continuité des activités’, a Busi-
ness Continuity Plan and a disaster recovery plan for the accounting soft-
ware have been implemented. The only remaining issue is the establish-
ment of a disaster recovery site planned to be finalised before the end of
2004.

(21) Council Decision 2003/76/EC of 1 February 2003 (OJ L 29, 5.2.2003,

p. 22).

(22) Especially those concerning the ‘sécurité logique et physique’, the ‘plan
de continuité des activités’, and the accounting software used by the
Directorate-General for Economic and Financial Affairs.

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Readaptation aid

10.33. At 31 December 2003 readaptation aid amounted to
75,76 million euro and represented the second largest category of
outstanding commitments of the ECSC.i.L (see Table 10.2).

10.33. Ongoing activities since the expiry of the Treaty consist of the liq-
uidation of outstanding commitments of ECSC readaptation aid. This will
continue until 2007.

10.34.
In 2003 an audit was carried out by the Court in Germany
to complement similar audits undertaken in previous years (23).
Although the audit did not show any general weaknesses regarding
the management of the readaption aid, differences were found in
the eligibility criteria for workers benefiting from this aid as com-
pared to the criteria applied in the other countries visited in previ-
ous years.

10.34. The difference in the eligibility criteria is due to the fact that the
German national criteria are stricter than those established by the Euro-
pean Commission. Member States had the opportunity to implement such
national schemes and if they did, they were free to impose different eligi-
bility criteria than those agreed with the Commission in the bilateral con-
ventions.

(23) Previous years audits of the Court covered steel traditional aid in the
United Kingdom and in Italy. Audit in Germany concerned both tradi-
tional aid and RECHAR (Volet social charbonnier).

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Annex 1 — Tripartite agreements currently in force

Parties

Subject

Date of conclusion or latest renewal

Date of expiry

Court of Auditors, European
Commission, European Investment
Bank

Court of Auditors, European Com-
mission, European Investment Bank

Court of Auditors, European Com-
mission, European Investment Fund

Audit by the Court on loan opera-
tions under the mandate conferred
by the European Communities on
the Bank and on the operations
managed by the Bank which are
entered in, and guaranteed by, the
general budget of the European
Communities

Applicable also to the operations
financed from the European Devel-
opment Fund which the Bank
manages.

Audit by the Court of the financial
management of the Guarantee
Fund

Audit by the Court of the Com-
munity shareholding in the Euro-
pean Investment Fund

27 October 2003

27 October 2007

Renewable by tacit agreement for
further four-year periods

11 January 1996

No expiry or renewal clause

25 September 2003

25 September 2005

Renewable by tacit agreement for
further two-year periods