Annual Report on the Implementation of the Budget, together with the institutions' replies
Date: 2005-09-28
Institutions: European Court of Auditors
Subjects: European Court of Auditors, activity report, financial year, general budget (EU), implementation of the budget

30.11.2005

EN

Official Journal of the European Union

C 301/1

COURT OF AUDITORS

In accordance with the provisions of Article 248 (1) and (4) of the EC Treaty, Articles 143 and 181(2) of
Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation 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 9th European Development Fund, the Court of Auditors of the European
Communities, at its meeting of 28 September 2005, adopted its

ANNUAL REPORTS

concerning the financial year 2004

The reports, together with the institutions’ replies to the Court’s observations, were transmitted to the
authorities responsible for giving discharge and to the other institutions.

30.11.2005

EN

Official Journal of the European Union

C 301/3

ANNUAL REPORT ON THE
IMPLEMENTATION OF THE BUDGET

(2005/C 301/01)

30.11.2005

EN

Official Journal of the European Union

C 301/5

TABLE OF CONTENTS

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

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

Page

7

9

Chapter 2 — Budgetary Management

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

43

Chapter 3 — Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59

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

79

Chapter 5 — Structural measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Chapter 6 — Internal policies, including research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Chapter 7 — External actions

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Chapter 8 — Pre-accession strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

Chapter 9 — Administrative expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Chapter 10 — Financial instruments and banking activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Annex I (1) — Financial information on the budget

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

III

Annex II (1) — Reports and Opinions adopted by the Court of Auditors since 2000 . . . . . . . . . . . . . . . . . . . XIX

(1) The annexes related to the Annual Report on the Implementation of the Budget can be found at the end of this publi-

cation.

30.11.2005

EN

Official Journal of the European Union

C 301/7

GENERAL INTRODUCTION

0.1. This document, covering the 2004 financial year, com-
prises the Court’s 28th Annual Report on the implementation of
the general budget of the European Union, as well as its Annual
Report in relation to the European Development Funds. The
document follows the structure established for recent Annual
Reports: the Statement of Assurance is presented in Chapter 1;
key observations on budgetary management are given in Chap-
ter 2; Chapters 3 to 9 cover revenue and activities financed from
different parts of the budget, reflecting the headings of the finan-
cial perspective; while Chapter 10 covers financial instruments
and banking activities. The replies of the Commission, or other
EU Institutions where appropriate, are presented with the reports.

0.2.
In relation to the Annual Report on the implementation of
the general budget, the chapters covering revenue and the major
areas of expenditure have the following main elements:

— detailed analyses and results of the audit work carried out in
the context of the Statement of Assurance in the form of spe-
cific assessments,

— results of follow-up reviews of progress made on implement-
the Court and the Budgetary

ing recommendations of
Authorities arising from previous audits,

— summaries of the Special Reports published by the Court

since the last annual report.

0.3. The specific assessments are based on an evaluation of the
operation of the principal supervisory and control systems gov-
erning revenue and each expenditure area, the results of the
Court’s testing of underlying transactions, an assessment of the
annual activity report and declarations of the Directors General,
and the results of the work of other auditors where relevant. The
Court’s overall appraisal of all these elements forms the basis for
the Statement of Assurance set out in Chapter 1. In addition, the
Annexes to Chapters 4 to 9 set out the elements used for moni-
toring and evaluating the financial management of the EU budget.

0.4. 2004 was marked by the accession of 10 new Member
States on 1 May 2004, the biggest enlargement in the EU’s his-
tory. Reform of the Commission’s financial management contin-
ued to be consolidated, with 2004 being the first year when the
budget was wholly decided and implemented under the activity
based budgeting (ABB) format. This has resulted in a change in
the way that financial information is presented, with details now
being given in the budget by ABB policy area.

0.5. The Commission continued to prepare for the introduction
of full accruals-based accounting, representing a fundamental
reform in the way that the accounts are kept and financial infor-
mation presented, for the 2005 financial year. Chapter 1 of this
report (see paragraphs 1.21 to 1.45) gives the results of audit
work undertaken on this ongoing process, particularly the key
process of establishing opening balances. The Court’s work shows
that further efforts are needed in order that the Commission
may provide accurate accounting information for the 2005 year
end.

0.6.
Since the reform process was initiated in 2000, the Court
has noted an improvement in the way in which the Commission
organises itself and manages the EU budget. There have been
improvements in the controls undertaken by the Commission on
expenditure it manages directly. However, significant effort is still
required, notably in those areas of the budget coming under
shared management with Member States. It is of critical impor-
tance that the Commission and Member States work together
to identify the weaknesses in the design and operation of schemes,
and introduce appropriate remedial action.

0.7.
In April 2004 the Court issued its Opinion No 2/2004 (1)
on the ‘single audit’ model which included a proposal for a Com-
munity internal control framework. The Opinion was based on
the experience gained by the Court in its audit work over a num-
ber of years, in particular the weaknesses identified in internal
control systems at both European institution and Member State
levels, which result in material incidences of error in underlying
transactions over much of the budget. The Court proposes that
current or new systems be developed and applied by the Com-
mission and Member States in a coordinated manner and follow-
ing common principles and standards. In addition, control sys-
tems should be designed to ensure an appropriate balance
between the cost of controls, and the benefits they bring in terms
of managing the risk of irregularity.

0.8. The Commission has reacted positively to the Court’s opin-
ion, and in its Communication of June 2005 (2), proposes a road-
map to an integrated internal control framework. The Commis-
sion recognises that it is essential that the citizens of the Union
have reasonable assurance that European public funds are man-
aged in a legal and regular manner. Furthermore, clearly defined
standards and objectives of internal control systems would pro-
vide an objective basis against which the Court could assess their
design and operation when auditing them, thereby increasing the
effectiveness of its work.

(1) OJ C 107, 30.4.2004.
(2) COM(2005) 252 final, 15.6.2005.

30.11.2005

EN

Official Journal of the European Union

C 301/9

CHAPTER 1

The Statement of Assurance and supporting information

TABLE OF CONTENTS

Statement of Assurance

Reliability of the accounts

Legality and regularity of the underlying transactions

Information in support of the Statement of Assurance

Introduction

Reliability of the accounts

Consolidated reports on implementation of the budget (revenue and expenditure)

Consolidated financial statements

Action plan for the modernisation of the accounting system

Legality and regularity of underlying transactions

The Court’s DAS approach

DAS audit results 2004

Commission’s internal control system

Audit scope

The Commission’s management representations

Progress made in reinforcing the internal control system

Towards a Community internal control framework

Paragraph

I-VIII

II-IV

V-VIII

1.1-1.86

1.1-1.5

1.6-1.45

1.12-1.15

1.16-1.20

1.21-1.45

1.46-1.53

1.46-1.47

1.48-1.53

1.54-1.86

1.54

1.55-1.70

1.71-1.83

1.84-1.86

C 301/10

EN

Official Journal of the European Union

30.11.2005

THE COURT OF AUDITORS’ STATEMENT OF ASSURANCE

I.
Pursuant to the provisions of Article 248 of the Treaty the Court has examined the ‘Consolidated reports on implementation
of the budget and the consolidated financial statements’ of the European Communities for the financial year ended 31 December
2004 (1). It carried out its audit in accordance with its own audit policies and standards, which are based on international stan-
dards 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 revenue, the scope of the Court’s audit work was limited. Firstly, VAT and GNI own
resources are based on macroeconomic statistics for which the underlying data cannot be audited directly by the Court, and sec-
ondly, the audits of traditional own resources cannot cover the imports that have not been subject to customs supervision.

Reliability of the accounts

II.
In the Court’s opinion, the ‘Consolidated reports on implementation of the budget and consolidated financial statements’ of
the European Communities were drawn up in accordance with the provisions of the Financial Regulation of 25 June 2002 and
with the accounting principles, rules and methods set out in the Annexes to the consolidated financial statements (2). 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 following:

(a) as has been the case in the past, the accounting system used to draw up the 2004 accounts was not designed to ensure that

all assets and liabilities are recorded;

(b)

following its action plan for the modernisation of the European Communities’ accounting system, the Commission has
achieved significant progress towards introducing accrual-based accounting by 2005. However, adaptations and validations
necessary to ensure the full implementation of the new accounting framework have been delayed.

Legality and regularity of the underlying transactions

V. On the basis of its audit results, the Court is of the opinion that in areas where the supervisory and control systems are imple-
mented and allow for an adequate risk management, i.e. revenue, commitments, administrative expenditure and pre-accession
strategy, the transactions underlying the consolidated annual accounts of the European Communities, taken as a whole, are legal
and regular. Moreover, for common agricultural policy (CAP) expenditure the Court’s audit shows that, where properly applied,
the integrated administration and control system (IACS) is an effective system to limit the risk of irregular expenditure.

VI. Without calling into question the opinion expressed in paragraph V, the Court emphasises that, in the area of pre-accession
strategy, risks of varying degrees still exist at the level of implementing organisations in the candidate countries for all pro-
grammes and instruments.

(1) The ‘Consolidated reports on implementation of the budget and Consolidated financial statements’ make up Volume I of the annual accounts of the

European Communities, financial year 2004.

(2) See Annex 1, Volume I, of the final accounts of the European Communities, financial year 2004.

30.11.2005

EN

Official Journal of the European Union

C 301/11

VII. A greater effort is needed to effectively implement the supervisory and control systems and to address their weaknesses, so
as to improve the handling of the attendant risks in the following areas, where payments are still materially affected by errors.

(a)

(b)

(c)

(d)

In the case of CAP expenditure, the Court found recurrent evidence that expenditure which is not subject to IACS, or where
IACS has been inadequately applied, poses greater risk because control systems are not as effective. Post-payment checks for
CAP subsidies not covered by IACS do not provide reasonable assurance as to compliance with Community legislation. The
Court concluded that CAP expenditure, viewed as a whole, was still materially affected by errors.

In the case of structural measures, the Court again found weaknesses in the management and control systems which show
the need, in varying degrees, for improvement in order to fully comply with the regulatory requirements for effective day-
to-day management checks and/or independent sample checks of operations for the 2000 to 2006 programming period.
For both programming periods (1994 to 1999 and 2000 to 2006), numerous errors of legality and regularity were detected
in the expenditure included in the declarations leading to payments by the Commission.

In the case of internal policies, despite the progress made in certain areas, the Court’s audit findings related to the supervi-
sory and control systems and the underlying transactions do not provide sufficient assurance as regards the legality and regu-
larity of payments. It is likely that the risk of errors will persist unless the legal framework is changed so as to simplify cost
reimbursement systems and clarify the procedures and instructions governing the different programmes.

In the case of external actions, the improvements of the Commission’s supervisory and control systems have not yet had an
impact at implementing organisation level, where a relatively high number of errors at the level of payments in terms of
frequency and financial impact were detected which were linked to the lack of a comprehensive approach to the supervi-
sion, control and audit of these organisations.

VIII. The Court notes the progress made by the Commission as regards the reform of its internal control system and the posi-
tive impact on the legality and regularity of the Commission’s internal management of expenditure. However, progress is still
required in terms of operational effectiveness.

28 September 2005

Hubert WEBER
President

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

C 301/12

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INFORMATION IN SUPPORT OF THE STATEMENT OF
ASSURANCE

Introduction

Pursuant to Article 248 of the EC Treaty, the Court of
1.1.
Auditors provides the European Parliament and the Council with
a statement of assurance concerning the reliability of the accounts
and the legality and regularity of the underlying transactions (the
DAS). The Treaty also authorises the Court to supplement this
statement with specific assessments of each major area of Com-
munity activity.

1.2. The aim of the work on the reliability of the accounts of the
European Communities is to obtain sufficient evidence to con-
clude on the extent to which revenue, expenditure, assets and
liabilities have been properly registered and that the annual
accounts faithfully reflect the financial position at the end of the
year (see paragraphs 1.6 to 1.45).

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 give an opinion on whether they are in
accordance with the applicable regulations or contractual provi-
sions, and have been correctly calculated (see paragraphs 1.46
to 1.86) (3).

1.4. Once again, the Court paid particular attention to the
efforts made by the Commission to strengthen its internal con-
trol system and to the follow-up given to the action plans annexed
to the annual activity reports and their Synthesis for the financial
year 2003 (see paragraphs 1.54 to 1.86).

1.5.
In addition, the Court provides indicators to monitor
progress in improving internal controls both overall, and for each
income and expenditure area (see Annexes to this Chapter and
to Chapters 3 to 9).

Reliability of the accounts

1.6. The Court’s observations concern the final consolidated
annual accounts for the financial year 2004 (4), as drawn up by
the Commission in compliance with the provisions of the Finan-
cial Regulation of 25 June 2002 (5).

(3) See the European Parliament resolution (EP 353.338, paragraph 35)
and the Council recommendation (6850/05 BUDGET 5, page 8) on
the 2003 discharge.

(4) The accounts comprise the ‘consolidated reports on the implementa-
tion of the budget’, covering the revenue and expenditure for the year,
and the ‘consolidated financial statements’, covering the balance sheet
setting out the assets and liabilities at the end of the year.

(5) 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, p. 1).

30.11.2005

EN

Official Journal of the European Union

C 301/13

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.7.
Pending the complete implementation of the action plan
on the modernisation of the accounting system as of the finan-
cial year 2005 (see paragraphs 1.21 to 1.45) and in the absence
of a suitable accounting system, the preparation of the year-end
financial statements was still, to a large extent, based on records
outside the accounts. The information used for this was not
always linked to the budgetary transactions from which they stem
and the central accounting department was not always able to
guarantee its accuracy or completeness (see paragraph 1.9).

1.7. The new accounting system was introduced in January 2005. The
2004 closure of accounts was made using the same rules and systems as
the previous year, as provided for by both the Financial Regulation and
the Commission Communication on the modernisation of the account-
ing system project in December 2002 (see COM(2002) 755 final of
17 December 2002).

1.8.
Furthermore, in 2004 the accounting system still followed,
to a large extent, cash-based accounting principles and did not
make it possible to distinguish between capital and non-capital
expenditure, between final payments and pre-financing, or even
to determine the amount of debts and receivables. This affected
the calculation of the economic outturn (see paragraphs 1.17
to 1.18 and also paragraphs 1.28 to 1.45).

1.8. The differentiation between capital and non-capital expenditure
is one of the improvements arising from the introduction of the new
accounting system. The 2005 opening balance sheet is currently being
prepared using this distinction.

the
1.9. The reservations contained in the declaration of
Director-General for Budgets (inadequate presentation of the
assets and liabilities and of the financial position of the Commu-
nities and the EDF, and security issues (6) on the accounting sys-
tem) are confirmed by the Court’s findings. However, the efforts
made by the Commission as part of the modernisation of the
accounting system have already resulted in improvements in the
quality of information provided.

1.10. Table 1.1 contains a follow-up of the reservation con-
cerning the reliability of the accounts which was expressed in the
Statement of Assurance for the 2003 financial year, as well as
other points raised by the Court in that Annual Report which,
according to the Commission, ought to be settled in the context
of the modernisation of the Community accounting framework.

1.10. As in last year’s replies, and as stated by the Court in its remark,
the reservation of the Court in 2003 concerning revenues and advances
is addressed by the introduction of the new accounting system in 2005.
The new system will also address the other points raised in table 1.1.

1.11. Despite the progress noted, in particular as regards the
presentation of the annual accounts and the reduction in the
number and scale of the reservations, the Court’s audit identified
problems, most of them already pointed out in previous reports
(see paragraphs 1.12 to 1.20).

1.11. As the Court has noted, progress has been made in the presen-
tation of the annual accounts. However, many of the remarks the Court
refers to can only be addressed with the introduction of accrual account-
ing and the new accounting system in 2005.

(6) See paragraph 1.18 of the Court’s 2003 Annual Report.

C 301/14

EN

Official Journal of the European Union

30.11.2005

n
o
i
t
a
s
i
n
r
e
d
o
m
e
h
t

f
o

t
c
a
p
m

i

l
a
i
t
n
e
t
o
p

e
h
t

d
n
a

s
t
n
u
o
c
c
a

e
h
t

f
o

y
t
i
l
i
b
a
i
l
e
r

e
h
t

o
t

s
a

e
c
n
a
r
u
s
s
A

f
o

t
n
e
m
e
t
a
t
S

3
0
0
2

e
h
t

n

i

d
e
s
s
e
r
p
x
e

n
o
i
t
a
v
r
e
s
e
r

e
h
t

o
t

p
u
-
w
o

l
l

o
F
—
1
1

.

e
l
b
a
T

t
r
o
p
e
R

l
a
u
n
n
A
3
0
0
2

e
h
t

n

i

e
d
a
m

s
n
o
i
t
a
v
r
e
s
b
o

n
i
a
t
r
e
c

f
o

t
c
e
p
s
e
r

n

i

m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a

e
h
t

f
o

n
o
i
t
a
u
t
i
s

e
h
t

f
o

n
o
i
t
u
o
v
E

l

t
r
o
p
e
R

l
a
u
n
n
A
3
0
0
2

e
h
t

n

i

s
e
i
l

p
e
R

e
c
n
a
r
u
s
s
A

f
o

t
n
e
m
e
t
a
t
S

3
0
0
2

e
h
t

n

i

n
o
i
t
a
v
r
e
s
e
R

-
r
e
d
n
u

n
e
e
b

e
v
a
h

s
e
r
u
s
a
e
m

l
a
r
e
v
e
s

t
a
h
t

t
u
o

d
e
t
n
o
p

i

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

n
o
s
r
o
t
a
c
i
d
n

i

i
g
n
n
i
a
t
n
o
c

s
r
e
d
r
o
y
r
e
v
o
c
e
r
d
n
a

s
t
b
e
d
f
o
e
c
n
a
l
a
b
d
e
g
a
n
A

.

n
e
k
a
t

r
e
s
o
l
c

s
i

e
r
e
h
t

,
s
t
n
e
m

t
r
a
p
e
d

g
n
i
s
i
r
o
h
t
u
a

e
h
t

o
t

y
l
r
e
t
r
a
u
q

t
n
e
s

s
i

i

g
n
n
n
u
d

e
h
t

d
n
a
e
r
u
d
e
c
o
r
p
y
r
e
v
o
c
e
r

e
h
t
g
n
i
r
u
d
s
t
n
e
m

t
r
a
p
e
d
g
n
i
s
i
r
o
h
t
u
a
h
t
i

w
n
o
i
t
a
r
e
p
o
o
c

e
h
t

,
e
s
i
w
e
k
i
L

.

y
l
l
a
c
i
t
a
m
e
t
s
y
s

d
e
t
c
e
l
l

o
c

s
i

s
r
e
d
r
o

y
r
e
v
o
c
e
r

n
o

t
s
e
r
e
t
n

i

s
r
a
e
r
r
a

s
a
h
d
n
a

s
n
o
i
t
a
r
e
p
o
g
n
i
c
n
a
n
i
f
-
e
r
p
f
o
y
r
o
t
n
e
v
n

i

n
a
g
n
h
s
i
l

i

b
a
t
s
e

s
i

n
o
i
s
s
i

m
m
o
C

.

5
0
0
2
m
o
r
f

s
a
d
e
i
l

p
p
a

e
b

l
l
i

w
s
e
r
u
d
e
c
o
r
p
g
n
i
t
n
u
o
c
c
a

e
t
a
u
q
e
d
a

t
r
u
o
C
e
h
t

e
l
b
a
n
e

t
o
n

d
d

i

4
0
0
2

d
n
e

y
b

n
e
k
a
t
r
e
d
n
u

s
n
o
i
t
c
a

e
h
t

t
a
h
t
d
e
t
a
c
i
d
n

i

,
s
s
e
l
e
h
t
r
e
v
e
N

.

7
1
1
s
h
p
a
r
g
a
r
a
p
e
e
s
(
e
t
a
d
t
a
h
t
y
b
d
e
v
l
o
s
n
e
e
b
d
a
h
s

m
e
l
b
o
r
p
e
h
t

l
l
a
r
e
d
i
s
n
o
c
o
t

.
)

9
1
1

.

o
t

s
i
h
t

h
t
i

w
g
n

i
l
a
e
d

f
o

s
d
o
h
t
e
m

s
t
i

e
v
o
r
p
m

i

o
t

s
e
u
n
i
t
n
o
c

n
o
i
s
s
i

m
m
o
C

e
h
T

-
u
g
e
r

e
h
t

,
e
l
p
m
a
x
e

r
o
f
(

)

…

(

l
a
s
o
p
s
i
d
s
t
i

t
a
y
l
t
n
e
r
r
u
c

s

m
e
t
s
y
s

e
h
t
g
n
i
s
u
a
e
r
a

e
h
t

)

…

(

,
r
e
v
e
w
o
H

)
.

i

3
0
0
2
-
d
m
e
c
n
i
s

s
t
n
u
o
m
a

e
u
d
r
e
v
o

f
o

g
n
i
t
r
o
p
e
r

r
a
l

n
o
i
t
c
u
d
o
r
t
n

i

e
h
t
h
t
i

w
e
d
a
m
e
b
y
l
n
o
n
a
c

a
e
r
a

s
i
h
t
n

i

s
t
n
e
m
e
v
o
r
p
m

i

r
o
j
a
m

r
o
f

g
n
i
t
n
u
o
c
c
a

e
h
t

r
a
l
u
c
i
t
r
a
p

n

i

,

5
0
0
2

n

i

m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a
w
e
n

e
h
t

f
o

.
s
t
n
e
m
y
a
p

g
n
i
c
n
a
n
i
f
-
e
r
p

s
u
o
e
n
a
l
l
e
c
s
i

m

r
o
f

s
e
r
u
d
e
c
o
r
p

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

e
v
i
t
c
e
f
f
e

f
o

e
c
n
e
s
b
a

e
h
t

n
I

s
n
o
i
t
c
a
s
n
a
r
t

e
h
t

t
a
h
t

n
i
a
t
r
e
c

e
b

t
o
n
n
a
c

t
r
u
o
C

e
h
t

,
s
e
c
n
a
v
d
a

d
n
a

y
l
e
t
e
l
p
m
o
c

d
n
a

y
l
t
c
e
r
r
o
c

n
e
e
b

e
v
a
h
m
e
t
i

s
r
o
t
b
e
d

y
r
d
n
u
s

e
h
t

o
t

e
u
n
e
v
e
r

g
n
i
t
a
l
e
r

.

d
e
d
r
o
c
e
r

r
o
f

e
s
u

o
t

d
e
n
e
p
o

s
a
w
m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a

l
a
r
t
n
e
c

e
h
t

,

5
0
0
2

y
r
a
u
n
a
J

0
1

s
i

g
n
i
t
n
u
o
c
c
a

l
a
r
e
n
e
g

e
h
t

,

n
o
i
s
s
i

m
m
o
C
e
h
t

o
t

i

g
n
d
r
o
c
c
A

.
t
e
g
d
u
b

l
a
r
e
n
e
g

n
O

e
h
t

s
s
e
r
p

d
n
a

s
n
o
i
t
a
g
e
l
e
d

l
a
n
r
e
t
x
e

e
h
t

r
o
f

t
p
e
c
x
e

s
i
s
a
b

l
a
u
r
c
c
a

l
l

u
f

a

n
o

w
o
n

-
i
s
n
o
p
s
e
r

l
a
i
c
n
a
n
i
f

h
c
i
h
w
o
t

,
s
r
e
t
r
a
u
q
d
a
e
h

’

s
n
o
i
s
s
i

m
m
o
C

e
h
t

e
d
i
s
t
u
o

d
e
t
a
r
g
e
t
n

i

y
l
e
v
i
s
s
e
r
g
o
r
p

e
b

l
l
i

w
h
c
i
h
w
d
n
a

d
e
t
a
r
t
n
e
c
n
o
c
e
d

n
e
e
b

e
v
a
h

s
e
c
i
f
f
o

s
e
i
t
i
l
i

b

5
0
0
2

e
h
t

g
n
i
s
o
l
c

r
o
f

s
e
r
u
d
e
c
o
r
p

e
h
T

.

5
0
0
2
m
o
r
f

s
a
m
e
t
s
y
s

l
a
r
t
n
e
c

e
h
t

o
t
n

i

-
a
n
i
f

e
b
o
t
d
e
e
n

l
l
i
t
s

s
t
n
e
m
e
t
a
t
s

l
a
i
c
n
a
n
i
f
5
0
0
2
e
h
t
g
n
i
r
a
p
e
r
p
r
o
f
d
n
a

s
t
n
u
o
c
c
a

.

d
e
s
i
l

.
s
e
i
r
a
i
d
e
m
r
e
t
n

i

l
a
i
c
n
a
n
i
f

e
h
t

d
r
o
c
e
r

o
t

e
d
a
m
n
e
e
b

e
v
a
h

s
t
r
o
f
f
e

e
l
b
a
r
e
d
i
s
n
o
C

.
s
e
l
u
r

g
n
i
t
n
u
o
c
c
a

e
h
t

n

i

h
t
i

w

t
l
a
e
d

n
e
e
b

e
v
a
h

s
n
o
i
t
s
e
u
q

e
h
t

f
o

e
m
o
S

-
b
u
p
e
h
t

f
o
t
s
o
m
o
d
s
a

,

g
n
i
t
n
u
o
c
c
a
h
s
a
c

e
s
u
s
e
i
t
i
n
u
m
m
o
C
n
a
e
p
o
r
u
E

e
h
T

f
o

s
n
o
i
t
a
t
i

m

i
l

e
h
t

f
o

e
r
a
w
a

s
i

n
o
i
s
s
i

m
m
o
C

e
h
T

.
s
n
o
i
t
a
s
i
n
a
g
r
o

r
o
t
c
e
s

c
i
l

-
d
o
m
e
h
t

r
o
f

t
c
e
j
o
r
p

e
h
t

n
e
k
a
t
r
e
d
n
u

s
a
h

t
i

y
h
w
s
i

h
c
i
h
w

,

h
c
a
o
r
p
p
a

s
i
h
t

.

g
n
i
t
n
u
o
c
c
a

l
a
u
r
c
c
a
o
t

e
v
o
m
e
h
t
d
n
a
m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a

e
h
t

f
o
n
o
i
t
a
s
i
n
r
e

.

5
0
0
2

y
b

s
d
r
a
d
n
a
t
s

S
A
S
P
I

h
t
i

w
y
l
p
m
o
c

o
t

s

m
i
a

n
o
i
s
s
i

m
m
o
C
e
h
T

-
r
a
e
y
e
h
t

f
o
n
o
i
t
a
r
a
p
e
r
p
e
h
t

,

m
e
t
s
y
s
g
n
i
t
n
u
o
c
c
a

e
l
b
a
t
i
u
s

a

f
o
e
c
n
e
s
b
a

e
h
t
n
I

e
h
t

e
d
i
s
t
u
o

s
d
r
o
c
e
r

n
o

d
e
s
a
b

t
n
e
t
x
e

e
g
r
a
l

a

o
t

s
i

s
t
n
e
m
e
t
a
t
s

l
a
i
c
n
a
n
i
f

d
n
e

-
r
o
c

e
h
t
o
t
d
e
k
n

i
l

s
y
a
w
l
a

t
o
n
e
r
a

s
i
h
t

r
o
f
d
e
s
u
s
n
o
i
t
a
u
l
a
v
e

e
h
t
d
n
a

s
t
n
u
o
c
c
a

s
e
o
d
m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a

t
n
e
s
e
r
p

e
h
T

.
s
n
o
i
t
c
a
s
n
a
r
t

y
r
a
t
e
g
d
u
b

i

g
n
d
n
o
p
s
e
r

-
n
e
p
x
e

l
a
t
i
p
a
c
-
n
o
n
d
n
a

l
a
t
i
p
a
c
n
e
e
w
t
e
b
h
s
i
u
g
n
i
t
s
i
d
o
t

e
l
b
i
s
s
o
p
t
i

e
k
a
m

t
o
n

e
h
t

i

e
n
m
r
e
t
e
d
o
t
n
e
v
e

r
o
g
n
i
c
n
a
n
i
f
-
e
r
p
d
n
a

s
t
n
e
m
y
a
p

l
a
n
i
f
n
e
e
w
t
e
b

,
e
r
u
t
i
d

n
r
u
t
t
u
o
c
i
m
o
n
o
c
e

e
h
t

f
o
n
o
i
t
a
l
u
c
l
a
c

e
h
T

.
s
e
l
b
a
v
i
e
c
e
r

d
n
a

s
t
b
e
d

f
o
t
n
u
o
m
a

d
e
t
c
e
f
f
a

y
l
e
s
r
e
v
d
a

s
u
h
t

s
i

e
h
t

f
o

a
e
r
a

e
h
t

n

i

k
r
o
w

t
n
a
c
i
f
i
n
g
i
s

e
n
o
d

y
d
a
e
r
l
a

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

e
b

y
l
n
o

y
l
e
t
a
m

i
t
l
u
n
a
c

s

m
e
l
b
o
r
p
h
c
u
s

,
r
e
v
e
w
o
H

.
s
e
i
r
a
i
d
e
m
r
e
t
n

i

l
a
i
c
n
a
n
i
f

.

5
0
0
2

n

i

m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a
w
e
n

e
h
t

f
o

n
o
i
t
c
u
d
o
r
t
n

i

e
h
t

h
t
i

w
d
e
v
l
o
s
e
r

-

m
o
C
e
h
t

d
n
a

e
s
i
c
r
e
x
e

l
a
u
n
a
m
a

y
b

d
e
h
s
i
l

b
a
t
s
e

e
r
a

s
e
r
u
g
i
f

e
h
t

y
l
t
n
e
r
r
u
C

.
t
s
e
r
e
t
n

i

i

g
n
d
r
o
c
e
r

r
o
f

s
e
r
u
d
e
c
o
r
p

e
h
t

e
v
o
r
p
m

i

o
t

d
e
u
n
i
t
n
o
c

s
a
h

n
o
i
s
s
i

m

e
r
a

s
e
l
i
f

P
I
C
E

n
e
p
o

l
l
a

g
n
i
t
n
u
o
c
c
a

d
e
s
a
b
-
l
a
u
r
c
c
a

o
t

e
v
o
m
e
h
t

f
o

t
r
a
p

s
A

d
e
s
i
v
e
r

g
n
i
e
b

y
l
t
n
e
r
r
u
c

-
r
e
c

n

i

n
w
o
h
s

s
t
n
u
o
m
a

e
h
t

f
o

n
o
i
t
a
u
l
a
v
e

e
h
t

o
t

d
e
t
a
l
e
r

s

m
e
l
b
o
r
p

n
i
a
t
r
e
C

l
a
i
c
n
a
n
i
f

y
b
d
l
e
h
s

m
u
s

r
a
l
u
c
i
t
r
a
p
n

i

e
v
l
o
v
n

i

t
e
e
h
s

e
c
n
a
l
a
b
e
h
t

f
o
s

m
e
t
i

n
i
a
t

e
t
a
r
n
o
i
t
a
s
i
l
i
t
u

l
a
u
t
c
a

r
i
e
h
t

,
)
s
r
o
t
b
e
d
y
r
d
n
u
s

r
e
d
n
u
d
e
d
r
o
c
e
r
(

s
e
i
r
a
i
d
e
m
r
e
t
n

i

s
n
a
o

l

d
n
a

s
t
n
e
m

t
s
e
v
n

i

n
i
a
t
r
e
c

n
i
a
g
a

r
o

,
t
s
e
r
e
t
n

i

d
e
t
a
l
e
r

f
o

t
n
u
o
m
a

e
h
t

d
n
a

t
r
o
s
n
o
C
e
r
u
t
n
e
V

,
l
a
t
i
p
a
C
h
c
e
t
o
r
u
E

,

P
I
C
E
(

s
n
o
i
t
a
i
r
p
o
r
p
p
a
y
r
a
t
e
g
d
u
b
t
s
n
i
a
g
a

.
)
e
l
p
m
a
x
e

r
o
f

e
m
m
a
r
g
o
r
P

e
r
u
t
n
e
V

t
n
o
J

i

d
n
a

’

s
e
i
t
i
n
u
m
m
o
C

e
h
t

n
o

t
c
e
j
o
r
p

n
o
i
t
a
s
i
n
r
e
d
o
m
e
h
t

f
o

t
c
a
p
m

i

e
r
u
t
u
f

y
n
A

t
r
o
p
e
R

l
a
u
n
n
A
3
0
0
2

e
h
t

n

i

s
e
i
l

p
e
R

e
h
t

f
o

n
o
i
t
a
s
i
n
r
e
d
o
m
e
h
t

f
o

k
r
o
w
e
m
a
r
f

e
h
t

i

n
h
t
i

w
d
e
v
l
o
s
e
r

y
l
l
a
i
t
n
e
t
o
p

s
t
n
o
P

i

k
r
o
w
e
m
a
r
f

g
n
i
t
n
u
o
c
c
a

m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a

’

s
e
i
t
i
n
u
m
m
o
C

r
e
c
i
f
f

O
g
n
i
t
n
u
o
c
c
A
e
h
t

y
b

d
e
t
p
o
d
a

s
e
l
u
r

g
n
i
t
n
u
o
c
c
a

e
h
t

f
o

n
o
i
t
a
c
i
l

p
p
a

e
h
T

.

d
e
s
i
a
r

e
h
t

n

i

s
t
n
o
p

i

e
h
t

f
o

t
s
o
m

e
l
t
t
e
s

o
t

d
e
s
o
p
p
u
s

s
i

4
0
0
2

r
e
b
m
e
c
e
D

8
2

n
o

s
n
o
i
s
n
e
p

f
o

n
o
i
t
a
t
n
e
s
e
r
p

t
n
e
r
r
u
c

e
h
t

,

n
o
i
s
s
i

m
m
o
C

e
h
t

o
t

i

g
n
d
r
o
c
c
A

n
e
e
b
s
a
h
d
r
a
d
n
a
t
s

S
A
S
P
I
n
a

l
i
t
n
u
d
e
n
i
a
t
n
i
a
m
e
b

,
r
e
v
e
w
o
h

,
l
l
i

w

t
e
e
h
s

e
c
n
a
l
a
b

.
t
c
e
j
b
u
s

e
h
t

n
o

d
e
u
s
s
i

o
t
n
o
i
t
i
s
n
a
r
t

e
h
t

f
o
k
r
o
w
e
m
a
r
f

e
h
t
n
h
t
i

i

w
h
t
i

w

t
l
a
e
d

i

e
r
e
w
s
t
n
o
p
s
u
o
i
r
a
V

e
c
u
d
o
r
t
n

i

y
l
n
o

l
l
i

w

n
o
i
s
s
i

m
m
o
C

e
h
t

d
n
a

5
0
0
2

n

i

g
n
i
t
n
u
o
c
c
a

l
a
u
r
c
c
a

.
s
e
g
n
a
h
c

e
v
i
s
s
e
c
c
u
s

i

d
o
v
a

o
t

s
t
n
u
o
c
c
a

5
0
0
2

e
h
t

r
o
f

s
e
g
n
a
h
c

o
t

d
e
t
c
e
p
x
e

s
i

d
n
a

s
t
n
u
o
c
c
a

4
0
0
2

e
h
t

r
o
f

g
n
i
t
n
u
o
c
c
a

e
h
t

f
o

n
o
i
t
a
s
i
n
r
e
d
o
m

e
h
t

f
o

d
e
g
n
a
h
c
n
u

k
r
o
w
e
m
a
r
f

s
n
i
a
m
e
r

n
o
i
t
a
u
t
i
s

e
h
T

e
h
t

n

i

h
t
i

w

t
l
a
e
d

e
b

n
w
o
n
k

s
y
a
w
l
a

l
l
i

w
n
o
i
t
a
m
r
o
f
n

i

s
i
h
t

f
o
y
t
i
l
i

b
a
i
l
e
r

e
h
T

.
e
r
u
s
o
l
c

r
i
e
h
t

f
o
e
m

i
t

e
h
t

s
a

n
o
i
t
a
m
r
o
f
n

i

l
a
i
c
n
a
n
i
f

t
n
e
s
e
r
p

y
l
i
r
a
s
s
e
c
e
n

s
t
n
u
o
c
c
a

l
a
u
n
n
a

e
h
T

t
a

e
b

s
a

t
s
i
s
r
e
p

s
t
n
u
o
c
c
a

e
h
t

f
o

n
o
i
t
a
t
n
e
s
e
r
p

e
h
t

i

g
n
n
r
e
c
n
o
c

s
e
s
s
e
n
k
a
e
w

r
e
h
t
O

t
o
n

s
e
c
n
a
v
d
a

r
e
h
t
o

d
n
a

e
r
u
t
i

d
n
e
p
x
e

l
a
r
u
t
l
u
c
i
r
g
a

s
t
n
u
o
m
a

e
t
a
m
i
x
o
r
p
p
a

f
o

n
o
i
t
a
t
n
e
s
e
r
p

e
h
t

,

h
c
u
s

f
o

s
a

s

m
e
t
i

n
i
a
t
r
e
c

s
d
r
a
g
e
r

n
w
o
h
s

t
u
b

d
e
t
u
c
e
x
e

e
h
t

d
n
a

,
s
t
b
e
d

e
k
i
l

n
w
o
h
s

g
n
i
e
b

,
s
n
o
i
s
i
v
o
r
p

f
o

s
c
i
t
s
i
r
e
t
c
a
r
a
h
c

e
h
t

g
n
i
v
a
h

c
i
m
o
n
o
c
e

e
h
t
n
o
t
c
e
f
f
e

e
h
t

s
e
s
i
l
a
r
t
u
e
n
h
c
i
h
w

,
s
t
h
g
i
r
n
o
i
s
n
e
p
r
o
f
g
n
i
t
n
u
o
c
c
a

.

n
r
u
t
t
u
o

s
n
o
i
t
c
a
s
n
a
r
t

s
t
n
e
m

t
r
a
p
e
d

e
m
o
s

t
a
h
t

s
t
n
u
o
c
c
a
d
n
e
-
r
a
e
y

e
h
t
n

i

n
o
i
t
a
c
i
d
n

i

’

s
n
o
i
s
s
i

m
m
o
C
e
h
t

y
b

e
t
a
d

r
e
t
a
l

a

t
a

d
e
t
c
e
r
r
o
c

o
n

e
b

l
l
i
t
s

s
i

e
r
e
h
T

o
t

y
l
e
k
i
l

e
r
a

e
h
t

f
o

n
o
i
t
a
c
i

d
n

i

y
n
a

r
o
n

,
)

2
1
1

.

h
p
a
r
g
a
r
a
p

e
e
s
(

s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

y
b

r
o

-
n
i
a
t
r
e
c
n
u

r
e
h
t
o

e
r
a

e
r
e
h
t

,
e
r
o
m
r
e
h
t
r
u
F

.
s
n
o
i
t
c
e
r
r
o
c

h
c
u
s

f
o

e
l
a
c
s

e
l
b
i
s
s
o
p

.
)

3
1
1

.

h
p
a
r
g
a
r
a
p

e
e
s
(

s
t
n
u
o
c
c
a

e
h
t

t
c
e
f
f
a

y
l
i
r
a
r
o
p
m
e
t

y
a
m
h
c
i
h
w
s
e
i
t

.

m
e
t
s
y
s

n
e
k
a
t
r
e
d
n
u

r
o

e
m

i
t

t
a
h
t

t
a

y
a
w
r
e
d
n
u

s
t
i
d
u
a

f
o

i

s
g
n
d
n
i
f

e
h
t

o
t

t
c
e
j
b
u
s

-
v
o
c
e
r

e
b
o
t

s
t
n
u
o
m
a

e
h
t

e
s
i
n
g
o
c
e
r

y
l
n
o
n
a
c

s
t
n
u
o
c
c
a

e
h
T

.

y
l
t
n
e
u
q
e
s
b
u
s

f
o

r
o
f

e
h
t

e
c
n
a
r
a
e
l
c

r
e
d
n
u

s
n
o
i
s
i
c
e
d

s
t
i

s
t
p
o
d
a

n
o
i
s
s
i

m
m
o
C

e
h
t

n
e
h
w

d
e
r
e

s
e
l
u
r

g
n
i
r
a
p
e
r
p

s
i

n
o
i
s
s
i

m
m
o
C

e
h
T

.
s
e
r
u
d
e
c
o
r
p

r
a
l
i

m

i
s

r
o

s
t
n
u
o
c
c
a

g
n
i
v
o
r
p
m

i

r
o
f

d
n
a

,
s
e
i
r
e
v
o
c
e
r

h
c
u
s

f
o

t
n
e
m
t
a
e
r
t

g
n
i
t
n
u
o
c
c
a

e
h
t

n
o
i
t
a
s
i
n
r
e
d
o
m
e
h
t

f
o

t
r
a
p

s
a

,
s
t
n
u
o
c
c
a

l
a
u
n
n
a

e
h
t

o
t

s
e
t
o
n

y
r
o
t
a
n
a
l
p
x
e

.

m
e
t
s
y
s

g
n
i
t
n
u
o
c
c
a

e
h
t

f
o

30.11.2005

EN

Official Journal of the European Union

C 301/15

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Consolidated reports on implementation of the budget
(revenue and expenditure)

Provisional components of the implementation of the budget

the Court’s observation in its 2002 (7)
1.12. Despite
and 2003 (8) Annual Reports, there continues to be no sufficient
and precise indication in the explanatory notes to 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
the EAGGF-Guarantee paying agencies’
States (clearance of
accounts, adjustment of the provisional amounts in the case of
the closure procedure for projects and programmes relating
to Internal policies, External actions and Structural Funds). Addi-
tionally, the explanatory notes contain no indication of the pos-
sible scale of such corrections (e.g. the magnitude of the correc-
tions made in previous financial years or the extent to which
payments charged to the budget might be subject to future cor-
rections).

1.13.
Furthermore, there are other uncertainties which may
temporarily affect the accounts, for example, 20 paying agencies,
managing 11 000 million euro of agriculture funds, received a
qualified or negative opinion on their accounts from the certify-
ing bodies (see paragraph 4.19), and the Commission’s postpone-
ment of its financial clearance decision for the financial year 2004
of paying agency accounts representing 9 % of the expenditure
declared for the financial year 2004, pending further information
or the completion of certain audit work (see paragraph 4.20).

Expenditure booked against non-corresponding budget headings

1.12. An additional comment is included in the 2004 final accounts
indicating that most of the payments made by the Commission during
the year are provisional and subject to varying conditions. Following the
modernisation of the accounting system, the Commission has new
accounting rules in place for accounting methods of recoveries of amounts
paid out, and this also covers the explanatory notes to the annual
accounts. The effects of the new rules should be seen in the 2005 annual
accounts.

For Structural Fund payments, it is difficult to predict the level of future
corrections as it depends on the outcome of lengthy procedures in large
numbers of individual cases.

the annual accounts necessarily
Concerning agricultural spending,
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 underway at that time or undertaken subsequently. The accounts
can only recognise the definitive amounts to be recovered when the Com-
mission adopts its final decisions under clearance of accounts or similar
procedures.

The Commission will analyse the possibility of improving information on
the financial impact of corrections made concerning prior years.

1.13. As stated in point 4.19, qualifications and negative opinions
are restricted in the great majority of cases to particular issues and mea-
sures, concerning specific aspects of the activities of the 20 paying agen-
cies concerned. The expenditure concerned is in general limited.

It should be emphasised that the postponement of the clearance of
accounts decision does not cause any financial consequences for the
Member States concerned, nor does it prejudice any exclusion of expen-
diture of Community financing. The Commission has already initiated a
procedure to recover any material undue payments.

1.14. According to the Accession Treaty (9), ISPA projects not
fully implemented by the date of accession, shall be considered
approved by the Regulation on the Cohesion Fund, while

1.14. According to the Financial Regulation, a payment can only be
made against the budget heading on which the commitment was made.
The heading title has now been changed to ‘closure of pre-accession aid

(7) Paragraphs 1.10 to 1.11.
(8) Paragraph 1.11.
(9) Accession Treaty, Annex II, chapter 15, point 1 e)

(OJ L 236,

23.9.2003).

C 301/16

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

payments made since that date (345,5 million euro) to the new
Member States concerned, continue to be made against appro-
priations for pre-accession intervention. On the basis of the bud-
getary principle of transparency it would be appropriate to clarify
the situation in the financial statements (10).

for the eight candidate countries’. Therefore, the Commission is no longer
paying on pre-accession appropriations. As underlined by the Court, the
management of these projects according to Cohesion Fund rules was pro-
vided for by the Accession Treaty.

In the context of the common agricultural policy (11), the
1.15.
Member States have the possibility of reducing the payments due
to farmers under certain aid schemes and using the funds with-
held to finance additional rural development measures. Accord-
ing to this system (known as modulation), accounting entries
have been made against a budget heading which will ultimately
not be the one to which the concerned expenditure will be
charged (165,2 million euro in 2004), and expenditure which has
not yet been implemented (263 million euro at 31 Decem-
ber 2004) has been presented in the accounts as already having
been effected (see paragraphs 1.13 and 1.14 of the 2002
and 1.10(a) of the 2003 Annual Report).

1.15. With regard to the entry into the accounts of 165,2 million
euro in 2004, the accounting methods applied to the amounts withheld
under Articles 3 and 4 of Regulation (EC) No 1259/1999 and
Article 1 of Regulation (EC) No 1655/2004 are established in accor-
dance with Article 1 of Commission Regulation (EC) No 1017/2001
(amending Article 2 of Regulation (EC) No 296/96).

With regard to the expenditure not yet implemented by the Member
States (263 million euro in 2004), Member States can withhold part
of the direct aid for farmers, on the basis of modulation and eco-
conditionality, to be used during a specific period for measures accom-
panying rural development (under Articles 3 to 5 of Regulation (EC)
No 1259/1999 and Articles 153(4) and 155 of Regulation (EC)
No 1782/2003). The amounts withheld and not used must be reim-
bursed at the end of that period.

The current modulation system is being phased out and there are no
plans to change the entry into the budgetary accounts during its last
years. How it is treated in general accounts is under examination as part
of the changeover to accrual accounting in 2005.

Consolidated financial statements

Balance sheet

Amounts owed by Member States

1.16. Reservations concerning the completeness and accuracy
of the amounts due to the Commission in respect of the EAGGF-
Guarantee debtors ledger (665,5 million euro net at 31 Decem-
ber 2004) have been expressed by several certifying bodies (see
paragraph 1.25 of the 2002 and 1.10(d) of the 2003 Annual
Report).

(10) Article 29 of the Financial Regulation (OJ L 248, 16.9.2002).
(11) Council Regulation (EC) No 1259/1999 (OJ L 160, 26.6.1999, p. 113)
and Commission Regulation (EC) No 963/2001 (OJ L 136,
18.5.2001, p. 4).

1.16. The provision for doubtful debts continues to be based on the
best estimates of each paying agency involved, as in previous years. It is
assumed 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 cer-
tifying bodies to check that these ledgers are complete. Certifying bodies
for 86 of the 91 paying agencies were able to provide assurance that
debtors’ ledgers were stated fairly.

Approximately one third of the amount mentioned by the Court is attrib-
utable to one paying agency, for which a reservation was made by the
Certifying Body and for which the accounts were disjoined by the Com-
mission.

30.11.2005

EN

Official Journal of the European Union

C 301/17

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.17. As replied in previous years, the Commission accepts this remark
of the Court, but states that the introduction of the new accounting sys-
tem in 2005 addresses the problems raised.

1.18. The new system introduced in 2005 and based on accrual-
accounting rules, will allow the Commission to better control the
amounts of pre-financing (such as for financial intermediaries).

1.19. The review of the open files continued in 2005. The value of
51,5 million euro registered in the balance sheet at year-end 2004 cor-
responds to 41,2 million euro relating to pre-financing amounts (facil-
ity 2), and 10,3 million euro on accounts opened by the various finan-
cial institution partners of the ECIP programme. The value reduction of
29,6 million euro applies only to the amount of the pre-financing. The
value reduction was estimated by deducting the amount for which recov-
ery is almost certain (11,5 million euro) from the total. The amount of
10,3 million euro was identified thanks to a circularisation exercise
made to confirm the situation concerning facilities 3 and 4. It will be
transferred to the Commission following the sending of the necessary
recovery orders.

1.20. As has been responded previously by the Commission, this
accounting treatment for pensions is in accordance with the accounting
rules adopted by the Accounting Officer of the Commission following
discussion with the Accounting Standards Committee. The issue will be
re-addressed when an IPSAS on the treatment of pensions in public sec-
tor entities is available.

Sundry debtors

1.17. The recording of sundry debtors (4 139,8 million euro at
31 December 2004) continues to pose problems (12). 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 assur-
ance that the record of amounts receivable is complete and accu-
rate.

1.18.
Furthermore, in the absence of a suitable accounting sys-
tem, the Court is unable to give assurance as to the accuracy
and completeness of the amounts entered as held by financial
intermediaries (13)
at
31 December 2004 (see paragraph 1.27 of the 2002 and 1.10(f)
of the 2003 Annual Report).

1 313,6 million

euro (14)

totalling

In addition, the basis on which the Commission recorded
1.19.
a value reduction of 29,6 million euro on advances for ECIP (13)
(European Community Investment Partners) (51,5 million euro at
31 December 2004) was doubtful, because the constituent parts
to which it applies were not yet fully identified, as the review of
the open files has not been finalised (see paragraph 1.18 of the
2002 and 1.10(b) of the 2003 Annual Report)

Provision for pensions

1.20. The current presentation in the balance sheet of the pro-
vision for pensions (15)
(26 008 million euro at 31 Decem-
ber 2004 according to an actuarial evaluation for
staff
(25 814 million euro) and for the Members of the Commission,
the Judges and Advocates General of the Court of Justice as well
as for the Members of the Court of Auditors (194 million euro))
and of the corresponding amount receivable from the Member
States has the effect of neutralising the impact on the economic
outturn, as it does not show the change during 2004 for the
Community institutions’ pension liabilities (see paragraphs 1.31
to 1.32 of the 2002 and 1.10(h) of the 2003 Annual Report).

(12) See paragraph 1.23 and paragraphs 1.10(e) and 1.14 and 1.15 of the

Court’s 2002 and 2003 Annual Reports.

(13) Included in the amount of sundry debtors mentioned in para-

graph 1.17.

(14) Including 19,6 million euro in interest.
(15) The provision for pensions is included under ‘Provisions for risks

and charges’.

C 301/18

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Action plan for the modernisation of the accounting
system

General background

1.21. On 17 December 2002, the Commission adopted the
Action Plan for the modernisation of the European Communities’
accounting system (16). This was in response to a number of pre-
vious observations by the Court and takes into account the pro-
visions of the Financial Regulation adopted in June 2002 (17)
requiring, inter alia, the introduction of accrual-based accounting
(Article 125). This action plan, which was intended to be fully
operational as of 1 January 2005 (18), consists of two strands, one
concerning the adoption of the new accounting framework (19),
and the other, the development of the information systems
required for its implementation (20). A project oversight board
and an advisory committee for accounting standards were set up
in order to provide support to the Commission’s Accounting
Officer, who is responsible for the implementation of the project.

Audit scope and approach

1.22. Given the fundamental importance of the modernisation
project, the Court commenced an audit of the different phases of
the Commission’s project implementation, which is ongoing. The
Court provides its preliminary findings here, and will report on
subsequent stages in future Annual Reports.

In the first phase, which covers the transition process dur-

1.23.
ing 2004, the Court concentrated on the:

— verification that the new accounting rules and accounting
guidelines are compatible with the Financial Regulation
and international standards (see paragraphs 1.24 to 1.27);

— identification of the data not previously available, which
needed to be put into the system (pre-financing and related
guarantees, invoices/payment requests, legal entities), by car-
rying out a system evaluation and corroborative tests (21) (see
paragraphs 1.28 to 1.37);

(16) Communication from the Commission — Modernisation of the
Accounting System of the European Communities (COM(2002) 755
final of 17.12.2002).

(17) See also resolution of the European Parliament concerning discharge
for the 2001 financial year, paragraph 23 (OJ L 148, 16.6.2003).

1.22. The new accounting system is operational and the preparation
of the 2005 annual accounts (including opening balance sheet) contin-
ues to progress since the finalisation of the Court’s audit in May 2005.

(18) However, a full

local accounting systems was
expected from the beginning to take a longer period than the two
years available after adoption of the Commission.

integration of all

(19) Action 16 (accounting framework) of the Action Plan (COM(2002)

426 final of 24.7.2002).

(20) Action 17 (core financial information systems) of the Action Plan

(COM(2002) 426 final of 24.7.2002).

(21) Substantive tests will be carried out in a later phase of this audit.

30.11.2005

EN

Official Journal of the European Union

C 301/19

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— high level assessment by the Accounting Officer and his ser-
vices of the state of readiness of the local financial manage-
ment systems of certain Directorates-General and services
providing data for the Commission’s accounts (local systems)
for the introduction of accrual-based accounting (ABAC) (see
paragraphs 1.38 to 1.42).

New accounting framework

1.24. On 28 December 2004, the Commission’s Accounting
Officer adopted a set of 15 rules (22) as required by Article 133 of
the Financial Regulation. These rules cover the key items for
accounting and financial reporting based on the internationally
accepted standards for the public sector (23), adapted to the spe-
cific needs of the Commission and of the European Communi-
ties (24). These rules were subsequently transposed into imple-
menting rules and an accounting manual applicable in the
institutions and bodies whose accounts are to be consolidated (25),
in time for the drawing-up of the accounts for the financial year
2005.

1.25. With a view on its future work on the opening balance for
the 2005 financial year, which by the end of the audit work
(May 2005) was not yet completed, the Court limited its first
analysis to four accounting rules considered as key for the tran-
sition, namely those dealing with financial statements, expenses
and payables, pre-financing and provisions, contingent assets and
liabilities. The remaining rules will be analysed in later phases of
this audit.

(22) 1. Group Accounting, 2. Financial statements, 3. Expenses and pay-
ables, 4. Revenue and receivables, 5. Pre-financing, 6. Intangible fixed
assets, 7. Tangible fixed assets, 8. Leases, 9. Stock, 10. Provisions, con-
tingent assets and liabilities, 11. Financial assets and liabilities,
12. Employee Benefits, 13. Foreign currency translation, 14. Eco-
nomic result of the year, fundamental errors and changes in account-
ing policies, 15. Related party disclosure.

(23) International Public Sector Accounting Standards (IPSAS) issued by
in their
the International Federation of Accountants (IFAC) or,
absence,
International Accounting Standards (IAS)/International
Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board (IASB).

(24) Article 133(2) of the Financial Regulation provides that, in certain
cases, the applicable accounting rules may deviate from the interna-
tionally accepted standards for the public sector where it is justified
by the specific nature of the Communities’ activities.

(25) See Article 129 of the Financial Regulation of 25 June 2002.

C 301/20

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.26.
It was found that these four rules comply in all material
aspects with the Financial Regulation as well as with the Interna-
tional Public Sector Accounting Standards (IPSAS), as far as they
are covered by them (26). However, due to the complexity of the
different areas covered, compliance is, to a certain extent, achieved
by remaining rather general in both the basic rules and the more-
detailed accounting manual, thereby leaving the interpretation of
specific elements to the discretion of the different Directorates-
General (see paragraph 1.32). Furthermore, there is a need for
clarification concerning guarantees and pre-financing (see para-
graph 1.33).

1.26. The accounting rules as adopted by the Accounting Officer of
the Commission had been discussed by the Accounting Standards Com-
mittee and are, by their very nature, necessarily more general than spe-
cific. This is also the case with the international accounting rules on
which they are based,
the International Accounting Standards/
International Financial Reporting Standards (IAS/IFRS) as well as the
International Public Sector Accounting Standards. More detailed
instruction and guidance is available in the accounting manual and
fiches that are available on the Commission Intranet. The application of
these rules is compulsory for the Directorates-General.

1.27. The development and approval of instructions was not
yet finalised by the end of the audit work (May 2005) as, for
example, for the cut-off procedure which is currently under
preparation. It is important to define the financial year to which
generating events should be attributed, as this has a direct impact
on the accounting of transactions and the true and fair view of the
financial position.

1.27. The development of such instructions is an ongoing process
which has greatly advanced since the finalisation of the Court’s audit.
Instructions were prepared in good time. The cut-off procedure was pre-
sented and discussed with Directors-General at the end of July and the
beginning of August. Finally, as was envisaged, cut-off instructions were
finalised and sent to Directorates-General by mid-August. They were
also published on the internal website.

Additional data required for the opening balance sheet

1.28. The Commission has to prepare the accounts according
to the new accounting rules for the financial year 2005. This
requires reprocessing the closure of the 2004 financial year in
order to establish the opening balance for 2005 according to the
new accounting rules. Certain data, necessary for the opening bal-
ance, do not appear in the accounts at the end of 2004. There-
fore, these data must be identified, applying specific procedures,
and accounted for in 2005.

1.29. The following paragraphs deal with the most important
elements: pre-financing (advances), which constitutes an asset;
invoices/payment requests not paid by the 31 December 2004,
which constitute a liability; guarantees, which will be entered in
the Annex to the balance sheet; and the legal entities, which are a
necessary condition to carry out payments.

1.30. The Commission estimates the amount of
the pre-
financing to be entered into the accounts at approximately
64 000 million euro. Five Directorates-General represent more
than 90 % of this amount: Directorate-General for Regional
Policy, Directorate-General for Employment, Social Affairs and
Equal Opportunities, Directorate-General for Agriculture and
Rural Development, Directorate-General for Research and Euro-
peAid Cooperation Office. It was therefore decided to concentrate
on these five Directorates-General for the audit of the pre-
financing and related issues such as guarantees.

(26) For pre-financing and non-exchange operations not yet covered by

IPSAS, it tried to respect the spirit of the IPSAS.

30.11.2005

EN

Official Journal of the European Union

C 301/21

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Pre-financing

1.31. By the end of the audit work for this Annual Report in
May 2005, not all technical and conceptual issues had been
addressed (see paragraphs 1.25 to 1.27). Furthermore,
the
amounts entered into the system were still provisional, as they
had not yet been validated by the Authorising Officers with the
result that definitive opening balances for the financial year 2005
were not yet available. Accurate opening balances are a precon-
dition for establishing the financial statements for the year 2005
which show a true and fair view.

1.31.

See replies 1.26 and 1.27.

The process of establishing opening balances is expected to be completed
in good time. The first upload of data into the new system was done dur-
ing the first week of January. Directorates-General have been verifying
and correcting the figures and are required to formally validate the defini-
tive opening balances.

1.32. The procedures concerning the recognition, clearing and
measurement of pre-financing in the general accounts differ
between the Directorates-General. This could have an impact on
the disclosure and consequently on the information given on the
economic outturn of the reporting period (27).

1.32. The many different types of contractual conditions require dif-
ferent procedures for the clearing of pre-financing amounts. The presen-
tation of pre-financing in the financial statements will reflect the eco-
nomic reality.

1.33. All guarantees are first recorded at face value. This amount will
only be reduced if the Authorising Officer has accepted a reduction in the
guarantee provided. Both the value of the guarantee held and the current
net amount guaranteed will be presented in the notes to the financial
statements, using information coming from the accounting system.

1.34.

See reply to paragraph 1.31.

1.35. The discrepancies identified by the Court have been reviewed
and corrected. Since the Court’s audit reconciliations have been made by
each Directorate-General, which is required to validate its definitive
opening balances.

The comments regarding the Directorate-General for Employment, Social
Affairs and Equal Opportunities concern errors corrected in May 2005,
and the adoption of a prudent provision for cost claims received. IT devel-
opments in early 2005 interrupted the Directorate-General for Regional
Policy’s regular reconciliation of its local system to ABAC.

Guarantees

1.33. At the moment, all Directorates-General maintain guar-
antees at their initial nominal value. However, maintaining this
value, irrespective of the amount which can be claimed in case an
event gives rise to a call on the guarantee, overstates the total
amount backed up by guarantees. Therefore it would be neces-
sary to provide complementary information in the explanatory
notes relating to contingent assets and liabilities.

Invoices/payment requests

1.34. As for pre-financing (see paragraph 1.31), the amounts
entered into the system for invoices/payment requests were still
provisional by the end of the audit work for this Annual Report
in May 2005.

1.35. The Court’s audit revealed some risks related to the local
systems. It was found (for instance in the Directorate-General for
Regional Policy) that local systems and ABAC are not regularly
reconciled in order to confirm a successful transfer of data, and
(as found in the Directorate-General for Employment, Social
Affairs and Equal Opportunities) that certain amounts were reg-
istered more than once and communicated to the central system.
Furthermore, errors were found resulting from a misinterpreta-
tion of data (as found in the Directorate-General for Employment,
Social Affairs and Equal Opportunities) where the larger of the
cost claim and outstanding commitment was considered as
invoice/payment request and loaded into the central system.

(27) The Court focused the checks, at this stage, on the recognition
and clearing of pre-financing as such. Liaised aspects as the assess-
ment of non-current pre-financing (actuarial method), generated
interest and foreign currency translation will be covered at a later
stage. Furthermore, intended accounting corrections to harmonise the
content of what is considered as pre-financing were still under dis-
cussion at the time of the audit (e.g. corrections by means of
provisions).

C 301/22

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Legal entities

1.36.
Starting in 2005, no budgetary transaction can be
executed if it does not carry the reference of a legal entity, previ-
ously registered and validated in the legal entity file (LEF). The LEF
is, generally, an area of low risk since any error occurring in this
context blocks any payment. Before the payment process can
continue, the LEF-entries have to be corrected and validated.

1.37. Of the five Directorates-General and Services audited only
the EuropeAid Cooperation Office had problems concerning the
validation of legal entities due to the nature of the activity, as the
necessary documentation could not always be obtained (contrac-
tors from all over the world being subject to varying legal systems
with the resulting differences in banking procedures, VAT treat-
ment, register of companies etc.).

Validation of local systems

1.38. The Accounting Officer has to verify and validate that
local systems are capable of providing the central system with
data which complies with the new accounting rules (28). Once this
procedure is finalised, the central system is no longer allowed to
accept data provided by non-validated local systems.

1.37.
Specific measures have been taken to resolve the particular prob-
lems the Directorate-General in question was faced with. Accordingly,
these problems should not reoccur.

1.39. This validation is carried out in two phases. In the first,
the controls were solely based on management representations.
Although initially foreseen for end-December 2004, 40 individual
and a final Synthesis report were only available during February
2005.

1.39. The final report was adopted at the end February 2005, after
the Directorate-General for Budget had incorporated comments received
from all the Directorates-General. The final version included an overall
assessment of the validation exercise in 2004, plus individual assess-
ments for the 40 Directorates-General.

1.40.
Following the Accounting Officer’s review of all 40 sys-
tems, some risks were identified for five systems (29) and three
other systems (30) were deemed to contain serious problems.
However, as modifications could not be implemented in the short
term, these systems continued to be used during 2005.

1.40. Where risks were identified for five systems, the reports con-
cluded that these risks do not currently call into question their ability to
provide data for the institution’s accounts or their use to substantiate
data in those accounts.

As part of the follow-up work being performed in 2005, an in-depth
investigation will be carried out for 13 Directorates-General and offices.
This includes the Directorates-General mentioned by the Court as wells
as five of the larger Directorates-General (1). This work has already
started and will continue until the end of the year. Draft reports on the
validation of local systems for these 13 Directorates-General will be
issued before the end of 2005.

(28) In terms of Article 61(1)(e) of the Financial Regulation, the Account-
ing Officer is responsible for ‘laying down and validating the account-
ing systems and where appropriate validating systems laid down by
the authorising officer to supply or justify accounting information’.
The corresponding Article 57 of the Implementing Rules states that
‘where financial management systems set up by the authorising officer
provide data for the institution’s accounts or are used to substantiate
data in those accounts, the accounting officer must give his agree-
ment to the introduction or modification of such systems.’

(29) Directorates-General for Informatics, Education and Culture, Humani-
tarian Aid, the EuropeAid Cooperation Office and the European Com-
munities Personnel Selection Office.

(30) Directorate-General for External Relations, the Office for the Admin-
istration and Payment of Individual Entitlements and the Office for
Official Publications of the European Communities.

(1) Directorates-General Agriculture and Rural Development, Employment,
Social Affairs and Equal Opportunities, Regional Policy, Research and Press
and Communication.

30.11.2005

EN

Official Journal of the European Union

C 301/23

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.41. The current validation procedure does not include a
mechanism to inform the Accounting Officer about modifica-
tions to the local systems which would trigger a new validation
according to Article 61 of the Financial Regulation.

1.41. The Directorate-General for Budget will develop a procedure for
the notification of changes to the local systems before the end of 2005,
based on the experience gained throughout this validation exercise.

1.42.
In the second validation phase (scheduled still to start in
2005), in-depth checks will be carried out to ensure a sufficient
level of data quality and to corroborate the results of the first
phase. The requirements of Article 61 of the Financial Regulation
will only be fulfilled when, still based on the results of these
checks, the Accounting Officer concludes on the final validation
of the local systems.

1.42. During the course of year 2005, further validation of local sys-
tems is indeed envisaged. Initially, individual follow-up questionnaires
were addressed to the 40 Directorates-General and Services, and replies
were received within the deadline, that is to say by end June 2005. A
progress report has been compiled and covers 27 Directorates-General,
for which no significant problems have been identified. This Progress
Report has been sent firstly to the Accounting Officer and will be made
available, in due course, to the Court of Auditors.

Assessment of progress made

1.43. The modernisation of the accounting system had to be
planned and implemented within the timeframe imposed by the
Financial Regulation. Experience in public administrations under-
taking similar reforms (31) shows that projects of this scale are
linked to a variety of problems delaying a frictionless implemen-
tation. Against this background the Commission has achieved sig-
nificant progress towards introducing accrual-based accounting.

1.44. However, as already observed by the Court in previous
Annual Reports (32), the timetable established for the necessary
adaptations and validations is very ambitious. Indeed, the open-
ing balance 2005, initially forecast to be established by the end
of 2004, has not been issued by mid-2005.

1.44. The modernisation project has met its target date of January
2005 for the new system to be in place, on 1 January 2005, the Com-
mission moved the reporting of the EU budget from cash-based to
accrual-based accounts. The Commission is confident that the opening
balances will be established in good time.

1.45.
Further progress has to be made, as figures needed for the
establishment of the opening balance 2005 are not yet validated
by the Authorising Officers of the Commission. Additionally, not
all aspects are yet fully covered by the existing rules and instruc-
tions are not interpreted coherently by the services concerned.
The Accounting Officer should take the necessary measures to
ensure coherence and consistency with a view to the presentation
of financial information giving a true and fair view. If no timely
action is taken by the Commission, the shortcomings identified
by the Court may affect the reliability of the 2005 financial state-
ments.

1.45. The accrual-based accounting system will continue to be devel-
oped and improved during 2005 and 2006. The modernisation project
has largely met the objectives set for the first eight months of 2005. All
services have invested heavily to prepare the information necessary for the
opening of accrual-based accounts, and make the necessary adaptations
to their local systems to enable the correct bookkeeping of transactions
in the new system.

The Commission has, as it has done throughout this modernisation
project, every intention in taking the actions necessary to ensure the
completion of the work.

(31) For instance at the United Nations Headquarters or in France, Spain,

Sweden and the United Kingdom.

(32) See paragraph 1.8 of the Court’s 2002 Annual Report and para-

graph 1.25 of the Court’s 2003 Annual Report.

C 301/24

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Legality and regularity of underlying transactions

The Court’s DAS approach

the

into

requirements

of
consideration
1.46. Taking
Article 248(1) of the Treaty, the changing audit environment
(which is extremely complex and has changed fundamentally due
to the financial reform of the Commission) and the expectations
of the DAS’s ‘users’ (namely the discharge authority), the Court
decided that its audit opinion would be the result of a consolida-
tion of the specific assessments concerning own resources and
each of the six operational chapters of the financial perspective
2000 to 2006 (33). These specific assessments, which aim to give
the discharge authority the possibility to monitor the quality of
the management of the funds in each of the major fields of Com-
munity intervention (34), are based on four sources of evidence:

(a) an examination of the way in which the supervisory and con-
trol systems set up both in the Community institutions and in
the Member States and third countries work;

(b) a testing of samples of transactions for each major area by

carrying out checks down to final beneficiary level;

(c) an analysis of the annual activity reports and declarations of
the Directors-General and of the procedures applied in draw-
ing them up;

(d) where possible, an examination of the work of other audi-
tors who are independent of Community management pro-
cedures.

1.47. The objective of the audit of supervisory and control sys-
tems is to assess the extent to which they manage the risks con-
cerning legality and regularity of underlying transactions. The
testing of transactions seeks to obtain direct evidence on the legal-
ity and regularity and to provide indications on the origin, fre-
quency, nature and impact of errors found. The results of the
transaction testing are used to complement and contribute to the

1.47. The Commission welcomes the Court’s assessment of the extent
to which the supervisory and control systems manage the risk of irregu-
larity of underlying transactions, and will endeavour to improve them
where the Court finds weaknesses. Equally, where the Court’s transaction
testing indicates that the supervisory and control systems are not oper-
ating as intended, the Commission will endeavour to correct the deficien-
cies, and to recover any damage to the Communities’ budget.

(33) Agriculture, structural measures, internal policies, external actions,

administration and pre-accession strategy.

(34) With regard to expenditure, the Financial Regulation distinguishes
between the following cases (Article 53): the Commission implements
the budget on a centralised basis (administrative expenditure
and internal policies); the management of transactions is shared with
the national authorities in the Member States (EAGGF-Guarantee and
Structural Funds); the Commission decentralises the implementation
of certain aspects of its operations to beneficiary countries after hav-
ing carried out an ex ante check (pre-accession strategy) and the Com-
mission may manage, jointly, certain operations with international
organisations (see the Court’s Annual Report concerning the finan-
cial year 2003, paragraph 1.57).

30.11.2005

EN

Official Journal of the European Union

C 301/25

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

conclusions on the systems. Information from both sources is
used to identify recommendations for corrective actions. In accor-
dance with international audit standards, the Court also takes
account of the ‘management representations’ contained in the
annual activity reports and declarations of the Directors-General,
as well as in their Synthesis which is adopted by the Commission.
Finally, the work of other auditors (35) is reviewed in order to
evaluate the potential relevance for the specific assessments.

DAS audit results 2004

Need to achieve effectiveness of supervisory and control systems

1.48. The conclusions of the specific assessments to be drawn
concerning the different DAS sources available are broadly con-
sistent. In areas where, according to the Court’s audit, supervisory
and control systems are implemented that allow risk to be man-
aged adequately, the Court’s substantive testing tends to identify
only insignificant findings as regards legality and regularity of
underlying transactions and the Court’s assessment of the decla-
rations of Directors-General and authorising officers by delega-
tion (36) confirmed that no or only minor reservations had to be
presented (see paragraphs 3.52 to 3.55, 8.31 and 8.32, 8.36
and 8.37, 9.13 and 9.26 to 9.28).

1.49.
In areas where, according to the Court’s evaluation, super-
visory and control systems exist but their effectiveness in manag-
ing the associated risk has to be improved, the Court’s substan-
tive testing tends to identify material findings as regards legality
and regularity of underlying transactions (see paragraphs 4.55
to 4.62, 5.47 to 5.50, 6.46, 7.39 and 7.40). Furthermore, the
Court’s assessment of the declarations of Directors-General con-
firmed that major reservations were either presented or, in the
Court’s view, should have been presented. This is an indication
that management itself has to continue its efforts in order to
ensure an adequate control of the risk concerning legality and
regularity of the underlying transactions (see table 1.2).

1.49. As stated in its replies to the paragraphs referred to by the
Court, the Commission considers that the Directors-General had reason-
able assurance that the supervisory and control systems in place are suf-
ficient to manage the risk of error and irregularity in the underlying
transactions. When significant risks materialise, the EC budget is pro-
tected by recoveries from the claimants concerned or, for jointly managed
funds, from the Member State concerned. The Commission works con-
stantly to improve these systems, most recently through its analysis of
gaps between its present systems and those recommended by the ECA in
its Opinion No 2/2004, and in its regulatory proposals for the 2007
to 2013 financial perspectives.

(35) Other auditors mean any public or private person called upon to give
an auditor’s assessment of operations that are financed in whole or in
part from the Community budget, but whose obligation does not
stem from the Community regulations.

(36) For some Institutions (Court of Justice and Committee of the Regions),
the Court could not take the annual activity reports into consideration
as they had not been produced before the Court’s audit was concluded
(see paragraph 9.13).

)
4
(

n
o
i
t
u
o
v
E

l

r
o
f

e
c
n
a
v
e
l
e
R

s
’
t
r
u
o
C

e
h
t

t
i
d
u
a

)
3
(

s
n
o
i
s
u
l
c
n
o
c

f
o

t
n
e
t
n
o
C

)
2
(

s
n
o
i
t
a
r
a
l
c
e
d

)
4
(

n
o
i
t
u
o
v
E

l

4
0
0
2

3
0
0
2

y
b

d
e
l
a
e
v
e
r

s
e
s
s
e
n
k
a
e
w

r
e
h
t
O

t
i
d
u
a

s
’
t
r
u
o
C

e
h
t

)
4
(

n
o
i
t
u
o
v
E

l

e
s
e
h
t

f
o

t
c
a
p
m

I

n
i
a
m

n
o

s
n
o
i
t
a
v
r
e
s
e
r

-
r
o
t
c
e
r
i

D
e
h
t

s
’
l
a
r
e
n
e
G

n

i

e
c
n
a
r
u
s
s
a

s
’
t
r
u
o
C

e
h
t

)
1
(

w
e
i
v

4
0
0
2

3
0
0
2

e
v
i
t
c
e
p
s
r
e
p

l
a
i
c
n
a
n
i
f

y
b

l
a
r
e
n
e
G
-
s
r
o
t
c
e
r
i
D
e
h
t

y
b

4
0
0
2

d
n
a

3
0
0
2

n

i

d
e
s
s
e
r
p
x
e

s
n
o
i
t
a
v
r
e
s
e
r

e
h
t

o
t

t
r
u
o
C
e
h
t

y
b

p
u
-
w
o

l
l

o
F
—
2
1

.

e
l
b
a
T

C 301/26

EN

Official Journal of the European Union

30.11.2005

+

A

A

=

A

A

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

+

C

C

+

B

C

+

C

C

+

B

C







×

×

)

8
5
4

.

.
r
a
p
e
e
s
(

9
8
/
5
4
0
4
n
o
i
t
a
l
u
g
e
r

s
d
r
a
g
e
r

s
a

×

y
r
o
s
i
v
r
e
p
u
s

e
h
t

f
o
n
e
k
a
t

t
n
u
o
c
c
a

t
n
e
i
c
i
f
f
u
s
n
I

—

s
n
o
i
t
c
a
s
n
a
r
t

3
0
0
2

r
o
f

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

s
k
c
e
h
c

e
t
e
l
p
m
o
c
n

i

f
o
g
o
l
k
c
a
b
d
n
a
n
o
i
t
c
a

g
n

i

-
r
o
t
i
n
o
m

’

s
n
o
i
s
s
i

m
m
o
C
e
h
t

f
o
e
p
o
c
s
d
e
t
i

m
i
L

—

+

B

B

/

+

A

B

×

e
h
t

f
o

e
r
u
s
o
l
c

e
h
t

h
t
i

w

d
e
t
c
e
n
n
o
c

s
k
s
i
R

—

-
g
i
s

i

r
o
/
d
n
a
d
o
i
r
e
p
g
n
m
m
a
r
g
o
r
p
9
9
9
1
-
4
9
9
1

f
o
n
o
i
t
a
t
n
e
m
e
l
p
m

i

e
h
t
n

i

s
e
s
s
e
n
k
a
e
w

t
n
a
c
i
f
i
n

)

5
4
5

.

.
r
a
p

e
e
s
(

7
9
/
4
6
0
2

o
N

)

C
E
(

n
o
i
t
a
l
u
g
e
R

+

B

C

4
0
0
2

3
0
0
2

l
a
r
e
n
e
G
-
s
r
o
t
c
e
r
i

D

f
o

s
n
o
i
t
a
v
r
e
s
e
r

n
i
a
M

r
o
t
c
e
S







×

×

×

×

×

)
y
l
a
t
I
(

×

×

×

×

×

×

×

×

×

×

)
e
c
e
e
r
G

(

e
c
e
e
r
G

(

)

n
i
a
p
S

d
n
a

×

)
e
c
e
e
r
G

(

×

×

,
e
c
e
e
r
G

(

d
n
a

n
i
a
p
S

)
l
a
g
u
t
r
o
P

s
e
m
e
h
c
s

l
a
i
t
n
e
r
e
f
e
r
p

f
o

n
o
i
t
a
c
i
l

p
p
a

e
h
t

g
n
i
r
o
t
i
n
o
M

—

s
e
c
r
u
o
s
e
R

n
w
O

e
c
i
r

i
t
a
m
s
a
B

f
o

t
r
o
p
m

I

—

f
e
e
b

’

n
o
t
l
i

H

‘

—

l
i
c
n
u
o
C

l
i

O
e
v
i
l

O

l
a
n
o
i
t
a
n
r
e
t
n
I

—

l
a
r
u
t
l
u
c
i
r
g
A

n
o
m
m
o
C

y
c
i
l

o
P

e
c
e
e
r
G
n

i

S
C
A

I

—

-
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m

i

:
e
c
n
a
d
u
G
-
F
G
G
A
E

—

)

6
0
0
2
/
0
0
0
2

(

s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

n

i

s

m
e
t

l
a
r
u
t
c
u
r
t
S

s
e
r
u
s
a
e
m

e
h
t
n

i

s

m
e
t
s
y
s

l

o
r
t
n
o
c
d
n
a

t
n
e
m
e
g
a
n
a
m

l
a
r
e
v
e
s

:

F
S
E

—

)

6
0
0
2
/
0
0
0
2

(

s
e
t
a
t
S

r
e
b
m
e
M

-

m
e
M
e
h
t
n

i
s

m
e
t
s
y
s
l

o
r
t
n
o
c
d
n
a
t
n
e
m
e
g
a
n
a
m
P
O
F
I

:

—

)

6
0
0
2
/
0
0
0
2

(

s
e
t
a
t
S

r
e
b

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m

:

F
D
R
E

—

)

6
0
0
2
/
0
0
0
2

(

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m
G
E
R
R
E
T
N

I

d
n
a

N
A
B
R
U

—

)

6
0
0
2
/
0
0
0
2

(

s

m
e
t
s
y
s

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m

:
s
d
n
u
F

n
o
i
s
e
h
o
C

—

)

6
0
0
2
/
0
0
0
2

(

30.11.2005

EN

Official Journal of the European Union

C 301/27

)
4
(

n
o
i
t
u
o
v
E

l

r
o
f

e
c
n
a
v
e
l
e
R

s
’
t
r
u
o
C

e
h
t

t
i
d
u
a

)
3
(

s
n
o
i
s
u
l
c
n
o
c

)
4
(

n
o
i
t
u
o
v
E

l

f
o

t
n
e
t
n
o
C

)
2
(

s
n
o
i
t
a
r
a
l
c
e
d

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

+

B

B

+

B

B

+

C

C

+

B

C

+

+

B

C

A

B

+

+

B

C

A

B

4
0
0
2

3
0
0
2

y
b

d
e
l
a
e
v
e
r

s
e
s
s
e
n
k
a
e
w

r
e
h
t
O

t
i
d
u
a

s
’
t
r
u
o
C

e
h
t

)
4
(

n
o
i
t
u
o
v
E

l

e
s
e
h
t

f
o

t
c
a
p
m

I

n
i
a
m

n
o

s
n
o
i
t
a
v
r
e
s
e
r

-
r
o
t
c
e
r
i

D
e
h
t

s
’
l
a
r
e
n
e
G

n

i

e
c
n
a
r
u
s
s
a

s
’
t
r
u
o
C

e
h
t

)
1
(

w
e
i
v

4
0
0
2

3
0
0
2









×

×

5
3

e
l
c
i
t
r
A

(

t
n
e
m
e
g
a
n
a
m
d
e
s
i
l
a
r
t
n
e
c

t
c
e
r
i
d
n

i

f
o

k
r
o
w
e
m
a
r
f

e
h
t

i

n
h
t
i

w
g
n
i
t
s
e
t

y
r
a
n
m

i

i
l
e
r
P

—

)

9
3
6

.

.
r
a
p

e
e
s
(

)
F
R
E
M

e
e
s
(

a
e
r
a

h
t
l
a
e
h

c
i
l

b
u
p

r
o
f

y
c
n
e
u
q
e
r
f

r
o
r
r
E

—

)

9
3
6

.

.
r
a
p

×

f
o

i

g
n
d
e
e
c
x
e

c
i
t
a
m
e
t
s
y
s

e
h
t

o
t

d
e
t
a
l
e
r

s
k
s
i
R

—

h
c
r
a
e
s
e
r

f
o

a
e
r
a

e
h
t

n

i

d
o
i
r
e
p

t
n
e
m
y
a
p

e
h
t

=

B

B

×

t
o
n
n
a
c

s
e
i
r
t
n
u
o
c

e
t
a
d

i

d
n
a
c

e
m
o
s

t
a
h
t

k
s
i
R

—

g
n
i
c
n
a
n
i
f
-
o
c
g
n
d
r
a
g
e
r

i

s
n
o
i
t
a
g
i
l

b
o
r
i
e
h
t

l
i
f
l
u
f

×

×

e
h
t

r
o
f

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

y
r
o
s
i
v
r
e
p
u
S

—

-
c
a
s
n
a
r
t

g
n
i
y
l
r
e
d
n
u

f
o

y
t
i
r
a
l
u
g
e
r

d
n
a

y
t
i
l
a
g
e
l

-
a
s
i
n
a
g
r
o

g
n
i
t
n
e
m
e
l
p
m

i

f
o

l
e
v
e
l

e
h
t

t
a

s
n
o
i
t

y
l
l

u
f

e
b
o
t
d
e
v
o
r
p
m

i

r
e
h
t
r
u
f

e
b
o
t
d
e
e
n
s
n
o
i
t

)

0
4
7

.

.
r
a
p

e
e
s
(

l
a
n
o
i
t
a
r
e
p
o

+

A

B

/

+

=

B

C

A

A









4
0
0
2

3
0
0
2

l
a
r
e
n
e
G
-
s
r
o
t
c
e
r
i

D

f
o

s
n
o
i
t
a
v
r
e
s
e
r

n
i
a
M

r
o
t
c
e
S

×

×

×

×

×

)
a
i
n
a
m
o
R

(

×

a
i
n
a
m
o
R

(

-
l
u
B

d
n
a

)
a
i
r
a
g

×

×

×

t
c
e
r
i
d
n

i

f
o
k
r
o
w
e
m
a
r
f

e
h
t
n
h
t
i

i

w
g
n
i
t
s
e
t
y
r
a
n
m

i

i
l
e
r
P

—

s
n
o
i
t
a
r
a
l
c
e
d

t
s
o
c

e
h
t

n

i

)
y
t
i
l
i

b
i
g
i
l
e
(

y
c
n
e
u
q
e
r
f

r
o
r
r
E

—

s
t
c
a
r
t
n
o
c

h
c
r
a
e
s
e
r

r
o
f

n

i

i

d
n
a
m
o
d
g
n
K
d
e
t
i
n
U
e
h
t

n

i

m
e
t
s
y
s

t
n
e
m
e
g
a
n
a
m

’

s
e
e
g
u
f
e
R

r
o
f

d
n
u
F

n
a
e
p
o
r
u
E

e
h
t

n

i

s
e
s
s
e
n
k
a
e

W

—

g
r
u
o
b
m
e
x
u
L

)
F
R
E
M
5
3

e
l
c
i
t
r
A

(

t
n
e
m
e
g
a
n
a
m
d
e
s
i
l
a
r
t
n
e
c

s
t
i
d
u
a

t
o
p
s
-
e
h
t
-
n
O

—

l
a
n
r
e
t
n
I

,
s
e
i
c
i
l

o
p

i

g
n
d
u
l
c
n

i

h
c
r
a
e
s
e
r

×

n
o
i
t
a
s
i
n
a
g
r
o

l
a
t
n
e
m
n
r
e
v
o
g
-
n
o
n

a

h
t
i

i

w
p
h
s
r
e
n
t
r
a
P

—

l
a
n
r
e
t
x
E

s
n
o
i
t
c
a

×

×

s
n
o
i
t
c
a
s
n
a
r
t

d
n
a

s

m
e
t
s
y
s

f
o

t
i
d
u
a

e
h
t

n

i

s
n
o
i
s
s
i

m
o

,
s

m
e
t
s
y
s
d
e
s
i
l
a
r
t
n
e
c
e
d
e
h
t
n

i

t
n
e
r
e
h
n

i

s
k
s
i
R

:

E
R
A
H
P

—

y
b
s
e
r
u
d
e
c
o
r
p
t
n
e
m
e
r
u
c
o
r
p
t
c
a
r
t
n
o
c

f
o
t
c
e
p
s
e
r
n
o
N

—

n
o
i
t
a
s
i
n
a
g
r
O
n
a
i
r
a
t
i
n
a
m
u
H
a

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m

:

A
P
S
I

—

n
o
i
s
s
e
c
c
a
-
e
r
P

y
g
e
t
a
r
t
s

×

×

e
h
t
n

i

s
d
r
a
d
n
a
t
s

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

f
o
n
o
i
t
a
t
n
e
m
e
l
p
m

I

—

s
n
o
i
t
a
g
e
l
e
d

’

s
U
E

e
v
i
t
a
r
t
s
i
n
m
d
A

i

e
r
u
t
i
d
n
e
p
x
e

y
e
K

n
o
i
t
a
r
a
l
c
e
d

s
’
l
a
r
e
n
e
G
-
r
o
t
c
e
r
i

D

e
h
t

n
o

s
n
o
i
t
a
v
r
e
s
e
r

n
i
a
m

e
s
e
h
t

f
o

t
c
a
p
m

I

)
1
(

)
d
e
n
r
e
c
n
o
c

t
e
g
d
u
b

e
h
t

f
o
%
0
1

<

t
c
a
p
m

i

l
a
i
c
n
a
n
i
f

e
s
o
h
w
s
e
s
s
e
n
k
a
e
w
m
e
t
s
y
s

r
o
%
2

<

s
r
o
r
r
e
(

s
n
o
i
t
c
a
s
n
a
r
t

g
n
i
y
l
r
e
d
n
u

e
h
t

f
o

y
t
i
r
a
l
u
g
e
r

d
n
a

y
t
i
l
a
g
e
l

e
h
t

e
r
u
s
n
e

s

m
e
t
s
y
s

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

e
h
t

t
a
h
t

s
n
o
i
t
a
c
i
f
i
l
a
u
q

h
t
i

w
e
c
n
a
r
u
s
s
a

e
l
b
a
n
o
s
a
e
r

:

B

s
n
o
i
t
a
c
i
f
i
l
a
u
q

t
n
a
c
i
f
i
n
g
i
s
n

i

r
o

o
n

h
t
i

w
s
n
o
i
t
c
a
s
n
a
r
t

g
n
i
y
l
r
e
d
n
u

e
h
t

f
o

y
t
i
r
a
l
u
g
e
r

d
n
a

y
t
i
l
a
g
e
l

e
h
t

e
r
u
s
n
e

s

m
e
t
s
y
s

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

e
h
t

t
a
h
t

e
c
n
a
r
u
s
s
a

e
l
b
a
n
o
s
a
e
r

:

A

)
d
e
n
r
e
c
n
o
c

t
e
g
d
u
b

e
h
t

f
o
%
0
1

>

t
c
a
p
m

i

l
a
i
c
n
a
n
i
f

e
s
o
h
w
s
e
s
s
e
n
k
a
e
w
m
e
t
s
y
s

r
o
%
2

>

s
r
o
r
r
e
(

e
c
n
a
r
u
s
s
a

o
n

:

C

)

n
o
i
t
a
m
r
o
f
n

i

e
l
b
a
s
u
n
u

,

n
o
i
t
a
c
i
f
i
t
n
a
u
q

f
o

k
c
a
l

,
r
a
e
y

l
a
i
c
n
a
n
i
f

s
u
o
i
v
e
r
p

e
h
t

f
o

r
e
v
o
c

,
t
n
e
m
e
g
a
n
a
m
d
e
r
a
h
s

f
o

s

m
e
l
b
o
r
p

e
h
t

f
o

e
c
n
e
g
i
l
g
e
n

:
e
l
p
m
a
x
e

r
o
f
(

s
e
i
c
a
r
u
c
c
a
n

i

d
e
i
f
i
t
s
u

j

y
l
t
n
e
i
c
i
f
f
u
s
n

i

r
o

t
n
a
c
i
f
i
n
g
i
s

h
t
i

w

:

C

s
u
o
u
g
i
b
m
a
n
u

d
n
a

r
a
e
l
c

:

A

s
e
i
c
a
r
u
c
c
a
n

i

h
t
i

w

:

B

:
s
n
o
i
t
a
r
a
l
c
e
d

f
o

t
n
e
t
n
o
C

)
2
(

)

n
o
i
t
a
m
r
o
f
n

i

t
n
e
i
c
i
f
f
u
s
n

i

r
o

e
t
a
u
q
e
d
a
n

i

o
t

e
u
d

.

g
.
e
(

s
n
o
i
s
u
l
c
n
o
c

s
’
t
r
u
o
C
e
h
t

r
o
f

e
c
n
e
d
i
v
e

t
n
e
i
c
i
f
f
u
s
n

i

:

C

s
n
o
i
t
c
e
r
r
o
c

r
e
t
f
a

s
n
o
i
s
u
l
c
n
o
c

s
’
t
r
u
o
C
e
h
t

r
o
f

e
c
n
e
d
i
v
e

t
n
e
i
c
i
f
f
u
s

:

B

s
n
o
i
s
u
l
c
n
o
c

s
’
t
r
u
o
C
e
h
t

r
o
f

e
c
n
e
d
i
v
e

t
n
e
i
c
i
f
f
u
s

:

A

:
s
n
o
i
s
u
l
c
n
o
c

t
i
d
u
a

s
’
t
r
u
o
C

e
h
t

r
o
f

e
c
n
a
v
e
l
e
R

)
3
(

t
n
e
m
e
v
o
r
p
m

i

n
o
i
s
s
e
r
g
e
r

t
n
a
t
s
n
o
c

+

=

–

:

n
o
i
t
u
l
o
v
E

)
4
(

C 301/28

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Commission considers that no additional reserves should have been
presented, as stated in the column ‘Other weaknesses revealed by the
Court’s audit’ of table 1.2. Each case concerns issues which were known
to the responsible service and, for which appropriate action had been
taken to protect the EC budget, or which presented no significant finan-
cial risk (see replies to paragraphs 4.58, 5.45, 6.39 and 7.40).

With regard to the Courts assessments in the column ‘Relevance to the
Court’s conclusions’ of table 1.2, thanks to its work to improve the con-
tent of declarations and monitoring of compliance with the standards on
which they are based, the Commission feels that the annual activity
reports and annual declarations have become an effective management
tool and a reliable indicator of the results it has obtained and of its strat-
egy to deal with identified risks so that the Court can use them as a basis
for its Statement of Assurance. However, the Commission will continue
to provide more details so that the Court can use them more effectively in
support of its Statement of Assurance.

The Commission would welcome guidance as to the further information
sought by the Court in order to improve its assessment of the relevance
of the declarations for the three budgetary areas agriculture, structural
measures and external actions for 2004.

1.50. The Court has recognised in its annual reports, especially
since the presentation of the White Paper on the Commission’s
reform in April 2000 (37), that progress has been made in improv-
ing the design, implementation and functioning of supervisory
and control systems, namely at Commission level (see para-
graphs 1.71 to 1.83). This evolution has gone hand in hand with
a change in the administrative culture concerning the implemen-
tation of the EU budget. Whereas, initially, the primary focus was
on budgetary execution, control and audit aspects have gained in
importance. Furthermore, greater attention has been given to
governance issues (see paragraphs 1.55 to 1.70). The Court’s audit
shows, however, that further efforts are needed,
in varying
degrees, to ensure that supervisory and control systems function
effectively, particularly at the level of the Member States (see para-
graphs 3.54 and 3.55, 4.55 to 4.62, 5.47 to 5.50, 6.42 to 6.45,
7.39 and 7.40, 8.37 and 9.26 to 9.28).

1.50. The Commission notes the Court’s positive assessment of the
progress made since the beginning of the reform with regard to the con-
trol systems and management culture.

It acknowledges that improvements in internal control will always be
possible. Further efforts are being made, as the replies of the Commis-
sion to the Court’s observations in the relevant chapters of the report
show, in particular through the actions to ensure that key controls by
Member States are properly implemented.

Moreover, at this point, the Commission is demonstrating its commit-
ment by endeavouring to reinforce implementation of an integrated inter-
nal control system in line with the principles set out by the Court in
Opinion No 2/2004 on the single audit.

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

30.11.2005

EN

Official Journal of the European Union

C 301/29

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.52. The production of static indicators would not necessarily be
adjusted to the changing management and control environment in the
Commission. With a view to implementing the road map to an inte-
grated control framework (COM(2005) 252/4 of 15 June 2005), an
evaluation report on the differences between the internal control frame-
work in the Commission departments and the control principles set out
in the Court’s Opinion No 2/2004 relating to Community internal con-
trols has been drawn up. It finds that global rates of error in policies do
not always make sense, given the heterogeneity and multi-annual nature
of the programmes that make up the policies. It appears more appropri-
ate for each Directorate-General to define its control strategy (in particu-
lar ex post), its target indicators and the desired development over time.
The Commission acknowledges that this process, which had already
started in 2003, could be more formalised in its departments.

The effectiveness of internal controls relies largely on qualitative assess-
ments using tools which cannot always be reduced to simple indicators.

1.53. The Commission already has monitoring indicators similar to
those of the Court (see note 44) used in the following cases: implemen-
tation of the minimum requirements relating to internal control stan-
dards in the overview report on internal control, reform measures and res-
ervations by the Directors-General in the annual activity reports (AAR)
on the state of play with regard to the reform and the synthesis of the
annual activity reports (AAR), and comments on the statement of assur-
ance as part of the discharge, in particular. It recognises that such indi-
cators should be developed further and it proposes to do so in its approach
to risk management.

In the Synthesis, the Commission also undertook to analyse existing
indicators as part of a peer review by ‘families’ with a view to examining
ways to make these indicators more operational management tools.

Need to develop indicators for assessing progress

1.51. Careful monitoring is necessary,
in order to assess
whether reinforced supervisory and control systems ensure that
the risk is adequately managed. This is of particular relevance if
one takes into account all relevant developments in the audit
environment (namely the enlargement, reforms of the policies,
changes in the administrative structures).

1.52. Management is responsible for the development of the
necessary indicators (38). Therefore,
the Commission should
ensure that supervisory and control systems consistently provide
timely, accurate and adequate information on the implementation
and effective functioning of key controls and the frequency,
nature and impact of errors at the level of underlying transactions
which are not prevented, detected and rectified. The Court could
then evaluate and comment on the accuracy of the information
presented by the Commission and the Member States, and assess
the progress achieved (39).

1.53. The Court’s audits reveal that the design and use of indi-
cators by the Commission is still not sufficient (40) to continu-
ously monitor the quality of internal control systems and the
legality and regularity of underlying transactions (see para-
graph 1.61) (41).

(38) See INTOSAI — Auditing standards, Chapter 1, Point 1.0.6 (d):
‘Development of adequate information (…) and reporting systems
(…) will facilitate the accountability process. Management is respon-
sible for correctness and sufficiency of the form and content of finan-
cial reports and other information.’ The Court considers that indica-
tors are included in the scope of the adequate information.

(39) This proceeding which was proposed by the European Parliament in
its 2003 discharge resolution (see paragraphs 65 and 66) would
enable it to respond to the requests presented by the discharge
authorities.

(40) Annual Reports of the Court of Auditors concerning the financial year
2002, paragraphs 1.68 to 1.74 and the financial year 2003, para-
graphs 1.85 to 1.87.

(41) The Court developed its own monitoring elements on: implementa-
tion of actions foreseen in the White Paper on the reform or in action
plans of the synthesis reports, implementation of internal control
standards, follow-up of reservations and observations concerning the
DAS, follow-up of reservations of Directors-General, assessment of
the implementation of key controls, etc.

C 301/30

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Commission’s internal control system

Audit scope

1.54. The Court assessed the Commission’s internal control sys-
tem in the different management areas (see Article 53 of the
Financial Regulation), in view of the guarantees it provides as
regards the legality and regularity of the underlying transactions.
On the one hand, the Court examined 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 find-
ings and could be taken into account, where necessary, for the
DAS. On the other, the Court examined the progress made as
regards the implementation of the key elements of the Commis-
sion’s internal control (internal control standards and action plans
annexed to 2003 annual activity reports and their Synthesis) and
assessed the effectiveness of the procedures introduced and tools
developed.

The Commission’s management representations

2004 Synthesis report

1.55.
In its 2004 Synthesis of the annual activity reports (42),
the Commission continued its efforts to improve the transpar-
ency concerning its obligation to render account of its manage-
ment, and decided on the appropriate actions to respond to cross-
cutting (horizontal) aspects (43).

1.56. The assessment of the Commission’s internal control sys-
tem presented in the Synthesis is generally consistent with the
analysis of the Court. However, in certain cases the Court’s audit
findings indicate that further measures are needed to reach the
‘globally satisfactory’ situation presented in the 2004 Synthesis
(modernisation of the accounting system, see paragraphs 1.21
to 1.45;
indicators assessing progress, see paragraphs 1.51
to 1.53; annual activity reports and declarations of Director-
General, see paragraphs 1.59 to 1.70; action plans, see para-
graphs 1.72 to 1.74).

1.56.
In the 2004 Synthesis, the Commission noted that the autho-
rising officers by delegation were able to provide the reasonable assur-
ance required.

In the ongoing improvement process, the Commission had set itself a
series of objectives relating to essential cross-cutting questions in connec-
tion with the quality of management. By way, in particular, of integrated
controls, the certification of integrity, consistency and reliability of the
accounts, reinforcement of the presentation of annual activity reports and
a common method of risk management, the Commission has undertaken
to improve its operation in line with the reform.

(42) Communication from the Commission, 2004 Synthesis (COM(2005)

256 of 15.6.2005).

(43) The new horizontal action plan includes 12 measures related to the
following domains: governance issues, activity-based management,
financial management and reporting and human resources.

30.11.2005

EN

Official Journal of the European Union

C 301/31

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.57. As in the preceding financial years, in adopting the Synthesis of
the 2004 annual activity reports, the Commission took stock of the
management of its departments and tackled the main horizontal issues
raised by the latter in their annual activity reports.

To call for a consolidated declaration of assurance from the entire Com-
mission would run counter to the reform of financial management begun
in 2000 with a view to giving responsibility to the authorising officers
by delegation. In the Synthesis, the Commission, nevertheless, assumes
its political responsibilities by analysing the annual activity reports and
expressing its views on the main horizontal issues including measures
relating to problems to be resolved at Commission level.

1.57. While the Parliament, in its Discharge resolution 2003,
invited the Commission to convert the Synthesis into a consoli-
dated assurance statement on the financial management and con-
trols as a whole, the Commission explained that, the Synthesis
report is an act through which political responsibilities are exer-
cised by analysing the annual activity reports. Following the
approach by which management responsibilities are decentra-
lised, the Commission does not give any further assurance, as it
deems that this is done in the declarations of the Directors-
General. The Court recommends that the Commission, as an
institution, should assume ‘responsibility for the implementation
of the budget as provided for in the Treaty (Article 274) by adopt-
ing as its own the Authorising Officers by delegation’s manage-
ment representations’, (see the Court’s Annual Report for the
financial year 2003, paragraphs 1.58 to 1.60).

1.58. The Synthesis Report establishes a reference framework
under which the Commission aims, among other things, to
obtain, in the medium term, an assurance statement from the
Court with only marginal reservations. The Court notes that the
Commission’s strategy implies a qualitative change because fur-
ther improvements are sought, not by launching a new reform
but by fully developing the performance potential of the existing
systems, concentrating on the following areas:

(a) promoting accountability, by assurances from the Directors-
General and accrual based accounts signed by the Account-
ing Officer;

(b) enhancing effective performance management, by effective
supervisory and control systems and solid daily management
in which risk management is embedded;

(c)

reinforcing responsibility and monitoring capacity through
an integrated internal control
framework (see para-
graphs 1.84 to 1.86).

Annual activity reports and declarations of the Directors-General for the
financial year 2004

Improved guidelines

1.59. Based on the experience gained in previous years, the cen-
tral departments of
the Commission (Secretariat-General,
Directorate-General for the Budget and Directorate-General for
Personnel and Administration) drew up general guidelines for the
annual activity reports and declarations, which, on the one hand,
were used as a circular on the financial year 2004 (44) and, on the
other, could serve as a reference for the future financial years.

(44) Note to Directors-General and Heads of Service — Circular on the
annual activity reports for year 2004 (SEC(2004) 1562 of 3.12.2004).

C 301/32

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.60. The Commission feels that the provisions in the circular relat-
ing to part 3 of the annual reports (management and internal control
systems) also make a significant improvement by refocusing the analysis
of the departments on the risks inherent in their management environ-
ment and the effectiveness of the internal control system instead of on the
evaluation of its consistency with the minimum requirements of the inter-
nal control standards. The formulation of reservations to the declaration
of assurance by the Directors-General is, thus, the logical outcome on the
reasoning behind the strengths and weaknesses of the internal control
system which ensures consistency between the annual report, the decla-
ration and the reservations, as the Court requested in its 2003 annual
report.

1.61. Although annual reports do not have the sole purpose of super-
vising the implementation of control systems nor to determine to what
extent they ensure the legality and regularity of operations, the Commis-
sion is prepared to step up surveillance controls and risk management in
the annual activity reports.

See also replies to paragraphs 1.52 and 1.53.

1.62 to 1.63.
Following the peer review of reservations that could be
made, the Commission began to study the possibility of introducing a
certain degree of modulation in determining the materiality thresholds
for the various management areas. As stated in the report on the evalu-
ation of the differences between the control system in Commission
departments and the control principles set out in Opinion No 2/2004
of the Court of Auditors, it is normal that the rates of error found fluc-
tuate depending on the characteristics of the programmes and also over
time. This work is one of the measures launched by the Synthesis
(Action 8).

For the 2005 annual activity reports, the Commission is going to explore
the possibility of adopting a common method for determining the thresh-
old of materiality of weaknesses (see 2004 Synthesis), including those of
a systemic nature, with a view to making a more consistent evaluation of
their impact on the reasonable assurance for the ‘families’ of shared man-
agement, research and internal policies.

1.60. The Court noted an improvement in the quality of the
guidelines, as compared to 2003, particularly for the following
aspects having a link with legality and regularity:

(a)

inclusion of the monitoring of actions established within the
framework of risk management and internal control assess-
ment;

(b) explanations, for policies in shared management, on the links
between the systems for which the Commission is respon-
sible and those for which Member States are in charge;

(c)

identification, for all management models except centralised
management, if the weaknesses being the subject of a reser-
vation are attributable to the Commission and/or to a third
party;

(d) conclusions on the combined impact of reservations on dec-

larations.

1.61. Despite the progress noted, there remains scope for
improvement, in particular the presentation of indicators having
a direct link to legality and regularity (see paragraphs 1.51
to 1.53).

1.62. As regards the materiality of system weaknesses and their
impact on the Directors-General’s reasonable assurance, the 2004
circular refers to the basic principles already adopted in January
2003 (45). Difficulties with the application of the proposed crite-
ria were treated in the peer review exercise, which focused on the
analysis of the potential reservations of the Directors-General and
dealt mainly with:

(a)

scope of reservations, materiality and consistency (46);

(45) Communication from the Commission:

‘The 2002 review of the
implementation of activity-based management in the Commission,
including clarification of the methodology for the establishment of
Annual Activity Reports’ (COM(2003) 28 of 21.1.2003).

(46) In order to establish the actual scope of the reservations, the Directors-
General are asked to specify their criterion for defining the material-
ity 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 activity concerned
(COM(2003) 28 of 21.1.2003). As already indicated in its Annual
Report concerning the financial year 2003 (paragraphs 1.64 and 1.65)
the Court feels that this notion of materiality is not in itself adequate
to identify system weaknesses. The Directors-General may depart
from this criteria 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 threshold or of another materiality criteria must be
justified in the annual activity report.

30.11.2005

EN

Official Journal of the European Union

C 301/33

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b) impact of reservations on the reasonable assurance;

(c) carry-over of reservations and envisaged measures.

1.63. The Court notes that certain progress was achieved, in
particular with regard to the clarity of the reservations and their
link to material weaknesses. However, no common materiality
thresholds were yet established by budgetary area taking into con-
sideration the nature of the operations concerned and the toler-
able risk for the area in question (47). Furthermore, the guidelines
established to determine a significant system weakness and its
potential financial impact require further clarification in order to
ensure a coherent and consistent interpretation by the Directors-
General.

Declarations of Directors-General

1.64.
In their declarations attached to the annual activity
reports, the Directors-General state that the internal controls
implemented in their departments provide reasonable assurance
that the underlying transactions are legal and regular. In the event
of material internal control weaknesses or irregularities, they
make reservations. The guidelines for the annual activity reports
and the Charter for Authorising Officers by Delegation specify
that reservations must not make the declaration meaningless and
that, in extreme cases (48), the Director-General may not be able
to provide the required assurance. In order to remedy weaknesses,
action plans, which include deadlines for implementation should
be drawn up.

the declarations of

the
1.65. The Court’s examination of
Directors-General confirms the heterogeneous application of the
materiality criteria and the difficulties of their use for the formu-
lation of the reservations by the Commission departments, in par-
ticular with regard to system weaknesses (see paragraph 1.63).
For example, certain Directorates-General did not clarify appro-
priately the selected criteria and/or quantify the financial impact
in a satisfactory way (49).

(47) Opinion No 2/2004 of the Court of Auditors on the ‘single audit’
model (and a proposal for a Community internal control framework).
impact on the

(48) E.g. when the reservations have a significant

Directorate-General’s budget.

(49) E.g. Directorates-General for Employment, Social Affairs and Equal
Opportunities, for Enterprise and Industry, for Fisheries and Maritime
Affairs, for Justice, Freedom and Security, for External Relations,
Eurostat and the Office for the Administration and Payment of Indi-
vidual Entitlements.

in
1.65. The Commission notes that the Court itself recognises,
point 1.63, the progress made overall in the formulation of reservations
to the declaration of assurance by the Directors-General, a difficult mat-
ter and a practice still rather new to the Commission.

As stated in Objective 6 of the Synthesis of the 2004 annual reports,
work is continuing towards a common method to determine the materi-
ality of weaknesses, including those of a systemic nature having an
impact on the declaration of assurance of the Directors-General by ‘fami-
lies’ of Directorates-General.

A certain degree of heterogeneity in the assessment of materiality is, how-
ever, inevitable given the specific characteristics and context of each area
of activity and of the decentralised responsibilities and the related report-
ing as part of the reform of the Commission.

The declarations are intended to be read in conjunction with the annual
activity reports to which they are annexed. These reports give comple-
mentary explanations.

C 301/34

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.66. All the Directors-General stated that they had obtained
reasonable assurance that the resources allocated to them had
been used for the specified purposes, and that the internal con-
trols which they had introduced had ensured that the underlying
transactions were legal and regular. Of the 40 declarations 18 con-
tain reservations.

1.66. The determination of the impact of the reservations on the assur-
ance is improving as the practice is consolidated. The Directors-General
and Heads of Services have generally given an indication, by explicit
arguments, of the impact of the reservations made on the reasonable
assurance relating to the use of resources and the legality and regularity
of the operations. They all concluded that they could give their assur-
ance.

1.67. The main reservations are shown in table 1.2. Of the
32 reservations expressed in 2004, the majority (26) concern
weaknesses already brought to light in 2003. This confirms that
most of the weaknesses identified can be eliminated only in the
medium term (see paragraph 1.67 of the Court’s Annual Report
concerning the financial year 2003). The reduction in the num-
ber of reservations from 49 in 2003 to 32 (50) in 2004 is prima-
rily due to the fact that the Directors-General improved the pre-
sentation of declarations by concentrating on weaknesses which
represent important risks for the legality and regularity of the
underlying transactions.

1.68. Due to the improved situation (see paragraphs 1.60
and 1.63), the combined impact of the reservations on the assur-
ance given in the declarations was,
in general, more clearly
defined than in the 2003 financial year. However, the extent of
the reservations expressed by some Directorates-General is not
always compatible or sufficiently justified in view of the assurance
provided (see table 1.2 and paragraphs 4.27 to 4.32, 4.62
and 5.42).

1.67. Through its work to improve the content of the declarations and
the monitoring of compliance with the standards on which the declara-
tions are founded, the Commission is endeavouring to make the annual
declarations an efficient management tool and a reliable indicator of the
results which it achieved and its strategy to deal with risks identified so
that the Court can use them as a basis for its assurance.

With regard to the impact and scope of the reservations (see table 1.2
and paragraph 1.49), the Commission notes the Court’s observations
and will continue to provide more detailed information so that the Court
can take them into account to greater advantage in order to support its
declaration of assurance.

1.68. The Commission notes that all authorising officers by delega-
tion were able to provide reasonable assurance.

1.69. The Court’s work shows that the supervisory and control
systems in several areas of the financial perspectives, have still not
reached a satisfactory level and that further efforts are required in
order to strengthen them. Therefore, some weaknesses singled
out by the Court during its audits should have been included in
the declarations of the Directors-General (see table 1.2 and para-
graphs 4.58, 5.46, 6.39 and 7.37).

1.69.

See replies to paragraphs 1.49, 4.58, 5.45, 6.39 and 7.37.

The Directors-General’s assurance in a given year is not based solely on
the audit work carried out in the course of the year concerned, but on the
assurance built up over previous years’ audit work under the Directorates-
General’s audit strategy, as well as the assurance provided from the audit
work of Member States.

1.70. Due to the reinforced guidelines and the peer review, an
improvement is noted as regards the annual activity reports and
declarations of the Directors-General. However, the Court con-
siders that they can still only serve as a limited source for its assur-
ance because of difficulties of a coherent application of some
methodological principles.

1.70. The Commission considers that the annual activity reports and
declarations are already, and will be to a greater degree in the future, a
sound source of assurance and an effective management tool, which will
make it possible to detect weaknesses and provide an effective remedy. It
feels that in 2004, significant improvements were made in the reports
and the declarations accompanying them. See also reply to point 1.49.

As stated in the Synthesis, the Commission is also continuing to rein-
force consistency in the way its departments apply the guidelines it issues.
The road map for an integrated internal control system (COM(2005)
252/4 of 15 June 2005) and the related commitment by all the finan-
cial actors concerned will also contribute to providing the Court of Audi-
tors with a sounder basis for its assessment.

(50) The variation of the number of reservations between 2003 and 2004
(– 17) is composed of six new reserves and of the removal of
23 reserves of the financial year 2003.

30.11.2005

EN

Official Journal of the European Union

C 301/35

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Progress made in reinforcing the internal control system

Overview on the state of internal control

1.71. The Directorate-General for the Budget presented, for the
second year, a report providing an overview of the state of inter-
nal control in the Commission’s Directorates-General and services
in 2004 (51). This report takes stock of the significant progress in
implementing internal control since the establishment of the
White Paper in March 2000. It also recognises that further efforts
are necessary in order to support the move from compliance to
an effectiveness approach. Areas identified are reinforcing the
monitoring of the effectiveness of internal control of Directorates-
General, enhancing supervision procedures on financial manage-
ment, strengthening of risk management, review and simplifica-
tion of low value contracts and grants and the creation of an
integrated internal control framework. The Court considers that
this overview on the internal control system of the Commission
gives a balanced presentation of the progress achieved and areas
in need for improvement.

Action plans

General situation as regards implementation

1.72. The Court examined the progress of implementation of
the measures foreseen in the consolidated action plan annexed to
the 2003 Synthesis report, that have a direct link to legality and
regularity (52), as well as the horizontal actions indicated in table
1.3 of its 2003 Annual Report which are not covered by the Syn-
thesis (53).

(51) Action 13 of the Synthesis 2001.
(52) Actions 5.4.5 ‘Internal control standards review’, 3.3.2 ‘Communica-
tion’, 5.4.1 ‘Internal controls in delegations’, 3.3.2 ‘Management risk
assessment’, 5.4.6 ‘Follow-up by services’, 5.3.3A ‘Shared manage-
ment’, 5.3.3B ‘Audit in shared management’, 5.3.4 ‘Co-financing’,
5.3.2A ‘Recovery’, 5.3.7 ‘Accounting framework’, 3.3.2 and 3.3.3
‘Coordination of the Commission’s audit community and Audit
Progress Committee: audit overview’ and 3.3.3 ‘Audit methodology’
of the 2002 Synthesis. Actions 2 ‘Evaluation of the devolution exer-
cise’ and 7 ‘Interoperability’ of the 2001 Synthesis. Actions 11 and 74
‘Development of a database of legal entities and of a database of con-
tracts’ of the White Paper.

(53) Action 4.4 ‘Annual activity reports methodology’ of the 2002 Syn-
thesis; actions 87 ‘Review of progress made by Commission’s services
in the change process’, 93 ‘Better of coordination of interaction
between OLAF and other services’ and 94 ‘Fraud-proofing of legisla-
tion and contracts management’ of the White Paper.

C 301/36

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.73. The monitoring of the implementation of the horizontal
action plans (as well as of the specific action plans and of the
audit recommendations) has been satisfactorily integrated into the
working environment of the Commission, in particular through
the activity-based management of
the Directorates-General
(annual management plans and annual activity reports).

1.74. Table 1.3 provides an overview on the state of implemen-
tation of the 19 actions examined by the Court. At the end of the
financial year, for six actions, which are in principle completed,
further efforts are necessary in order to achieve the foreseen
objective or to introduce certain improvements (54). At the end of
2004, five actions were still in the process of implementation (55).

1.74. The Commission feels that most of the measures referred to by
the Court have since been terminated. Monitoring of measures which had
not been completed was integrated into the series of objectives of a multi-
annual nature set in the 2004 Synthesis affecting essential cross-cutting
issues for the quality of management work.

Reinforcement of internal audit function

1.75. Action 87 of the White Paper required the Internal Audit
Service (IAS) to review the improvements of the Commission’s
internal control system and to carry out a complete cycle of audits
of management and control systems in all Directorates-General.
Work on this action has been largely executed over a two year
period. The audit results presented in the different reports (56)
(strengths and achievements, as well as areas in need for improve-
ment) are balanced and confirm, on the whole, the Court’s audit
findings.

1.76. With a view to reinforcing the relations between the IAS
and the Internal Audit Capabilities
set up in all
(IACs)
Directorates-General,
in February 2004 (57) the Commission
obliged the IACs to systematically send their final reports to the
IAS and requested that the latter reports twice a year on their key
findings. Furthermore, efforts are undertaken to coordinate work
programmes and harmonise audit methodologies and reporting
structures. The first joint audits took place in 2004. The Court
considers that these steps should help to reinforce the internal
audit function within the Commission.

(54) Internal controls in delegations (action 5.4.1 of the 2002 Synthesis);
shared management and audit in shared management (actions 5.3.3A
and 5.3.3B of the 2002 Synthesis); co-financing (action 5.3.4 of the
2002 Synthesis), interoperability (action 7 of the 2001 Synthesis),
annual activity reports methodology (action 4.4 of the 2002 Synthe-
sis).

(55) Evaluation of the devolution exercise (action 2 of the 2001 Synthe-
sis), management risk assessment (action 3.3.2 of the 2002 Synthe-
sis), certain aspects connected with the reliability of the accounts
(recoveries, accounting framework and development of a database of
legal entities and of a database of contracts (actions 5.3.2A and 5.3.7
of the 2002 Synthesis, actions 11 and 74 of the White Paper).
(56) Annual internal audit report 2003, according to Article 86(3) of the
Financial Regulation, report ‘Completion of Action 87’ and a report
on the RELEX family.

(57) Communication from the Commission ‘Completing the reform man-
date: progress report and measures to be implemented in 2004’
(COM(2004) 93 of 10.2.2004).

30.11.2005

EN

Official Journal of the European Union

C 301/37

.
)

7
4
6

.

h
p
a
r
g
a
r
a
p

e
e
s
(

n
o
i
t
a
l
u
g
e
R

l
a
i
c
n
a
n
i
F

t
i
d
u
a

e
l
g
n
i
s

f
o

t
p
e
c
n
o
c

e
h
t

f
o

t
n
e
m
p
o
l
e
v
e
d

d
n
a

l

y
g
o
o
d
o
h
t
e
m
e
h
t

f
o

i

g
n
n
e
h
t
g
n
e
r
t
S

e
l
b
i
s
s
o
p

s
t
n
e
m
e
v
o
r
p
m

i

–

y
a
w

r
e
d
n
u

n
o
i
t
a
t
n
e
m
e
l
p
m

I
/
d
e
h
s
i
n
i
f

n
o
i
t
c
A

)

.
)

4
5
5

.

h
p
a
r
g
a
r
a
p

e
e
s
(

6
0
0
2

d
n
a

5
0
0
2

r
o
f

n
e
e
s
e
r
o
f

.

B
3
3
5

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

t
i
d
u
A

’
t
n
e
m
e
g
a
n
a
m
d
e
r
a
h
s

n

i

t
i
d
u
A

‘

d
n
a

e
c
n
a
i
l

p
m
o
c

e
h
t

n
e
h
t
g
n
e
r
t
s

o
t

s
r
a
e
y

t
x
e
n

e
h
t

n

i

y
r
a
s
s
e
c
e
n

s
t
r
o
f
f
e

l
a
n
o
i
t
i
d
d
A

.
)
)
c
(
1
4
7

.

h
p
a
r
g
a
r
a
p

e
e
s
(

s
n
o
i
t
a
g
e
l
e
d

n

i

s

m
e
t
s
y
s

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

f
o

s
s
e
n
e
v
i
t
c
e
f
f
e

e
l
b
i
s
s
o
p

s
t
n
e
m
e
v
o
r
p
m

i

–

y
a
w

r
e
d
n
u

n
o
i
t
a
t
n
e
m
e
l
p
m

I
/
d
e
h
s
i
n
i
f
n
o
i
t
c
A

)

.

1
4
5

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

s
l
o
r
t
n
o
c

l
a
n
r
e
t
n
I

n

i

s
l
o
r
t
n
o
c

l
a
n
r
e
t
n
I
‘

’

s
n
o
i
t
a
g
e
l
e
d

S
N
O
I
T
C
A
L
A
N
R
E
T
X
E

.
)

1
5
7

.

o
t

8
4
7

.

s
h
p
a
r
g
a
r
a
p

e
e
s
(

s
r
a
e
y

t
x
e
n

e
h
t

n

i

d
e
r
i
u
q
e
r

p
u
-
w
o

l
l

o
F

’

e
s
i
c
r
e
x
e

s
s
e
r
g
o
r
p

n

i

n
o
i
t
c
A

)

2

(

1
0
0
2

s
i
s
e
h
t
n
y
S

s
e
u
s
s
i

l
a
c
i
t
i
l

o
p

g
n
i
t
t
u
c
-
s
s
o
r
C

n
o
i
t
u
o
v
e
d

l

e
h
t

f
o

n
o
i
t
a
u
l
a
v
E

‘

-

m
e
M

f
o

s
e
i
t
i
l
i

b
i
s
n
o
p
s
e
r

e
h
t

y
f
i
r
a
l
c

r
e
t
t
e
b

o
t

r
e
d
r
o

n

i

5
0
0
2

n

i

d
e
r
i
u
q
e
r

p
u
-
w
o

l
l

o
F

-
a
r
a
p

e
e
s
(

s
a
e
r
a

t
n
e
m
e
g
a
n
a
m

t
n
e
r
e
f
f
i
d

e
h
t

n

i

n
o
i
s
s
i

m
m
o
C
e
h
t

d
n
a

s
e
t
a
t
S

s
r
e
b

e
l
b
i
s
s
o
p

s
t
n
e
m
e
v
o
r
p
m

i

–

y
a
w

r
e
d
n
u
n
o
i
t
a
t
n
e
m
e
l
p
m

I
/
d
e
h
s
i
n
i
f

n
o
i
t
c
A

)

.
)

7
5

.

h
p
a
r
g

.

A
3
3
5

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

t
n
e
m
e
g
a
n
a
m

l
a
i
c
n
a
n
i
F

’
t
n
e
m
e
g
a
n
a
m
d
e
r
a
h
S

‘

T
N
E
M
E
G
A
N
A
M
D
E
R
A
H
S

)
S
N
O
I
T
C
A
L
A
R
U
T
C
U
R
T
S
(

4
0
0
2

r
e
b
m
e
c
e
D
1
3

t
a

s
a

s
n
o
i
t
c
a

l
a
t
n
o
z
i
r
o
h

d
e
s
o
l
c
-
n
o
n

n
i
a
m
e
h
t

f
o

s
i
s
y
l
a
n
a

s
’
t
r
u
o
C
e
h
T
—
3
1

.

e
l
b
a
T

n
e
k
a
t
r
e
d
n
u

e
b

o
t

l
l
i
t
s

s
e
r
u
s
a
e
M

/
s
i
s
o
n
g
a
i
D

n
a
l
p

n
o
i
t
c
a

e
h
t

f
o

e
c
r
u
o
S

e
r
u
s
a
e
m
e
h
t

f
o

r
e
t
c
a
r
a
h
C

n
o
i
t
c
A

n
i
a
m
o
D

e
h
t

n

i

d
e
c
u
d
o
r
t
n

i

e
b

o
t

s
e
s
n
e
p
x
e

f
o

s
e
i
r
o
g
e
t
a
c

e
m
o
s

r
o
f

n
o
i
t
a
s
i
t
i
a
f
r
o
f

f
o

t
p
e
c
n
o
c

e
h
T

e
l
b
i
s
s
o
p

s
t
n
e
m
e
v
o
r
p
m

i

–

y
a
w

r
e
d
n
u

n
o
i
t
a
t
n
e
m
e
l
p
m

i
/
d
e
h
s
i
n
i
f

n
o
i
t
c
A

)

.

4
3
5

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

t
n
e
m
e
g
a
n
a
m

l
a
i
c
n
a
n
i
F

’

g
n
i
c
n
a
n
i
f
-
o
C

‘

S
E
I
C
I
L
O
P

L
A
N
R
E
T
N

I

)

H
C
R
A
E
S
E
R

(

.
)

9
7
1

.

d
n
a

8
7
1

.

s
h
p
a
r
g
a
r
a
p

e
e
s
(

s
r
a
e
y

t
x
e
n

e
h
t

n

i

y
r
a
s
s
e
c
e
n

s
t
r
o
f
f
e

l
a
n
o
i
t
i
d
d
A

s
s
e
r
g
o
r
p

n

i

n
o
i
t
c
A

)

.

2
3
3

.

i

g
n
m
m
a
r
g
o
r
p

d
n
a

i

g
n
n
n
a
l
p

c
i
g
e
t
a
r
t
S
/
t
n
e
m
e
g
a
n
a
m

(

2
0
0
2

s
i
s
e
h
t
n
y
S

d
e
s
a
b

y
t
i
v
i
t
c
A

’
t
n
e
m

s
s
e
s
s
a

k
s
i
r

t
n
e
m
e
g
a
n
a
M

‘

-
a
r
a
p

e
e
s
(

e
c
n
a
r
u
s
s
a

e
l
b
a
n
o
s
a
e
r

e
h
t

n
o

s
n
o
i
t
a
v
r
e
s
e
r

f
o

t
c
a
p
m

i

,
)

3
6
1

.

h
p
a
r
g

.
)

1
6
1

.

h
p
a
r
g
a
r
a
p

e
e
s
(

s
r
o
t
a
c
i
d
n

i

d
n
a

)

8
6
1

.

h
p
a
r
g

e
l
b
i
s
s
o
p

s
t
n
e
m
e
v
o
r
p
m

i

–

y
a
w

r
e
d
n
u

n
o
i
t
a
t
n
e
m
e
l
p
m

I
/
d
e
h
s
i
n
i
f

n
o
i
t
c
A

)

4
4

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

s
t
r
o
p
e
r

y
t
i
v
i
t
c
a

l
a
u
n
n
A

s
t
r
o
p
e
r

y
t
i
v
i
t
c
a

l
a
u
n
n
A

‘

F
O
S
T
C
E
P
S
A
L
A
T
N
O
Z
R
O
H

I

-
a
r
a
p

e
e
s
(

y
t
i
l
a
i
r
e
t
a
m

:
s
e
u
s
s
i

i

g
n
w
o

l
l

o
f

e
h
t

r
o
f

y
r
a
s
s
e
c
e
n

s
t
r
o
f
f
e

l
a
n
o
i
t
i
d
d
A

l

y
g
o
o
d
o
h
t
e
m

’

l

y
g
o
o
d
o
h
t
e
m

L
O
R
T
N
O
C

L
A
N
R
E
T
N

I

.
)

5
4
1

.

o
t

1
2
1

.

s
h
p
a
r
g
a
r
a
p

e
e
s
(

y
r
a
s
s
e
c
e
n

s
t
r
o
f
f
e

l
a
n
o
i
t
i
d
d
A

s
s
e
r
g
o
r
p

n

i

n
o
i
t
c
A

)

.

7
3
5

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

t
n
e
m
e
g
a
n
a
m

l
a
i
c
n
a
n
i
F

’

k
r
o
w
e
m
a
r
f

g
n
i
t
n
u
o
c
c
A

‘

.
)

5
4
1

.

o
t

1
2
1

.

s
h
p
a
r
g
a
r
a
p

e
e
s
(

y
r
a
s
s
e
c
e
n

s
t
r
o
f
f
e

l
a
n
o
i
t
i
d
d
A

V
r
e
t
p
a
h
c

d
n
a

’

e
c
i
v
r
e
s

n
o

’

s
t
c
a
r
t
n
o
c

f
o

d
n
a

s
e
i
t
i
t
n
e

l
a
g
e
l

s
s
e
r
g
o
r
p

n

i

n
o
i
t
c
A

)

4
7

d
n
a

1
1

(

r
e
p
a
p

e
t
i
h
W

d
e
s
a
b

e
r
u
t
l
u
c
A

‘

I
I

r
e
t
p
a
h
C

f
o

e
s
a
b
a
t
a
d

a

f
o

t
n
e
m
p
o
l
e
v
e
D

‘

t
n
e
m
e
g
a
n
a
m

l
a
i
c
n
a
n
i
f

,
t
i
d
u
A

‘

’
l

o
r
t
n
o
c

d
n
a

.
)

1
6
1

.

h
p
a
r
g
a
r
a
p

e
e
s
(

y
r
o
t

)
s
c
i
t
a
m
r
o
f
n
I

r
o
f

l
a
r
e
n
e
G
-
e
t
a
r
o
t
c
e
r
i

D
d
e
t
a
e
r
c

y
l
w
e
n

y
b
(

y
r
a
s
s
e
c
e
n

s
t
r
o
f
f
e

l
a
n
o
i
t
i
d
d
A

m
r
o
f
e
r

-
a
d
n
a
m

t
e
y

t
o
n

y
r
e
v
o
c
e
r

i

g
n
d
r
a
g
e
r

s
r
o
t
a
c
i
d
n

i

e
c
n
a
m
r
o
f
r
e
p

c
i
f
i
c
e
p
s

f
o

n
o
i
t
a
t
n
e
s
e
r
P

.
s
r
a
e
y

t
x
e
n

e
h
t

n

i

s
s
e
r
g
o
r
p
n

i

n
o
i
t
c
A

)

.

A
2
3
5

.

(

2
0
0
2

s
i
s
e
h
t
n
y
S

t
n
e
m
e
g
a
n
a
m

l
a
i
c
n
a
n
i
F

’

y
r
e
v
o
c
e
R

‘

T
I

D
N
A
G
N
I
T
N
U
O
C
C
A

S
M
E
T
S
Y
S

e
l
b
i
s
s
o
p

s
t
n
e
m
e
v
o
r
p
m

i

–

y
a
w

r
e
d
n
u

n
o
i
t
a
t
n
e
m
e
l
p
m

I
/
d
e
h
s
i
n
i
f
n
o
i
t
c
A

)

7

(

1
0
0
2

s
i
s
e
h
t
n
y
S

e
h
t

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

I

’

y
t
i
l
i

b
a
r
e
p
o
r
e
t
n
I
‘

F
O
S
T
C
E
P
S
A
L
A
T
N
O
Z
R
O
H

I

C 301/38

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.77.
In addition, the Court invites the Commission to consider
the possibility for ensuring synergies between the IAS and the
IACs by introducing a logical chain structure (58) within the inter-
nal audit function of the Commission, so that the Internal Audit
Service can take into account the work done by the IACs.

1.77. The Commission shares the Court’s concern for fully exploiting
possible synergies between the different internal audit actors in the Com-
mission.

The Commission is already taking action in this regard: a clarified infor-
mation and reporting structure and a common reporting framework,
established in Spring 2005, in particular covering the rating of audit
observations and recommendations, are important steps in enhancing the
effectiveness of the internal audit function for the Commission overall.
The work programmes of the Internal Audit service (IAS) and Internal
Audit Capacities (IACs) are being coordinated in order to avoid overlaps
and this coordination of audit planning will be reinforced for the next
programme period. There have been joint IAS and IACs audits.

The IAS has launched a quality assessment of the IACs, starting with a
self-assessment exercise in 2005 and leading to an assessment by the
IAS in 2006. This has not only the objective of guaranteeing the avail-
ability of quality internal audit services for the Directorates-General but
also to establish an objective basis for other auditors to rely on audit work
done at other levels.

Risk assessment

1.78. Action 3.3.2 of the 2002 Synthesis ‘Management risk
assessment’ stipulates that the management of the risks becomes
an operational and strategic instrument to decide on the alloca-
tion of the financial and human resources within the Commis-
sion’s departments. To that end, the Central Financial Service
(CFS) of the Directorate-General for the Budget, initiated, in 2004,
a pilot project in seven Directorates-General in order to test the
preliminary version of the risk management framework and cor-
responding implementation manual, while preparing in parallel
the activity planning process and setting their main objectives for
2005.

1.79. Despite the generally positive result,
further efforts
are necessary to develop methodological elements and tools
for risk analysis and management, which could form a solid
structural framework to be applied effectively in all Commission
services. An inter-service steering committee is following up the

1.79. The Commission agrees that further efforts are necessary and
that the Court observations fairly reflect the Commission’s action plan.

(58) Opinion No 2/2004 of the Court of Auditors on the ‘single audit’
(and a proposal for a community internal control framework),
paragraph V.

30.11.2005

EN

Official Journal of the European Union

C 301/39

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

development of the common framework, which should be
adopted by the Commission in the second half of 2005, and used
for the preparation of the 2006 Strategic Planning and Program-
ming (SPP) cycle. On this basis, adequate annual management
plans should allow Directorates-General to reduce risks deemed
unacceptable but that could not be avoided nor transferred.

Internal control standards

1.80. The Court analysed the application of internal control
standards (59) by 14 of
the Commission’s Directorates-
General (60). The aim was not only to assess the degree of imple-
mentation but also to evaluate their effective functioning as
regards the legality and regularity of the underlying transactions
(see paragraphs 1.58 and 1.71).

1.81. The guidelines presented by the CFS on the definition of
the internal control standards (baseline requirements) for the
2004 financial year did not introduce significant changes as com-
pared to 2003 (61).

In their self-assessments, which are annexed to the ‘Over-
1.82.
view on the state of internal control in the Commission DGs and
services in 2004’ (see paragraph 1.71), the Directorates-General
declare for the 2004 financial year that they comply with 93 %
of the baseline requirements defined by the CFS. In general, the
analysis of the Court confirms this presentation. Given that the
baseline requirements remained essentially unchanged, the Court
notes a slight increase in the compliance with the internal con-
trol standards, as compared to 2003 (91 %) The analysis of the
Court on the implementation of internal control standards is pre-
sented in table 1.4.

(59) Standards Nos 11 ‘Risk analysis and management’, 12 ‘Adequate
management information’, 14 ‘Reporting improprieties’, 17 ‘Supervi-
sion’, 18 ‘Recording exceptions’, 20 ‘Recording and correction of
internal control weaknesses’, 21 ‘Audit reports’ and 22 ‘Internal audit
capability’.

(60) The Directorates-General for Economic and Financial Affairs, Agri-
culture and Rural Development, Employment, Social Affairs and
Equal Opportunities, Fisheries and Maritime Affairs, Regional Policy,
Research, the Information Society and Media, Enlargement, the Bud-
get, Personnel and Administration, Health and Consumer Protection,
Humanitarian Aid, the EuropeAid Cooperation Office and Eurostat.
(61) The number of the baseline requirements decreased from 74 to 71.
Four of the requirements retained for 2004, were strengthened in
comparison to 2003.

C 301/40

EN

Official Journal of the European Union

30.11.2005

y
t
i
r
a
l
u
g
e
r

d
n
a

y
t
i
l
a
g
e
l

e
h
t

o
t

k
n

i
l

t
c
e
r
i
d

a

h
t
i

w

(

s
d
r
a
d
n
a
t
s

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

i

e
h
t

f
o

s
i
s
y
l
a
n
a

s
’
t
r
u
o
C
e
h
T
—
4
1

.

e
l
b
a
T

)
4
0
0
2

r
e
b
m
e
c
e
D
1
3

t
a

n
o
i
t
a
u
t
i
s
(

)
l
a
r
e
n
e
G
-
s
e
t
a
r
o
t
c
e
r
i
D
n
i
a
m
e
h
t

r
o
f

s
n
o
i
t
c
a
s
n
a
r
t

g
n
i
y
l
r
e
d
n
u

f
o

2
2

d
r
a
d
n
a
t
S

-
a
p
a
c

t
i
d
u
a

l
a
n
r
e
t
n
I
‘

’

y
t
i
l
i

b

1
2

d
r
a
d
n
a
t
S

’

s
t
r
o
p
e
r

t
i
d
u
A

‘

0
2

d
r
a
d
n
a
t
S

i

g
n
d
r
o
c
e
R

‘

f
o

n
o
i
t
c
e
r
r
o
c

d
n
a

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

’

s
e
s
s
e
n
k
a
e
w

8
1

d
r
a
d
n
a
t
S

-
p
e
c
x
e

i

g
n
d
r
o
c
e
R

‘

’

s
n
o
i
t

7
1

d
r
a
d
n
a
t
S

’

n
o
i
s
i
v
r
e
p
u
S

‘

4
1

d
r
a
d
n
a
t
S

-
o
r
p
m

i

g
n
i
t
r
o
p
e
R

‘

’

s
e
i
t
e
i
r
p

2
1

d
r
a
d
n
a
t
S

-
n
a
m
e
t
a
u
q
e
d
A

‘

-
a
m
r
o
f
n

i

t
n
e
m
e
g
a

’

n
o
i
t

1
1

d
r
a
d
n
a
t
S

d
n
a

s
i
s
y
l
a
n
a

k
s
i
R

‘

’
t
n
e
m
e
g
a
n
a
m

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

A

A

A

A

A

A

A

A

B

B

A

A

A

B

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

B

A

A

A

A

A

A

A

A

A

A

A

A

B

A

B

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

B

A

A

A

A

A

A

A

A

B

A

A

A

A

B

A

A

A

A

A

A

B

A

B

B

A

A

A

A

A

B

A

A

A

A

A

A

B

B

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

B

A

A

B

A

A

A

A

A

B

A

A

A

B

A

B

A

B

B

A

A

A

A

B

A

A

A

B

B

A

A

A

A

A

A

A

A

B

A

A

A

B

A

B

A

A

B

-
y
a
p

f
o

n
o
i
t
u
c
e
x
E

-
a
i
r
p
o
r
p
p
a

t
n
e
m

n

i

s
n
o
i
t

4
0
0
2

)
o
r
u
e

n
o

i
l
l
i

m

(

t
n
e
m

t
r
a
p
e
d

r
o

l
a
r
e
n
e
G
-
e
t
a
r
o
t
c
e
r
i

D

8
7
1

n
o
i
t
a
r
t
s
i
n
m
d
A
d
n
a

i

l
e
n
n
o
s
r
e
P

5
4
3
7
4

t
n
e
m
p
o
l
e
v
e
D

l
a
r
u
R
d
n
a

e
r
u
t
l
u
c
i
r
g
A

3
8
6
3

0
2
4
1

1
0
3

7
9
4

8
4
9
1

8
0
2
9

0
3

4
8
7

s
r
i
a
f
f

A

l
a
i
c
n
a
n
i
F

d
n
a

c
i
m
o
n
o
c
E

i

d
A
n
a
i
r
a
t
i
n
a
m
u
H

t
n
e
m
e
g
r
a
l
n
E

d
n
a

s
r
i
a
f
f

A

l
a
i
c
o
S

,
t
n
e
m
y
o
p
m
E

l

s
e
i
t
i
n
u
t
r
o
p
p
O

l
a
u
q
E

s
r
i
a
f
f

A
e
m

i
t
i
r
a
M
d
n
a

s
e
i
r
e
h
s
i
F

t
a
t
s
o
r
u
E

i

d
A
e
p
o
r
u
E

t
e
g
d
u
B

8
4
1
1

a
i
d
e
M
d
n
a

y
t
e
i
c
o
S

n
o
i
t
a
m
r
o
f
n
I

6
1
8
1
2

8
4
4
2

5
6
3

s
t
n
e
m
e
r
i
u
q
e
r

e
n

i
l
e
s
a
b

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

i

l
a
i
t
r
a
P

:

B

s
t
n
e
m
e
r
i
u
q
e
r

e
n

i
l
e
s
a
b

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

I

:

A

:
t
n
e
m

s
s
e
s
s

A

n
o
i
t
c
e
t
o
r
P

r
e
m
u
s
n
o
C
d
n
a

h
t
l
a
e
H

y
c
i
l

o
P

l
a
n
o
i
g
e
R

h
c
r
a
e
s
e
R

30.11.2005

EN

Official Journal of the European Union

C 301/41

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.83. The innovative element introduced by the guidelines on
the annual review of the internal control system for the financial
year 2004 consists of the assessment, by the Directorates-General,
of the effectiveness of the application of the internal control stan-
dards. The Court’s review of the annual activity reports showed,
however, that the evaluation is very general and does not make it
possible to systematically identify the areas in need of improve-
ment (see paragraph 1.58). A number of the Directorates-
General (62) did not sufficiently evaluate the effectiveness of their
internal control system. Among the services which presented a
sufficient self-assessment, the majority (63) declared that the effec-
tive operation of the internal control standards 11 ‘Risk analysis
and management’ and/or 17 ‘Supervision’ requires additional
effort.

1.83. The internal control standards have been gradually introduced
in the Directorate-Generals since the launch of the reform. Emphasis was
shifted in 2004 to effective implementation. A lot of work has already
been done in this area, in particular, with regard to the two key stan-
dards of supervision and risk management.

However, this is a continuing process and the Commission acknowledges
that much remains to be achieved in connection with one of the impor-
tant innovations of the circular on the 2004 AARs as stated in reply to
paragraph 1.60.

Towards a Community internal control framework

1.84. The Court proposed,
in its Opinion No 2/2004, the
implementation of a Community internal control framework that
should integrate and strengthen the elements already existing,
while at the same time adding new aspects in order to increase
efficiency and effectiveness of controls (common principles to be
applied at all levels of administration in the institutions and Mem-
ber States, internal controls should provide reasonable (not abso-
lute) assurance on the legality and regularity of the underlying
transactions, costs of the controls should be in proportion to the
benefits they bring in both monetary and political terms, systems
should be based around a logical chain structure where controls
are undertaken, recorded and reported to a common standard,
allowing reliance to be placed on them by all participants).

(62) E.g. Directorates-General for Competition, Development, Informat-
ics, Employment, Social Affairs and Equal Opportunities, Enterprise
and Industry, Press and Communication, Regional Policy, External
Relations, Health and Consumer Protection, Taxation and Customs
Union, the European Communities Personal Selection Office, Euro-
stat, the Bureau of European Policy Advisers, the Joint Research Cen-
tre, the Office for Infrastructure and Logistics in Brussels, the Office
for Infrastructure and Logistics in Luxembourg, the European Anti-
Fraud Office, the Office for the Administration and Payment of Indi-
vidual Entitlements and the Legal Service.

(63) E.g. Directorates-General for the Budget, Education and Culture, Eco-
nomic and Financial Affairs, Enlargement, Fisheries and Maritime
Affairs, the Information Society and Media, Translation, Energy and
Transport, Interpretation, Justice, Freedom and Security, Research, the
EuropeAid Cooperation Office, the Office for Official Publications of
the European Communities.

C 301/42

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.85. The Commission adopted as a strategic objective to ensure
that the Court obtains reasonable assurance concerning the legal-
ity and regularity of underlying transactions (64). Furthermore, the
Commission adopted a ‘roadmap to an integrated internal con-
trol framework’ (65) with a view to initiating a process leading to
a common understanding by the end of 2005, to be formalised
in an interinstitutional agreement between the Parliament, the
Council and itself, on how the current internal control framework
can be improved in order to provide the Court with the reason-
able assurance it seeks.

1.86. The Court welcomes this initiative and the Commission’s
commitment to establish an effective Community internal con-
trol framework following the recommendations presented in the
Court’s Opinion No 2/2004. Effective supervisory and control
systems are of major relevance, particularly in a context where a
large part of the Community budget consists of expenditure
which is intrinsically high risk because it depends on information
supplied by beneficiaries, or is subject to extremely complex
or imprecise rules.

1.86. There are necessarily numerous conditions governing the eligi-
bility of operations and expenditure, but the Commission provides guid-
ance and has simplified the rules as far as possible.

(64) Commission Communication, Strategic Objectives 2005-2009,
Europe 2010: A Partnership for European Renewal, Prosperity, Soli-
darity and Security. (COM(2005) 12 of 26.1.2005)

(65) Communication from the Commission to the Council, the European
Parliament and the European Court of Auditors on a roadmap to
an integrated internal control framework (COM(2005) 252/4 of
15.6.2005).

30.11.2005

EN

Official Journal of the European Union

C 301/43

CHAPTER 2

Budgetary Management

TABLE OF CONTENTS

Introduction

Observations

More information in Commission report, but insufficient analysis

A larger budget for a bigger Union

Payment spending rate increased to 95 %

Smaller surplus

Current expenditure programmes have reached the expected spending rate

Increase in outstanding budgetary commitments due to enlargement

Outstanding budgetary commitments do not represent total legal commitments

Year n + 2 rule has resulted in little decommitment so far

Inappropriate budgeting over life of spending programmes

Conclusions and recommendations

Paragraph

2.1-2.3

2.4-2.29

2.4-2.5

2.6-2.8

2.9

2.10-2.13

2.14-2.16

2.17-2.20

2.21-2.23

2.24-2.26

2.27-2.29

2.30-2.35

C 301/44

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

2.1. This chapter analyses issues arising from the implementa-
tion of the EU general budget in 2004.

2.2. The budget of the European Union is approved by the bud-
getary authority (European Parliament and Council) on the basis
of proposals presented by the Commission, and is set within the
multiannual framework of the financial perspectives. For most
expenditure areas — agriculture, structural operations, external
action and pre-accession strategy — the Commission implements
the budget in cooperation with Member and other beneficiary
States.

2.3. Within the budget there are separate appropriations for
commitments and payments. Appropriations for commitment
represent the amounts the Union has available to make budget-
ary commitments in the current year in order to honour legal
commitments (or agreements) to spend during the current or
future years (1). Appropriations for payment represent amounts
that can be spent during the current year. Most expenditure on
structural operations and on internal and external policies takes
the form of programmes managed over a number of years (e.g.
2000-2006 for the current Structural Fund programming period).
In these cases, legal obligations are not generally reflected as bud-
getary commitments in the year they are agreed, but as approxi-
mately equal yearly tranches over the life of the programmes (2).

OBSERVATIONS

More information in Commission report, but insufficient analysis

2.4. Detailed information on budgetary implementation for
2004 can be obtained from the Commission document entitled
‘Report on budgetary and financial management - Financial year
2004’ (3). In its 2003 annual report (4), the Court recommended
that more detailed information be given on the cumulative state
of implementation of Community programmes. Additional data
on the cumulative state of implementation of Community pro-
grammes has been provided which increases the information
value of the report. The Court recommends that in future

2.4. The Commission has provided extensive information in the form
of an introductory text, tables and graphs on the cumulative state of a
number of the most important multi-annual programmes (i.e. the Struc-
tural Funds, the Cohesion Fund, Sapard and ISPA). The annual bud-
gets illustrate the expected performance, comparing these with the actual
implementation. In future, the Commission will examine the possibility
of providing the additional information recommended by the Court in
the Report on budgetary and financial management. On the budget-
ary implementation of the Structural Funds, the Commission has,

(1) The case of differentiated appropriations.
(2) See paragraph 2.21 and Annex I for further background information

on the budget.

(3) This document is again, this year, only available on the Commission’s
website — http://europa.eu.int/comm/budget/infos/publications_
en.htm — despite Article 29 of the Financial Regulation requiring it to
be published in the Official Journal of the European Union.

(4) Paragraph 2.4.

30.11.2005

EN

Official Journal of the European Union

C 301/45

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

since 1977, published a detailed annual report. This report comprises,
inter alia, a thorough analysis of the cumulative state of implementa-
tion, as well as an analysis of the individual Funds. The 2004 report was
published
at
online
http://europa.eu.int/comm/budget/furtherinfo/index_pg2_en.htm.

in May

available

2005

and

is

In addition, detailed information on the state of the implementation of
the Structural Funds (stating amounts allocated, committed and paid, by
objective, Fund and Member State) is published in the Annual Report
on the Implementation of Structural Funds which appears in October of
the following year, see e.g. the 2003 report (COM(2004) 721 final).

2.5. The purpose of the report is to provide an overview on the evolu-
tion of the annual budget and its implementation. In addition, the Com-
mission provides a number of more specialised, detailed annual reports
on several policy areas, notably the annual report on budgetary imple-
mentation of the Structural Funds.

the presentation could be made more useful by better explaining
and analysing the data, and comparing actual with expected per-
formance. In the case of the Structural Funds the information is
presented by policy objective. However, it would also be useful to
present the information by individual Fund as this would more
closely reflect the Commission’s management and accountability
structure.

2.5. Article 185 of the implementing regulations to the Finan-
cial Regulation stipulates that the report on budgetary and finan-
cial management (5) ‘shall give an accurate description […] of the
achievement of the objectives for the year, in accordance with the prin-
ciples of sound financial management’. This requirement has been
complied with at a general level. More detailed information is
included within the annual activity reports of the directors-
general.

A larger budget for a bigger Union

2.6. The 2004 budget was originally drawn up for an EU of
15 Member States (6). Total appropriations for commitments fell
by 0,3 % and total appropriations for payments increased by
2,3 % compared with the 2003 final budget. Enlargement neces-
sitated an amending budget (7) from 1 May onwards. The updated
budget represented increases of 11,5 % and 7,8 % for commit-
ments and payments respectively, compared with the 2003 final
budget. The increase in commitments is proportionally larger
because they can cover expenditure for more than one year (see
paragraph 2.3).

2.7. Commitment and payment appropriations were below
their increased financial perspective ceilings by 4,3 billion euro
and 11,8 billion euro respectively. For commitments, the margin
occurs mainly in agriculture (2,5 billion euro) and pre-accession
strategy (1,7 billion euro) with the other headings being near or
slightly over (8) the limits.

(5) Under the terms of Article 128 of the Financial Regulation this report
is sent to the European Parliament, the Council and the Court of Audi-
tors.

(6) Adopted by the European Parliament on 18 December 2003 (OJ L 53,

23.2.2004).

(7) Amending budget No 1/2004 of 9 March 2004 (OJ L 128, 29.4.2004,

p. 1).

(8) Making use of the ‘flexibility instrument’ allowing financing of clearly
identified expenditure which could not be financed within the limits
of the ceilings available. The flexibility instrument should not, as a rule,
be used to cover the same needs two years running.

C 301/46

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.8. Amending budgets voted during the year (9) resulted in an
overall 1,6 billion euro reduction in appropriations for commit-
ments (due to less than foreseen expenditure on agriculture), and
a 2,0 billion euro increase in appropriations for payments, mostly
related to extra appropriations for structural operations (see para-
graph 2.14).

Payment spending rate increased to 95 %

2.9. Table 2.1 gives an overview of the budgetary outturn for
the 2004 financial year for both payments and commitments. In
2004 the proportion of final appropriations for commitments
used (the implementation rate) was 98 %, marginally lower than
2003 (99 %). For payments, the proportion of final appropria-
tions used (the spending rate) was 95 %, an increase on 2003
(92 %, albeit based on a reduced budget (10)) and 2002 (86 %).
The increase in spending occurred in all areas.

Smaller surplus

For 2004, the budget surplus (11) totalled 2,7 billion euro

2.10.
(see Table 2.2), for the following reasons:

— revenue received was 1,7 billion euro more than revenue

budgeted;

— expenditure (taking into account carryover of payment
appropriations) was 2,1 billion euro less than budgeted;

— other elements leading to a deduction of 1,0 billion euro,
mainly related to an adjustment for earmarked revenue.

(9) Excluding amending budget No 1/2004 for enlargement, but com-

prising amending budgets numbers 2 to 10/2004.
(10) See paragraph 2.10 of the Court’s 2003 Annual Report.
(11) The surplus is not a reserve which can be accumulated and used in
future years to finance expenditure. The unused revenue that the sur-
plus represents is offset against the own resources to be collected for
the following year. The unused appropriations for payment resulting
from the underspending are, in most cases, cancelled and thereby
‘lost’.

30.11.2005

EN

Official Journal of the European Union

C 301/47

Table 2.1 — Implementation of the 2004 budget by financial perspective heading

Financial perspective heading

Financial
perspective
ceiling

Initial
appropria-
tions (1)

Final
appropria-
tions (2)

Commit-
ments and
payments
made

Implemen-
tation rate

Appropria-
tions carried
over
to 2005

% of final
appropria-
tions
available

Appropria-
tions
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

49 305

44 761

45 122

44 760

Structural operations

41 035

34 326

41 046

40 834

Internal policies

External action

8 722

7 051

9 835

9 010

5 082

5 177

5 368

5 198

Pre-accession strategy

3 455

1 732

1 837

1 718

Administrative expenditure

5 983

6 040

6 361

6 161

Reserves

Compensation

Rounding

442

442

442

182

1 410

0

1 410

1 410

100 %

1

50

115

619

121

91

70

0

0

0,1

0,3

6,3

2,3

5,0

1,1

0,0

0,0

312

97

206

49

29

130

260

0

0,7

0,2

2,1

0,9

1,6

2,0

58,9

0,0

Total

115 434

99 529

111 422

109 273

98 %

1 066

1,0

1 083

1,0

Payment appropriations

Common agricultural policy

44 761

44 308

43 579

Structural operations

28 962

34 635

34 198

Internal policies

External actions

Pre-accession strategy

Administrative expenditure

Reserves

Compensation

Rounding

6 606

4 951

2 856

6 040

442

0

1

8 992

7 255

5 098

4 606

3 220

3 053

6 927

5 856

442

182

1 410

1 410

100 %

398

197

0,9

0,6

1 152

12,8

3,5

1,8

12,3

0,0

0,0

176

58

850

0

0

– 1

331

240

585

317

109

221

260

0

0,7

0,7

6,5

6,2

3,4

3,2

58,8

0,0

Total

111 380

94 619

105 032

100 139

95 %

2 830

2,7

2 063

2,0

(1) Budget finally adopted for EU-15 by the European Parliament on 18 December 2003 (OJ L 53, 23.2.2004).
(2) Budget appropriations amended after taking into account amending budgets (including for enlargement) and transfers, and including appropriations carried over from 2003,

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

Source: 2004 annual accounts.

99 %

99 %

92 %

97 %

94 %

97 %

41 %

98 %

99 %

81 %

90 %

95 %

85 %

41 %

C 301/48

EN

Official Journal of the European Union

30.11.2005

Table 2.2 — Composition of surplus 2004 (and 2003)

2004

2003

(million euro)

Budgeted

Collected

Contribution to
surplus

Budgeted

Collected

Contribution to
surplus

94 997

6 810

95 051

8 461

Total

101 807

103 512

Underspending (1)

Less carryover
to 2005 (2)

729

437

– 398

– 197

1 737

– 1 152

492

167

1 071

260

0

– 176

– 58

– 850

0

0

1

Total

4 893

– 2 830

Total surplus

54

1 651

1 705

331

240

585

316

109

221

260

0

1

2 063

– 50

– 961

– 18

2 739

84 011

8 514

92 525

83 633

9 836

93 469

Underspending

Less carryover
to 2004

717

3 310

1 585

613

559

782

216

– 1

7 781

– 331

– 177

– 920

– 113

– 55

– 650

0

– 2 246

– 378

1 322

944

386

3 133

665

500

504

132

216

– 1

5 535

– 109

– 740

– 146

5 484

Revenue

Own resources

Other revenue

Expenditure

Agriculture

Structural operations

Internal policies

External actions

Pre-accession strategy

Administration

Reserves

Compensation

Rounding

Exchange differences

Earmarked revenue (3)

Other (4)

Includes the cancellation of unused credits brought forward of 276 million euro (2 074 million euro in 2003).

(1)
(2) Amount carried over includes 1 263 million euro in respect of third party earmarked revenues for which the usual cancellation rules for carry-overs do not apply (1 044 mil-

lion euro in 2003).

(3) Adjustment for earmarked revenue received but not budgeted for.
(4) Sundry elements mainly related to re-used credits carried forward and EFTA contributions.
Source: 2004 annual accounts.

2.11. The 2004 surplus represents a further reduction com-
pared with 5,5 billion euro in 2003, 7,4 billion euro in 2002
and 15,0 billion euro in 2001. Much of the reduction in the sur-
plus is due to the higher spending rate for structural operations.
This reflects not only improved management by the Commission,
but also the fact that, as 2004 is well over half way through the
2000 to 2006 spending programmes, the spending rates have
increased (see paragraphs 2.14 to 2.16).

30.11.2005

EN

Official Journal of the European Union

C 301/49

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

In its 2002 and 2003 Annual Reports (12) the Court iden-
2.12.
tified poor forecasting of structural operations expenditure by
Member States as a significant reason for the Commission not
being able to take timely action on management of the under-
spending and the resulting surplus. Estimates have improved,
with the forecasting error rate falling from 50 % in 2003 to 23 %
in 2004. However, this still represents an over-forecast of 6,5 bil-
lion euro and the Commission itself recognises the scope for fur-
ther improvement. Unlike in previous years, the Commission’s
2004 report on budgetary and financial management provides
no information or analysis of Member States’ estimates.

2.12. The Commission has provided a detailed report on the Member
States’ payment forecasts, including a comparison of the forecasting error
rates 1998 to 2004, in the aforementioned annual report on the bud-
getary implementation of the Structural Funds.

The Commission would like to emphasise that the annual payment bud-
get is not directly based on the Member States’ forecasts, but on the Com-
mission’s own assessment of the likely need for payment appropriations.
The Member States’ forecasts are potentially a useful input for this
assessment, which is why the Commission is continuing to press for
improvement.

2.13.
In the past, significant carryovers of appropriations have
been made and not used (13). Of the amount of non-earmarked
payment appropriations brought forward from 2003, 23 % were
not used (14). A total amount of 2,8 billion euro is being carried
over to 2005, comprising 1,5 billion euro in respect of the opera-
tional budget (1,2 billion euro in 2003), and 1,3 billion euro in
respect of earmarked third party revenues (1,0 billion euro in
2003).

Current expenditure programmes have reached the expected spending
rate

2.14. A large proportion of the budget — structural operations,
some internal policies and external actions — consists of multi-
annual expenditure programmes running within defined cycles
over a number of years (e.g. 2000-2006 in the case of the Struc-
tural Funds). The Commission and the Member States encoun-
tered significant delays in setting up and starting operation of
these programmes, particularly in respect of the Structural Funds.
However, in 2004 the programmes largely reached the planned
annual level of spending, involving the reimbursement of claims
from Member States for payments made to beneficiaries. Indeed,
the budgeted payment appropriations for the Structural Funds
were not sufficient so an amending budget (15) totalling 3,7 bil-
lion euro was requested prior to the year end. Of this amount,
3,3 billion euro related to the current programmes.

(12) See paragraph 2.26 of the Court’s 2002 Annual Report, and para-

graphs 2.31 and 2.47 of the Court’s 2003 Annual Report.

(13) See paragraph 2.14 of the Court’s 2003 Annual Report.
(14) Payment appropriations covering earmarked revenue are subject to
specific rules due to their different nature. See paragraph 2.37 of the
Court’s 2003 Annual Report.

(15) No 10/2004 (OJ L 80, 29.3.2005, p. 1).

C 301/50

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.15. The current level of spending involves only a limited
reduction in the level of outstanding commitments. The informa-
tion provided in the Commission’s report on financial and bud-
getary management on the state of implementation of the Struc-
tural Funds (see paragraph 2.4) shows that the three policy
objectives for the 2000-2006 period were implemented by
around 40 % by the end of 2004.

2.15. The Commission aims to budget accurately for all eligible pay-
ment requests, and this may include bringing forward amending bud-
gets where payment flows exceed expectations.

2.16. Also ongoing is the closure of the Structural Fund expen-
diture programmes for the previous programming period (1994
to 1999). The Commission has experienced significant problems
and delays in closing these programmes and in making final pay-
ments (see paragraphs 5.29 to 5.31). Of the 9,1 billion euro of
outstanding budgetary commitments at the end of 2003, pay-
ments were made on 3,6 billion euro and 2,3 billion euro were
cancelled as they will not be used. At the end of 2004, 3,3 billion
euro of budgetary commitments remain outstanding for the clo-
sure of these old programmes in 2005 and potentially beyond.

2.16. Member States were obliged to submit payment claims for these
programmes at the latest by 31 March 2003. A large number of claims
arrived just before the deadline and the variable quality of the accompa-
nying closure documentation made it necessary to make additional
enquiries before the claims could be processed. The closure exercise made
substantial progress in 2004. This is shown by the reduction in out-
standing commitments by two thirds to around 5 % of the total out-
standing commitments for the Structural Funds.

2.17. The 2,2 years referred to by the Court can be regarded as a nor-
mal ratio and close to the n + 2 principle.

Increase in outstanding budgetary commitments due to enlargement

represent

the
2.17. Outstanding budgetary commitments
amounts which the Commission has legally committed to pay in
the future. The higher the value of outstanding budgetary com-
mitments, the greater is the demand on the payments budgets in
future years. Outstanding budgetary commitments increased by
4,5 % to 110,1 billion euro (see Table 2.3). The increase was due
to the additional budgetary commitments for the new Member
States after enlargement. The underlying outstanding budgetary
commitments for the pre-enlargement EU remained stable. Out-
standing budgetary commitments for differentiated expenditure
as a whole represents 2,2 years of payments at the current spend-
ing rate (2,5 years in 2003).

2.18. Graph 2.1 shows the value of outstanding budgetary
commitments on differentiated expenditure since 1994. The
increase is due to both the change in the system for annual com-
mitments for the Structural Funds, introduced for the 2000-2006
programming period, and the cumulative effect of underspend-
ing between 1999 and 2003 which resulted in 40 billion euro of
payment appropriations being cancelled (16).

(16) See paragraph 2.12 of the Court’s 2003 Annual Report.

30.11.2005

EN

Official Journal of the European Union

C 301/51

Table 2.3 — Change in balance of outstanding budgetary commitments 2004

By type

Non-diffe-
rentiated
appro-
priations

Differen-
tiated
appro-
priations

By Financial Perspective heading

(million euro)

Total

Agri-
culture

Structural
operations

Internal
policies

External
actions

Admi-
nistra-
tion

Reser-
ves

Pre-
accession
strategy

Com-
pensa-
tion

Adjust-
ments

Commitments brought
forward

Balance brought forward

877 103 883

104 760

290

69 274 12 196 12 156

584

Payments

– 776 – 41 221

– 41 997

– 271 – 30 969 – 3 995 – 3 245

– 503

Decommitments

– 17

– 3 626

– 3 643

– 5

– 2 624

– 501

– 436

0

Cancellations

– 81

0

– 81

– 14

0

0

0

– 59

0

0

0

0

10 260

– 3 013

– 85

0

0

0

0

0

0

– 1

8

– 8

Commitments made in
2004

Commitments made

51 494

57 779

109 273

44 761

40 834

9 010

5 198

6 161

182

1 718

1 410

– 1

Payments

Cancellations

Rounding

Balance carried
forward to 2005

– 50 162

– 7 981

– 58 143 – 43 308

– 3 229 – 3 260 – 1 361 – 5 354

– 182

– 40 – 1 410

– 22

0

– 22

0

– 1

0

– 1

0

0

1

– 22

0

0

1 313 108 834

110 147

1 452

73 285 13 450 12 313

807

0

8 840

0

0

1

0

1

0

Source: 2004 annual accounts and report on budgetary and financial management.

Graph 2.1 — Outstanding budgetary commitments 1994 to 2004

Note: Differentiated appropriations comprise expenditure on structural operations, internal policies, external actions and pre-accession strategy.
Source: Annual accounts 1994 to 2004.

C 301/52

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.19.
In its reply to the 2003 Annual Report the Commission
stated the level of outstanding budgetary commitments to be in
line with its forecasts (17). In 2002 the Commission undertook an
in-depth analysis of the progress of the budgetary execution of
the Structural Funds taking into account, and adjusting for, the
low rates of spending in 2000 to 2002, and forecasting the level
of outstanding budgetary commitments at the end of each year
up to 2010 (18).

2.20.
In the event, the level of outstanding commitments at the
end of 2004 for 2000-2006 programmes was 3,7 billion euro
higher than the Commission predicted in 2002 for the EU 15.
Outstanding budgetary commitments for the 1994-1999 pro-
grammes were 3,3 billion euro: the Commission’s 2002 analysis
expected them to have been completely liquidated. Furthermore
there were 2,1 billion euro of outstanding budgetary commit-
ments relating to enlargement, not included in the Commission’s
analysis.

2.20. The higher than forecast level of outstanding commitments for
1994 to 1999 is due to the delay in the closure of these programmes,
which was difficult to predict at the time (see reply to point 2.16). The
2002 figures were best estimates based on information available. The
difficulties in making these estimates were, to a large extent, due to the
fundamental change of the payments system for the new 2000 to 2006
programmes, compared to the previous programmes.

Outstanding budgetary commitments do not represent total legal
commitments

2.21. Due to the nature of the budgetary process the balance of
outstanding budgetary commitments does not reflect the full
extent of legal commitments, as most expenditure programmes
are subject to specific rules. Financing decisions made at the
beginning of the programming period — representing legal com-
mitments to pay — are not translated immediately into budget-
ary commitments, but are allowed by the Financial Regulation (19)
to be committed over the programming period on an approxi-
mately equal annual basis. The legal commitments made, but not
yet transformed into budgetary commitments, are disclosed as off
balance sheet items in the annual accounts (20).

(17) Paragraph 2.48 of the Court’s 2003 Annual Report: ‘A “RAL” for the
2000 to 2006 period of 2,3 times current annual payments […] is in line
with the Commission’s forecast’.

(18) Graph 7, Commission Communication: Evolution of budget execu-
tion of the Structural Funds, in particular outstanding commitments
(RAL) (COM(2002) 528 final, 20.9.2002). No similar exercise was
done for the Cohesion Fund, although the balance of outstanding
budgetary commitments totals 9,7 billion euro.

(19) Article 76(3): ‘Budgetary commitments for actions extending over more than
one financial year may be broken down over several years into annual instal-
ments only where the basic act so provides…’.

(20) See off-balance-sheet commitments in the annual accounts: item 6 of

contingent liabilities.

30.11.2005

EN

Official Journal of the European Union

C 301/53

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.22. At the end of 2004, outstanding budgetary commitments
for the Structural Funds 2000-2006 programming period were
60 billion euro, representing 2,2 years’ expenditure at the 2004
spending rate. Legal commitments not yet transformed into bud-
getary commitments (see paragraph 2.21), total 75 billion euro.
As such, total outstanding legal commitments for the Structural
Funds 2000-2006 programming period at the end of 2004 were
136 billion euro, which represents nearly five years’ payments at
the 2004 spending rate. The total outstanding legal commitments
only fell slightly in 2004, due to the effect of the additional legal
commitments arising from enlargement. However, in order to liq-
uidate all the outstanding legal commitments from the 2000-
2006 programming period by the end of the payment period
(2010), the Commission will need to maintain a high spending
rate and/or to undertake significant decommitments under the
n + 2 rule (see paragraphs 2.24 to 2.26).

2.23.
In respect of the current Structural Funds programming
period, Member States can make payments to beneficiaires up to
the end of 2008, and the Commission can reimburse Member
State claims up to 2010, including closure. Experience with pre-
vious periods shows that spending rates fall towards the end of
the cycle and closure is problematic (21). There is, therefore, a risk
that spending on the current programmes will be delayed even
further into the next period, and the start of the new programmes
delayed.

2.22. The Commission considers that the presentation of the ratio of
‘outstanding legal commitments’ relative to payments in a given year is
not, in itself, a useful indicator; the ratio of ‘outstanding legal commit-
ments’ relative to payments naturally falls as the end of the program-
ming period approaches. The total level of outstanding commitments
should therefore always be seen in the light of the remaining time span
for execution of the remaining payments. In this respect, the Commis-
sion agrees with the Court’s observations in the last sentence.

2.23.
It is normal that part of the balance for programmes for the cur-
rent period will be paid in the years 2007 to 2010. Due to the appli-
cation of the n + 2 rule for the Structural Funds the Commission does
not expect to face any significant accumulation of outstanding commit-
ments at the end of the current period.

The closure of 2000 to 2006 programmes should not mean that the
start-up of programmes in the next period will be delayed. The Commis-
sion will propose budgets that match the expected level of eligible pay-
ment claims, whether these claims arise from the 2000 to 2006 period
or the 2007 to 2013 programming period.

Year n + 2 rule has resulted in little decommitment so far

2.24. The Commission considers (22) that the risk of a high level
of outstanding budgetary commitments within the Structural
Funds is reduced by the year n + 2 rule. This provides that com-
mitments on which no payment has been made within the two
years following the year the commitment was made are cancelled
automatically. In 2003 the cancellations following application of
this rule amounted to 31 million euro. In 2004, the amount
involved was higher at 219 million euro, representing just 0,3 %
of the balance of outstanding budgetary commitments for the
Structural Funds at the end of the year.

2.24. The Commission maintains its view that the n + 2 rule will sta-
bilise the level of outstanding commitments.

The payments on account made at the beginning of the programming
period, representing 7 % of the total 2000 to 2006 envelope of each
programme, provide a relatively long-term protection against n + 2
decommitments as advance payments reduce the level of reimbursements
needed to avoid automatic decommitments. This protection weakens over
time though, which may lead to growing n + 2 de-commitments in the
years ahead.

At the same time, the n + 2 rule provides an incentive for faster imple-
mentation and more regular submission of payment claims. Therefore,
its impact cannot only be judged by the level of decommitments.

(21) ‘The administrative and financial constraints connected with comple-
tion of the 1994-99 programmes contributed largely to the delays in
starting up programmes for the 2000-06 period.’ COM(2002) 528
final, p. 4.

(22) See, for example, the Commission’s reply to paragraph 2.48 of the
Court’s 2003 Annual Report: ‘The “N + 2” rule should result in a stabi-
lised level of outstanding commitments over the next few years…’.

C 301/54

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.25. Of the commitments cancelled following this rule, 76 %
related to ESF expenditure in the Netherlands. In practice new
commitments from the performance reserve (23) were in some
cases allocated to the programmes from which commitments
were cancelled, thereby negating the effect of the procedure (24).
The lack of cancellations for other Member States reflects
increased spending. However, the Court found evidence of claims
including ineligible expenditure being submitted by Member
States in order to prevent cancellations. This illustrates the real
nature of the risk identified by the Court in its 2003 Annual
Report (25).

2.25. The background to the situation described by the Court, regard-
ing the additional commitment from the performance reserve to a pro-
gramme from which funding had been decommitted under n + 2 is, that
given the fact that appropriations cannot be shifted between objectives
(amounts fixed at the Berlin European Council in 1999 and in the
Structural Funds Regulation), competition for the Performance Reserve
is limited to programmes of one Member State within one Objective. As
there is one Objective 3 SPD in the Netherlands, the Commission had
no choice but to commit the reserve to this programme, but of course put-
ting it into the better performing priorities.

The Commission is examining the Court’s evidence found in its audits in
Member States of ineligible expenditure being included in claims and will
take the necessary measures. It examines this risk in its own audits.

2.26. Although the Commission considers the year n + 2 rule
to be an important budgetary management tool, no analysis on
its operation or effect is given in its report on budgetary and
financial management.

2.26. One purpose of the n + 2 rule is to spur execution, and so the
effects of the rule can be partly gauged from the information on execu-
tion given in the budgetary and financial management report. More
detailed information as related to the Structural Funds is included in the
aforementioned annual report on the Structural Funds, published in May
2005.

Inappropriate budgeting over life of spending programmes

2.27. While the outturn for 2004 was largely satisfactory for
the Structural Funds, many of the persistent problems — delays,
increase in outstanding budgetary commitments — in imple-
menting multiannual spending programmes arise from budget-
ing over the programming period which does not take sufficient
account of the ability of Member States to absorb the funds within
the timing foreseen. Moreover, commitments, as explained in
paragraph 2.21, are made in approximately equal annual tranches
over the nominal life of the programme. This neither reflects

2.27. The budgeting of commitments is a direct consequence of the
allocation of resources as decided by the European Council. The annual
budgeted commitments normally reflect the programming (or revised
programming). As a policy, the Commission aims at forecasting what is
actually needed as annual payment approriations.

(23) 4 % of the appropriations allocated to each Member State were placed
in reserve for distribution to the best performing programmes in
three tranches from 2004 to 2006.

(24) For example, in the case of 167 million euro decommitted from a
programme following the year n + 2 rule in the Netherlands, 76 mil-
lion was allocated to the same programme from the Performance
Reserve.

(25) Paragraph 2.35: ‘…there is a risk of Member States claiming expenditure
that is ineligible, in order to avoid the cancellation of commitments.’

30.11.2005

EN

Official Journal of the European Union

C 301/55

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

the expected payment profile, nor the full extent of legal commit-
ments (26), and therefore provides information which can be eas-
ily misinterpreted.

2.28.
Payments are intended to be made during a period stretch-
ing beyond the nominal life of the programme (up to 2010 in the
case of the 2000-2006 period). The payment profile varies greatly
during the programme cycle with low initial payments as pro-
grammes (and the projects they finance) are defined and started,
and then higher demand in intermediate years, reducing towards
the end. Where two cycles overlap, the years of lower demand at
the start of the second cycle are intended, by the Commission, to
be compensated for by payments from the end of the first cycle,
resulting in a smooth and consistent demand for payment appro-
priations.

In practice, the demand for budgetary payments by the
2.29.
Commission depends on claims from Member States which them-
selves depend on the ability of beneficiaries to undertake projects
and absorb expenditure. The uneven demand over the five years
to 2003, resulted in significant underspending (27). Underspend-
ing has different consequences for payment appropriations
and commitments: unused payment appropriations are cancelled
whilst commitments remain outstanding. This difference in treat-
ment results in growing levels of outstanding budgetary commit-
ments (see paragraph 2.18) and the resulting time lag between
commitments and payments.

CONCLUSIONS AND RECOMMENDATIONS

2.30. The Commission’s report on budgetary management now
provides some additional information on the progress of spend-
the information could still be
ing programmes. However,
improved by being more completely explained, by assessing
progress against expected performance and by reflecting more
closely budgetary management and accountability. Information
should also be provided on Member State spending estimates and
the operation of the year n + 2 rule for the Structural Funds.

(26) Other than at the end of the last year of a particular programming

period.

(27) See paragraph 2.12 and Table 2.3 of the Court’s 2003 Annual Report.

2.29. A growing stock of outstanding commitments is a normal fea-
ture of multi-annual programming such as that in the structural funds.
The stock of RAL would ‘normally’ be expected to grow in the early years,
stabilise and then fall back down towards the end of the period. There is
no particular reason in a system with differentiated appropriations why
payments and commitments in any given year should match.

2.30. As recommended in last year’s report by the Court, the Com-
mission has provided extensive information on the cumulative state and
progress of a number of the most important multi-annual programmes.
(i.e. the Structural Finds, the Cohesion Fund, Sapard and ISPA).

The Commission is willing to seek to improve the information provided
as has been the case in the past, including in the 2004 report. In addi-
tion, the Commission draws to the attention of the Court the extensive
annual report on the budgetary implementation of the Structural Funds,
published by DG Budget in May.

The Commission also refers to its response in point 2.4.

C 301/56

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.31.
Improved spending rates and the resulting reduced sur-
plus are a reflection of better management by the Commission
and an increased level of spending within the major expenditure
programmes, particularly the Structural Funds.

2.32. The level of outstanding budgetary commitments contin-
ued to rise, and totalled 109 billion euro at the end of 2004. The
increase was mainly due to enlargement, with underlying out-
standing budgetary commitments relating to the EU-15 falling
slightly. The year n + 2 rule, which is intended to manage the situ-
ation for the Structural Funds, has resulted in very little decom-
mitment since it was established.

2.32. The level of decommittments is not in itself a proper indicator
of the effectiveness of the n + 2 rule. This rule also has an effect on pro-
moting execution (see also reply to point 2.24).

2.33. Outstanding budgetary commitments for the Structural
Funds are in excess of the Commission’s revised forecasts of 2002.
The Court recommends the Commission should consider updat-
ing its analysis in order to identify the implications for the current
and future period, and identify if any specific action is needed.

2.33. The pattern of actual execution and the actual level of outstand-
ing commitments are analysed and used as input relevant to assessing
payments needs during the preparation of the Preliminary draft budget.
At present there are no plans to bring forward a revised Communica-
tion.

2.34.
EU budgetary information neither completely reflects the
reality of expenditure nor provides sufficiently clear information
on the legal obligations of the Union. For the Structural Funds the
budget for commitments is based on equal annual instalments,
and that for payments is based on smooth and consistent supply-
led assumptions for spending, but implemented following irregu-
lar demand-led claims from Member States. As already recogn-
ised by the Commission,
its ability to actively manage the
implementation of the budget for multiannual spending pro-
grammes is limited (28).

2.34.
For the Structural Funds, the annual commitment appropria-
tions are directly predetermined by the multi-annual programming (i.e.
supply-led). To an extent, this also applies to other major multi-annual
programmes.

Payment approriations, on the other hand, must be demand-led, with the
exception of limited advance payments. Payment appropriations are
annually budgeted for, aiming at realistic forecasting of the actual
demand on the basis of trends in execution and other relevant informa-
tion. The basis for the Commission’s estimates of payments needs for the
structural funds are generally provided in the Preliminary draft budget.
By and large, there was a substantial improvement of the budgeting of
payments in 2004.

The amount of the legal commitments for which no budgetary commit-
ments have yet been made is disclosed amongst the contingent liabilities
in the Communities’ annual accounts.

(28) See Commission reply to paragraph 2.32 of the Court’s 2003 Annual

Report.

30.11.2005

EN

Official Journal of the European Union

C 301/57

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.35. As unused appropriations for payment, together with
their associated financing, cannot be carried forward to meet
future demand there is a time lag between the programmed
expenditure period (e.g. 2000-2006), and the timing of the actual
expenditure. This results in either a high level of spending needed
at the end of the programming period — which is difficult to
manage — or a high and increasing level of outstanding budget-
ary commitments and expenditure, with current period expendi-
ture being pushed further into the new period, potentially ham-
pering its start. Without specific attention, the time lag will
continue into the future.

2.35. The Commission has an obligation to budget sufficient payment
appropriations, including proposing an amending budget if necessary, as
was the case for the Structural Funds in 2004. The budget implemen-
tation in 2004 did not increase the RAL, except for the new Member
States, which was natural and inevitable for such new operations. For the
Structural Funds, the payments are primarily determined by the Mem-
ber States requests for reimbursements, and the budgeting has to reflect
this. The n + 2 rule sets a limit on the back-loading of the programmes
regarding payments, and the Commission does not share the concern that
the payments relating to the 2000 to 2006 programmes could hamper
the start of the subsequent programming period.

The Commission also refers to its response in point 2.23.

30.11.2005

EN

Official Journal of the European Union

C 301/59

CHAPTER 3

Revenue

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Traditional own resources

Introduction

Evaluation of supervisory and control systems

Commission supervisory and control systems

Supervisory and control systems in Member States

Paragraph

3.1

3.2-3.55

3.2-3.26

3.2-3.3

3.4-3.18

3.4-3.5

3.6-3.18

Findings of audits in respect of the transactions of the financial year

3.19-3.26

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

3.19-3.23

Sugar levies

VAT/GNI own resources

Introduction

Evaluation of supervisory and control systems

Commission supervisory and control systems

Supervisory and control systems in Member States

Annual activity reports and declarations of the Directors-General

Conclusions and recommendations

3.24-3.26

3.27-3.49

3.27-3.28

3.29-3.49

3.29-3.46

3.47-3.49

3.50-3.51

3.52-3.55

C 301/60

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

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 (92 %). 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 (15 %), and own resources derived from the Mem-
ber States’ gross national income (72 %).

Table 3.1 — Revenue for the financial years 2003 and 2004

Type of revenue and corresponding budget heading

Actual revenue
in 2003

Development of the 2004
budget

Initial budget

Final budget

Actual
revenue
in 2004

(million euro)

% change
(2003 to 2004)

(a)

(b)

(c)

(d)

e = [(d) – (a)]/(a)

1

Traditional own resources

10 857,2

11 049,0

12 406,9

12 307,1

— Agricultural duties (Chapter 10)

— Sugar and isoglucose levies (Chapter 11)

1 011,8

383,2

839,1

359,9

1 325,6

1 313,4

416,9

401,6

— Customs duties (Chapter 12)

9 462,1

9 850,0

10 664,4

10 592,1

13,4 %

29,8 %

4,8 %

11,9 %

2 VAT resources

21 260,1

13 319,5

13 579,9

13 912,1

– 34,6 %

— VAT resource from the current financial year (Chapter 13)

21 534,9

13 319,5

13 579,9

13 679,3

— Balances from previous years (Chapter 31)

– 274,8

0,0

0,0

232,8

3 GNI resource

51 235,2

69 444,6

69 010,2

68 982,0

34,6 %

— GNI resource from the current financial year (Chapter 14)

50 624,3

69 444,6

69 010,2

69 214,2

— Balances from previous years (Chapter 32)

4

Balances and adjustments

— UK correction (Chapter 15)

— Final calculation of UK correction (Chapter 35)

5 Other revenue

— Surplus from previous financial year (Chapter 30)

— Miscellaneous revenues (Titles 4 to 9)

610,9

280,1

281,1

– 1,0

9 836,1

7 676,8

2 159,3

0,0

0,0

0,0

0,0

805,6

0,0

805,6

0,0

0,0

0,0

0,0

6 809,6

5 693,0

1 116,6

– 232,2

– 148,0

– 149,3

1,3

8 458,7

5 693,0

2 765,7

Grand Total

93 468,6

94 618,7

101 806,6

103 511,9

– 152,8 %

– 14,0 %

– 25,8 %

28,1 %

10,7 %

Source: Budgets and amending budgets for 2004; Annual Accounts of the European Communities, 2004.

30.11.2005

EN

Official Journal of the European Union

C 301/61

Graph 3.1 — Breakdown of actual revenue in 2004

Source: Annual Accounts of the European Communities, 2004.

Graph 3.2 — Evolution of sources of actual revenue 1990 to 2004

(1) Contains surplus from previous financial year and miscellaneous revenue.
Source: Annual Accounts of the European Communities, 2004.

C 301/62

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Traditional own resources

Introduction

3.2. 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).
The risks to the collection of traditional own resources are eva-
sion 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 the duty established.

3.3. The Court’s audit cannot cover either undeclared imports
or those that have escaped customs surveillance. However, as well
as direct testing of customs declarations and accounting systems,
the Court’s audit work included evaluation of supervisory
and control systems, both in the Commission and in Member
States, in order to assess whether the arrangements in place gave
reasonable assurance of completeness. It consisted of:

(a) a review of the organisation of customs supervision and of
the national systems for accounting for traditional own
resources in 12 Member States (2). The Court examined in
particular customs supervision at land frontiers in eight of
these Member States, and the use of electronic customs clear-
ance systems in 12 Member States (see paragraphs 3.6-3.18);

(b) verification of the sugar levies calculation completed in

2004; and

(1) Council Decision 2000/597/EC, Euratom of 29 September 2000 on
the system of the 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
system of the Communities’ own resources (OJ L 130, 31.5.2000), as
amended by Regulation (EC, Euratom) No 2028/2004 (OJ L 352,
27.11.2004, p. 1).

(2) Estonia, Greece, France,

Italy, Cyprus, Latvia, Lithuania, Poland,

Slovenia, Slovakia, Finland and the United Kingdom.

30.11.2005

EN

Official Journal of the European Union

C 301/63

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(c)

examination of the Commission’s accounts for traditional
own resources, together with an analysis of the flow of duties
from all Member States in order to gain reasonable assurance
that the amounts recorded were complete and correct.

Evaluation of supervisory and control systems

Commission supervisory and control systems

3.4. The Commission may request Member States to carry out
inspections of the establishment and making available of tradi-
tional own resources, and may also carry out such inspections
itself, either in association with the Member State authorities or
autonomously (3). 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 (4). An overall report on the func-
tioning of the inspections is drawn up every three years and pre-
sented to the budgetary authority (5).

3.5. The Court has reviewed the inspections and has taken the
results into account. As in previous years, their methodology was
found to be soundly-based and the documentation to be good.
The inspections found that the own resources collection systems
were generally satisfactory, but confirmed the continued poor
reliability of the B accounts in some Member States (see para-
graph 3.23).

Supervisory and control systems in Member States

3.6. The supervisory and control systems for traditional own
resources in Member States consist in the first instance of super-
vision by the customs authorities, as defined by the Community
Customs Code (6). Community legislation does not generally pre-
scribe either particular methods or the level of customs control,
this being at the discretion of the Member States.

(3) Article 18 of Council Regulation (EC, Euratom) No 1150/2000.
(4) The Advisory Committee on Own Resources (ACOR), established by
Article 20 of 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 Mem-
ber States on own resources matters. It examines questions concern-
ing the implementation of the own resources system, as well as the
estimates of own resources.

(5) The latest is document COM(2003) 345 final: Fourth report from the
Commission on the operation of the inspection arrangements for tra-
ditional own resources (2000-2002).

(6) 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).

3.5. The Commission will continue to focus on Member States’ man-
agement of the B accounts in its own inspections of traditional own
resources.

C 301/64

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Customs surveillance at the external land frontier of the EU

3.7. The Court examined customs supervision and clearance at
selected land frontier posts in eight Member States (7). The audit
concentrated on an evaluation of
the customs surveillance
and control procedures that are intended to ensure that all goods
are subject to a customs treatment (8). The procedures for ensur-
ing that goods arriving are properly dealt with were generally
considered satisfactory at the border stations visited.

Collection of import duties using electronic customs clearance

3.8. The Commission is implementing an action plan (9) to fos-
ter more effective customs procedures generally through better
use of information technology. Computer systems for the submis-
sion and clearance of customs declarations make it possible to
automate the calculation of and accounting for duty, as well as
various routine checks. Such systems can also be used to select
which declarations and consignments should be checked by cus-
toms staff whilst clearing the rest automatically, greatly reducing
disruption of international trade and the costs of control. The reli-
ability of electronic clearance systems, and the quality of the risk
analysis procedures incorporated in them thus have a major effect
on the completeness and correctness of traditional own resources.
Member States’ systems are at present in different stages of devel-
opment. In 2003 the Commission inspected electronic clearance
systems, found that they were on the whole satisfactory, and rec-
ommended that their use should be further developed (10).

3.9. The Court carried out an examination of the electronic cus-
toms clearance systems in 12 Member States (11) and of the super-
vision and coordination done by the Commission. Its audit did
not identify substantial shortcomings either in the actions so far
taken by the Commission or in the systems of the Member States
visited. However, the Court draws attention to the following
issues on which it recommends further action before conven-
tional paper declarations can be dispensed with.

(7) Estonia, Greece, Latvia, Lithuania, Poland, Slovenia, Slovakia and Fin-

(8)

land.
It should be noted that most goods are not cleared at the frontier but
at inland customs posts following a transit movement.

(9) See Communication from the Commission to the Council, the Euro-
pean Parliament and the European Economic and Social Committee:
‘A simple and paperless environment
for Customs and Trade’
(COM(2003) 452 final, 24.7.2003).
(10) See 2003 Annual Report, paragraph 3.9.
(11) Germany, Estonia, Spain, France, Latvia, Lithuania, Hungary, Nether-

lands, Poland, Slovakia, Finland, United Kingdom.

30.11.2005

EN

Official Journal of the European Union

C 301/65

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.10. Where computer systems are used there need to be tested
plans to have fallback systems up and running in the event of disas-
ter. No comprehensive disaster plans existed in three Member
States visited, but some back-up procedures and instructions had
been prepared. In four Member States a plan existed but had not
been tested. These weaknesses represent a risk to the continuity
of import and export trade and to the collection of customs duties
in the event of a breakdown or other emergency.

3.10. The Commission agrees with the Court’s comments regarding
the importance of fall-back mechanisms. Precautions are needed to avoid
disruption of trade, to allow control by the customs authorities and to
protect the collection of traditional own resources. The Commission has
provided for such procedures in its legislation (Article 353 of Regula-
tion (EC) No 837/2005) on the Community computerised transit sys-
tem, NCTS. The Commission would also point out that manual systems
may be subject to disruption. Where this has occurred, traditional own
resources payments have been adjusted, as considered necessary, to ensure
that the Community budget does not lose out.

3.11.
In six Member States visited SAD (12) forms may be sent
on paper accompanied by a diskette, from which data are loaded
into the system without an electronic signature. Legally, only the
conventional paper form is binding. In three Member States there
were either no formally-established and recorded input control pro-
cedures to ensure that the data on the diskette matched the printed
form, or the procedures were not always followed. In those cir-
cumstances there is a risk that data used in computer processing,
including the amounts of import duty, might differ from the data
presented on the SAD form.

3.12. Where 100 % checking of declarations is not feasible, risk
analysis and risk profiles should be used to decide whether an
import requires an examination. Risk profiles can best be imple-
mented in a computerised clearance environment. In order to
ensure efficiency and a similar level of control at all customs
points, the Commission has proposed a number of tools (13),
which include a common methodology and common criteria for
risk management. The Commission also proposes that frontier
customs offices should focus on admissibility and security checks.
Fiscal and commercial policy controls are usually to be made at
the traders’ premises through audits and on-the-spot checks based
on common risk criteria.

3.11. As part of its regular follow-up of points raised by the ECA, the
Commission will pursue the introduction of suitable controls with Mem-
ber States.

3.12. Given the volume of international trade and the wide range of
tasks to be performed by customs services, customs checks will always be
selective. Risk analysis has a part to play, not only in the uniform col-
lection of customs duties (and their prompt transfer to the Commission),
but also in other tasks. These tasks and the respective tools proposed by
the Commission, range from protecting European citizens from threats
to their health, safety and security, to the collection of customs duties.

(12) The official model for written declarations to customs by the normal
procedure, for the purposes of placing goods under a customs pro-
cedure or re-exporting them in accordance with Article 182(3) of the
Code, shall be the Single Administrative Document (SAD) (Commis-
sion Regulation (EEC) No 2454/93 of 2 July 1993 laying down pro-
visions
the implementation of Council Regulation (EEC)
No 2913/92 establishing the Community Customs Code (OJ L 253,
11.10.1993, p. 1).

for

(13) Communication from the Commission to the Council, the European
Parliament and the European Economic and Social Committee: ‘A
simple and paperless environment for Customs and Trade’.

C 301/66

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.13. The Court has previously reported on the use of risk
analysis techniques (14). However, despite the Commission’s sup-
port and recommendations, differences still remain between the
Member States in the degree to which they make systematic use
of risk analysis and risk profiles in targeting controls, even though
computerisation of customs processes has made this possible.

3.13.
Following the recent amendment of the Customs Code (Regu-
lation (EC) No 648/2005 of 13 April 2005), the Commission and the
Member States are further cooperating to implement a Community-wide
risk-management framework.

3.14. An amendment of the Customs Code (15) introduces an
obligation for Member States to use risk management and stipu-
lates the time periods within which the Member States shall use
appropriate risk-based controls and when customs controls shall
be based on risk analysis using automated data processing tech-
niques. To comply with these new rules additional efforts will be
necessary. As the Court found during its audit, in 2004 risk pro-
files were not used at all in two Member States, leaving decisions
about physical or documentary checks to be based mainly on
purely personal subjective initiative of the customs officer. In
another two Member States risk profiles were used only on part
of imports, leaving goods imported under certain simplified pro-
cedures without any profile-based targeting of control measures.

3.14. The two Member States found not to have been using risk
analysis by the Court were on the brink of doing so and both introduced
systems for imports by the end of 2004. This is an important initial level
but adopting a risk-analysis basis for customs control has a much wider-
reaching impact. The analysis of risk has a part to play in all types of
customs controls, including the selection of importers for authorisation,
to use simplified procedures, and the frequency and content of audit-
based checks. It is to be expected that, apart from the security and safety
issues for which specific targets have been set, Member States will adopt
a variety of measures at different speeds depending upon the volume and
types of customs traffic they handle.

In one Member State fiscal risk profiles at borders have
3.15.
been reduced and substituted for by audit-based fiscal controls
made at the economic operators’ premises. This strategy is in
accordance with the Commission’s proposal in its communica-
tion of July 2003. This approach, however, can weaken customs
control, since the frequency of checks on many operators is low.

3.15. The Commission will remind Member States of the key role that
frequency of control can play in the implementation of an audit-based
control strategy.

3.16. Although the importance of random sampling as a
supplementary element was generally recognised in the Member
States, statistical random selection of goods is not used in six of
the Member States visited.

3.16. The Commission will continue to recommend that the Commu-
nity risk framework includes a random element in the basis for the selec-
tion of consignments or declarations subject to customs controls.

3.17. Customs authorities should regularly monitor and review
the results of customs controls to assess the effectiveness and effi-
ciency of the risk management system using feedback from the
customs clearance process to update the analysis and prioritisa-
tion of control work.

3.17 to 3.18. The Commission agrees that recording results and
reviewing and updating risk profiles are key aspects of properly manag-
ing risk and will continue to urge Member States to implement suitable
procedures to achieve this.

(14) Special Report No 13/98 concerning the use of risk analysis tech-

niques in customs control and the clearance of goods.

(15) Regulation (EC) No 648/2005 of the European Parliament and of the
Council of 13 April 2005 amending Council Regulation (EEC)
No 2913/92 establishing the Community Customs Code (OJ L 117,
4.5.2005, p. 13).

30.11.2005

EN

Official Journal of the European Union

C 301/67

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.18. Weaknesses were noted in some customs administrations
in recording the results of documentary/physical checks and in
reporting to central level. In some cases filters were overridden
without justification and management approval. In addition, risk
profiles were not always appropriately reviewed to ascertain
whether they were effective, or there was a lack of coordination
between the branches responsible for setting up filters at differ-
ent levels (central, regional, local). Insufficient monitoring and
review of the functioning of risk profiles and of the results of cus-
toms controls lead to lack of feedback from the process, which in
turn prevents both timely updating of the risk profiles and opti-
mal prioritisation of the control work done by Customs.

Findings of audits in respect of the transactions of the
financial year

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

Entitlements without security, and, those which have
3.19.
been challenged and might be subject to change, need not be
made available to the Commission if they are instead entered by
the Member States in separate accounts (the B accounts). Each
Member State provides a quarterly statement of its B accounts to
the Commission. The net balance included in the Communities-
‘balance sheet under’ Amounts owed by Member States’
is
739,4 million euro (2003: 729,3 million euro).

3.20. At 31 December 2004 the gross balance for the
B accounts standing in the Commission’s books was 1 905,0 mil-
lion euro, 19,4 % less than the equivalent figure at 31 December
2003 (2 364,3 million euro) (16). The major reason for this

(16) Figures given are gross before deductions as follows:

C 301/68

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.22. The Commission considers that, in using the estimates prepared
by Member States, it has applied the principle of prudence required by
the Financial Regulation. Recovering customs debts depends upon
national laws and procedures; only Member States are aware of the solid-
ity of the grounds for demanding payment, whether or not the debtor has
assets and the likelihood of the enforced recovery proceedings available to
them proving successful. The Commission explained to Member States
the underlying principle they should use in preparing their estimates dur-
ing the ACOR meeting on 9 December 2004. It will remind Member
States of their responsibility to produce estimates based on realistic data.

3.23. The Commission is pursuing these points with the Member
States concerned to obtain explanations and corrections of the errors.

change is that entries relating to the import of New Zealand but-
ter products have been taken out of the B account following reso-
lution of the case (17).

3.21. The Court welcomes the adoption of Council Regulation
(EC, Euratom) No 2028/2004 (18), which requires Member States
to write off amounts of traditional own resources that are not
recovered by a specific deadline. The regulation also introduces a
requirement for Member States to provide an estimate of the
amount standing in their B accounts for which recovery has
become unlikely.

3.22. To recognise the extent to which recovery is unlikely, the
Commission has entered in its balance sheet a write-down based
on the information newly provided by the Member States. The
total write-down is in the range expected by comparison with
previous years. However, most of the Member States have not
provided information about the methods they used to make their
estimates. In consequence, the Court cannot confirm the amount
of the write-down, and considers that the Commission should
provide guidance with the aim of ensuring a consistent approach
throughout. The estimates of the unrecoverable proportion pro-
vided by the Member States vary from 10 % (12,8 million euro,
in the case of the United Kingdom) to 96 % (118 million euro, in
the case of Spain) (19).

3.23. As in previous years (20), the Court’s audit and the Com-
mission’s inspections (see paragraph 3.5) found systematic prob-
lems with B accounts, such as delays in making entries, errone-
ous entries, omissions and incorrect cancellations,
in several
Member States (Belgium, Germany, Ireland, Italy, Cyprus, Poland,
Slovakia, Sweden, United Kingdom). In 2003 Germany removed
entries totalling 40,1 million euro from its B account, without
providing a full explanation of this reduction.

(17) For the origin of these entries see the Court’s Special Report No 4/98
on importation at reduced rate of levy into the Community and dis-
posal of New Zealand milk products and Swiss cheese. The cancella-
tions finally made result from the litigation in the case and were
already taken into account in the write-downs made in previous years.
The amount recovered (11,6 million GBP) has been made available to
the Commission in the usual way.

(18) Council Regulation (EC, Euratom) No 2028/2004 of 16 November
2004 amending Regulation (EC, Euratom) No 1150/2000 imple-
menting Decision 94/728/EC, Euratom on the system of the Com-
munities’ own resources (OJ L 352, 27.11.2004, p. 1).

(19) In addition, seven Member States which have only small amounts
standing in their B accounts (together less than 0,1 % of the total
B-account balance) considered that the whole amounts were recov-
erable.

(20) See 2003 Annual Report, paragraph 3.40.

30.11.2005

EN

Official Journal of the European Union

C 301/69

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Sugar levies

3.24.
In the common organisation of the markets in the sugar
sector the producers have financial responsibility for the losses
incurred from disposing of
the surplus production under
quota (21). This is implemented by setting levies on the produc-
tion of sugar, isoglucose and inulin syrup. The levies are calcu-
lated by the Commission (479,8 million euro for the marketing
year 2002/03) and collected from the manufacturers by the Mem-
ber States. The Member States retain 25 % of the levies as collec-
tion costs (22).

3.25. The Court followed up previous work on sugar levies and
examined the calculation finalised in September 2004 (for the
marketing year running from 1 July 2002 to 30 June 2003). The
Court found that the system for calculating sugar levies was oper-
ating in a generally satisfactory way despite ambiguities in the
prescribed calculation method (23), which need to be resolved.
The Court also draws attention to the following points, on which
corrective action is recommended:

3.25.

(a)

the total amount of sugar levies (479,8 million euro) was
erroneously understated by some 6 million euro;

(a) The corrections will be made automatically during the calculation
of the 2005 levies, which must include the calculations and carry-
overs from previous marketing years.

(b)

regarding the two main sources of data on which the calcu-
lation is based:

(b)

(i)

(ii)

the Eurostat COMEXT database (24) has shown inaccu-
racy concerning the quantities of inulin syrup exported
and consequently the Commission, contrary to the
Regulation, was obliged to use other data obtained from
the Member States;

the communications submitted by the Member States
were not systematically checked by the Commission.
Furthermore the Commission has still not issued guid-
ance on best practice in the design of control mecha-
nisms to ensure the reliability of these communications
as
recommended in the Court’s Special Report
No 20/2000 (25).

(i) Regulation (EC) No 314/2002 will be amended, inter alia,

in order to specify this particular calculation method.

(ii) Recommendations have been made to Member States about
the design of their control mechanisms. The Commission will
take due account of the findings of the Court’s and its own
audits when establishing control mechanisms for the new
sugar regime.

(21) Council Regulation (EC) No 1260/2001 of 19 June 2001 on the com-
mon organisation of the markets in the sugar sector (OJ L 178,
30.6.2001, p. 1).

(22) Council Decision 2000/597/EC, Euratom, Article 2(3).
(23) Commission Regulation (EC) No 314/2002 of 20 February 2002 lay-
ing down detailed rules for the application of the quota system in the
sugar sector (OJ L 50, 21.2.2002, p. 40).

(24) COMEXT is the title of the Eurostat reference database containing

external trade statistics.

(25) Paragraph 61.

C 301/70

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.26.
In addition it is still the case that, as noted in the Court’s
Special Report No 4/91 (26), no conclusive reconciliation between
the revenue and the expenditure to be financed by sugar levies is
feasible within the Commission’s current system of accounting.

3.26. There is no need to carry out an accounting reconciliation
between resources obtained from the levies and budgetary expenditure,
since the calculation method currently provided for in the Council rules
does not give the two elements equal status. Comparisons may be made
outside the accounting system whenever necessary.

VAT/GNI own resources

Introduction

3.27.
In contrast to the revenue from traditional own resources,
the VAT and GNI own resources reflect macroeconomic statistics
whose underlying data cannot be audited directly. For this rea-
son, 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 final figures) and seeks
to assess the Commission’s system for handling the data until
they are ultimately included in the final accounts. The audit thus
covers the establishment of the annual budget and its implemen-
tation in respect of the monthly payments by Member States. The
audit
further concentrates on the Commission supervisory
and control systems which are intended to provide assurance that
the EU revenue is correctly established and collected. Specific
aspects of the VAT/GNI own resources are the subject of separate
audits.

3.28. The Court’s separate audits concerning the VAT and GNI
own resources covered Commission controls on Member States’
inventories for the European System of Accounts (ESA 95) (27),
the calculation of the weighted average VAT rate (WAR) in the
Member States’ VAT statements (28) and supervisory and control
systems in relation to the compilation of National Accounts at
Statistical Offices in Member States.

(26) Paragraph 5.19.
(27) European System of Accounts 1995 (Annex A to Council Regulation
(EC) No 2223/96 of 25 June 1996 on the European system of national
and regional accounts in the Community (OJ L 310, 30.11.1996,
p. 1), is used to compile National Accounts for purposes of the Com-
munity including for GNI own resource purposes (Council Regula-
tion (EC, Euratom) No 1287/2003 of 15 July 2003 on the harmoni-
sation of gross national income at market prices (GNI Regulation)
(OJ L 181, 19.7.2003, p. 1)).

(28) The VAT statement is a document drawn up by the Member States
which contains 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 (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)).

30.11.2005

EN

Official Journal of the European Union

C 301/71

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.30. The Commission’s analysis shows how difficult it is to estimate
the financial impact of reservations since they mainly concern cases where
reliable data are lacking. They are generally made precisely in order to
oblige Member States to seek reliable quantitative data and an accept-
able methodology. Finally, the Commission announced in 2003 its will-
ingness to take longstanding reservations to the European Court of Jus-
tice where this appears useful. This has already proved effective in the case
of two Member States which met the Commission’s wishes while the
infringement procedure was still at the preparatory stage. The Commis-
sion is aware of the increased workload resulting from enlargement and is
examining how to make the best use of its resources to maintain the
quality of inspections.

Evaluation of supervisory and control systems

Commission supervisory and control systems

3.29. The Commission inspection activities carried out in coop-
eration with the Member States constitute an essential element of
the control system for VAT/GNI-related own resources. The
Court examined the work of the units carrying out these inspec-
tions.

VAT own resource

3.30.
In respect of the VAT own resources, the Commission’s
on-the-spot inspections carried out during the financial year
2004 led to 28 new reservations (29) in respect of specific ele-
ments of Member States’ VAT statements (30). The preparation
and the reporting of the results of these inspections were of good
quality. However, given the limited resources available, the Com-
mission faces difficulties to maintain the same quality and fre-
quency of inspection visits to Member States as before enlarge-
ment (31). Furthermore, as far as the follow-up of the audit
observations related to reservations is concerned little progress
was made (only six reservations were lifted during the year) and
thus 107 remained at the end of 2004. These reservations often
cover several financial years and four of them date back to VAT
statements submitted more than 10 years ago. Their financial
impact has not been estimated by the Commission.

Controls carried out on the calculation of the weighted average
VAT rate in the VAT statements produced by Member States

3.31. Member States that apply differing VAT rates are required
to calculate a weighted average rate (WAR) to be used in the cal-
culation of the VAT own resource by the Commission. Any error
in this calculation would affect the VAT base used for the calcu-
lation of own resources and can consequently affect the amount
of VAT own resources paid. The Court examined the Commis-
sion’s inspections of this aspect of the system, audited the calcu-
lation of the WAR in five Member States (32) and checked its
compliance with Community legislative requirements (33).

(29) 10 of the 28 concern a subdivision of existing reservations.
(30) Reservations are an important tool used by the Commission to ensure
that corrections to the Member States’ VAT Statements can be made
beyond the four years time limit mentioned in Community legisla-
tion.

(31) On average every two years.
(32) Germany, Italy, Netherlands, Finland and Sweden.
(33) See Articles 3 and 4 of Council Regulation (EEC, Euratom)

No 1553/89.

C 301/72

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.32. As far as the 29 specific reservations on the WAR are con-
cerned, the Court found that a number of them have been pend-
ing for an excessively long period (34). Once a reservation was
placed, the Member States had an indefinite length of time to
solve the problem.

3.33. On the other hand, the Commission placed no reserva-
tion in cases of systematic shortcomings (35) in the WAR calcu-
lation.

3.32. There is no legal sanction that the Commission can use to oblige
Member States to improve data sources or methods of calculation rap-
idly even though infringement procedures provide a possible solution in
the longer term. Nevertheless, outstanding reservations are re-examined
at each control and successive control reports document the development
of discussions on each reservation. In the case of Austria, significant
progress has been made that will make it possible to lift the reservation,
which was placed both by Austria and by the Commission, once the
Commission has received the agreed amendments.

3.33.
In the Italian example cited in the Court’s footnote, the Com-
mission accepted approximate data to allocate a small number of prod-
ucts to VAT rates. For these products the expenditure is known but there
is no specific information available on the allocation to different VAT
rates or to exemption. For GFCF, one approximate percentage is used to
distinguish between standard and reduced rate. Italy can grant this taxa-
tion only for a restricted period of time. During the relevant control, the
Commission confirmed the lack of any data to accomplish this calcula-
tion. The Commission accepted a split, based on a rough estimate only,
exceptionally for a short period of two years, later extended to four. The
Commission has already announced in the last control report that this
practice will no longer be accepted.

3.34. Within the Commission, the Directorate-General for the
Budget (DG Budget) has delegated a substantial part of the checks
on the WAR calculation to Eurostat and certain fiscal aspects of
the calculation to the Directorate-General for Taxation and Cus-
toms Union (DG TAXUD). Their respective roles and responsi-
bilities were not formally documented at the time of the Court’s
audit.

3.34. The Budget DG retains overall responsibility for the determina-
tion of the WAR but receives technical support from Eurostat regarding
the weighting of economic sectors and from TAXUD regarding the allo-
cation of goods and services to VAT rates. As a result of the Court’s com-
ment, a Memorandum of Understanding signed by the three Directors-
General, specifying these roles and also covering other areas of
cooperation, entered into force in September 2005.

GNI own resource

In respect of the GNI own resources, there was still insuf-
3.35.
ficient direct verification by the Commission of the underlying
National Accounts which are the basis for the figures presented
in the GNI questionnaires (36). However the Commission has

(34) For example, ‘The small firms adjustment’ for Germany, applicable to
the years 1991 to 2001, which was placed during a 1995 inspection,
subsequently prolonged and lifted in 2004 (except for the reservation
related to 2000), and the ‘Car compensation’ reservation in Austria
made in 1999 in respect of the 1995-2001 VAT statements.

(35) In Italy, methods used to obtain the required breakdown of final con-
sumption of households and of expenditure for gross fixed capital
formation (GFCF) were not fully reliable.

(36) Document based on a common model by which the National Statis-
tical offices communicate the GNI figures to Eurostat each year.

30.11.2005

EN

Official Journal of the European Union

C 301/73

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.37. Quality reports were submitted in 2004 for the first time and
produced a significant improvement in the information supplied with the
questionnaire compared with previous years. It is not unusual or surpris-
ing to observe that the new guidelines were interpreted differently to some
extent when used for the first time. The GNI Committee, at its July 2005
meeting, approved Eurostat proposals for extended guidelines that are
intended to ensure a more harmonised result this year.

started to set up a unit that will undertake verification of public
and National Accounts produced by Member States.

3.36.
Since 2003, Community legislation provides for the trans-
mission of an annual report on the quality of GNI data by Mem-
ber States to the Commission. The report should supply the infor-
mation necessary to show how the aggregate GNI figure was
reached, and, in particular, describe any significant changes in the
procedures and basic statistics used and explain the revision made
to earlier GNI estimates. Pursuant to Article 2(3) of Council Regu-
lation (EC, Euratom) No 1287/2003 the content and format of
this report should follow the guidelines laid down by the Com-
mission (37).

3.37. A review of the quality reports submitted in 2004 shows
that:

(a)

some Member States have not followed the guidelines on
content and format;

(b)

significant differences exist in the amount and detail of the
information given;

(c) no information is given on the results of investigations on
the quality of GNI and its components, although such infor-
mation is requested by the guidelines.

C o m m i s s i o n c o n t r o l s o n E S A 9 5 i n v e n t o r i e s

3.38. An important part of Commission supervisory and con-
trol systems in respect of the GNI own resource concerned the
ESA 95 inventories. GNI and the underlying National Accounts,
which constitute the basis for the calculation of the GNI own
resources, have to be compiled by Member States in accordance
with ESA 95. For this purpose, Member States are required to
produce GNI inventories, which are country-specific descriptions
of methods and procedures used for the calculation of the GNI
aggregates and underlying National Accounts.

3.39.
In order to evaluate the effectiveness of checks for ensur-
ing that Member States comply with ESA 95 requirements, the
Court assessed the way in which the Commission has carried out
these checks on GNI inventories for ESA 95 for the 15 pre-
enlargement Member States (38).

(37) See Minutes of the 2nd GNI Committee meeting of 25-26 March 2004
in which the Committee accepted the proposed structure of the 2004
questionnaire and quality report.

(38) The GNI inventories of the 10 new Member States are foreseen to be

produced in 2006.

C 301/74

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.40. GNI inventories had to be presented to the Commission
by the end of the year 2000. Though the majority of Member
States submitted their inventory during 2001, France and Luxem-
bourg presented their inventories only in 2003 and 2004 respec-
tively.

3.40. The Commission has continuously pressed France and Luxem-
bourg to submit their inventories.

3.41. Through the development of the GNI Inventory Assess-
ment Questionnaire (GIAQ) (39), the Commission has improved
the control approach in setting up a systematic and structured
tool for carrying out its checks. However, the Commission did
not check that the systems and methods described in the inven-
tories are actually applied by the national statistical offices.

3.41. Member States in many cases describe in their inventories cur-
rent weaknesses in their accounts and the improvements that are planned.
The Commission considers as low-risk the possibility that the systems
and methods as described in the inventories are not actually applied. This
view is supported by the fact that many Members States publish their
inventories or extracts thereof.

3.42. The documentation of the Commission’s checks on inven-
tories was incomplete. Only those cases were documented where
the Commission noted problems or outstanding issues. Such an
approach does not provide a full audit trail of checks performed
by the Commission, thus reducing auditability and reliance that
can be placed on such checks.

3.42. The Commission checks the inventories using the GIAQ as
checklist to ensure that the same issues are covered for all Member States.
From the questions sent to Member States to prepare GNI visits, it can
easily be seen that the GIAQ is used in their compilation. The Commis-
sion decided it would not be useful or cost-effective to lay down detailed
information on all GIAQ items that did not lead to a question for the
GNI visit, as the Commission would not have been able to complete the
analysis of the Inventories within a reasonable time.

Illegal activities

3.43.
Exhaustiveness is an important aspect of GNI to ensure
that a reliable basis exists for the equitable share of GNI own
resources between Member States. ESA 95 provides that all cat-
egories of illegal activities are to be included in GNI. The Com-
mission has requested that Member States should start with an
estimation of certain categories of illegal activities (40).

3.44.
From the Commission checks on the inventories for ESA
95 it appears that only a few Member States have included such
estimates in GNI, moreover for different types of illegal activities.
Thus GNI estimates are not fully comparable which affects the
GNI own resources calculation and do not fully comply with ESA
95 requirements.

3.44. The Commission actively presses the Member States to include
illegal activities in GNI. However, the inclusion is required only from
financial year 2002 onward (year from which ESA95 applies to own
resources). These years are currently still open to revision. Member States
have until 2006 to comply with ESA95 in this respect, before possible
reservations are placed.

Intermediate consumption

ESA 95 stipulates that purchases of low value (small tools
3.45.
with a value lower than 500 euro) by companies are to be con-
sidered as intermediate consumption. Derogation from this rule
requires an adjustment by the Member States in question to com-
ply with the ESA requirement.

(39) The GIAQ is a standard questionnaire used by the Eurostat to control
the GNI inventories; the GIAQ contains 277 questions on a large field
of topics.

(40) Estimated by Eurostat on the basis of already existing studies to

amount to 1-2 % of GNI.

30.11.2005

EN

Official Journal of the European Union

C 301/75

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

In two of the eight Member States (41) audited (Belgium
3.46.
and Ireland), there is no threshold in the business accounting
rules and no adjustment is made for compliance with ESA 95.
The Commission accepted this situation after discussions with
these two Member States without further seeking evidence that
this deviation from ESA 95 was not material.

3.46.
In both Belgium and Ireland, it is not known which thresholds
companies apply in practice as there is no fiscal or accounting threshold.
Because in such cases it is not even known which sign a possible adjust-
ment should have, let alone its size, the Commission considers the most
prudent course is not to apply an adjustment.

3.48 and 3.49. Because of differences between Member States, the
Commission uses the same standardised tools to verify the reliability,
comparability and exhaustiveness of all Member States’ GNI data used
for own resources, including very detailed descriptions of sources and
methods (GNI inventories) with annual updates in the form of the qual-
ity reports. The Commission considers that these systems give sufficient
guarantees that the GNI data are reliable, comparable and exhaustive.

The Commission will discuss with the Member States in the GNI Com-
mittee the extent to which the national supervisory and control systems
should become part of the GNI verification process.

Supervisory and control systems in Member States

3.47. Community legislation on the harmonisation of Gross
National
Income (42) requires particular efforts to be made
to improve Member States’ GNI compilation practices and the
dissemination of best practises in this domain. It also foresees the
adoption of measures to make GNI data more comparable, reli-
able and exhaustive. The Court has examined in seven Member
States (43) to what extent supervisory and control systems were
set up and implemented at Statistical Offices in respect of the
compilation of National Accounts.

3.48. The Court notes that significant differences exist between
Member States in the existence and implementation of the follow-
ing elements of supervisory and control systems in respect of the
National Accounts compilation process:

(a)

the performance of a formal and structured risk analysis in
respect of the process of National Accounts compilation (44);

(b)

the existence of agreements or equivalent arrangements
between National Accounts departments and units provid-
ing basic statistical data, which set out the conditions for the
delivery and the quality of data (45);

(c)

the systematic production of ‘quality reports’ accompanying
statistical surveys (46);

(d)

the documenting of supervisory controls performed by man-
agement on National Accounts compilation (44);

(e)

the performance of internal audits on the process of statisti-
cal data collection and compilation (44).

(41) Belgium, Denmark, France, Ireland, Luxembourg, Netherlands, Swe-

den and United Kingdom.

(42) Council Regulation (EC, Euratom) No 1287/2003,

in particular

Articles 2, 3 and 5.

(43) Germany, Greece, Spain, France, Hungary, Poland and United King-

dom.

(44) This element is fully implemented in the United Kingdom.
(45) This element is fully implemented in Germany, Poland and the United

Kingdom.

(46) Takes only place in France and the United Kingdom.

C 301/76

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.49. The Court points out that the differences in the existence
and implementation of supervisory and control systems could
lead to varying degrees of reliability, comparability and exhaus-
tiveness of National Accounts.

Annual activity reports and declarations of the Directors-General

3.50. The Court has examined the annual activity reports and
declarations of the Directors-General of DG Budget and Eurostat.
As in 2003, the annual activity report for DG Budget includes the
number of VAT inspection visits in Member States but says noth-
ing else about the verification of the VAT own resources data. It
mentions neither control activities related to the GNI own
resource, the existence of 107 reservations in respect of Member
States’ VAT statements or changes in the number of reservations
during the year.

3.50. The annual activity reports made by Directors-General are by
their nature highly selective and present activities either of particular
importance or having a certain illustrative value. In the case of DG Bud-
get, it was considered sufficient to mention the controls themselves with-
out giving details of the reservations, which are a routine tool for the
improvement of VAT statements. DG Budget will nevertheless
re-examine its presentation of its controls on the VAT resource.

3.51. The number of reservations for each Member State is small.
Moreover, the simple number of reservations is not a very significant
indicator because they may be of greater or lesser numerical impact on
GNI. Eurostat agrees to provide more information on verifying GNI
and VAT in its Annual Activity Report.

3.51. The Eurostat annual activity report mentions the checks
on Member States’ ESA 95 inventories of statistical sources and
methods. It says that these have led to replace former general res-
ervations placed on all data for all Member States by a small num-
ber of specific reservations. The report does not, however, men-
tion the actual number of specific reservations (57) and the fact
that there was still a general reservation in force for Germany and
Luxembourg at the end of 2004. Neither does the Eurostat annual
activity report mention to what extent key priorities for 2004 in
verifying VAT and GNI data produced by Member States, men-
tioned in the Statistical Programme of the Commission for the
year 2004, had been achieved.

Conclusions and recommendations

3.52. Taking into account the scope of the audit (see para-
graph 3.3) and with the exception of the B-account matters noted
in paragraph 3.23, the audit work carried out by the Court gave
satisfactory overall results concerning the reliability of
the
accounts recording traditional own resources and the legality and
regularity of the underlying transactions.

3.52. As the Court remarks in paragraph 3.21 of the report, the regu-
lation governing the B accounts was amended at the end of 2004. The
changes introduced will help in obtaining more reliable and accurate
B accounts.

3.53. Taking into account the scope of the audit, as set out in
paragraph 3.27, the Court is of the opinion that, on the basis of
data supplied by Member States, the VAT and GNI resources in
all material respects had been correctly calculated, collected and
entered in the Community accounts by the Commission.

30.11.2005

EN

Official Journal of the European Union

C 301/77

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

3.54. However, the Court’s audit work on the GNI own resource
has identified weaknesses that could impact on the quality of the
data on the basis of which Member States’ GNI contributions are
established. The Court recommends the Commission:

3.54. The Commission considers that its systems give sufficient guar-
antees that the GNI data are reliable, comparable and exhaustive. The
recently adopted Recommendation on the independence, integrity and
accountability of the national and Community statistical authorities
(COM(2005) 217), which includes a European Statistics Code of Prac-
tice, should in any event help to strengthen the quality of macroeconomic
statistics, including GNI.

(a)

to perform (direct) verification checks on selected National
Accounts aggregates (see paragraph 3.35);

(a) The Commission is currently examining ways in which more direct
verification, in the sense indicated by the Court, might be carried
out.

(b)

(c)

(d)

to expand its checks on Member States’ inventories of sources
and methods applied in the compilation of National
Accounts and to improve its system for documenting checks
(see paragraphs 3.41-3.42);

to pursue that all Member States comply with ESA 95
requirements in respect of illegal activities in GNI (see para-
graphs 3.43-3.44);

(b) The Commission will endeavour to improve documentation within

the limits of its resource constraints.

(c) The Commission is already pursuing this actively.

to review in consultation with the Member States how best
practices for supervision and controls in respect of the
National Accounts compilation can be implemented (see
paragraphs 3.47-3.49);

(d) The Commission encourages best practices in national accounts
compilation through the GNI Committee. The Commission will put
forward the Court’s recommendation to the GNI Committee.

(e)

to perform a comparative analysis of the quality reports, for-
mulate more precise guidelines and strengthen the follow-up
on their implementation (see paragraphs 3.36-3.37).

(e) Since the Court’s audit, the results of a comparative analysis and
more precise guidelines were presented to and approved by the July
2005 GNI Committee.

In respect of the Commission’s controls on the systems
3.55.
underlying the calculation of the VAT own resource, the Court:

3.55.

(a) notes that reservations, especially given their high num-
ber (107) impact on the correctness of the Member States’
VAT statements and recommends that the Commission
should in consultation with the Member States, where pos-
sible, quantify these reservations (47) (see paragraph 3.30);

(b)

recommends that the Commission should increase its efforts
to reduce the number of long-standing reservations (see para-
graphs 3.30 and 3.32);

(a) Reservations are generally made precisely in order to oblige Mem-
ber States to seek reliable quantitative data and an acceptable meth-
odology. Moreover, the Commission’s practice since 2003 of sub-
dividing certain reservations
to make them more
transparent and potentially easier to lift has led to an apparent
increase in their number. The control cycle of two to three years
between visits leads to a time-lag in the beneficial effect of this
policy.

in order

(b) The reduction in the number of longstanding reservations depends
mainly on the capacity of the Member States’ administrations to
meet an adequate quality standard. Inevitably, where data become
outdated, new reservations are necessary. In 2003, the Commis-
sion announced its readiness to use the infringement procedure to
seek to end longstanding reservations, where appropriate.

(47) See 2002 Annual Report, paragraph 3.38.

C 301/78

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(c) observes that, with the number of Member States increased
from 15 to 25, the same coverage and quality of the inspec-
tions could in the future only be maintained if human
resources are increased, the inspection policy is further ratio-
nalised through the use of risk analysis and/or the regulatory
and procedural framework for producing VAT statements is
reinforced (see paragraph 3.30).

(c) The Commission expects a significant reduction in the number of
reservations applicable to certain Member States in the near future
and will focus its controls on the basis of risk analysis.

30.11.2005

EN

Official Journal of the European Union

C 301/79

CHAPTER 4

The common agricultural policy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Scope of the audit

Supervisory and control systems

IACS

Post-payment checks under Regulation (EEC) No 4045/89 — Backlogs and insufficient
information on results of checks performed

Physical checks of subsidised exports of agricultural products — Value of transactions
checked and irregularities unknown

Clearance of accounts

The Court’s sample of transactions

Annual Activity Report of the Director-General for Agriculture for the year 2004

Some improvement from last year

Internal Control Standards — Some standards are not fully implemented

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 and recommendations

Global conclusion

Post-payment checks

Clearance of accounts

Annual Activity Report of the Director-General for Agriculture

Recommendations

New Member States: transition

Accreditation of the EAGGF paying agencies in the new Member States

SAPARD — Satisfactory supervision but some weaknesses in claims assessment

Follow-up to previous observations

CMO in the Banana sector

Paragraph

4.1-4.3

4.4-4.63

4.4-4.5

4.6-4.25

4.6-4.8

4.9-4.10

4.11-4.14

4.15-4.25

4.26

4.27-4.34

4.27-4.32

4.33-4.34

4.35-4.54

4.35-4.38

4.39-4.42

4.43-4.45

4.46-4.48

4.49-4.54

4.55-4.63

4.55-4.57

4.58

4.59-4.61

4.62

4.63

4.64-4.76

4.64-4.68

4.69-4.76

4.77-4.95

4.77-4.84

C 301/80

EN

Official Journal of the European Union

30.11.2005

Prefinancing of Export Refunds

Potato and cereal starch

Principal observations in Special Reports

Forestry measures within rural development policy

Agri-environment

Paragraph

4.85-4.91

4.92-4.95

4.96-4.99

4.96-4.97

4.98-4.99

30.11.2005

EN

Official Journal of the European Union

C 301/81

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

4.1.
Expenditure in 2004 on the common agricultural policy
(CAP), i.e. the European Agricultural Guidance and Guarantee
Fund (EAGGF Guarantee section), totalled 43 579 million euro
(2003: 44 379 million euro). Graphs 4.1 and 4.2 show how the
money was spent. Graph 4.1 shows the breakdown of expendi-
ture 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.
Payments to farmers based on the amount of land they
farm or the number of livestock on their farms constitute the
greater part (59 %) of CAP spending. These payments are prima-
rily intended to compensate farmers for reductions that have been
made in CAP prices.

4.3. Virtually all CAP expenditure is effected by the paying
agencies of the Member States. The process for payments to farm-
ers 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 all claims to administrative
checks and a sample of claims 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 exam-
ined 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; to ask for more work to be performed
or information provided (1);

(f)

the Commission may then itself examine payments made by
the paying agencies. If these were irregular, or if financial
controls were weak, it 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 Com-
mission makes a conformity decision which ‘disallows’ such
expenditure as part of the ‘clearance of accounts’) i.e., it
reduces the payments to the paying agency accordingly (see
paragraph 4.22).

(1) The Commission may disallow expenditure at this stage on the basis

of the findings of the certifying bodies (see paragraph 4.3(f)).

C 301/82

EN

Official Journal of the European Union

30.11.2005

Graph 4.1 — Breakdown of EAGGF-Guarantee Expenditure by economic category — financial year 2004

(1) Others: production, processing or consumption aid paid to producers or organisations of producers or processors and administrative expenditure.
(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 advance,

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

milk levies).
The total of area aid, animal premiums together with other direct aid gives an overall total for direct aid of 76,17 % of CAP expenditure.

Source: The Commission’s annual accounts for 2004 — gross data.

Graph 4.2 — Breakdown of EAGGF-Guarantee expenditure by sector — financial year 2004

Source: The Commission’s Annual accounts for 2004 — Volume II.

30.11.2005

EN

Official Journal of the European Union

C 301/83

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

SPECIFIC ASSESSMENT IN THE CONTEXT OF
THE STATEMENT OF ASSURANCE

Scope of the audit

4.4. 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 agricultural area, in order to seek assurance on
the functioning of control systems and on the legality and regu-
larity of the transactions. For that purpose, the Court:

(a) assessed the workings of IACS (the supervisory system for
area aid and animal premiums); post-payment checks and
physical checks on subsidised agricultural exports (the prin-
cipal supervisory systems for other types of agricultural
expenditure) (see paragraphs 4.6 to 4.14);

(b) examined the Commission’s financial clearance decision for
expenditure in 2004 and conformity decisions taken in
2004, which relate to payments made to beneficiaries in ear-
lier years (see paragraphs 4.15 to 4.25);

(c)

tested a sample of transactions directly (see paragraph 4.26);

(d) examined the Annual Activity Report and Declaration by the
Director-General for Agriculture and reviewed the imple-
mentation of internal control standards at the Commission
(see paragraphs 4.27 to 4.34).

Paragraphs 4.35 to 4.54 set out the Court’s assessment of
4.5.
the legality and regularity of expenditure under the CAP, based on
the above sources of evidence. Observations on the reliability of
the accounts are set out in Chapter 1, paragraphs 1.12, 1.13, 1.15
and 1.16.

Supervisory and control systems

IACS

4.6. The Integrated Administrative and Control System (IACS)
is the key management and control tool for area aid and animal
premium schemes and covers 59 % of agricultural expenditure.
IACS comprises a computerised database of holdings and aid
applications, systems for identifying parcels of agricultural land
and identifying and registering animals, and a coordinated set of
administrative checks and on farm inspections. Claims for a num-
ber of other Community aid schemes must be compatible with
the system.

C 301/84

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.7.
In 2004, the Court continued its examination of the way
IACS is functioning in a further five paying agencies in four Mem-
ber States (2) as well as following up earlier findings in Portugal
after the merger of two paying agencies. IACS checks in the five
paying agencies visited other than in Greece are generally opera-
tional and satisfactory (see Annex 2); IACS functioning is com-
parable to that of the paying agencies audited in previous years,
although there is still scope for improvement in risk analyses,
administrative checks and on the spot inspections.

4.7. Although the Commission considers some of the Court’s assess-
ments in Annex 2 to be too severe, its audit results generally concur with
the Court’s own findings, and further enhancements are being achieved
as from 2005 with implementation of the Geographical Information
Systems obligatory as from 1st January.

Regulation (EC) No 118/2004, amending IACS legislation as from
2004, will still further improve the already generally satisfactory situa-
tion.

4.8. More than seven years after the deadline for full implemen-
tation IACS in Greece can still not ensure compliance with legal-
ity and regularity for area aid and animal premium payments (3)
(see also paragraphs 4.28(b) on the Commission’s reservation in
respect of the implementation of IACS in Greece and 4.44 on the
results of the Court’s transaction testing). The major reasons for
the deficiencies and failures are:

Facing the IACS situation in Greece, the Commission has regu-
4.8.
larly applied important financial corrections (384 million euro from
1999 to 2004). In addition, in 2002 the Commission initiated an
infringement procedure against Greece. The European Court of Justice
found against Greece in 2004.

(a)

farmers’ unions control the input of all data into the com-
puter system. None of the data in the system is secure and it
can be and is modified by the farmers’ unions at any time
before payment. The computer system does not record when
and why changes to the original data are made. For 2004
expenditure, farmers’ unions changed data for more than
22 000 parcels more than five months after the claim period
ended. Analysis shows that these irregular changes have an
estimated financial impact of at least 10 million euro, and the
impact over the whole claim period could be significantly
more;

Moreover, following the DG AGRI Director-General’s reservation to his
annual declaration, a specific action plan was put in place in 2003
and 2004, consisting of an enhanced audit programme and other super-
visory measures. In 2004, nine missions to Greece were carried out on
IACS and IACS-related measures. These actions on the part of the
Commission and the setting up of a new paying agency in Greece
(Opekepe) have led to good progress, so that by the end of 2004
(2005 financial year) the different elements of the IACS system were in
place. However the Commission will continue to identify and assess the
remaining deficiencies in the functioning of the IACS in Greece, and to
apply appropriate financial corrections.

As regards the weaknesses mentioned by the Court, the Commission has
repeatedly criticised the role of the farmer’s unions in the claim procedure
and the weakness of supervision. By letter of June 2004, the Commis-
sion has formally required the Greek authorities to implement a new aid
application procedure, reducing the dependence on farmer’s unions. This
subject, as well as the insufficient quality of the on-the-spot inspections,
already identified by the Commission, will be pursued through the ongo-
ing clearance of accounts enquiries.

(2) Germany (Thüringen, Saarland), Greece, Spain (Castilla y Leon), and

the United Kingdom (Scotland).

(3) In 2003, IACS expenditure in Greece amounted to 868 million euro
(this figure does not include expenditure for tobacco, cotton and olive
oil, which are indirectly covered by IACS).

30.11.2005

EN

Official Journal of the European Union

C 301/85

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b)

the quality of on-the-spot inspections is low. The inspection
findings are very poorly, or not at all documented, or report-
ing of results is unreliable. Re-performance of inspections by
the paying agency for quality assurance could not confirm
the results for more than one third of initial inspections.
Some reports do not seem to be based on genuine inspec-
tions (4).

Post-payment checks under Regulation (EEC)
No 4045/89 (5) — Backlogs and insufficient information
on results of checks performed

4.9. Member States are required to carry out annual pro-
grammes of post-payment checks of commercial documentation
for a range of CAP subsidies, including export refunds, process-
ing and transformation subsidies, processing of cotton, olive oil
and tobacco and some rural development expenditure, in total
some 37 % of agricultural expenditure. Member States must sat-
isfy 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.

4.10. The Commission analyses the documents Member States
provide on an annual basis and may visit some Member States in
order to check the implementation of the Regulation on the spot.
The Court examined the Commission’s monitoring of Regulation
(EEC) No 4045/89 checks and found that:

4.10.

(a)

the analysis of the reports provided by Member States is of
limited value as the existing regulation does not require coor-
dination bodies to present statistics in a format which per-
mits meaningful analysis (for example, reporting the rates of
error for different categories of expenditure);

(a) The Commission considers the reports provided by Member States
to provide valuable information, although it accepts that reporting
in respect of Regulation (EEC) No 4045/89 could be improved. It
will introduce a proposal to amend Commission Regulation (EC)
No 4/2004 to this effect.

In particular, tables will be introduced for communication of find-
ings so that their number, value and nature can be identified and
analysed. Moreover, new ways of identification and reporting of the
backlog are envisaged so that scrutinies not completed during the
reporting period can be followed up in the reports in respect of sub-
sequent reporting periods.

(4) Area aid: in one report examined, the local inspector asserts hav-
ing measured 85 parcels in one day without reporting any discrepan-
cies. Another local inspection team of two inspectors reports having
measured 223 parcels by GPS in one day without finding any discrep-
ancies. In claim year 2003, a team of two inspectors reported having
checked the area of 653 parcels again without finding any discrepan-
cies. Experience from area measurements and discrepancies suggests
that these results are unlikely.
Sheep premiums: inspections revealed siginificant differences in a herd
of 470 sheep, claimed to be unchanged in number from 2002 to 2004.
The differences were covered by declarations of losses (70, 192
and 239 animals lost in 2002, 2003 and 2004 respectively) due to
natural circumstances (by disease and wolves). The losses were sup-
ported by certificates from the local veterinary office. However no evi-
dence could be produced by the farmer to justify how he restocked his
herd.

(5) Council Regulation (EEC) No 4045/89 of 21 December 1989

(OJ L 388, 30.12.1989, p. 18).

C 301/86

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b)

in 2003, the Court examined the application of post-
payment checks in 11 Member States and concluded that
fewer than one in three were wholly satisfactory (6). In
response, the Commission has visited three Member States in
2004, the first visits since January 2001 dedicated to the full
examination of the post-payment checks. In addition the
Commission regularly covers specific aspects of post-
its clearance of
payment checks in the framework of
accounts’ audit of export refunds (which accounts for some
25 % of the expenditure to be covered by these checks);

(b) Following the Court’s 2003 Annual Report where a similar remark
was made, the Commission took further measures to improve the
situation. Even if some of those checks are not to be considered as
wholly satisfactory, the Commission considers that due to the com-
plexity of post-payment checks, there might often be a margin for
improvement without putting into question the value of the checks
carried out.

In 2004, DG AGRI carried out three missions (to Belgium, Greece
and Portugal) on the application of Regulation (EEC) No 4045/89
to cover the general aspects, i.e. the annual report, risk-analysis
and control programme. In 2005, six further missions are ongo-
ing during which the specific findings of the Court will be followed
up.

In addition, the Commission has given added emphasis to Regula-
tion (EEC) No 4045/89 controls in the framework of compliance
audits in 2005.

(c)

the delays in completion of Member States’ annual pro-
grammes of post-payment checks, highlighted by the Court
in its 2003 Annual Report (7), persist. At the end of 2004
almost 40 % of the checks planned had not been completed
according to the Member States’ annual reports.

(c) The Commission acknowledges that there have been delays in the
completion of post-payment checks in certain Member States. How-
ever, the number of scrutinies planned by most Member States
exceeds significantly the minimum number required. On this basis
the shortfall is less than 40 %.

While some scrutinies are not completed at the end of the scrutiny
period, they must be followed up and be completed in the following
scrutiny period. The Commission is investigating the reasons for the
failure to complete in due time control programmes in certain
Member States and, where appropriate, will request clarification
from Member States.

Graph 4.3 shows the number of checks carried out and the num-
ber of irregularities discovered for the last six reporting periods as
presented by Member States. Given that the data does not pro-
vide for analysis by amount or by type of expenditure, it is not
possible to draw conclusions on the significance and cause of the
variation in the reported frequency of irregularity.

Graph 4.3 Member States report the total amount of the irregularities
detected by Regulation (EEC) No 4045/89 scrutinies which for the
2001/2002 control programme amounted to 23,4 million euro.

(6) Annual Report 2003, paragraph 4.15(b).
(7) Annual Report 2003, paragraph 4.15(a).

30.11.2005

EN

Official Journal of the European Union

C 301/87

Graph 4.3 — Regulation (EEC) No 4045/89: Number of post-payment checks performed
and irregularities identified 1997/98 to 2002/03

Source: Commission, annual summary of Member States scrutiny reports.

Physical checks of subsidised exports of agricultural
products (8) — Value of transactions checked
and irregularities unknown

4.11.
Export refunds paid to exporters of EU agricultural prod-
ucts cover the difference between EU internal and world market
prices and allow surplus EU production to be disposed of on
world markets. In 2004, refunds accounted for some 3,6 bil-
lion euro, 7,5 % of CAP expenditure (8,3 % in 2003). Member
States are required to physically check 5 % of exports to ensure
that they are correctly described and entitled to the export refund
claimed. The Commission monitors the quality and number of
checks carried out by Member States.

In 2004, the Commission visited 7 Member States to
4.12.
evaluate the performance of physical checks. The Commission’s
main preliminary findings indicate weaknesses relating to:

4.12. As the Court states, the remarks are of preliminary nature and
the Commission can only finalise its position once the Member States
have exercised their right of reply.

(a) quality and/or frequency;

(b) procedures for selection of consignments;

(8) Council Regulation (EEC) No 386/90 of 12 February 1990 (OJ L 42,

16.2.1990, p. 6).

C 301/88

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.13.
Following the Court’s recommendation, made for the first time
in its 2002 Annual Report, the Commission responded in timely fash-
ion by adopting Regulation (EC) No 1454/2004, which stipulates that,
as from 2005 the value of transactions checked, as well as irregularities
exceeding the amount of 200 euro, have to be communicated by Mem-
ber States.

Until 2005, the information on the value of irregularities depended on
the reliability of the communication of irregularities referred to in
Article 3 of Regulation (EEC) No 595/91 delivered by the Member
States to OLAF and did not comprise irregularities below 4 000 euro.

4.14. The assurance gained from Regulation (EEC) No 386/90 is an
integral part of the overall assurance obtained by the Director-General
as explained in the Annual Activity Report (section 4.2.2). See also reply
to paragraphs 4.29 to 4.31.

(c) prior notification;

(d)

statistics.

These weaknesses of variable importance were not found in all
Member States visited.

4.13. The Commission was unable to provide information on
the value of transactions physically checked and the value of
irregularities detected. During 2004, the Commission adopted a
regulation requiring Member States to report this information
with effect from the 2005 report. Table 4.1 summarises the num-
bers of declarations checked and of irregularities detected for the
period 2001 to 2003.

4.14. The Commission’s Annual Activity Report 2004 contains
information on the number of export declarations lodged, the
number checked by the Member States and the number of irregu-
larities found. There is no reference to the results of the Commis-
sion’s evaluation of the performance of physical checks by Mem-
ber States, nor of the extent to which assurance can be gained
from them.

Clearance of accounts

Financial clearance

4.15. The Court examined:

(a)

the reports of the certifying bodies on the 25 paying agen-
cies (see Table 4.2) from which transactions were tested (see
paragraph 4.26) and of all paying agencies whose accounts
were qualified;

(b)

the Commission’s financial clearance decision;

(c)

the Commission’s clearance of accounts postponed from pre-
vious years (9).

(9) As part of its cyclical examination of various aspects of the paying
agencies’ functions, the Court also examined the Commission’ enquiry
started in 2002, into the way in which paying agencies delegate cer-
tain functions to other bodies. The Commission’ reports show two
common weaknesses: failure by paying agencies to exercise adequate
supervision over the delegated bodies, and failure to specify the role
of delegated bodies. In particular the Commission found widespread
weaknesses over the management of delegated bodies by AGEA (Italy):
the weaknesses persisted in 2003 and 2004.

30.11.2005

EN

Official Journal of the European Union

C 301/89

1
0
0
2

2
0
0
2

3
0
0
2

s
k
c
e
h
c

l
a
c
i
s
y
h
P

s
e
i
t
i
r
a
l
u
g
e
r
r
I

s
k
c
e
h
c

l
a
c
i
s
y
h
P

s
e
i
t
i
r
a
l
u
g
e
r
r
I

s
k
c
e
h
c

l
a
c
i
s
y
h
P

s
e
i
t
i
r
a
l
u
g
e
r
r
I

)
1
(

d
e
t
c
e
t
e
d

s
e
i
t
i
r
a
l
u
g
e
r
r
i

d
n
a

s
k
c
e
h
c

l
a
c
i
s
y
h
p

f
o

r
e
b
m
u
N

:

0
9
/
6
8
3

o
N

)

C
E
E
(

n
o
i
t
a
l
u
g
e
R
—
1
4

.

e
l
b
a
T

5
6
9
7

3
1
7
9

0
9
2
4

7
2
8
1

7
0
7

5
0
5

0
4
4
3

7
5
8
7

2
4
7

3
1
5
5

7
8
9
2

5
3
4
1

6
6
0
1

4

6
8
2

2
1

3
6

2
1

3
3

6

3

3

0

0

0

0

0

0

0

0

6
1
8
6

6
7
4
8

2
4
6
3

1
3
6
1

4
2
7

1
9
8
2

3
6
3

2
9
1
8

9
8
6

1
9
4
5

0
7
5
2

1
3
1
1

6
1
0
1

0

4
5
2

9
5

1
6

9
1

2
2

3

2

2

0

0

0

0

0

0

0

0

6
8
7
4

4
4
6
6

9
5
4
3

0
7
4
1

2
7
8

6
7
7
2

4
9
4

9
2
2
7

8
6
6

8
1
6
4

8
1
4
1

6
7
9

5
3
8

2
4
2

0

3
2

0
2

8

8

6

2

2

1

1

0

0

0

0

0

0

y
n
a
m
r
e
G

e
c
n
a
r
F

k
r
a
m
n
e
D

n
i
a
p
S

d
n
a
l
e
r
I

m
u
i
g
l
e
B

l
a
g
u
t
r
o
P

s
d
n
a
l
r
e
h
t
e
N

d
n
a
l
n
i
F

e
c
e
e
r
G

y
l
a
t
I

m
o
d
g
n
K

i

d
e
t
i
n
U

g
r
u
o
b
m
e
x
u
L

a
i
r
t
s
u
A

n
e
d
e
w
S

7
3
3
8
4

2
3
1

6
8
8
3
4

8
6
1

7
8
4
6
3

1
7

l
a
t
o
T

.

3
0
D

I

R
G
A
G
D

,

n
o
i
s
s
i

m
m
o
C
e
h
t

y
b

,
’

2
0
0
2

r
a
e
y

e
h
t

n
o

s
t
r
o
p
e
r

l
a
u
n
n
a

s
e
t
a
t
S

r
e
b
m
e
M

f
o

y
r
a
m
m
u
S

‘

d
n
a

’

3
0
0
2

r
a
e
y

e
h
t

n
o

s
t
r
o
p
e
r

l
a
u
n
n
a

s
e
t
a
t
S

r
e
b
m
e
M

f
o

y
r
a
m
m
u
S

‘

:
e
c
r
u
o
S

.

1
9
/
5
9
5

o
N

)

C
E
E
(

n
o
i
t
a
l
u
g
e
r

r
e
d
n
u

d
e
t
r
o
p
e
r

s
o
r
u
e

0
0
0
4

n
a
h
t

e
r
o
m

s
e
s
a
c

f
o

r
e
b
m
u
N

)
1
(

C 301/90

EN

Official Journal of the European Union

30.11.2005

Table 4.2 — Paying agencies by expenditure declared in 2004

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
86
87
88
89
90
91

France
Italy
United Kingdom
Greece
France
Ireland
Spain
Denmark
Austria
Germany
France
Spain
Finland
Sweden
Spain
France
France
Germany
Spain
Germany
Germany
Netherlands
United Kingdom
France
Belgium

ONIC
AGEA
RPA
OPEKEPE
OFIVAL
DAF
Andalucia
EU-direktoratet
AMA
Bayern, Landwirtschaft
ONIOL
Castilla-Léon
MMM
SJV
Castilla-La Mancha
CNASEA
ONILAIT
Nordrhein-Westfalen
FEGA
Baden-Württemberg
Brandenburg
LASER
NAWAD
FIRS
ABKL (Vlaamse Gemeenschap)

PAs covered by DAS 2004

Subtotal (2)

Germany
Portugal
Belgium
Spain
United Kingdom
Spain
Netherlands
Germany
Germany
Germany
Italy
Italy
Spain
Germany
Italy
Germany
Netherlands
France
Germany
United Kingdom
France
Belgium
Germany
Germany
Italy
Germany
Italy
Spain
France
Spain
Spain
Spain
Italy
Spain
Portugal
Spain
Netherlands
Spain
Spain
Netherlands
Netherlands
Spain
Austria
Luxembourg
Spain
Spain
Germany
Germany
United Kingdom
Poland
France
Ireland
Germany
United Kingdom
Germany
Czech Republic
Germany
France
Spain
Slovakia
Germany
Estonia
Lithuania
Hungary
Slovenia
Latvia

Niedersachsen
INGA
BIRB
Extremadura
SERAD
Aragón
PZ
Hamburg-Jonas
Mecklenburg-Vorpommern
Sachsen-Anhalt
Region Lombardie
AVEPA (Veneto)
Cataluña
Schleswig-Holstein
AGREA
Sachsen
HPA
ONIFLHOR
Thüringen
DARD
ONIVINS
Région Wallonne
Hessen
BLE
ARTEA (Toscana)
Rheinland-Pfalz
SAISA (ex DCCC)
Canarias
ODEADOM
Galicia
Valencia
Navarra
ENR
Murcia
IFADAP
Asturias
PT
País Vasco
Madrid
DLG
PVE
La Rioja
ZA Salsburg
Ministère de l’Agriculture
Cantabria
Baleares
Bayern, Umwelt
Saarland
FC
ARR
OFIMER
DMNR
Hamburg
CCW
Nordrhein-Westfalen LfEJ
SAIF
Bremen
ACCT/SDE
FROM
APA
Berlin
PRIA
NPA
ARDA
AAMRD
RSS

Subtotal
Total

4 413,80
3 835,46
2 854,11
2 781,44
1 897,26
1 820,73
1 709,70
1 215,85
1 101,64
1 074,15
1 000,20
940,67
869,36
844,25
810,45
802,45
530,51
475,58
467,09
440,92
380,94
362,23
278,70
273,94
220,88
31 402,32
795,90
754,26
617,65
616,27
614,59
520,32
448,82
439,64
407,74
384,88
359,66
359,44
349,54
341,16
323,79
312,99
297,38
282,90
282,21
281,61
245,19
234,40
228,27
222,59
187,56
187,44
185,47
164,13
143,58
139,30
138,36
116,35
114,32
98,29
69,97
62,84
58,23
57,73
57,02
56,18
42,17
41,24
40,19
37,80
34,22
25,57
23,82
20,23
17,30
11,42
9,23
9,20
6,72
5,63
4,99
4,94
2,49
1,87
1,68
1,48
1,40
0,55
0,53
0,51
0,07
0,03
11 903,25
43 305,57

10,19
8,86
6,59
6,42
4,38
4,20
3,95
2,81
2,54
2,48
2,31
2,17
2,01
1,95
1,87
1,85
1,23
1,10
1,08
1,02
0,88
0,84
0,64
0,63
0,51
72,51
1,84
1,74
1,43
1,42
1,42
1,20
1,04
1,02
0,94
0,89
0,83
0,83
0,81
0,79
0,75
0,72
0,69
0,65
0,65
0,65
0,57
0,54
0,53
0,51
0,43
0,43
0,43
0,38
0,33
0,32
0,32
0,27
0,26
0,23
0,16
0,15
0,13
0,13
0,13
0,13
0,10
0,10
0,09
0,09
0,08
0,06
0,06
0,05
0,04
0,03
0,02
0,02
0,02
0,01
0,01
0,01
0,01
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
27,49
100,00

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×
×

×

×

×

11 507,17

3 955,97

(1) Accounts disjoined from the financial decision taken on 13 May 2005.
(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: Czech Republic: 30,031; Denmark: 7,4502; Estonia: 15,6466; Hungary: 247,25; Latvia: 0,6960; Lithuania: 3,4528; Poland: 4,0876;
Slovakia: 38,75; Slovenia: 239,7; Sweden: 9,1687; United Kingdom: 0,6867.

Source:

Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2004.

30.11.2005

EN

Official Journal of the European Union

C 301/91

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Work of the certifying bodies

4.16. A certifying body must be operationally independent of
the paying agency (10). It must base its certificate on an examina-
tion of procedures and on a sample of transactions. The certifi-
cate must state whether the accounts are true, complete and accu-
rate and whether the internal control procedures have operated
satisfactorily. This certificate must be supported by a report on
the certifying body’s findings. Work on legality and regularity is
limited to ensuring that the paying agency is able to demonstrate
that it has the necessary administrative structures to ensure that
claims are checked for compliance before they are paid. Claims
submitted by beneficiaries of EU aid are not usually checked on
the spot by the certifying body.

4.17. The Commission seeks to ensure that the certifying bod-
ies properly audit expenditure managed by the paying agencies.
It issues guidelines for the certifying bodies (including on the sam-
pling of transactions), and reviews their reports to ensure that its
guidance has been followed.

In its summary accompanying its financial clearance deci-
4.18.
sion, the Commission states that it is generally satisfied with the
quality and content of the certifying bodies’ reports, but mentions
the following areas where certifying bodies need to pay more
attention: advances and securities; debts; follow-up of financial
errors detected during previous certification audits; sampling and
error evaluation; checking maximum guaranteed quantities and
the audit of rural development. The Court endorses these conclu-
sions.

Financial clearance decision for 2004

4.19. The Commission took its Financial Decision on 13 May
2005 (11). For the financial year ending 15 October 2004, 71 pay-
ing agencies managing 32 billion euro received an unqualified
audit opinion from their certifying bodies (see Table 4.2). The
remaining 20 agencies received a qualified or negative opinion
albeit for limited amounts. Reasons included: overpayments
and ineligible expenditure found by the certifying bodies;
missing supporting documents; weaknesses in the arrange-
ments whereby paying agencies delegate some functions to other
bodies; or incomplete, incorrect or misleading information about
debtors.

(10) Article 3 of Regulation (EC) No 1663/95.
(11) The 30 April deadline was not met due to translation difficulties.

4.19. The qualifications and negative opinions refer, in the great
majority of cases, to particular aspects and particular measures within the
20 paying agencies concerned.

The Commission has already initiated a procedure to recover any mate-
rial undue payments (see also paragraph 4.20).

C 301/92

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.20. The Commission approved the accounts of 86 of the
91 paying agencies, and postponed its clearance of the accounts
of five paying agencies (representing 4 billion euro, 9 % of the
total expenditure declared) because of imprecise or insufficient
work by the certifying bodies concerned (12). It intends to make
financial corrections, totalling some 7 million euro, in respect of
14 paying agencies (13).

Paying agency accounts not approved (disjoined) in previous
years

In 2004,

4.21.
the Commission completed work on the
accounts it had not cleared in the financial decision of 2001
and 2002, in most cases because of inadequacies in the work per-
formed by certifying bodies or because of the need to clarify some
information. It cleared the accounts of four paying agencies which
were not accepted for 2001 and 17 which were not accepted
for 2002.

Conformity decisions taken in 2004

4.22. Conformity decisions usually relate to several years of
expenditure and are taken a few years in arrears. Thus, corrections
made in the conformity decisions taken in 2004 do not relate
to CAP payments to final beneficiaries in 2004.

(12) The main reasons for not clearing these accounts were: a failure by the
certifying bodies to quantify the financial impact of all identified
errors (Bayern-Umwelt, (DE) AGEA, (IT)); inadequate audit by the cer-
tifying body for Luxembourg; a scope limitation for Madrid (ES) and
failure by SDE (FR) to carry out the on-the-spot controls.

(13) The certifying bodies identified material error (more than 1 % of
expenditure declared) affecting either the whole account or specific
areas in seven paying agencies (Navarra, Baden-Wurttemberg, Bayern-
Umwelt, IFADAP, Region Wallonne, ONIVINS and SDE). The Com-
mission reached the same conclusion for three other paying agencies
(La Rioja, ODEADOM and ONIFLHOR). Furthermore, the Commis-
sion intends to make corrections based on financial errors detected in
a further four paying agencies (Andalusia, Canary Islands, Forestry
Commission and SERAD).

4.22. The audits leading to conformity decisions primarily concentrate
on the management and control systems set up by Member States. Where
those audits do not reveal any deficiencies or lead to subsequent improve-
ments of the systems, they are also relevant for the legality and regular-
ity of related expenditure in subsequent years. They are the proof that the
existence of a clearance of accounts procedure contributes to the reason-
able assurance sought.

30.11.2005

EN

Official Journal of the European Union

C 301/93

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.23.
In 2004, the Commission took three conformity deci-
sions in respect of expenditure declared from 1998 to 2003 (14),
refusing to finance 406 million euro (15). As in previous years,
most of them (71 %), are flat-rate corrections (16). The corrections
mainly relate to animal premiums (186 million euro), fruit
and vegetables (70 million euro) and arable crops (67 mil-
lion euro) and mainly concern France (213 million euro), Italy
(63 million euro), Greece (46 million euro) and Spain (34 mil-
lion euro). The principal reasons quoted by the Commission for
the corrections were weaknesses in the system of identification
and registration of cattle and deficiencies in the number and/or
quality of on the spot inspections.

Conformity decisions in recent years

4.24. Table 4.3 shows the results of the Commission’s clear-
ance decisions in respect of 1991 and subsequent years. As at the
end of 2004, clearance was not complete for any year later than
1998. The total corrections represent the Commission’s view, for
the budget headings and Member States it has examined, of the
amount of expenditure which, mainly because of weaknesses in
Member States’ systems for managing and controlling expendi-
ture, should not be borne by the Community budget.

4.24. The Commission would like to finish with the past and the most
longstanding cases still pending were closely examined when the audit
work programme relating to agricultural expenditure for 2005 was
drawn up. The situation in June 2005 is that 94,3 % of the audits car-
ried out in 2001 (which allow financial corrections back to 1999)
and 78,7 % of the audits carried out in 2002 (which allow financial
corrections back to 2000) have been closed.

4.25. Graphs 4.4 and 4.5 set out the distribution of corrections
in decisions taken by the Commission during the period 1999
to 2004 (17), by Member State and market sector. These decisions
relate to items of expenditure from the Community budget years
1996 to 2003.

(14) Commission decisions 2004/136/EC (OJ L 40, 12.2.2004, p. 31),
2004/457/EC (OJ L 156, 30.4.2004, p. 47) and 2004/561/EC
(OJ L 250, 24.7.2004, p. 21).

(15) These conformity decisions were offset against expenditure for the

year 2004.

(16) The flat-rate corrections are applied as follows: 2 % when key con-
trols are satisfactory but secondary controls are partly or totally inef-
fective; 5 % when key controls are executed but the number, fre-
quency or rigour required by regulations is not respected, and the risk
of loss to the Fund is significant; 10 % when one or more key con-
trols do not operate making it impossible to determine the eligibility
or regularity of a claim, with, as a result, a high risk of loss to the
Fund.

(17) 1999 was the first year in which the Commission took conformity
decisions under the revised procedure for clearance of accounts intro-
duced in 1996.

C 301/94

EN

Official Journal of the European Union

30.11.2005

)
o
r
u
e

n
o
i
l
l
i

m

(

3
0
0
2

2
0
0
2

1
0
0
2

0
0
0
2

9
9
9
1

8
9
9
1

7
9
9
1

6
9
9
1

5
9
9
1

4
9
9
1

3
9
9
1

2
9
9
1

1
9
9
1

,

0
2
1
2
4
4

,

8
0
1
7
2
4

,

8
3
9
5
1
4

,

6
0
1
4
0
4

,

2
6
2
7
0
4

,

4
7
5
8
8
3

,

3
4
8
8
0
4

,

5
2
6
0
9
3

,

4
4
5
6
5
3

,

8
2
9
5
3
3

,

0
8
0
0
4
3

,

2
0
8
4
0
3

,

9
5
5
2
1
3

3
0
0
2

o
t

1
9
9
1

s
r
a
e
y

t
e
g
d
u
b

f
o

t
c
e
p
s
e
r

n

i

s
n
o
i
s
i
c
e
d

s
t
n
u
o
c
c
a

f
o

e
c
n
a
r
a
e
l
c

n

i

s
n
o
i
t
c
e
r
r
o
C
—
3
4

.

e
l
b
a
T

,

0
7
3
–

,

5
7
4
1
–

,

7
1
5
2
–

,

4
0
8
3
–

,

6
5
7
2
–

,

3
9
2
3
–

,

4
1
8
4
–

,

0
0
9
7
–

,

8
2
7
5
–

,

8
7
0
3
–

,

6
6
3
7
–

,

2
8
8
7
–

,

1
4
0
5
1
–

f
o

t
n
u
o
m
a

l
a
t
o
T

s
n
o
i
t
c
e
r
r
o
c

e
r
u
t
i
d
n
e
p
x
E

d
e
r
a
l
c
e
d

:

h
c
i
h
w

f
o

0
0

,

0
0

,

0
0

,

0
0

,

0
0

,

0
0

,

,

2
0
1
1
–

,

0
5
1
2
–

,

1
5
1
–

,

7
2
–

,

6
0
3
2
–

,

7
9
1
4
–

,

2
9
7
9
–

s
e
i
v
e
l

r
e
p
u
s

k
l
i

M

)
a
(

,

0
7
3
–

,

5
7
4
1
–

,

7
1
5
2
–

,

4
0
8
3
–

,

6
5
7
2
–

,

3
9
2
3
–

,

2
1
7
3
–

,

0
5
7
5
–

,

7
7
5
5
–

,

1
5
0
3
–

,

0
6
0
5
–

,

5
8
6
3
–

,

9
4
2
5
–

e
r
u
t
i
d
n
e
p
x
e

d
e
w
o

l
l
a
s
i
D

)
b
(

s
a

e
r
u
t
i
d
n
e
p
x
e

f
o

e
g
a
t
n
e
c
r
e
p

a

d
e
w
o

l
l
a
s
i
D

%
1
0

,

%
3
0

,

%
6
0

,

%
9
0

,

%
7
0

,

%
8
0

,

%
9
0

,

%
5
1

,

%
6
1

,

%
9
0

,

%
5
1

,

%
2
1

,

%
7
1

,

d
e
r
a
l
c
e
d

e
r
u
t
i
d
n
e
p
x
e

.

3
0
0
2

o
t

1
9
9
1

s
r
a
e
y

t
e
g
d
u
b

f
o

t
c
e
p
s
e
r

n

i

s
n
o
i
s
i
c
e
d

s
t
n
u
o
c
c
a

f
o

e
c
n
a
r
a
e
l
C

:
e
c
r
u
o
S

30.11.2005

EN

Official Journal of the European Union

C 301/95

Graph 4.4 — Corrections by Member State (1999 to 2004)

Source: Comission’s conformity decisions taken from 1999 to 2004.

Graph 4.5 — Corrections by market (1999 to 2004)

Source: Comission’s conformity decisions taken from 1999 to 2004.

C 301/96

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Court’s sample of transactions

4.26. The Court examined a representative sample of payments
drawn from the expenditure of 25 paying agencies (which were
collectively responsible for 72,5 % of CAP expenditure) as well as
from the direct expenditure of the Commission. Through these
tests, the Court sought to obtain direct evidence that payments
were properly made for an eligible activity. Such tests provide
good evidence of whether expenditure on area aid is legal and
regular (see paragraphs 4.35 to 4.38) and, to a lesser extent, ani-
mal premiums (see paragraphs 4.39 to 4.42) where physical evi-
dence is usually available to the auditor. By contrast, in areas such
as export refunds (see paragraphs 4.49 and 4.50) or aids paid on
the basis of the quantity produced (see paragraph 4.43), the audi-
tor can only check documents. The extent to which such docu-
ments provide reliable evidence is influenced by both the nature
of the transaction (see paragraph 4.48) and the control system
concerned (see paragraph 4.54).

Annual Activity Report of the Director-General for Agriculture
for the year 2004

Some improvement from last year

4.27. The Annual Activity Report (AAR) contains a declaration
by the Director-General that control procedures give him assur-
ance that CAP transactions for 2004 are legal and regular.

4.28. The report states that:

(a) Directorate-General for Agriculture (DG AGRI) is in overall
compliance with the internal control standards although fur-
ther work is required in some areas (18);

(b)

IACS provides, except in Greece, an excellent means of ensur-
ing the proper use of Community funds;

(c) post-payment checks provide reasonable assurance that the
expenditure concerned complies with Community legisla-
tion;

(d)

the certification procedure provides assurance about the
completeness, accuracy and reliability of the accounts of the
paying agencies and a certain degree of assurance about the
functioning of their internal control systems and their ability
to ensure that payments are legal and regular;

(18) Annual Activity Report 2004, section 3.2.1.1.

30.11.2005

EN

Official Journal of the European Union

C 301/97

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(e)

for the 2004 expenditure, the audit work on control systems
will be concluded, and final financial corrections decided, at
the earliest, in 2006;

(f)

there is a risk that ineligible expenditure has been financed,
but this expenditure may be audited in subsequent years
under the conformity procedures and may be subject to
financial corrections (19);

(g)

the financial corrections under the clearance procedure along
with the recoveries in Member States cover the ‘global finan-
cial risk’.

4.29. The sources of information on which the Director-
General bases his declaration provide limited coverage of, and
assurance on, the legality and regularity of 2004 expenditure.
IACS inspection results address the legality and regularity of pay-
ments to farmers, but these are insufficiently verified and vali-
dated by an independent body. The work of certifying bodies may
bring to light problems at the level of paying agencies, but can-
not be relied upon to provide assurance on claims by farmers and
traders.

4.30.
In order to obtain reliable information on the legality and
regularity of payments to final beneficiaries, the Director-General
would need:

(a)

either to make arrangements for certifying bodies to extend
their work to final beneficiaries, through extending their
sample tests to the level of farmers or by doing more work
to verify and validate IACS inspections statistics and post-
payment checks (20); or

(b)

to require his own staff, on the basis of an appropriate sam-
pling method, to verify the legality and regularity of transac-
tions for the year at the level of final beneficiaries.

(19) Annual Activity Report 2004, paragraph 4.2.2.
(20) The critical aspect in checking the legality and regularity of the trans-
actions is the existence and accuracy of the information declared by
beneficiaries, many of which can only be verified by physical inspec-
tion at the final beneficiary level. Such coverage would represent a
stronger and clearer chain of accountability for CAP spending. It
would provide increased assurance to the Commission on the legality
and regularity of transactions. See Court Opinions No 2/2004 on the
single audit model, paragraphs 21, 41 and 42 and No 1/2005 on the
Financing of the CAP, paragraph 24.

4.29 and 4.30. The Commission takes the view that the Director-
General already has sufficient information to have reasonable assurance
of the legality and regularity of agricultural expenditure.

As already indicated in response to the Court’s annual report 2003 the
set-up and accreditation of the Member States’ paying agencies, the
annual certification procedure and the application of the various man-
agement and control systems, including IACS, permit a great deal of reli-
ance to be placed on the control over expenditure declared. In order to fur-
ther improve the overall system the new basic regulation on the financing
of the common agricultural policy provides that the heads of paying
agencies shall henceforth sign an ex post declaration of assurance on the
legality and regularity of their expenditure.

The information on which the Director-General relies is derived from a
system which is based on a multi-annual approach. The Commission
therefore does not support the options set out by the Court.

C 301/98

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.31. The fact that the Director-General’s declaration relates to
expenditure which may subsequently be the subject of financial
corrections, and does not indicate to what extent expenditure
might be affected by such corrections, limits the assurance which
the Court can derive from his declaration (21). The declaration
should distinguish, on the one hand, expenditure which has been
verified (and has been or will be the subject of corrections where
necessary) for which the Director-General can give reasonable (or
no) assurance and, on the other hand, expenditure which is the
subject of further verification (and possible correction).

4.31. The Commission is of the opinion that it would not be appro-
priate in the AAR to distinguish, as the Court suggests, between expen-
diture which has already been verified and expenditure which will be sub-
ject to further verification. Given the multi-annual nature of the
conformity clearance process, such a distinction would be largely arbi-
trary; it would also prejudice the Member States’ right of defence in the
context of the clearance of accounts procedure.

The Director-General’s declaration and the accompanying AAR need to
be placed in the broader regulatory framework for the clearance of
the EAGGF accounts set out
in Article 7 of Regulation (EC)
No 1258/1999. The whole process is divided into an annual financial
clearance on the one hand and a multi-annual conformity clearance on
the other, which allows the Commission to exclude expenditure from
Community financing that has been effected less than 24 months prior
to the Commission’s written communication of the results of its audits
to the Member State concerned.

Against this background, reasonable assurance as regards the legality
and regularity of agricultural expenditure carried out under shared man-
agement cannot be obtained on an annual basis, in particular in the con-
text of the Director-General’s AAR, from the audit work of the Com-
mission services alone, but must be predicated on the premise that
Member States fulfil their management and control obligations. Where
Commission audits subsequently identify deficiencies, the risk of ineli-
gible expenditure will be determined and appropriate financial correc-
tions applied.

The fact that the clearance of accounts decisions are usually taken 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, and this fact is explicitly acknowledged in the Director-
General’s 2004 AAR.

(21) See Opinion No 2/2004 on the single audit model, paragraphs 57

and 58.

30.11.2005

EN

Official Journal of the European Union

C 301/99

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.32. The Commission considers the total financial corrections in
respect of a given year, together with the sanctions imposed on final ben-
eficiaries at national level, to give a valuable estimation of the overall
level of irregular payments.

4.32. At present, the level of irregular payments financed by the
CAP is not known to, or estimated by, the Director-General (22).
He has no reliable basis on which to assert that a sum equivalent
to the total sum of irregular payments is likely to be recovered
through the clearance of accounts (23) procedure and through the
recovery procedures in the Member States. The conformity deci-
sions are in most cases flat-rate corrections for weaknesses in the
control systems rather than an assessment of the impact of the
individual errors.

Internal Control Standards — Some standards are not
fully implemented

4.33. One of the innovations introduced in the framework of
the reform of financial management in the Commission services
was the requirement to meet 24 Internal Control Standards which
were made more concrete in the form of 71 baseline require-
ments. DG AGRI’s 2004 self-assessment concluded that all stan-
(see para-
dard and baseline requirements had been met
graph 4.28(a)).

4.34. The Court examined the implementation of eight stan-
dards (24), and found that four of them showed room for improve-
ment (25). DG AGRI’s Internal Audit Capability (see Chapter 1,
paragraph 1.81) reports issued during 2004 confirmed this.

4.34. The Commission must emphasise that DG AGRI by the end of
2004 was in compliance with all the baseline requirements laid down
by the Commission for the 24 ICS. This does not exclude that improve-
ments in some areas are still possible and desirable, which DG AGRI
also indicated in its assessment of the situation at the end of 2004.

(22) In order to estimate the level of irregularities, an appropriate sampling
method should be clearly defined (Opinion No 2/2004 on the single
audit model, paragraph 48) and the legality and regularity of expen-
diture should be verified at the level of the beneficiary (Opinion
No 1/2005 on the Financing of the CAP, paragraph 24).

(23) Conformity decisions have the objective of excluding expenditure
from Community financing where the Commission has found it has
not been in compliance with Community rules (Council regulation
(EC) No 1258/1999, Article 7(4). These decisions are (in most cases)
flat-rate corrections for disfunctioning key elements of the control
systems.

(24) ICS 11 (Risk analysis), ICS 12 (Management information), ICS 14
(Reporting improprieties), ICS 17 (Supervision), ICS 18 (Recording
exceptions), ICS 20 (Internal control weaknesses), ICS 21 (Audit
reports) and ICS 22 (Internal audit Capability).

(25) ICS 11 (risk analysis), no action plan was drawn up to address risks

in respect of 2004.
ICS 12 (management information), reporting on ‘qualitative aspects’
such as the implemenation of the Annual Management Plan is not yet
satisfactory.
ICS 17 (supervision), effective supervision of financial activities by the
authorising officers is doubtful and no evidence on ex post control
procedures.
ICS 18 (recording exceptions), the recording requirements were not
met by the units involved.

C 301/100

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Court’s assessment of areas of CAP spending

Area aid schemes

4.35.
Spending on arable crop subsidies paid on an area basis
amounted to 17 475 million euro in 2004, 39 % of CAP expen-
diture. All of this expenditure is covered by IACS.

4.36. The IACS inspection results on declarations of area for
2003 (for payments in 2004) are set out in Table 4.4.

4.37. Member States reported to the Commission that they
checked 8,1 % of claims on the spot, representing 11,4 % of the
total area claimed. For the 14 Member States that have imple-
mented IACS satisfactorily, their random checks showed an error
rate of 1,6 %. This provides a reasonable estimate of the likely
error in claims paid. For on-site inspections, areas not found in
the claims inspected (26) (see Table 4.4 and Graph 4.6) include
both the results of checks on claims selected at random and
selected on the basis of an analysis of risk. As in previous years,
in certain Member States, risk-based transactions proved to have
a lower rate of error than randomly selected transactions.

It should first be noted that the overall on-the-spot inspection
4.37.
levels are well in excess of the minimum requirements. It is correct to say
that in some Member States random checks appear to be more effective.
As explained previously, this is largely due to some Member States’
reporting of remote sensing controls as ‘random’, when in fact they are
also at least partly risk-based. As of 2004, with the introduction
of Regulation (EC) No 118/2004, there is a regulatory requirement for
Member States to review the results of inspections and to improve their
risk analysis procedures accordingly, which will resolve the issue.

However, it is pointed out that there are to some extent ‘diminishing
returns’. Because of the quality of the IACS system, including 100 %
administrative checks, the frequency of anomalies detected on the spot is
low, so that the difference in results achieved between random and risk-
based inspections is marginal, and possibly explained by the difference
in sample sizes. Furthermore, the Court bases its calculations on discrep-
ancies in terms of areas, whereas the same comparison in terms of fre-
quency of farmers with irregularities gives a different result for several
Member States.

(26) Percentage expressed of areas claimed by inspected farmer.

30.11.2005

EN

Official Journal of the European Union

C 301/101

%

9
0

,

5
0

,

6
0

,

5
1

,

9
2

,

6
0

,

3
0

,

4
3

,

6
1

,

2
4

,

3
1

,

7
1

,

6
0

,

1
3

,

,

6
0

6
1

,

7
1

,

1
2

,

4
0
0
2

n

i

d
i
a
p

s

m
i
a
l
c

o
t

g
n
i
t
a
l
e
r

,

3
0
0
2

n

i

g
n
i
s
n
e
s

e
t
o
m
e
r

d
n
a

s
n
o
i
t
c
e
p
s
n

i

d
l
e
i
f

S
C
A

I

f
o

s
t
l
u
s
e
R
—

s
p
o
r
c

r
e
h
t
o

d
n
a

s
a
e
r
a

e
g
a
r
o
f

,

d
i
A
a
e
r
A
—
4
4

.

e
l
b
a
T

s
r
o
r
r
e

h
t
i

w
s
n
o
i
t
a
c
i
l

p
p
A

d
e
k
c
e
h
c

s
n
o
i
t
a
c
i
l

p
p
A

d
e
t
t
i

m
b
u
s

s
n
o
i
t
a
c
i
l

p
p
A

)
a
h
(

a
e
r
A

%

r
e
b
m
u
N

e
z
i
s

e
g
a
r
e
v
A

)
a
h
(

%

)
a
h
(

a
e
r
A

%

r
e
b
m
u
N

e
z
i
s

e
g
a
r
e
v
A

)
a
h
(

)
a
h
(

a
e
r
A

r
e
b
m
u
N

e
t
a
t
S

r
e
b
m
e
M

6
2
3
1

7
4
6

1
3
7
5

6
2
3
9
2

9
7
5
0
6

3
9
5
0
1

5
4
7
1

9
5
7
3
4

3
3
1

0
8
2
2

7
1
5
2

3
1
6
1
2

9
8
1
1

7
7
3
6

8
4
3
7

3
6
1
5
9
1

9
7
0
8
9
1

6
8
7
0
4
2

,

1
4
3

,

4
7
2

,

7
2
4

,

7
0
3

,

4
4
4

,

3
0
4

,

5
5
1

,

4
5
4

,

6
9
8

,

4
7
3

,

1
1
5

,

4
2
7

,

2
4
4

,

2
6
5

,

9
5
5

,

4
2
4

,

1
8
3

,

1
5
3

2
2
4
1

6
1
7

8
7
8
7

5
7
3
1
1

2
7
9
9
1

3
9
2
1
1

8
0
4
1

1
3
7
0
2

5
9

2
1
2
1

4
3
4
4

3
6
4
8

4
6
0
2

0
8
2
2

7
3
4
4

0
8
7
7
9

7
1
7
4
9

9
9
0
5
0
1

6
3

3
5

1
5

2
5

6
4

7
6

8
5

8
2

8
7

7
1

3
2

9
0
1

1
4

0
5

3
4
1

2
5

7
4

9
3

,

8
4
1

9
0
2
1
5
1

,

0
0
1

2
7
1
4

9
5

,

7
6

,

,

1
9
4

,

6
1
1

9
7

,

,

3
1
1

,

0
8
1

,

8
6

3
8

,

1
8

,

9
5
7
7
3
1

9
8
9
1
4
9

7
8
7
3
1
9
1

8
6
2
7
7
0
2

3
8
3
0
7
8
1

3
5
1
9
2
5

9
1
8
0
7
2
1

2
9
2
8

4
2
6
4
5

2
0
4
0
0
2

,

1
4
6

5
1
8
1
7
2
1

2
9

,

5
7

,

,

0
8

,

1
2
1

,

9
1
1

,

8
1
1

0
9
4
1
9
1

1
7
5
4
0
2

9
6
8
4
3
1
1

0
3
4
8
5
9
1
1

9
2
0
6
5
6
1
1

3
5

,

0
6

,

,

3
1
1

,

5
0
1

8
6

,

1
7

,

8
7

,

4
5

,

1
7

,

8
6

,

9
8

,

8
6

,

9
6

,

2
6

,

,

1
8

,

6
8

1
1
6
2

7
6
4
8
1

8
8
0
7
3

4
9
9
4
4

0
9
9
7
2

2
9
0
9

8
7
6
5
4

6
0
1

9
3
2
3

0
8
6
8

7
8
6
1
1

4
7
6
4

4
5
0
4

2
3
9
7

4
6
4
0
3
2

2
7
5
8
4
2

4
2

7
4

6
4

2
1

2
4

8
5

7
3

2
1

2
6

4
1

9
1

5
1

1
3

7
4

9
8
3
9
1
0
1

8
1
6
1
4

1
8
0
9
1
3
2

4
7
5
9
4

6
7
4
8
0
0
4
1

5
1
3
5
0
3

6
3
3
7
9
8
3

0
0
2
8
2
3

4
7
4
9
8
8
7
1

9
6
0
9
2
4

4
6
9
7
7
7
3
2

6
7
9
9
0
4

2
1
6
6
8
6
4

2
3
5
7
2
1

8
6
7
8
6
0
7

9
6
0
8
8
5

m
u
i
g
l
e
B

k
r
a
m
n
e
D

y
n
a
m
r
e
G

e
c
e
e
r
G

n
i
a
p
S

e
c
n
a
r
F

d
n
a
l
e
r
I

y
l
a
t
I

0
8
6
1
2
1

3
5
9
1

g
r
u
o
b
m
e
x
u
L

9
3
4
4
5
6

4
1
9
5
4

s
d
n
a
l
r
e
h
t
e
N

4
0
2
5
6
4
2

9
5
0
7
2
1

0
7
3
4
8
9
1

8
4
6
0
3
1

7
4
4
6
8
0
2

9
2
3
8
6

2
9
7
5
4
7
2

8
5
9
8
5

a
i
r
t
s
u
A

l
a
g
u
t
r
o
P

d
n
a
l
n
i
F

n
e
d
e
w
S

5
3

4
3

3
3

4
6
2
1
7
8
8
9

9
4
3
0
4
8
2

3
0
0
2

l
a
t
o
T

6
9
7
5
5
9
7
9

7
1
9
4
9
8
2

2
0
0
2

l
a
t
o
T

5
7
6
5
7
2
8
9

3
7
2
5
3
9
2

1
0
0
2

l
a
t
o
T

0
1
1

2
3
2
6
4
1
4
1

5
3
1
8
2
1

m
o
d
g
n
K

i

d
e
t
i
n
U

3
2
4
8
3
6
1
1

,

2
0
1

6
1
7
9
9
2

.
s
n
o
i
t
a
c
i
l

p
p
a

S
C
A

I

k
c
e
h
c

o
t

y
h
p
a
r
g
o
t
o
h
p

l
a
i
r
e
a

r
o

e
t
i
l
l
e
t
a
s

f
o

e
s
u

e
h
t

s
e
v
l
o
v
n

i

g
n
i
s
n
e
s

e
t
o
m
e
R

.

1
+
N
r
a
e
y

n

i

e
d
a
m

s
t
n
e
m
y
a
p

o
t

t
n
a
v
e
l
e
r

e
r
a
N
r
a
e
y

n

i

d
e
m
r
o
f
r
e
p

t
s
e
T

:

1

:

2

B
N

B
N

.
I

R
G
A
G
D
o
t

s
e
t
a
t
S

r
e
b
m
e
M
y
b

d
e
t
t
i

m
b
u
s

s
c
i
t
s
i
t
a
t
s

S
C
A

I

:
e
c
r
u
o
S

C 301/102

EN

Official Journal of the European Union

30.11.2005

Graph 4.6 — Area Aid. Results of field inspections: percentage of applications inspected which were overstated

(1) Percentage of claims inspected.
(2) Percentage of area not found in the claims inspected.
NB: Tests performed in year N are relevant to payments made in year N + 1.
Source:

IACS statistics submitted by Member States to DG AGRI.

4.38.
For area aid as a whole, the results of the Court’s testing
of transactions are broadly consistent with the results of random
testing performed by the Member States, and the distribution by
type is similiar to previous years:

4.38. The Court’s remarks broadly correspond to the Commis-
sion’s own findings of a generally satisfactory situation in the great
majority of Member States.

(a)

the majority of the payments were free of error;

(b) around one in three was affected by relatively small errors of
measurement. As in previous years, errors of this nature and
scale, while frequent, have no marked impact on overall
expenditure;

(c) a small number of cases were affected by larger errors, but
the number and impact of such cases was however lower
than in previous years.

30.11.2005

EN

Official Journal of the European Union

C 301/103

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Animal premium schemes

4.39.
Spending on animal premiums amounted to 9 019 mil-
lion euro in 2004, 20 % of CAP expenditure. IACS inspection sta-
tistics for animal premiums show the number of animals claimed
by farmers which inspectors found not to exist or not to be eli-
gible for subsidy. Statistics for animal premiums are still less reli-
able than the equivalent statistics for area aid applications.

4.39.
Statistics for (the six) animal premium schemes are more varied
than those for arable crops, which explains the difference in quality of the
Member States’ reporting. Furthermore, several reforms in the animal
premium sector, concerning market and control-related issues, have
necessitated regular revision of reporting requirements.

However, the statistics are considered sufficiently reliable for their main
purpose, i.e. to monitor Member States’ compliance with regulatory con-
trols and sanctions. Furthermore, quality has improved, and timely
reporting is now the ‘norm’, overall constituting a very significant
improvement compared to previously.

4.40. The figures reported show an improvement in terms of detecting
animals miss- or over-declared by farmers. The situations described for
Greece and Italy are also the result of improved checking procedures fol-
lowing actions encouraged under the clearance of account procedure.

4.40.
In 2003 (i.e. in respect of claims paid in 2004), for the
largest scheme, the suckler cow premium (see Table 4.5 and
Graph 4.7), Member States inspected 17,3 % of the animals
claimed, finding 1,4 % of these to be missing or ineligible, a
decrease on 2002, when 2 % were found to be ineligible. For the
sheep and goat premiums the percentage of missing animals
increased from 7,2 % in 2002 to 8,2 % in 2003. Italy and Greece
report significantly higher levels of error for sheep and goat pre-
miums than the other Member States; the rate of error for the
remaining 13 Member States in 2003 was 1,8 % (2,2 % in 2002).

4.41. Overall, the rate of error found by IACS inspections of
cattle in 2003 shows small variations from Member State to
Member State, except for Italy where the percentage of ineligible
cattle is still very high (10,2 % of animals claimed for the suckler
cow premium and 22,3 % of animals claimed for the special beef
premium).

4.41. The Court’s remarks on the level of cattle ineligibility in Italy
may well reflect the fact that this Member State was somewhat late in
implementing its national database and had a high proportion of non-
compliant farmers who are now being effectively detected and sanctioned.

4.42. The direct testing performed by the Court did not reveal
any significant errors.

C 301/104

EN

Official Journal of the European Union

30.11.2005

d
e
t
c
e
j
e
r

s
l
a
m
n
a

i

d
e
t
c
e
p
s
n
I

d
e
t
c
e
p
s
n

i

s
l
a
m
n
A

i

d
e
t
c
e
j
e
r

y
l
l

u
f

s

m
i
a
l
c

d
e
t
c
e
p
s
n
I

y
l
l
a
i
t
r
a
p

s

m
i
a
l
c

d
e
t
c
e
p
s
n
I

d
e
t
c
e
j
e
r

d
e
t
c
e
p
s
n

i

s

m
i
a
l
C

4
0
0
2

n

i

d
i
a
p

s

m
i
a
l
c

o
t

g
n
i
t
a
l
e
r

,

3
0
0
2

n

i

s
k
c
e
h
c

t
o
p
s
-
e
h
t
-
n
o

f
o

s
t
l
u
s
e
R
—
m
u
i
m
e
r
p
w
o
c

r
e
l
k
c
u
s

r
o
f

s
n
o
i
t
c
e
p
s
n

i

S
C
A

I

—
5
4

.

e
l
b
a
T

%

1
0

,

1
0

,

5
1

,

3
1

,

7
0

,

7
0

,

8
0

,

r
e
b
m
u
N

%

r
e
b
m
u
N

r
e
b
m
u
n

l
a
t
o
T

s
l
a
m
n
a

i

f
o

d
e
m
i
a
l
c

9
3

4
4

2
1
4
1

5
6
6
2

3
2
3
2

1
5
7
4

7
0
0
1

,

2
0
1

,

5
9
2

,

6
4
1

4
5
3
0
4

7
4
0
4
9
3

7
3
3
2
3

4
4
4
9
0
1

8
7
8
2
9

0
5
7
5
3
6

,

1
0
0
1

2
0
6
2
1
2

0
1
3
2
1
2

8
0
0
2
5
3

7
1
7
4
3
7
1

0
3
5
5
9
6

1
4
7
6
8
2
4

2
3
6
1
2
1

5
4
2
5
0
1
1

%

3
0

,

3
0

,

9
2

,

0
1

,

6
0

,

6
2

,

7
0

,

r
e
b
m
u
N

2

3

0
0
1

3
1
1

7
3

2
5
4

2
3

,

2
0
1

9
9
6
2
1

1
0

,

8
0

,

6
1

,

9
1

,

4
1

,

1
0

,

7
0

,

,

4
1

,

0
2

4

6
2
1

6
9
9

1
7

6
1

9
4
1
1

9
3
3
1

1
4
6
8
2

8
0
4
5
4

,

3
0
2

,

2
6
1

,

0
1
1

,

6
5
1

,

2
3
1

,

0
9
2

,

1
6
1

,

3
8
1

,

8
3
1

4
7

,

,

7
3
1

,

3
7
1

,

7
8
1

9
2
4
4
2
1

0
8
6
7
9
7

,

8
5
1

7
3
0
1

0
8
0
3

1
9
3
3
2

1
4
0
6
1

7
4
3
5
5

5
9
7
3
6

6
7
3
7
9
3

1
4
0
0
6

5
3
9
8
2
3

9
7
0
5

4
9
7
6
3

3
7
1
1
1

2
0
9
0
5
1

2
1
2
3
9
1

8
4
7
4
1
4
1

1
9
1
4
2
0
2

7
2
4
3
8
6
1
1

6
1
8
0
3
2
2

9
4
2
4
3
9
1
1

6
2

,

7
1

,

5
1

,

1
4

,

0
1

,

2
0

,

5
0

,

1
3

,

8
3

,

1

1
1

0
0
1

3
1
1

2

1

6
1

0
2
0
2

3
3
9
2

%

9
0

,

9
1

,

6
8

,

9
1

,

4
5

,

7

0
2

2
0
3

3
1
2

9
1
3

,

2
1
1

6
4
9
1

0
7

,

8
2

,

,

6
2

0
2

,

8
6

,

1
6

,

,

8
0
1

,

8
0

,

9
7
1

9
6

,

8
7

,

6
2
3

4
8
1

1

3
1

8
6
4

0
7
1

2
2

5

4
3
5

0
3
5
4

6
5
0
6

,

8
4

,

0
2
1

,

5
0
1

,

2
9
9

,

4
9

,

2
4
1

,

4
7

,

2
1
1

5
7

,

,

4
5
1

,

2
1
1

,

1
1
1

,

3
3
1

4
6

,

,

5
9

,

8
2
1

,

5
4
1

8
4
7

3
3
4
5
1

3
5
0
1

4
5
7
8

6
9
4
3

6
2
3
3
3

6
2
4
1
1

3
1
5
1
1

2
1
9
5

7
3
8
2
6

1
1
3
7
1

9
4
8
1
2
1

5
5
6
4

1
6
8
2
6

7
6
5
6

0
9
8
8
5

8
3

2
5
6

8
0
5

4
3
2
4

2
7
8
6

4
2
3
1
6

1
7
7
2

6
6
0
5
2

3
0
2

6
1
6

2
3
5
1

9
9
5
9

m
u
i
g
l
e
B

k
r
a
m
n
e
D

y
n
a
m
r
e
G

e
c
e
e
r
G

n
i
a
p
S

e
c
n
a
r
F

d
n
a
l
e
r
I

y
l
a
t
I

g
r
u
o
b
m
e
x
u
L

s
d
n
a
l
r
e
h
t
e
N

a
i
r
t
s
u
A

l
a
g
u
t
r
o
P

d
n
a
l
n
i
F

n
e
d
e
w
S

7
9
2
5
6

9
9
9
8
0
5

3
0
0
2

l
a
t
o
T

7
8
0
8
7

3
9
0
9
3
5

2
0
0
2

l
a
t
o
T

7
7
9
2

3
7
2
1
3

m
o
d
g
n
K

i

d
e
t
i
n
U

r
e
b
m
u
N

%

r
e
b
m
u
N

r
e
b
m
u
n

l
a
t
o
T

s

m
i
a
l
c

f
o

d
e
t
t
i

m
b
u
s

e
t
a
t
S

r
e
b
m
e
M

.

y
l
l
a
n
o
i
t
n
e
t
n

i

d
e
t
t
i

m
m
o
c

s
e
i
t
i
r
a
l
u
g
e
r
r
i

f
o

t
l
u
s
e
r

e
h
t

s
i

e
c
n
e
r
e
f
f
i
d

e
h
t

n
e
h
w

r
o

,
e
l
b
i
g
i
l
e

e
b

o
t

i

d
e
n
m
r
e
t
e
d

t
a
h
t

d
n
a

d
e
r
a
l
c
e
d

s
l
a
m
n
a

i

f
o

r
e
b
m
u
n

e
h
t

n
e
e
w
t
e
b

d
n
u
o
f

s
i

%
0
2

n
a
h
t

e
r
o
m

f
o

e
c
n
e
r
e
f
f
i
d

a

n
e
h
w
d
e
t
c
e
j
e
r

y
l
l

u
f

s
i

m
i
a
l
c
A

.

1
+
N
r
a
e
y

n

i

e
d
a
m

s
t
n
e
m
y
a
p

o
t

t
n
a
v
e
l
e
r

e
r
a
N
r
a
e
y

n

i

d
e
m
r
o
f
r
e
p

s
t
s
e
T

:

1

:

2

B
N

B
N

.
I

R
G
A
G
D
o
t

s
e
t
a
t
S

r
e
b
m
e
M
y
b

d
e
t
t
i

m
b
u
s

s
c
i
t
s
i
t
a
t
s

S
C
A

I

3
0
0
2

:
e
c
r
u
o
S

30.11.2005

EN

Official Journal of the European Union

C 301/105

Graph 4.7 — Suckler cow premium: percentage of claims inspected with errors

NB 1: Average figures for claims partially and fully rejected.
NB 2: Tests performed in year N are relevant to payments made in year N + 1.
Source:

IACS statistics submitted by Member States to DG AGRI.

Subsidies paid on the basis of quantity produced

4.43. The EU subsidises olive oil, cotton and tobacco produc-
tion (4 132 million euro, 9,2 % of CAP expenditure in 2004) on
the basis of the quantity produced, rather than the area used to
grow the crop. Expenditure of this kind poses particular risks that
Community legislation tries to meet by providing for a number
of control mechanisms. These include:

(a)

requiring claims to be compatible with IACS area declara-
tions;

(b) a number of requirements for processors (for example, qual-
ity of weighing equipment, standard accounting informa-
tion);

(c)

requiring Greece, Spain, France, Italy and Portugal to set up
an olive tree register and a Geographical Information Sys-
tem (27) and (except in France) setting up olive oil control
agencies to carry out checks on mills, producers and pro-
ducer associations.

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

(27) The Geographical Information System links parcel identification, reg-
isters and aerial photographs to allow administrative checks on the
number and location of olive trees.

C 301/106

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.44. The Court’s audit identified a number of deficiencies:

4.44.

(a)

in Greece some claims for olive oil could not be verified as
the parcels declared were not at the location indicated;

(a) to (c) The Commission has made similar findings in the frame-

work of the clearance of accounts audits.

(b) Greece still did not have a functioning olive oil GIS for the
period relevant to payments made in 2004 and the regula-
tory compensating on-the-spot-checks were not carried out
satisfactorily;

(c)

(d)

in Greece cases were found of producer organisations failing
to make the necessary checks, for example on the disposal of
olive oil or on the milling certificate supporting the claim;

in Andalusia, incorrect calculations for the applications of
sanctions for olive growers who had declared more olive
trees than recorded in the GIS.

4.45. The findings of the olive oil control agencies in the four
Member States concerned are set out in Tables 4.6 and 4.7. The
agencies work includes checks on olive mills (producers are paid
on the basis of quantities of olive oil certified by the mills). Where
the agencies find errors and weaknesses (such as incorrect
accounting or reporting increased quantities), they may propose
a range of penalties, the most severe being withdrawal of
approval. Checks on mills in 2003 (affecting payments in 2004)
led to the agencies proposing the revocation of the authorisation
of 9 % of mills visited. However these proposals are often not
implemented by authorities in the Member States (see Annual
Report 2003, paragraph 4.39).

(d) Previous Commission clearance missions in several Autonomous
Communities of Spain have also shown that a tolerance is system-
atically wrongly added when calculating the sanctions in case of
over-declaration of trees. These cases are closely followed up by the
Commission.

4.45. The quality of the control of the olive oil mills is also considered
as a point of major importance (key control) by the Commission. This
includes not only the quality of the control itself, but also the quality of
the follow-up of the control agencies’ proposals. Unjustified failure
to implement proposals for sanctions is considered a basis for applying
financial corrections by the Commission.

Table 4.6 — Olive oil inspection agencies: checks on mills (2002-2003), relating to claims paid in 2004

Member State

No of mills

Total

Mills checked

In depth

Summary (1)

Proposals
to withdraw authorisation

Greece

Spain

Italy

Portugal

2 198

1 686

5 762

579

Total

10 225

No

1 097

958

3 124

428

5 607

%

49,9

56,8

54,2

73,9

54,8

No

739

825

1 852

428

3 844

%

33,6

48,9

32,1

73,9

37,6

No

358

133

1 272

(2)

1 763

%

16,3

7,9

22,1

(2)

17,2

No

180

73

285

22

560

% of
mills checked

16,4

7,6

9,1

5,1

10,0

(1) Summary checks are essentially documentary checks.
(2) Portugal do not carry out summary checks.
Source: Annual Reports for 2002 to 2003 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

30.11.2005

EN

Official Journal of the European Union

C 301/107

Table 4.7 — Olive oil inspection agencies: checks on producers (2002 to 2003), relating to claims paid in 2004

Producers checked

Member State

No
of producers

Total

On site

Using documents

Greece

Spain

Italy

Portugal

593 500

485 000

932 822

148 542

Total

2 159 864

No

3 591

1 324

2 013

1 768

8 696

%

0,6

0,3

0,2

1,2

0,4

No

2 619

943

432

1 768

5 762

%

0,4

0,2

0,0

1,2

0,3

No

972

381

1 581

N/A

2 934

%

0,2

0,1

0,2

0,0

0,1

Source: Annual Reports for 2002 to 2003 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

Aid payments withdrawn
or reduced

No

37

47

63

271

418

% of producers
checked

1,0

3,5

3,1

15,3

4,8

Rural development

development

EAGGF-Guarantee

4.46.
expenditure
rural
amounted to 5 395 million euro in 2004 (28) (12 % of CAP
spending). This covers spending on agri-environmental schemes,
compensatory amounts for farming in less-favoured areas, for-
estry, investments and support for young and for retiring farm-
ers. Schemes of this kind frequently have relatively complex eli-
gibility conditions which are difficult and costly to check and
which therefore present a high risk of irregularity.

4.47.
For rural development expenditure the certifying bodies
have qualified their audit opinion on the accounts of 12 paying
agencies (29), although with limited financial impact. Reasons for
qualifying the accounts were material errors, ineligible expendi-
ture, missing supporting documents and, concerned mostly agri-
environment measures and investments in agriculture and for-
estry. In two cases the Commission has already started the
follow-up of the weaknesses identified (Greece and Luxembourg).

(28) Total rural development expenditure, including EAGGF-Guidance,

amounted to 8 805 million euro.

(29) The 12 paying agencies concerned are: the regions of Catalunia and
Madrid (Spain), Agea (Italy), Bayern Umwelt and Saarland (Germany),
Ministère de l’Agriculture (Luxembourg), INGA and IFADAP (Portu-
gal), OPEKEPE (Greece), Région Wallone (Belgium), CNASEA and SDE
(France).

C 301/108

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.48. Most entitlements to rural development support are
dependent on respect of commitments entered into by the ben-
eficiaries, such as respect of good farming practices, and are cal-
culated on the basis of the number of hectares used, number of
animals etc. The Court’s Special report on agri-environment mea-
sures (see paragraphs 4.98 and 4.99), the largest type of expen-
diture in the rural development area, concludes that the verifica-
tion of such expenditure poses particular problems and that
verification can rarely lead to reasonable assurance of the legality
and regularity of expenditure at a reasonable cost.

Other expenditure

4.49.
Expenditure not discussed in paragraphs 4.35 to 4.48
amounts to 8 674 million euro. This includes export refunds
(3 384 million euro), subsidies for the withdrawal and storage of
excess production, a number of small subsidy schemes and vet-
erinary expenses.

4.50. The Court examined how the Commission has monitored
the application of two regulations relevant to expenditure not
covered by IACS and predominantly classified here as other
expenditure.

4.51. The Commission’s monitoring of post-payment checks in
2004 could have been more extensive. A significant proportion
of checks planned were not completed and reporting by Member
States on the value, nature, and distribution of errors and the
value of transactions tested was deficient. Taking these factors
into account, the Court considers that the Commission did not
have a sufficient basis to take assurance from the work performed
(see paragraph 4.10).

4.48. The control of agri-environment measures is, due to its complex-
ity, resource intensive both in technical and financial terms. Therefore, a
more exhaustive check of the AEM would lead to disproportionate addi-
tional costs and would bring only limited value added as to the minimi-
sation of the risk. See also reply to paragraphs 4.98 and 4.99.

4.51. The Commission also closely monitored the post-payment checks
in 2004 by analysing the documents provided by the Member States and
by visiting Member States in order to check the implementation of the
Regulation on the spot (see the response on paragraph 4.10).

Considering

— that post-payment checks provide an additional supplementary level
of controls to the pre-payment checks (which for the majority of
measures provide already reasonable assurance), and

— that the major part of the required minimum number of post-
payment checks had been performed by the end of 2004, and

— that the Member States have communicated in their annual reports
the number, value and nature of irregularities identified and the
value of transactions tested,

the Commission had sufficient basis to take part of its assurance from
the work performed (see also reply to paragraph 4.52).

Although the quality of reporting will be further improved, it is already
of sufficient quality to provide assurance over the work performed.

30.11.2005

EN

Official Journal of the European Union

C 301/109

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.52.
Physical and documentary checks on goods under Regu-
lation (EEC) No 386/90 at the time of export should cover at least
5 % of most subsidised exports. The Commission carried out a
programme of missions to seven Member States and provision-
ally found weaknesses in the execution of these checks (see para-
graphs 4.11 to 4.14). It has not stated the degree of assurance to
be gained from them.

4.52. The range of physical, pre- and post-payment checks available
to Member State authorities is exhaustive and weaknesses in any one
form of check must be evaluated in this context. Nevertheless, any con-
trol failures are subjected to financial correction under the clearance of
accounts procedure.

Thus the Director-General gains assurance from the clearance of accounts
system as a whole. Subjects to be audited are selected based on an annual
risk analysis on which the Court previously has commented positively,
and it is from this total population of audits and their follow-up that the
Director-General derives assurance.

4.53. While export refunds accounts for less than 10 % of the
CAP budget, in 2004, by value, they accounted for some 26 % of
CAP irregularities reported to the Commission under Regulation
(EEC) No 595/91 (30). The Commission should therefore improve
its monitoring of the system of post-payment checks and state its
findings on the execution of physical checks and the degree of
assurance to be gained from them.

4.53. The Commission is already carrying out regular audits on spe-
cific aspects of post-payment checks concerning export refunds, as stated
by the Court in paragraph 4.10(b).

Regarding physical checks, the Commission does not consider it appro-
priate to publish specific findings before they have been dealt with in the
clearance of accounts procedure.

The disproportionate share of export refunds in CAP irregularities is at
least partly due to average export refund payments being considerably
higher than for other intervention measures and especially direct pay-
ments. Therefore irregularities for export refunds are more likely to exceed
the 4 000 euro threshold for being reported under Regulation (EEC)
No 595/91.

4.54. The Court found weaknesses in subsidies for dried grapes
(Greece, also reported on in both 2002 and 2003 Annual Reports)
and nuts (Spain).

4.54. The Commission has made and will continue to propose finan-
cial corrections for the deficiencies found concerning dried grapes.

Concerning nuts, the Commission will follow up these cases.

Conclusion and recommendations

Global conclusion

4.55. As in previous years, the Court found recurrent evidence
that CAP expenditure, viewed as a whole, and drawing on all
available sources of evidence, was still affected by significant
errors. The Court recognises that different degrees of risk and
weaknesses attach to the main categories of CAP expenditure.

(30) OJ L 67, 14.3.1991, p. 11.

4.55. The Commission concludes from this observation together with
the points made under paragraphs 4.38 and 4.42 that for the agricul-
tural expenditure managed and controlled by the IACS the situation is
satisfactory, the risks identified by the Court being concentrated on the
other CAP measures (see paragraph 4.57). At the moment IACS covers
some 60 % of CAP expenditure. It should be noted that the CAP reforms
of 2003 and 2004 reduce the overall risk even further by extending the
expenditure covered by IACS to around 80 %.

As a general remark concerning the errors, the following should be noted:
due to the tight timetable for the Court’s Annual Report, the Court’s con-
clusion on the individual cases is drawn before all Member States have
replied to the Court’s findings. The Commission services, where neces-
sary in collaboration with the Member States concerned, make a thor-
ough analysis of the errors found by the Court, some of which do not lead
to a clearance of accounts financial correction.

C 301/110

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.56. The result of the Court’s work shows that, where prop-
erly applied, IACS (25 000 million euro) is an effective control
system to limit the risk of irregular expenditure. Even though the
elements that constitute IACS are formally in place in Greece,
there are serious deficiencies in the functioning of the system with
the result that the system is not reliable (1 000 million euro).

4.56. The Commission shares the Court’s opinion that IACS is an
effective control system to limit the risk of irregular expenditure.

Important weaknesses in the application of the system still exist in
Greece, and these are followed up in the framework of the action plan
consisting of an enhanced clearance of accounts audit programme for
Greece, see also the reply to paragraph 4.8.

4.57. All other expenditure (19 500 million euro) which can-
not be checked by IACS poses greater risk because the systems
available to control them are not as effective.

Even if the other expenditure poses a greater inherent risk, it
4.57.
should be noted that many of these schemes are managed in an IACS
compatible way. Furthermore, this expenditure is subject to an additional
layer of controls, i.e. the ex post controls pursuant to Regulation (EEC)
No 4045/89.

Post payment checks

4.58.
In view of the limited scope of the Commission’s moni-
toring action (involving visits to only 3 Member States to check
full implementation in 2004) and of the backlog of incomplete
checks, and given that weaknesses were already reported in the
Court’s 2003 Annual Report (31), the Court cannot agree with the
basis of the Commission’s statement in the Annual Activity
Report 2004 that ‘Based on the information received and based
on on-the-spot missions undertaken annually in order to evalu-
ate the application of the Regulation it can be concluded that the
controls pursuant to Regulation (EEC) No 4045/89 provide rea-
sonable assurance as to the compliance with Community legisla-
tion of the expenditure in the sectors covered by the Regulation’.

4.58. As outlined in paragraph 4.10, the Commission is of the view
that it has fulfilled all of its obligations as set out in Regulation (EEC)
No 4045/89. Risk analysis proposals, annual programmes, annual
reports, mutual assistance requests and replies, overviews of payments to
undertakings established in other Member States and other forms of
communication/reporting have been received and analysed. In addition
to the three missions mentioned by the Court, another six are scheduled
in 2005. Furthermore, regular missions covering specific aspects of
Regulation (EEC) No 4045/89 regarding export refunds have been tak-
ing place since 2001. All questions or enquires from Member Sates have
been replied to.

Considering the above reasons as well as the following:

— that post-payment checks provide an additional supplementary
level of controls to the pre-payment checks (which for the major-
ity of measures provide already relatively complete assurance), and

— that the major part of the required minimum number of post-
payment checks had been performed by the end of 2004, and

— that the Member States have communicated in their annual reports
the number, value and nature of irregularities identified and the
value of transactions tested,

the Commission is of the view that Regulation (EEC) No 4045/89
checks contribute to the overall assurance on the legality and regularity
of the 2004 expenditure.

(31) Annual Report 2003, paragraphs 4.15 and 4.16.

30.11.2005

EN

Official Journal of the European Union

C 301/111

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Clearance of accounts

4.59. The reports of the certifying bodies provide assurance that
financial information provided by the paying agencies (and incor-
porated in the Commission’s accounts) is materially accurate (32).
The Commission’s financial clearance decision for 2004 was, in
general, soundly based on the work of the certifying bodies on the
reliability of accounts. It has dealt correctly with decisions to defer
approval of the accounts (see paragraphs 4.19 to 4.21).

4.60. The work of the certifying bodies, however (as defined by
Regulation (EC) No 1663/95) is not designed to, and does not,
provide 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 regular. The
Court maintains its view that certification (or any other part of
the control chain) should cover the legality and regularity of
expenditure at the level of beneficiaries (33), current arrangements
provide limited assurance to the Court as certifying bodies do not
generally check beneficiaries of aid.

4.61. Commission’s conformity decisions, whereby it can
exclude expenditure from Community financing, were not com-
plete for any year later than 1998 (see paragraph 4.24).

Annual activity report of the Director-General for
Agriculture

4.62. Notwithstanding improvements made in the report, it
provides limited coverage of, and assurance on the legality and
regularity of 2004 expenditure. As the report cannot indicate to
what extent expenditure might be affected by subsequent finan-
cial corrections, it limits the assurance which the Court can derive
from it. The report does not assert that irregular payments are
recovered through the clearance of accounts procedure and
through the recovery procedures in the member states.

(32) Materiality was set at 1 % of expenditure declared by the paying
agency. Certifying bodies used statistical sampling to examine
26 000 transactions at paying agency level.

(33) Opinion No 1/2005 on Financing the CAP, paragraph 24.

4.60. As already indicated in the response to the Court’s annual report
for 2003, the set-up and accreditation of the Member States’ paying
agencies, the annual certification procedure and the application of the
various management and control systems, including IACS, permit a
great deal of reliance to be placed on the control over expenditure
declared.

In order to further improve the overall system, the new basic regulation
on the financing of the common agricultural policy provides that the
heads of paying agencies shall henceforth sign an ex post declaration of
assurance on the legality and regularity of their expenditure.

4.61. As indicated in the response to paragraph 4.24, the situation
in June 2005 was that 94,3 % of the audits carried out in 2001 (which
allow financial corrections back to 1999) and 78,7 % of the audits car-
ried out in 2002 (which allow financial corrections back to 2000) have
been closed.

4.62. The Annual Activity Report and the annual declaration of DG
AGRI are based on the assurance which can be gained from the systems
in place and their functioning. The activity report explains the whole
chain of controls of CAP expenditure under shared management. This
system gives reasonable assurance that by the end of the whole process,
possible serious shortcomings will have been detected and appropriate
financial corrections will have been imposed on Member States. This is
the basis which allows the Director-General to provide the Statement of
Assurance.

By the time of signing of the annual declaration, all expenditure under
shared management may still be subject to clearance of accounts audits
and possible financial corrections. This is inherent to the system of shared
management, in conformity with EU legislation, and should not be seen
as a limiting factor for the Director-General for providing the annual
declaration.

The assurance will be further consolidated with the annual statements of
paying agencies provided in the new CAP Financial Regulation as well
as by other measures proposed by the Commission in its communication
COM(2005) 252 final on a road map to an integrated internal control
framework.

C 301/112

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Recommendations

4.63. The Commission should seek to:

4.63.

(a)

improve the checks of CAP spending in those areas where
significant shortcomings persist;

(b) as indicated last year, improve the format of reporting of the
results of all supervisory systems. In particular make post-
payment checks a more valuable tool in the identification of
irregular CAP payments by addressing the deficiencies in the
data requested from Member States, notably by reporting on
value of transactions tested and irregularities detected by
budget heading (see paragraph 4.10(a)). It should assess the
quality of checks performed, and if appropriate, programme
further visits to Member States (see paragraph 4.10(b)) and
take appropriate measures to ensure the completion of
planned programmes (see paragraph 4.10(c));

(c)

ensure that control and supervisory systems provide assur-
ance on the legality and regularity of the transactions at the
level of the final beneficiary;

(a) The Commission is committed to address continuing shortcomings
still existing, such as the application of IACS in Greece. In this con-
text, it should be noted that the CAP reforms of 2003, and for
Mediterranean products of 2004, reduce the overall risk by extend-
ing the expenditure covered by IACS.

(b) First, the Commission accepts that reporting in accordance with
Regulation (EEC) No 4045/89 could be improved and will intro-
duce a proposal
to amend Commission Regulation (EC)
No 4/2004 to this effect. New tables will be introduced for com-
munication on the value of transactions tested and of irregularities
detected so that their number, value and nature can be clearly iden-
tified and analysed.

Secondly, the Commission is already assessing the quality of checks
performed on a regular basis. in the course of 2001 to 2004,
27 missions that
included the review of Regulation (EEC)
No 4045/89 controls on export refunds were carried out by DG
AGRI. The Commission took, following the Court’s 2003 Annual
Report, further measures to improve the monitoring of checks per-
formed by programming, with regard to general aspects, three mis-
sions in 2004 and six missions in 2005 and, with regard to con-
formity issues, 10 missions in 2005.

Finally, new ways of identification and reporting of the backlog are
foreseen (in the proposal to amend Commission Regulation (EC)
No 4/2004) so that the checks not completed during the reporting
period can be followed up in the reports in respect of following
reporting periods. The Commission is, in this respect, also investi-
gating the reasons for the failure to complete in due time control
programmes in certain Member States and, where appropriate, will
request clarification from Member States.

(c) The Commission is of the opinion that the existing management
and control systems, if properly placed in the context of a multi-
annual process, already provide reasonable assurance on the legal-
ity and regularity of the transactions at the level of the final ben-
eficiary. The whole process is divided into an annual financial
clearance on the one hand and a multi-annual conformity clearance
on the other, which allows the Commission to exclude expenditure
from Community financing that has been effected less than
24 months prior to the Commission’s written communication of the
results of its audits to the Member State concerned.

30.11.2005

EN

Official Journal of the European Union

C 301/113

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(d)

soundly estimate the level of irregularities and ensure that it
is recovered through the different procedures;

Against this background, reasonable assurance as regards the legal-
ity and regularity of the transactions carried out under shared man-
agement cannot be obtained on an annual basis from the audit
work of the Commission services alone, but must be predicated on
the premise that Member States fulfil their management and con-
trol obligations. Where Commission audits subsequently identify
deficiencies, the risk of ineligible expenditure will be determined and
appropriate financial corrections applied.

(d) As regards the requested estimation of the level of irregularities, the
Commission considers the total financial corrections in respect of a
given year, together with the sanctions imposed on final beneficia-
ries at national level, to give a valuable estimation of the overall
level of irregular payments.

The recovery of sums lost as a result of irregularities falls under the
responsibility of Member States. The Commission follows up on the
national recovery procedures on the basis of Article 8 of Regula-
tion (EC) No 1258/1999.

(e) distinguish in the declaration of assurance of the Director-
General, on the one hand, expenditure which has been veri-
fied (and has been subject of corrections where necessary) for
which the Director-General can give reasonable (or no) assur-
ance and, on the other hand, expenditure which is the sub-
ject of further verification (and possible correction);

(e) The Commission considers that it would not be appropriate in the
AAR to distinguish, as the Court suggests, between expenditure
which has already been verified and expenditure which will be sub-
ject to further verification. Given the multi-annual nature of the
conformity clearance process, such a distinction would be largely
arbitrary; it would also prejudice the Member States’ right of defence
in the context of the clearance of accounts procedure.

(f)

continue to investigate the reasons why, for IACS checks on
areas, tests performed on a random basis continue to show a
higher level of error than those selected on the basis of risk
analysis. It should also analyse the effects of the changes
made in the risk analysis in 2004.

(f) Regulatory amendments introduced with effect from 1 Janu-
ary 2004 will improve the situation and the Commission contin-
ues to audit the issue as normal.

The effect described by the Court is limited to some Member States
and is sometimes due to the classification of remote sensing con-
trols as random. Furthermore, when expressed in terms of farmers
with irregularities, the results from the risk-based selection are
indeed more successful than those from the random selection.

However, it should be noted that with decreasing levels of irregu-
larity, and effective 100 % administrative checks, the difference in
results achieved between random and risk-based on-the-spot checks
is expected to be marginal.

C 301/114

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

NEW MEMBER STATES: TRANSITION

Accreditation of the EAGGF paying agencies in the new Member
States

4.64. The acceeding countries were required to have established
and accredited EAGGF paying agencies by 1 May 2004.

4.65. The new Member States had to designate a competent
authority responsible for accrediting the paying agency. The body
that carries out the accreditation review must report on the
administrative and accounting conditions,
including those
adopted to protect the Commnuity’s interests regarding advances
paid, guarantees obtained, intervention stocks and amounts to be
collected. Based on this report the Member State’s competent
authority decides whether to grant provisional or final accredita-
tion.

4.66. Of the 11 paying agencies, seven have been granted
accreditation (34), but two of them were accredited for a limited
period of time (35) and four have provisional status.

4.67. The Commission has not verified whether these paying
agencies meet the accreditation criteria. Expenditure for 2004 was
negligible (19,5 million euro) but significant amounts are likely to
be charged to the Fund in the 2005 EAGGF year. It is therefore
important that the Commission completes its work as soon as
possible.

4.67. The Commission 2005 audit work programme covers all the
new Member States and missions will be carried out to them all from
June to November 2005. Thus, all new paying agencies will have been
audited before the clearance of accounts exercise for the financial
year 2005.

Since 2003, the Commission has ascribed paramount importance to
the development of the required structures and has been very proactive in
follow-up vis-à-vis each of the new Member States (candidate countries
at that time). In this respect, missions were carried out and a flow of
information through written communications was established. Meetings
between the Commission services and each of the new Member States
were held. Measures needed to be taken in order to remedy identi-
fied problems were recorded.

4.68. As can be seen from Table 4.8, accreditation reports indi-
cate that five paying agencies have attained a satisfactory level of
compliance. Two agencies have significant weaknesses in two
areas, while four are weak in at least four areas.

(34) Czech Republic, Lithuania, ARR (Poland), Slovenia and Slovakia.
(35) Estonia, Malta.

30.11.2005

EN

Official Journal of the European Union

C 301/115

Table 4.8 — Summary of weaknesses identified in the accreditation reports for the paying agencies
in the new Member States (1)

Member State

EAGGF
Expendi-
ture in
2004
(million
euro)

Paying agency

Written
proce-
dures

Segrega-
tion of
duties

Payment
checks
and pro-
cedures

Account-
ing
proce-
dures (2)

Com-
puter
security

Internal
audit

Delegated
Bodies (3)

Cyprus

—

Cyprus Agricultural Payments Organi-
zation (CAPO)

Czech Republic

4,70

SAIF (SZIF) State Agriculture Interven-
tion Fund

Estonia

Hungary

0,50

ARIB (PRIA) Agricultural Register
and Information Board

0,50

ARDA (MVH) Agricultural and Rural
Development Agency

Latvia

0,50

RSS (LAD) Rural Support Service

Lithuania

0,50

NPA (NMA) National Paying Agency

10,80

ARMA (ARiMR) Agency for Restruc-
turing and Modernization of Agric.

—

AMA (ARR) Agricultural Market
Agency

Poland

Poland

Malta

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

No major problems

×

×

×

No major problems

×

×

No major problems

×

×

×

—

‘Paying Agency’ Dept. within MRAE

×

Slovak Republic

1,40

APA (PPA) Agricultural Paying Agency

No major problems

Slovenia

0,10

AAMRD Agency for Agricultural Mar-
kets and Rural Development

No major problems

(1)

In relation to the Annex to Commission Regulation (EC) No 1663/95 of 7 July 1995, Guidelines for criteria for accreditation as a paying agency and Commission Guideline
No 1 (document VI/5168/96 rev. 1).
Including advances and securities and debtors.

(2)
(3) Point 4 of the Annex to Commission Regulation (EC) No 1663/95 allows for the authorization function and/or the technical service (i.e. on farm inspection) to be delegated

to other bodies under specified conditions.

Source: Reports on accreditation provided to the Court by the Competent Authorities.

SAPARD — Satisfactory supervision but some weaknesses in claims
assessment

4.69. The Special Accession Programme for Agriculture and
Rural Development (SAPARD) (36) aims to help the 10 benefi-
ciary countries of central and eastern Europe (37) to deal with the
problems of the structural adjustment in their agricultural sectors
and rural areas and to contribute to the implementation of the
common agricultural policy and related policies (see chapter 8).

(36) Council Regulation (EC) No 1268/1999 of 21 June 1999 (OJ L 161,
26.6.1999, p. 87), implemented by Commission Regulation (EC)
No 2222/2000 of 7 June 2000 (OJ L 253, 7.10.2000, p. 5).

(37) Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia,

Slovakia, Bulgaria and Romania.

C 301/116

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.70. The contracting period for those countries which joined
the EU on 1 May 2004 ended in 2004. Payments will, however,
continue to be made for the projects contracted in the previous
years. During this final contracting period (38), due to the low
implementation rate in the first years (39), a high number of appli-
cations was processed in a short time. Consequently, the quality
of these assessments and the related payment claims present a
higher risk.

4.70. During the transition period (from Sapard to post-accession
programme), the Commission drew the attention of the new Member
States to the importance of maintaining an adequate level of qualified
staff for the management of the Sapard Programme. The Commission is
aware of the potential risk, and will take it into account in its audits, but
has so far found no evidence of a financial risk arising.

Each SAPARD country is required to provide the Com-
4.71.
mission annually with a certificate on the accounts and an audit
report by a certifying body, which form the basis of the Commis-
sion’s annual clearance of accounts decision. On 28 Septem-
ber 2004 the Commission cleared the 2003 SAPARD accounts
for seven countries (Czech Republic, Estonia, Latvia, Lithuania,
Hungary, Slovenia and Slovakia) but postponed its decision on
the accounts for Poland, Bulgaria and Romania. The Court’s
review of the Commission’s decision does not give rise to any
major finding.

4.71. The Commission has requested supplementary audit work from
the certifying bodies of the countries concerned. Once this assessment is
finalised, and considered satisfactory, the Commission shall proceed with
the clearance of those Sapard accounts.

4.72. The Court reviewed the Commission’s analysis of the
annual implementation reports which the SAPARD countries are
obliged to submit. This review showed that the legal deadlines for
these analyses were not always respected.

4.72. The Commission is paying increased attention to the respect of
deadlines.

4.73. The Court visited two SAPARD Countries, Hungary and
Slovenia, to check a sample of payments for 20 projects and to
review the procedure, descriptions and checklists used by the
SAPARD paying agencies. Notwithstanding the errors found by
the Court (see next paragraph), the SAPARD systems included the
key concepts (segregation of duties, internal audit, etc.); proce-
dures were well documented and the systems as described and
accredited were generally working in practice.

4.74. The review of payments, covering the main measures
implemented at the time of the audit, revealed the following
weaknesses and errors although with minor financial impact
some of which are similar to those found for other SAPARD
Countries (40):

(a)

some major business plan figures were not evidenced with
supporting documentation;

(38) For example in one SAPARD beneficiary Country due to the lack of
staff and the unexpected huge number of the applications received
50 % of the applications remained unprocessed by the end of the
deadline.

(39) Annual Report 2003, paragraph 8.47.
(40) Annual Report 2003, paragraph 8.33.

30.11.2005

EN

Official Journal of the European Union

C 301/117

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b)

in the project file the evidence of the checks on the total eli-
gible cost was inadequate;

(c)

the work actually carried out by the authorities during the
on-the-spot visits was not clearly evidenced or was not
appropriate leading in one case to a payment for an invest-
ment only partially completed;

(d) errors of non-compliance with the three price offer proce-

dure (41) (42).

Some invoices for high value items, which were subse-
4.75.
quently reimbursed by the SAPARD agency, were settled by the
beneficiary in cash. It could not be established whether payments
were actually made by the beneficiary. Cash payments are more
difficult to evidence than other forms of payment and therefore
present a higher risk.

4.76. On the basis of the audit work performed and excepted
the findings in paragraphs 4.73 to 4.75), the Court reiterates the
opinion (43) that the SAPARD supervisory and control systems
generally worked in practice.

FOLLOW-UP TO PREVIOUS OBSERVATIONS

CMO in the Banana sector

In November 2002 the Court published a Special
4.77.
Report (44) on the CMO in the banana sector. The Court observed
that the definition of the CMO’s objectives and the description of
the expected impact were not sufficiently clear, which made mea-
surement of its impact and effectiveness difficult, and that it was
impossible to form an opinion on the cost-effectiveness of the
compensatory aid system. Weaknesses were also found in the
documentation of aid payments and in import controls.

(41) According to the Multi-Annual Financing Agreement (Section B,
Article 4(2)(e)) the costs of any services, supplies and works costing
more than a predetermined amount for which the beneficiary has not
obtained quotations from at least three suppliers shall be considered
as ineligible.

(42) Findings pointed out included the lack of three valid offers; offers
coming from less than three suppliers; acceptance without justifica-
tion of the bid which was not the cheapest.

(43) Annual Report 2003, paragraph 8.43.
(44) Special Report No 7/2002.

it has
4.75. The Member State
received adequate evidence to prove the reality of the payment to the sup-
plier. It is accepted however that cash payments represent a higher poten-
tial risk.

concerned

considers

that

4.77. As it has already pointed out in its reply to the special 2002
Court report, it feels that the CMO objectives in the banana sector cor-
respond to those laid down for the common agricultural policy in
Article 33 of the Treaty and that the detailed description and quantifi-
cation of the CMO objectives are comparable to those of other CMOs.

During preparations of the current CMO evaluation criteria the Steer-
ing Committee worked systematically and defined the objectives in detail.

A more thorough and, where necessary, a review of the CMO objectives
will be based on the results of the impact analysis evaluation which the
Commission is going to undertake in the second half of 2005.

C 301/118

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.78. The Court recommended that the Commission should
carry out the in-depth evaluation of the CMO, and a full analysis
of the risks, costs and benefits associated with various possible
options in view of the transition to tariff-only system foreseen on
1 January 2006. The Council supported (45) the Court’s recom-
mendations by expecting the overall evaluation to be completed
by 2004, and the Commission undertook this task in its action
plan for the 2001 (46) discharge procedure.

4.78 and 4.79. The evaluation was launched in 2003 and the con-
tract signed at the end of august 2004. The final stage of the evaluation
report will cover the operation of the CMO and its impact including an
assessment of the effectiveness and efficiency in support of Community
producers. The evaluation report as well as the report of the Court of
Auditors will be the basis for the planned impact study. In view of these
details and the public debate which it intends to open, the Commission
plans to present its proposals for reform to Parliament and to the Coun-
cil in 2006.

4.79. The overall evaluation had not yet been completed by the
Commission at the time of the Court’s follow-up audit in April
2005. Consequently, the planned in-depth review of the aims and
objectives of the CMO has not taken place since the Court’s Spe-
cial Report in 2002. The delay in the evaluation has deprived the
Commission of important management information allowing it
to make an assessment of the cost-effectiveness of the compen-
satory aid, prevented it from evaluating the extent of the contri-
bution of the Structural Funds measures to the CMO, and hin-
dered an impact analysis of the aid measures for ACP producers.

4.80. The Commission reported to the budgetary authorities in
February 2005 (47), as required by Article 32 of the framework
Regulation (EEC) No 404/93 (48). However, the contents and
analysis of its report were limited by the absence of the evalua-
tion results, and it presented no proposals or alternatives on the
operation of the Regulation.

4.80. Article 32 of Regulation (EEC) No 404/93, requires the Com-
mission to present a report on the operation of the CMO to the Euro-
pean Parliament and the Council no later than 31 December 2004.
Pending the finalisation of the evaluation study and international nego-
tiations on the tariff rate to be applied to imports from 1 January 2006
onwards, the Commission thought it advisable to present a purely fac-
tual report.

4.81.
In view of the transition to a tariff-only system in the EU’s
banana imports foreseen to take place no later that 1 January
2006 (49), the Commission agreed to the Court’s recommenda-
tion that a thorough analysis of the impact of the transition on
all the parties involved would be made at the time of the above-
mentioned review exercise. In January 2005, the Commission
notified the WTO of its plan to introduce a new common cus-
toms tariff of 230 euro/tonne (thereby replacing the existing tar-
iff of 75 euro/tonne for quantities under the present quotas A and
B up to 2 653 000 tonnes for countries other than the ACP coun-
tries). In March 2005, the EU’s four major trading partners
requested WTO arbitration on the proposed new tariff. The arbi-
tration process is ongoing.

(45) Council recommendation of 7 March 2003 on the discharge to be
given to the Commission for execution of the Budget — SN 1376/03,
Annex 7.

(46) SEC(2002) 1378 final, p. 12.
(47) COM(2005) 50 final.
(48) OJ L 47, 25.2.1993, p. 1.
(49) Council Regulation (EEC) No 404/93, Article 16(1).

30.11.2005

EN

Official Journal of the European Union

C 301/119

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.82. The Commission acknowledges that the evaluation has not been
carried out according to the initial timetable.

Nevertheless, the Commission will have a sound evaluation which
certainly will enliven the proposed discussions during the second half
of 2005.

In order to improve the control environment and to take account
4.83.
of the interest of the legitimate traders, the Commission is currently
working on a proposal to amend the provisions for checks on the weight
of fresh bananas released for free circulation in the Community. After
discussions with the various Commission services involved, taking input
from the Customs Code Committee meeting of 13 July 2005 and the
views of banana traders, the Commission is preparing a proposal for
adoption before autumn 2005.

4.84.
Like the Court, the Commission considers it advisable to com-
plete the CMO evaluation with an impact analysis which is to be
launched in the second half of 2005.

4.82. The banana aid scheme for Community producers grants
one of the highest levels of support per hectare (in average over
8 800 euro/ha (50)). The Court reported that the cost of the tariff
quota system has been two to three times greater to consumers
than the total aid paid to EU producers. However, the delays in
the evaluation have adversely affected the Commission’s under-
takings vis-à-vis almost all of the Court’s observations, all the more
important given the short time left before the mandatory intro-
duction of the tariff-only system.

4.83. The Commission acted on the control weaknesses in
compensatory aid identified by the Court by imposing financial
corrections on the Member States concerned. However, in the
follow-up assessment of its 2001 Action Plan (51), the Commis-
still prevailed
sion found that
and instructed the Member States to solve them. This is not in
accordance with the Court’s recommendation and the subsequent
Council conclusion that ‘the Commission, in consultation with
the Member States, draw up instructions on the control proce-
dures’.

import control problems

4.84. Therefore, the Court repeats its recommendation that the
Commission complete the announced in-depth review and
re-examination of the CMO, and conduct the wide consultation
with the Community’s producers, consumers and its major trad-
ing partners with the aim of better defining the objectives of the
CMO and to improve its management.

Pre-financing of export refunds

4.85.
Subsidies for the export of certain agricultural products
(export refunds) are paid to exporters up to four months in
advance of the date of export (pre-financed). The products con-
cerned have to be placed under customs control and a complex
system of checks put in place to ensure that goods for which
refunds have already been paid are physically exported.

4.86.
In its Special Report No 1/2003 the Court criticised pre-
financing for being cumbersome, difficult to control and not serv-
ing its original purpose, which was to give preference to Com-
munity sourced agricultural products. It concluded by requesting
that the Commission review the system and that consideration
should be given to its removal. Subsequently, in its decision on
discharge (52),
the Parliament requested the Commission to
present a proposal for the abolition of pre-financing by Decem-
ber 2004.

(50) Council document 14217/04 of 4 November 2004, table 2. Accord-
ing to the Court’s Special Report No 7/2002, it was 11 200 euro/ha
in 2000.

(51) COM(2004) 247 final, p. 13.
(52) European Parliament Decision on discharge 2002, Section III,

point 149.

C 301/120

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.87. The Commission reacted to the Court’s recommendations
by implementing two new regulations establishing horizontal
rules, and a further three new sector specific regulations in rela-
tion to prefinancing (53). The regulations did not remove the sys-
tem but only modified the implementing rules for a ‘test phase’.

4.87 to 4.91. The Commission took note of the Court’s criticism of
the pre-financing system raised in its Special Report and implemented an
action plan in order to remedy the weaknesses highlighted. Pre-financing
was effectively limited to the two sectors, beef meat and cereals, where it
was deemed still to be needed. Furthermore, the period of time under
which products can stay under pre-financing was shortened, some other
simplifications were made and some control measures were reviewed.

The Commission announced that the amended system would be reviewed
after a trial period. As the Court indicates in paragraph 4.89, in 2004,
the Commission services made an intermediary analysis. In this, alter-
natives to pre-financing were indicated but it was stated that a possible
abolition of the system should be seen against the alternative control sys-
tems that would have to be introduced.

The Commission is at the stage of concluding its analysis of the opera-
tion of the present system in order to allow it to make a final proposal
on the future of the pre-financing scheme.

4.88.
Since the Court’s report, the amount of refunds paid
under pre-financing has fallen from around 600 million euro
to 188 million euro, or around 5 % of total refunds, due to a
change in market conditions and a significant reduction in refund
rates in the cereals sector.

4.89.
In an internal analysis subsequent to the Court’s report
the Commission accepts that alternatives to pre-financing could
be applied to the cereals and processed beef sectors. The Com-
mission however justifies retention of prefinancing for ‘fresh’ (in
reality frozen) beef as a way of paying the higher special rate of
refund applicable to such exports; that control over beef exports
would be compromised by the removal of the scheme; and that
in the absence of prefinancing an increase in refund rates would
be necessary to compensate companies and therefore impose
extra costs to the EU budget.

4.90. The Court considers that a system reliant on making pay-
ment up to four months in advance of export in order to pay a
special refund rate to a limited number of commercial traders and
achieve efficient control is fundamentally flawed.

4.91. The Commission has not complied with the Parliament’s
request to present proposals to abolish prefinancing by the dead-
line set.

(53) Commission Regulations (EC) No 444/2003 (OJ L 67, 12.3.2003,
p. 3) and (EC) No 2010/2003 (OJ L 297, 15.11.2003, p. 13) in rela-
tion to horizontal rules and sector-specific Commission Regulations
(EC) No 456/2003 (beef)
(EC)
(OJ L 69, 13.3.2003, p. 18),
No 500/2003 (cereals)
(OJ L 74, 20.3.2003, p. 19) and (EC)
No 740/2003 (processed goods) (OJ L 106, 29.4.2003, p. 12).

30.11.2005

EN

Official Journal of the European Union

C 301/121

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Potato and cereal starch

4.92. The system of support for cereal and potato starch pro-
duction aims to secure the competitiveness of European non-food
starch user industries, and is complemented by specific direct sup-
port measures for the production of potato starch. In its Special
Report No 8/2001 the Court concluded that administrative con-
trols were satisfactory on the whole in the Member States
audited (54), but that they were not sufficiently supported by
physical checks, and it made a number of recommendations to
address weaknesses that it identified in the implementation of the
support system.

4.92. As not every measure can be audited every year, the Commis-
sion’s audits are determined on an annual risk-analysis driven basis. The
Special Report of the Court dates from July 2001. As a result of the risk
analysis based on a variety of risk factors including findings of the Court,
the audit work programme for 2004 for clearance of accounts which was
established in 2003 did envisage an enquiry into potato starch. During
the audit missions carried out in 2004, the issues raised by the Court
were also addressed. Clearance procedure for both audits is progressing
as scheduled and for the time being at the stage of the bilateral proce-
dure.

In the context of the 2000 discharge procedure, the Coun-
4.93.
cil (55) recognised that the starch support scheme did not present
any major difficulties, and supported the majority of the Court’s
recommendations. The European Parliament required in particu-
lar that the Commission define predictable and transparent crite-
ria for the calculation of production refunds for potato and cereal
starch (56).

4.93. The recommendations of the Parliament concerning the calcu-
lation of production refunds have been followed up by the Commission.
Parameters and the calculation method used for the calculation of the
production refunds for cereal and potato starch are specified in Commis-
sion Regulation (EC) No 1548/2004.

4.94. An evaluation (57) in 2002 addressed the lack of informa-
tion and analysis of production refunds on the competitivity of
the EU non-food starch industry, and on the impact of direct sup-
port on the incomes of starch potato producers noted by the
Court, and served as the basis for modifications to the support
scheme in the context of the CAP reform. The 2003 CAP reform
left the scheme components essentially unchanged, but allowed
for partial decoupling of direct aid to starch potato producers.

In its proposals for the CAP reform, the Commission proposed
4.94.
a full decoupling of potato starch payment as well as the abolition of the
minimum price paid to the producers. However, the Council favoured
only a partial decoupling of the direct aid of 40 %.

4.95. As recommended by the Court, from September 2004,
the Commission simplified and clarified its method for calculat-
ing the monthly production refund. Apart from this, few other
recommendations were taken on board by the Commission:

4.95.

(a)

checks made by national authorities on the potato starch
manufacturers have not yet been clearly defined by the Com-
mission, in particular as that the number of potato starch
producers has increased from 17 (EU-15) to 39 (EU-25);

(a) The Commission carried out audits in 2004 to Germany and the
Netherlands allowing the clarification of a number of issues within
the clearance of accounts procedure.

In addition, within the reform, plausibility checks with areas planted
have been imposed as of 2004 which should further enhance the
control system.

(54) The Court audited the systems in three Member States that account
for 70 % of expenditure (Germany, France and the Netherlands).
(55) Council recommendation of 5 March 2002 on the discharge to be
given to the Commission for execution of the 2000 Budget — SN
1651/02.

(56) European Parliament decision on the discharge for 2000, para-

graph 59 of the resolution (OJ L 158, 17.6.2002, p. 16).

(57) Evaluation of the Community Policy for Starch and Starch products

(2002), LMC International, Oxford.

C 301/122

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b)

there is no reliable data on the structural disadvantage suf-
fered by potato starch producers compared to cereal starch
therefore the compensatory premium has
producers,
remained unchanged since 1995.

(b) Given the oligopolistic structure of the potato starch industry, the
companies regard their cost structure as highly sensitive and conse-
quently keep them confidential. The Commission has therefore only
limited access to information regarding the structural disadvantage
of potato starch producers. As, in addition, there are no official price
quotations for different varieties of starch like stock exchange quo-
tations, the Commission had no basis for proposing a change of the
compensatory premium, subsequently maintaining it unchanged.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORTS

Forestry measures within rural development policy (58)

4.96. The Court’s audit led to the following conclusions about
forestry measures financed by rural development funds:

4.96.

(a) programme objectives are often contradictory and it is diffi-

cult to monitor how far they are achieved;

(b) management is shared between the Commission and the
Member States. There is no clear responsibility for assessing
the extent to which the financed projects contribute to the
achievement of the EU forestry strategy;

(c)

contrary to the requirements of the relevant regulation, for-
estry measures are frequently not based on national or sub-
national forest programmes;

(58) Special Report No 9/2004.

(a) The approach adopted since 2000 following the rural development
Regulation (EC) No 1257/1999, is consistent with the EU For-
estry Strategy, which provides the overall reference framework and
principles (sustainability and multifunctionality) for forestry actions
in the EU. For the future programming period, the Commission has
introduced a more strategic approach for rural development and has
set out in its strategic guidelines the EU priorities for its three policy
axes (competitiveness, sustainable land management and the wider
rural economy).

(b) The link between the Forestry Strategy and the individual projects
co-financed by the EAGGF funds is ensured via the Rural Devel-
opment Programmes (RDPs). The Commission verifies that pro-
grammes are in line with the Forestry Strategy. The national or
regional authorities approve the individual projects on basis of
the RDP.

The contribution to the achievement of the EU Forestry Strategy
is assessed for each Rural Development Programme in the
evaluation reports prepared by the Member States and summarised
by the Commission. The Commission proposed in July 2004
(COM(2004) 490 final) to reinforce the evaluation requirements
for the future rural development framework.

(c) At the beginning of the present programming period only few
Member States had developed national forest programmes. In the
absence of such programmes, it seemed justified to accept RDPs or
OPs as equivalent instruments, a possibility which was provided for
in Regulation (EC) No 1257/1999. However, Member States
made progress over the last years in the formulation and implemen-
tation of their national forest programmes.

30.11.2005

EN

Official Journal of the European Union

C 301/123

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(d)

the system in place for implementing forestry measures is
complex, creating difficulties for both managing authorities
found included unclear
and beneficiaries. Weaknesses
project selection criteria, weak on the spot checks of claims,
and unsatisfactory control procedures for public contract
tendering;

(d) The Commission is aware of the fact that the system is complex and
has consequently proposed significant simplifications for the period
post 2006 (COM(2004) 490 final). A single funding and pro-
gramming system will remove the need to comply with different
rules for different funds.

The Commission audit services verify the selection systems on the
basis of guidelines. Non-transparency or non-objectivity entails rec-
ommendations addressed to the Member State and in some cases
lead to financial corrections. The Commission audit services pay
particular attention to the respect of proper procedures for public
contract tendering.

(e)

there is a risk that afforestation measures by municipalities
will fail at a later stage: municipalities do not receive aid for
the maintenance of seedlings and young plantations;

(e) There is a certain responsibility of municipalities to maintain their
own forests. The authorities approving projects should require suf-
ficient evidence from the municipalities that the maintenance work
is ensured.

(f)

increasing woodland by grant-aided afforestation of agricul-
tural land is very expensive, mainly due to compensation for
loss of agricultural income over a period of 20 years. The
results could have been obtained more cheaply.

(f) Afforestation of agricultural land does indeed appear to be expen-
sive but is justified as a long term investment in ecological stability
and renewable natural resources.

The loss of income over a considerable number of years from the
land planted with forest is the biggest cost to the farmer entering
the scheme. Therefore, long-term compensation is necessary for
afforestation of agricultural land to be attractive to farmers. Nev-
ertheless, in its initial proposal for the post 2006 Rural Develop-
ment framework, the Commission suggested to limit the compen-
sation for income loss to 10 years. A compromise was reached with
the Member States on 15 years.

4.97. The Court recommended that the Commission should
review various aspects of the support scheme. In particular the
Commission should reconsider how aid for afforestation can be
better targeted, at a lower cost, taking into account changing pub-
lic needs and the fact that the emphasis of Community legislation
is now on environmental benefits.

4.97. The proposals for the post 2006 Rural Development framework
contain several provisions for better targeting of the measure (e.g. strat-
egy, designation of areas) and cost-efficiency (e.g. reduced aid ceilings,
shorter duration).

C 301/124

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.98 and 4.99. The Member States have systems in place to control
agri-environment measures and these are checked in all Member States.
Nevertheless, weaknesses in the implementation of the control systems
in
exist. The Commission’s Clearance of Accounts
2005/2006, conducting an audit programme to verify the control of
agri-environment measures in Member States.

service

is,

A comparison of resource requirements between agri-environment mea-
sures and those of first pillar measures should be seen in a wider context.
The resource requirements for AEM have to be judged in relation to the
objectives pursued. The Commission agrees that the control of agri-
environment measures is labour-intensive and costly. A system which
provides a sufficient level of control while remaining proportionate is
what is needed for the agri-environment measure, which the Commis-
sion deems to be a central element of the CAP, and essential for deliv-
ering environmental integration.

For the next programming period, the Commission has proposed a con-
trol system which will be, to the extent possible, aligned with control sys-
tems related to cross-compliance that Member States have to set up for
first pillar payments (cross-compliance).

In addition, the Commission has proposed a clearer allocation of respon-
sibilities between Member States and Commission thus reinforcing the
principle of shared management. It is proposed that the roles and respon-
sibilities under shared management will be further clarified as submitted
by the Commission in its communication COM(2005) 252 final on a
roadmap to an integrated internal control framework.

Agri-environment (59)

4.98. Agri-environment support (AE) is paid to farmers who
undertake to farm in a manner that goes beyond usual good farm-
ing practice and is deemed environmentally beneficial. The objec-
tive of the Court’s audit was to assess whether the Commission
has adequate assurance that the farming practices and techniques
for which AE is paid are verifiable and properly verified, and thus
that the recipients of AE payments comply with their obligation
to farm in an evironmentally-friendly manner.

4.99. The audit found significant weaknesses in the control
arrangements for AE expenditure, at both Commission and Mem-
ber State level. The Court concluded that the verification of agri-
environment measures is far more resource-intensive than verifi-
cation of expenditure on CAP market support and other rural
development measures, and can rarely lead to reasonable assur-
ance at a reasonable cost. The Court recommended that the Com-
mission, Council and Parliament should consider, for AE in the
new expenditure programming period commencing in 2007,
how to take into account the principle that if a measure cannot
be adequately checked, it should not be the subject of public
payment.

(59) Special Report No 3/2005.

30.11.2005

EN

Official Journal of the European Union

C 301/125

-
f
i

d

e
h
t

o
t

n
o
i
t
n
e
t
t
a

r
e
t
a
e
r
g

y
a
p

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

.
)

7
3
4

.

(

s
n
o
i
t
c
a
s
n
a
r
t

d
e
t
c
e
l
e
s

y
l
m
o
d
n
a
r

n
a
h
t

r
o
r
r
e

f
o

y
c
n
e
i
c
i
f
f
e

e
h
t

y
l
l
a
u
n
n
a
w
e
i
v
e
r

o
t

s
e
t
a
t
S

r
e
b
m
e
M

r
o
f

.
)

6
2
4

.

(

k
s
i
r

f
o

n
o
i
t
a
u
l
a
v
e

n
a

f
o

s
i
s
a
b

.
)

4
3
4

.

(

t
n
e
m
e
v
o
r
p
m

i

r
o
f

1
X
E
N
N
A

e
r
u
t
l
u
c
i
r
g
A
–

s
n
o
i
t
a
v
r
e
s
b
o

y
e
k

f
o

n
o
i
t
u
o
v
E

l

s
n
o
i
t
a
d
n
e
m
m
o
c
e
R

s
n
o
i
t
a
v
r
e
s
b
O

s
e
i
l

p
e
r

’

s
n
o
i
s
s
i

m
m
o
C

e
h
T

s
n
o
i
t
a
v
r
e
s
b
O

4
0
0
2

e
r
o
f
e
b

s
r
a
e
y

d
n
a

3
0
0
2

e
r
u
s
n
e
d
u
o
h
s

l

e
r
u
t
l
u
c
i
r
g
A
r
o
f

l
a
r
e
n
e
G
-
e
t
a
r
o
t
c
e
r
i

D
e
h
T

l
l
a

t
a
h
t

d
e
d
u
l
c
n
o
c

t
n
e
m

s
s
e
s
s
a
-
f
l
e
s

4
0
0
2

s
’
I

R
G
A
G
D

)
a
(
8
2
4

.

(

d
e
t
n
e
m
e
l
p
m

i

y
l
l

u
f

e
r
a

s
d
r
a
d
n
a
t
s

r
u
o
f

e
s
e
h
t

t
e
m
n
e
e
b

d
a
h

s
t
n
e
m
e
r
i
u
q
e
r

e
n

i
l
e
s
a
b

d
n
a

s
d
r
a
d
n
a
t
s

.
)

4
3
4

.

d
n
a

3
3
4

.

d
n
a

.
)

3
3
4

.

d
n
a

)
a
(
8
2
4

.

(

t
h
g
i
e

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

i

e
h
t

i

d
e
n
m
a
x
e

t
r
u
o
C

e
h
T

m
o
o
r
d
e
w
o
h
s

m
e
h
t

f
o
r
u
o
f

t
a
h
t
d
n
u
o
f
d
n
a
s
d
r
a
d
n
a
t
s

r
e
w
s
n
a

o
N

l

o
r
t
n
o
c

l
a
n
r
e
t
n

i

e
h
t

f
o

4
1

t
a
h
t

s
e
t
o
n

t
r
o
p
e
r

e
h
T

y
b

d
e
t
n
e
m
e
l
p
m

i

y
l
l

u
f

n
e
e
b

d
a
h

s
d
r
a
d
n
a
t
s

r
u
o
f

y
l
n
o

4
0
0
2

y
r
a
u
r
b
e
F

y
B

.

3
0
0
2

r
e
b
m
e
c
e
D

1
3

.
)

3
2
4

.

(

d
e
t
n
e
m
e
l
p
m

i

y
l
t
r
a
p

e
b

o
t

d
e
n
i
a
m
e
r

l

o
r
t
n
o
c

l
a
n
r
e
t
n
I

s
d
r
a
d
n
a
t
s

t
n
e
r
e
f
f
i

d

e
h
t

t
a
h
t

e
r
u
s
n
e

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

e
h
T

s
e
t
a
t
S

r
e
b
m
e
M
e
m
o
s

r
o
f

d
n
a

s
r
a
e
y

s
u
o
i
v
e
r
p

n

i

s
A

s
d
r
a
g
e
r

s
a

d
e
d
n
e
m
a

n
e
e
b

s
a
h

n
o
i
t
a
l
u
g
e
R

S
C
A

I

e
h
T

.
e
l
b
a
r
a
p
m
o
c

e
r
a

s
e
t
a
t
S

r
e
b
m
e
M
y
b
n
e
k
a
t

s
e
l
p
m
a
s

e
t
a
r

r
e
w
o

l

a

e
v
a
h

o
t

d
e
v
o
r
p

s
n
o
i
t
c
a
s
n
a
r
t

d
e
s
a
b
-
k
s
i
r

n
o
i
t
a
g
i
l

b
o
n
a

g
n
i
c
u
d
o
r
t
n

i

n

i

y
l
l
a
i
c
e
p
s
e

,
s
i
s
y
l
a
n
a

e
h
T

k
s
i
r

s
i

s
k
c
e
h
c
m
o
d
n
a
r

n

i

d
n
u
o
f

r
o
r
r
e

f
o

e
t
a
r

l
l
a
r
e
v
o

e
h
T

e
h
t
n
o
d
e
t
c
e
l
e
s

s
k
c
e
h
c

r
o
f

,

%
5
1
o
t
d
e
r
a
p
m
o
c

,

%
4
2

,

s
e
m
e
h
c
s

d
i
a

a
e
r
A

d
n
a

s
t
s
e
t

d
e
s
a
b
-
k
s
i
r

d
n
a

m
o
d
n
a
r

f
o

s
t
l
u
s
e
r

g
n
i
r
e
f

s
e
i
c
n
e
t
s
i
s
n
o
c
n

i

f
o

t
n
e
v
e

e
h
t

n

i

s
n
o
i
t
a
n
a
l
p
x
e

t
s
e
u
q
e
r

.
)

7
3
4

.

(

m
o
r
f

s
n
o
i
t
a
i
r
a
v

e
h
t

e
s
y
l
a
n
a

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

-
r
a
c

s
n
o
i
t
c
e
p
s
n

i

f
o

s
t
l
u
s
e
r

e
h
t

n

i

r
e
h
t
o
n
a

o
t

r
a
e
y

-
a
n
a
l
p
x
e

t
s
e
u
q
e
r

d
n
a

e
t
a
t
S

r
e
b
m
e
M
h
c
a
e

n

i

t
u
o

e
h
T

e
n
o

d
e
i
r

.
)

9
3
4

.

(

c
i
t
a
r
r
e

e
r
a

s
t
l
u
s
e
r

e
h
t

e
r
e
h
w
s
n
o
i
t

e
l
b
a
i
l
e
r

s
s
e
l

l
l
i
t
s

e
r
a

s

i

m
u
m
e
r
p

l
a
m
n
a

i

r
o
f

s
c
i
t
s
i
t
a
t
S

-
s
i
t
a
t
s

n
o
i
t
c
e
p
s
n

i

e
h
t

)
d
(

1
1
4

.

i

t
n
o
p

n

i

d
e
t
a
c
i

d
n

i

s
A

-
c
e
p
s
n

i

S
C
A

I

y
b

d
n
u
o
f

r
o
r
r
e

f
o
t
n
u
o
m
a

e
h
t

,
l
l
a
r
e
v
O

i

m
u
m
e
r
p

l
a
m
n
A

i

s
n
o
i
t
a
c
i
l

p
p
a
d
i
a
a
e
r
a
r
o
f

s
c
i
t
s
i
t
a
t
s

t
n
e
l
a
v
i
u
q
e

e
h
t
n
a
h
t

f
o
t
r
a
p
s
a

t
i
d
u
a
o
t

t
c
e
j
b
u
s
d
n
a
y
n
i
t
u
r
c
s

r
e
d
n
u
e
r
a

s
c
i
t

e
l
b
a
r
e
d
i
s
n
o
c

w
o
h
s

o
t

s
e
u
n
i
t
n
o
c

s
l
a
m
n
a

i

f
o

s
n
o
i
t

s
e
m
e
h
c
s

.
)

7
2
4

.

d
n
a

6
2
4

.

(

d
e
s
u

s
r
o
t
c
a
f

k
s
i
r

e
h
t

f
o

s
t
s
e
t

t
a
h
t

e
l
b
a
k
r
a
m
e
r

s
i

t
i

s
e
t
a
t
S

r
e
b
m
e
M
e
m
o
s

r
o
F

f
o

e
t
a
r

r
e
h
g
i
h

a
w
o
h
s

s
i
s
a
b
m
o
d
n
a
r

a

n
o

d
e
m
r
o
f
r
e
p

s
i
s
y
l
a
n
a

n
a

f
o

s
i
s
a
b

e
h
t

n
o

d
e
t
c
e
l
e
s

e
s
o
h
t

n
a
h
t

r
o
r
r
e

.
)

7
2
4

.

(

k
s
i
r

f
o

.
)

9
3
4

.

(

.
)

2
3
4

.

(

e
m
m
a
r
g
o
r
p

k
r
o
w

l
a
u
n
n
a

e
h
t

e
t
a
t
S

r
e
b
m
e
M
m
o
r
f

d
n
a

r
a
e
y

o
t

r
a
e
y
m
o
r
f

n
o
i
t
a
i
r
a
v

)

2
1
4

.

d
n
a

1
1
4

.

s
h
p
a
r
g
a
r
a
p

o
s
l
a

e
e
S
(

.
)

2
3
4

.

(

e
t
a
t
S

r
e
b
m
e
M
o
t

-
c
u
d
o
r
p

e
h
t

h
t
i

w

r
e
t
c
i
r
t
s

e
b

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

e
h
T

f
o
r
e
b
m
u
n
a
w
o
h
s

l
i

o
e
v
i
l

i

o
g
n
n
r
e
c
n
o
c

s
n
o
i
t
c
a
s
n
a
r
T

o
t
n

i

n
e
k
a
t

e
r
a

e
c
e
e
r
G

n

i

i

s
g
n
m
o
c
t
r
o
h
s

’

s
S
C
A

I

)
a
(

s
y
a
w
l
a

i

t
o
n
d
d
s
e
c
i
f
f
o

l
a
n
o
i
g
e
r
n

i

f
f
a
t
s

,
e
c
e
e
r
G
n

i

)
a
(

e
h
t

,
s
k
c
e
h
c

f
o

y
t
i
l
a
u
q

e
h
t

s
d
r
a
g
e
r

s
a

s
e
i
r
t
n
u
o
c

g
n

i

-

m
e
t
s
y
s

e
h
t

d
n
a

d
e
i
l

p
p
a

e
b

o
t

s
e
i
t
l
a
n
e
p

e
h
t

f
o

t
n
e
t
x
e

e
h
t

e
k
o
v
e
r

o
t

s
n
o
i
s
i
c
e
d

e
h
t

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

i

c
i
t
a

-
s
i

m
m
o
C

e
h
T

.
s
l
l
i

m

t
n
a
i
l

p
m
o
c
-
n
o
n

f
o

s
n
o
i
t
a
s
i
r
o
h
t
u
a

e
b

r
e
t
s
i
g
e
r

l
i

o

e
v
i
l

o

e
h
t

t
a
h
t

d
n
a
m
e
d

o
s
l
a

l

d
u
o
h
s

n
o
i
s

.
)

5
4
4

.

d
n
a

4
4
4

.

(

.
e
c
e
e
r
G
n

i

l
a
n
o
i
t
a
r
e
p
o

y
l
l

u
f

s
a

d
e
i
f
i
r
e
v

e
b

t
o
n

l

d
u
o
c

s

m
i
a
l
c

e
m
o
s

e
c
e
e
r
G
n

i

)
a
(

;
s
t
n
u
o
c
c
a

;
)
)
b
(
5
3
4

.

(

s
k
c
e
h
c

e
t
i
s
-
n
o

e
v
i
t
c
e
f
f
e

o
t

e
l
c
a
t
s
b
o

:
s
e
i
c
n
e
i
c
i
f
e
d

e
h
t

f
o

e
c
n
a
r
a
e
l
c

e
h
t

f
o

t
x
e
t
n
o
c

e
h
t

n

i

t
n
u
o
c
c
a

n
a

s
i

h
c
i
h
w

,
e
s
a
b
a
t
a
d

S
C
A

I

e
h
t

o
t

s
s
e
c
c
a

e
v
a
h

r
o
f

,
s
k
c
e
h
c

y
r
a
s
s
e
c
e
n
e
h
t

e
k
a
m
o
t

g
n

i
l
i
a
f

s
n
o
i
t
a
s

-
i
n
a
g
r
o

r
e
c
u
d
o
r
p

f
o

d
n
u
o
f

e
r
e
w
s
e
s
a
c

e
c
e
e
r
G
n

i

)
c
(

;
l
i

o

e
v
i
l

o

f
o

l
a
s
o
p
s
i
d

e
h
t

n
o

e
l
p
m
a
x
e

d
a
h

o
h
w
s
r
e
w
o
r
g

e
v
i
l

o

r
o
f

s
n
o
i
t
c
n
a
s

f
o

n
o
i
t
a
c

e
h
t

n

i

d
e
d
r
o
c
e
r

n
a
h
t

s
e
e
r
t

e
v
i
l

o

e
r
o
m
d
e
r
a
l
c
e
d

-
i
l

p
p
a
e
h
t

r
o
f
s
n
o
i
t
a
l
u
c
l
a
c
t
c
e
r
r
o
c
n

i

,
a
i
s
u
l
a
d
n
A
n

i

)
d
(

.
)

4
4
4

.

(

S
I
G

;

4
0
0
2

l
i

o

e
v
i
l

o

i

g
n
n
o
i
t
c
n
u
f

a

e
v
a
h

t
o
n

i

d
d

l
l
i
t
s

e
c
e
e
r
G

)
b
(

-
t
e
k
r
a
m
4
0
/
3
0
0
2
e
h
t

e
c
n
i
s
y
r
o
t
a
g
i
l

b
o
n
e
e
b
y
l
n
o

n

i

e
d
a
m

s
t
n
e
m
y
a
p
o
t

t
n
a
v
e
l
e
r
d
o
i
r
e
p
e
h
t

r
o
f
S
I
G

.
)

7
3
4

.

(

r
a
e
y

g
n

i

;

d
e
t
a
c
i
d
n

i

s
a
h

d
n
a

l
i

o

e
v
i
l

o

r
o
f

d

i
a

n
o
i
t
c
u
d
o
r
p

n
o

s
k
c
e
h
c

n
o
i
t
a
c
o

l

e
h
t

t
a

t
o
n

e
r
e
w

d
e
r
a
l
c
e
d

s
l
e
c
r
a
p

e
h
t

f
o
m
e
t
s
y
s

e
h
t

f
o
t
n
e
m
e
l
e

e
n
o
s
i

S
I
G

l
i

o
e
v
i
l

o
e
h
t

)
b
(

e
d
a
m

s
t
n
e
m
y
a
p
o
t

t
n
a
v
e
l
e
r
d
o
i
r
e
p
e
h
t

r
o
f
S
I
G

l
i

o

-

m
u
n

e
h
t

m
r
o
f
r
e
p

o
t

d
e
l
i
a
f

n
i
a
p
S

d
n
a

,

3
0
0
2

n

i

-
n
e
p
m
o
c

o
t

d
e
r
i
u
q
e
r

s
n
o
i
t
c
e
p
s
n

i

e
t
i
s
-
n
o

f
o

r
e
b

.
)

7
3
4

.

(

s
i
h
t

r
o
f

e
t
a
s

e
v
i
l

i

o
g
n
n
o
i
t
c
n
u
f

a
d
a
h
n
i
a
p
S
r
o
n
e
c
e
e
r
G
r
e
h
t
i
e
n

)
b
(

.
s
l
l
i

m
e
v
i
l

o

n
o

s
k
c
e
h
c

s
e
d
u
l
c
n

i

k
r
o
w

s
e
i
c
n
e
g
a

e
h
T

-
i
n
o
m
e
h
t

f
o

y
t
i
l
a
u
q

e
h
t

s
e
e
s
r
e
v
o

n
o
i
s
s
i

m
m
o
C

e
h
T

n
o
s
k
c
e
h
c
o
t

s
e
t
a
l
e
r
k
r
o
w

’

s
e
i
c
n
e
g
a

e
h
t

f
o
t
r
a
p
y
e
k
A

s
e
i
c
n
e
g
a

e
h
t

s
e
s
s
e
n
k
a
e
w
d
n
a

s
r
o
r
r
e
d
n
i
f

y
e
h
t

e
r
e
h
W

l

o
r
t
n
o
c

e
h
t

f
o

k
r
o
w
e
h
t

f
o

s
e
t
a
t
S

r
e
b
m
e
M
y
b

g
n
i
r
o
t

t
a

s
e
i
c
n
a
p
e
r
c
s
i
d
d
n
i
f

s
e
i
c
n
e
g
a

e
h
t

e
r
e
h
W

.
s
l
l
i

m
e
v
i
l

o

-
o
r
p

s
e
i
t
i
t
n
a
u
q

f
o

s
i
s
a
b

e
h
t

n
o

d
i
a
p

s
e
i
d
i
s
b
u
S

d
e
c
u
d

)

2
1
4

.

d
n
a

1
1
4

.

s
h
p
a
r
g
a
r
a
p

o
s
l
a

e
e
S
(

-
o
r
p
s
e
i
c
n
e
g
a
e
h
t
o
t
d
e
l

)

4
0
0
2
n

i

s
t
n
e
m
y
a
p
g
n
i
t
c
e
f
f
a
(

f
o
%
9
f
o
n
o
i
t
a
s
i
r
o
h
t
u
a

e
h
t

f
o
n
o
i
t
a
c
o
v
e
r

e
h
t

g
n
i
s
o
p

t
o
n
n
e
t
f
o
e
r
a

s
l
a
s
o
p
o
r
p
e
s
e
h
t

r
e
v
e
w
o
H

.

d
e
t
i
s
i
v

s
l
l
i

m

s
e
t
a
t
S

r
e
b
m
e
M

e
h
t

n

i

s
e
i
t
i
r
o
h
t
u
a

y
b

d
e
t
n
e
m
e
l
p
m

i

.
)

5
4
4

.

(

e
h
t

g
n
i
e
b

e
r
e
v
e
s

t
s
o
m
e
h
t

,
s
e
i
t
l
a
n
e
p

e
s
o
p
o
r
p

y
a
m

3
0
0
2

n

i

s
l
l
i

m
n
o

s
k
c
e
h
C

.
l
a
v
o
r
p
p
a

f
o

l
a
w
a
r
d
h
t
i

w

.
)

9
3
4

.

(

s
e
i
c
n
e
g
a

e
h
t

e
h
t

,
s
e
i
t
l
a
n
e
p
f
o
e
g
n
a
r

a

e
s
o
p
o
r
p
y
a
m
y
e
h
t

s
l
l
i

m
e
h
t

m
o
r
f

l
l
i

m

e
h
t

e
v
o
m
e
r

o
t

g
n
i
e
b

s
u
o
i
r
e
s

t
s
o
m

-
n
e
p
x
e
3
0
0
2
g
n
i
t
c
e
f
f
a
s
k
c
e
h
c
(

2
0
0
2
n
I

.
t
s
i
l

d
e
v
o
r
p
p
a

t
a
n
o
i
t
c
a

f
o
e
s
r
u
o
c

s
i
h
t
d
e
s
o
p
o
r
p
s
e
i
c
n
e
g
a

e
h
t

)
e
r
u
t
i
d

-
s
i
n
m

i

,
e
c
i
t
c
a
r
p

n
I

.

d
e
t
c
e
p
s
n

i

s
l
l
i

m
e
h
t

f
o

0
1

n

i

e
n
o

n
e
t
f
o

s
e
t
a
t
S

r
e
b
m
e
M

e
h
t

f
o

e
r
u
t
l
u
c
i
r
g
a

f
o

s
e
i
r
t

.
)

9
3
4

.

(

y
t
l
a
n
e
p

r
e
s
s
e
l

a

e
s
o
p
m

i

C 301/126

EN

Official Journal of the European Union

30.11.2005

d
e
d

i
v
o
r
p

a
t
a
d

d
n
a

s
c
i
t
s
i
t
a
t
s

s
u
o
i
r
a
v

e
h
t

e
s
i

d
r
a
d
n
a
t
s

n
o
i
s
s
i

m
m
o
C

e
h
T

.
e
l

b
a
r
a
p
m
o
c

m
e
h
t

e
k
a
m

o
s

d
n
a

r
e
b
m
e
M
e
h
t

n

i

s
e
i
n
i
t
u
r
c
s

s
t
i

y
f
i
s
n
e
t
n

i

o
t

o
s
l
a

t
h
g
u
o

y
b

e
c
n
a
v
r
e
s
b
o

s
d
r
a
g
e
r

s
a

t
n
a
l
i
g
i
v

e
r
o
m
e
b

d
n
a

s
e
t
a
t
S

-
c
e
p
s
n

i

r
i
e
h
t

f
o
n
o
i
t
e
l
p
m
o
c

r
o
f

s
t
i

m

i
l

e
m

i
t

e
h
t

f
o
m
e
h
t

.
)

1
5
4

.

d
n
a

0
1
4

.

(

s
e
m
m
a
r
g
o
r
p

n
o
i
t

t
a
m
r
o
f

a

n

i

s
c
i
t
s
i
t
a
t
s

t
n
e
s
e
r
p

o
t

s
e
i
d
o
b

n
o
i
t
a
n

-
i
d
r
o
o
c

e
r
i
u
q
e
r

t
o
n

s
e
o
d

n
o
i
t
a
l
u
g
e
r

g
n
i
t
s
i
x
e

e
h
t

)
a
(

;
s
i
s
y
l
a
n
a

l

i

u
f
g
n
n
a
e
m

s
t
i

m
r
e
p

h
c
i
h
w

r
e
b
m
e
M

1
1

r
o
f

s
k
c
e
h
c

t
n
e
m
y
a
p
-
t
s
o
p

e
e
r
h
t

-
s
i

m
m
o
C

e
h
T

.

y
r
o
t
c
a
f
s
i
t
a
s

y
l
l

o
h
w

s
a
w

s
e
t
a
t
S

e
e
r
h
t

t
i
s
i
v

o
t

n
e
e
b

s
a
h

4
0
0
2

n

i

e
s
n
o
p
s
e
r

’

s
n
o
i
s

;

1
0
0
2

e
c
n
i
s

s
t
i
s
i
v

t
s
r
i
f

e
h
t

,
s
e
t
a
t
S

r
e
b
m
e
M

n

i

e
n
o

y
l
n
o

t
a
h
t

d
e
d
u
l
c
n
o
c

t
r
u
o
C

e
h
t

3
0
0
2

n

i

)
b
(

r
o
f

d
e
n
n
a
l
p

s
k
c
e
h
c

7
0
9
3

e
h
t

f
o
%
3
6

s
i

h
c
i
h
w

o
t
n

i

s
t
n
e
m
e
l
e

o
t

n
o
i
t
a
l
e
r

n

i

e
s
e
h
t

k
r
o
w

e
r
u
t
u
f

s
t
i

n

i

n
o
i
t
a
r
e
d

i
s
n
o
c

e
k
a
t

l
l
i

w

n
o
i
s
s
i

m
m
o
C

e
h
T

)
b
(

.
s
l
o
r
t
n
o
c

9
8
/
5
4
0
4

o
N

)

C
E
E
(

n
o
i
t
a
l
u
g
e
R

e
c
n
a
d
r
o
c
c
a

n

i

s
n
a
l
p

y
n
i
t
u
r
c
s

d
e
r
a
p
e
r
p

y
l
l
a
r
e

s
k
c
e
h
c

d
n
e

e
h
t

f
o

t
a

f
l
a
h

y
l
n
o

t
u
b

,

n
o
i
t
a
l
u
g
e
R

e
h
t

h
t
i

w

e
t
e
l
p
m
o
c

e
r
e
w
d
o
i
r
e
p
e
h
t

r
o
f
d
e
n
n
a
l
p

;

3
0
0
2

f
o

.

d
o
i
r
e
p

e
h
t

-
n
e
g

s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

n

i

s
e
i
d
o
b

g
n
i
t
a
n
d
r
o
o
c

i

)
a
(

-
e
l
e

e
d
i
v
o
r
p
o
t

r
e
d
r
o
n

i

s
e
c
i
v
r
e
s
n
o
i
s
s
i

m
m
o
C
e
h
t

.
s
e
t
a
t
S

r
e
b
m
e
M
n
e
e
w
t
e
b

n
o
s
i
r
a
p
m
o
c

f
o

s
t
n
e
m

;
e
l
b
a
i
l
e
r
n
u

y
l
l

o
h
w
e
r
e
w

y
b

d
e
t
a
e
r
t

d
n
a

d
e
s
y
l
a
n
a

s
i

d
e
v
i
e
c
e
r

n
o
i
t
a
m
r
o
f
n
I

)
c
(

t
r
u
o
C

e
h
t

y
b

i

d
e
n
m
a
x
e

s
e
i
n
i
t
u
r
c
s

f
o

h
t
f
i
f

e
n
o

)
b
(

:
s
k
c
e
h
c

9
8
/
5
4
0
4

o
N

)

C
E
E
(

n
o
i
t
a
l
u
g
e
R

f
o

9
6
4
2

s
a
w
d
e
t
e
l
p
m
o
c

s
e
i
n
i
t
u
r
c
s

f
o

r
e
b
m
u
n

e
h
t

:
t
a
h
t
d
n
u
o
f

t
r
u
o
C
e
h
t

,

9
8
/
5
4
0
4
o
N

)

C
E
E
(

n
o
i
t
a
l
u
g
e
R

s
n
o
i
t
a
d
n
e
m
m
o
c
e
R

s
n
o
i
t
a
v
r
e
s
b
O

s
e
i
l

p
e
r

’

s
n
o
i
s
s
i

m
m
o
C

e
h
T

s
n
o
i
t
a
v
r
e
s
b
O

4
0
0
2

e
r
o
f
e
b

s
r
a
e
y

d
n
a

3
0
0
2

o
t

s
p
e
t
s

y
r
a
s
s
e
c
e
n

e
h
t

e
k
a
t

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

e
h
T

g
n
i
r
o
t
i
n
o
m

’

s
n
o
i
s
s
i

m
m
o
C

e
h
t

i

d
e
n
m
a
x
e

t
r
u
o
C

e
h
T

s
t
r
o
p
e
r

l
a
u
n
n
a

’

s
e
t
a
t
S

r
e
b
m
e
M
e
h
t
o
t

i

g
n
d
r
o
c
c
A

)
a
(

f
o
s
t
n
e
m
e
r
i
u
q
e
r

e
h
t

r
e
d
n
u
t
u
o
d
e
i
r
r
a
c

s
k
c
e
h
c

e
h
t

r
o
F

e
r
u
t
i
d
n
e
p
x
e

r
e
h
t
O

’

s
e
t
a
t
S

r
e
b
m
e
M

f
o

n
o
i
t
e
l
p
m
o
c

n

i

s
y
a
l
e
d

e
h
t

)
c
(

n
e
k
a
t

e
v
a
h

s
n
o
i
t
c
e
p
s
n

i

f
o

s
e
m
m
a
r
g
o
r
p

s
i
s
y
l
a
n
a

k
s
i
r

n
o

d
e
s
a
b

s
r
a
e
y

s
u
o
i
v
e
r
p

n

i

h
c
u
S

e
c
a
l
p

)
d
(

-
i
t
u
r
c
s

f
o

s
t
l
u
s
e
r

e
h
t
n
o

s
c
i
t
s
i
t
a
t
s

t
n
e
s
e
r
p

t
o
n
o
d

l

i

u
f
g
n
n
a
e
m

s
t
i

m
r
e
p

h
c
i
h
w

t
a
m
r
o
f

a

n

i

s
e
i
n

s
e
i

d
o
b

g
n
i
t
a
n
d
r
o
o
c

i

e
h
t

y
b

s
t
r
o
p
e
r

l
a
u
n
n
a

e
h
t

)
c
(

t
n
e
m
y
a
p
-
t
s
o
p

f
o

s
e
m
m
a
r
g
o
r
p

l
a
u
n
n
a

%
0
4
t
s
o
m
l
a
4
0
0
2
f
o

d
n
e

e
h
t

t

A

.
t
s
i
s
r
e
p

s
k
c
e
h
c

.

d
e
t
e
l
p
m
o
c

n
e
e
b

t
o
n

d
a
h

d
e
n
n
a
l
p

s
k
c
e
h
c

e
h
t

f
o

y
b

s
i
s
y
l
a
n
a

r
o
f

e
d
i
v
o
r
p
t
o
n
s
e
o
d

a
t
a
d

e
h
t

t
a
h
t
n
e
v
i
G

e
l
b
i
s
s
o
p

t
o
n

s
i

t
i

,
e
r
u
t
i
d
n
e
p
x
e

f
o

e
p
y
t

y
b

r
o

t
n
u
o
m
a

f
o
e
s
u
a
c
d
n
a

e
c
n
a
c
i
f
i
n
g
i
s

e
h
t
n
o
s
n
o
i
s
u
l
c
n
o
c
w
a
r
d
o
t

-
r
a
l
u
g
e
r
r
i

f
o

y
c
n
e
u
q
e
r
f

d
e
t
r
o
p
e
r

e
h
t

n

i

n
o
i
t
a
i
r
a
v

e
h
t

.
)

1
5
4

.

h
p
a
r
g
a
r
a
p

o
s
l
a

e
e
S
(

.
)

0
1
4

.

(

y
t
i

t
u
o
d
e
i
r
r
a
c
g
n
i
e
b
y
l
t
n
e
r
r
u
c

s
i

d
n
u
o
r

r
e
h
t
o
n
a
d
n
a

;

n
o
s
i
r
a
p
m
o
c

d
n
a

s
i
s
y
l
a
n
a

.
)

5
1
4

.

(

-
e
v
i
t
c
e
f
f
e

e
h
t

e
r
u
s
n
e

o
t

s
n
o
i
t
c
e
p
s
n

i

f
o

e
m
m
a
r
g

-
o
r
p

a

e
c
a
l
p

n

i

t
u
p

t
o
n

d
a
h

n
o
i
s
s
i

m
m
o
C

e
h
t

)
d
(

.
)

5
1
4

.

(

t
u
o

d
e
i
r
r
a
c

s
k
c
e
h
c

f
o

s
s
e
n

.
)
)
a
(
6
4
4

.

h
p
a
r
g
a
r
a
p

o
s
l
a

e
e
S
(

-
i
s
s
o
p

e
h
t

f
o

t
h
g
i
l

e
h
t

n

i

,
t
n
a
t
r
o
p
m

i

y
l
r
a
l
u
c
i
t
r
a
p

s
i

t
I

n
o
i
t
a
m
r
o
f
n

i

e
d
i
v
o
r
p
o
t

e
l
b
a
n
u
s
a
w
n
o
i
s
s
i

m
m
o
C
e
h
T

t
r
a
t
s

o
t

s
p
e
t
s

n
e
k
a
t

y
d
a
e
r
l
a

s
a
h

,

n
o
i
s
s
i

m
m
o
C

e
h
T

r
e
d
n
u

t
u
o

d
e
i
r
r
a
c

s
d
n
u
f
e
r

t
r
o
p
x
e

f
o

s
k
c
e
h
c

e
h
t

r
o
F

f
o

n
o
i
t
u
t
i
t
s
b
u
s

,
s
d
o
o
g

e
h
t

f
o

t
r
o
p
x
e
-
n
o
n

f
o

s
e
i
t
i
l
i

b

d
n
a

d
e
k
c
e
h
c

y
l
l
a
c
i
s
y
h
p

s
n
o
i
t
c
a
s
n
a
r
t

f
o

e
u
l
a
v

e
h
t

n
o

s
t
r
o
p
x
e
e
h
t

l

f
o
e
m
u
o
v
l
a
i
c
n
a
n
i
f
e
h
t
n
o
a
t
a
d
g
n
i
t
c
e
l
l

o
c

t
a
h
t

d
n
u
o
f

t
r
u
o
C

e
h
t

,

0
9
/
6
8
3

o
N

)

C
E
E
(

n
o
i
t
a
l
u
g
e
R

t
r
o
p
x
e

f
o

y
l
l
a
n
i
f

d
n
a

n
o
i
t
a
n
i
t
s
e
d

f
o

e
g
n
a
h
c

,
s
t
r
o
p
x
e

e
h
t
4
0
0
2
g
n
i
r
u
D

.

d
e
t
c
e
t
e
d
s
e
i
t
i
r
a
l
u
g
e
r
r
i

f
o
e
u
l
a
v

e
h
t

t
a
h
t

,
)
s
t
c
u
d
o
r
p
d
e
s
i
d
i
s
b
u
s

f
o
n
o
i
t
a
t
r
o
p
m
i
e
r
(

s
l
e
s
u
o
r
r
a
c

r
e
b
m
e
M
g
n
i
r
i
u
q
e
r
n
o
i
t
a
l
u
g
e
r

a
d
e
t
p
o
d
a
n
o
i
s
s
i

m
m
o
C

e
h
t

f
o

g
n
i
r
o
t
i
n
o
m

s
t
i

s
e
v
o
r
p
m

i

n
o
i
s
s
i

m
m
o
C

e
h
t

e
h
t

m
o
r
f

t
c
e
f
f
e
h
t
i

w
n
o
i
t
a
m
r
o
f
n

i

s
i
h
t

t
r
o
p
e
r
o
t

s
e
t
a
t
S

t
r
o
p
x
e

r
o
f

y
r
o
s
l
u
p
m
o
c

e
r
a

t
a
h
t

s
k
c
e
h
c

t
o
p
s
-
e
h
t
-
n
o

n
o
i
t
a
l
u
g
e
r

s
i
h
t

t
a
h
t

s
e
p
o
h

t
r
u
o
C

e
h
T

.
t
r
o
p
e
r

5
0
0
2

.
)

3
5
4

.

d
n
a

2
5
4

.

,

3
1
4

.

(

s
d
n
u
f
e
r

2
5
4

.

,

3
1
4

.

(

s
e
i
c
n
e
i
c
i
f
e
d
e
s
e
h
t

y
d
e
m
e
r

y
l
e
v
i
t
c
e
f
f
e

.
)

3
5
4

.

l
l
i

w

d
n
a

.
)
)
b
(
6
4
4

.

(

s
k
c
e
h
c

l
a
c
i
s
y
h
p

o
t

t
c
e
j
b
u
s

s
k
c
e
h
c

f
o

r
e
b
m
u
n

e
h
t

d
e
t
r
o
p
e
r

s
e
t
a
t
S

r
e
b
m
e
M

l
l
a

t
o
n

d

i

d

l
a
r
e
v
e
s

t
u
b

,

n
o
i
s
s
i

m
m
o
C

e
h
t

o
t

d
e
m
r
o
f
r
e
p

e
h
T

.

d
e
t
c
e
t
e
d

s
r
o
r
r
e

f
o

r
e
b
m
u
n

e
h
t

e
t
a
c
i
n
u
m
m
o
c

s

m
i
a
l
c
y
d
i
s
b
u
s

f
o
t
n
u
o
m
a

e
h
t

e
t
a
c
i
d
n

i

t
o
n
o
d
s
t
l
u
s
e
r

d
e
t
c
e
f
f
a
t
s
o
m

s
d
n
u
f
e
r

t
r
o
p
x
e
f
o
e
p
y
t
e
h
t

r
o
n

,

d
e
t
c
e
j
e
r

.
)
)
b
(
6
4
4

.

(

e
r
a

n
o
i
t
c
u
d
o
r
p

d
n
a

d
l
e
i
y
m
u
m
n
m

i

i

f
o

s
n
o
i
t
i
d
n
o
c

e
h
t

.
)

4
5
4

.

(

d
e
i
f
i
t
s
u

j

y
l
r
e
p
o
r
p

n

i

r
a
l
u
c
i
t
r
a
p
n

i

n
o
i
t
c
a

e
k
a
t
o
t

t
h
g
u
o
n
o
i
s
s
i

m
m
o
C
e
h
T

-
i
s
b
u
s

n

i

s
r
o
r
r
e

s
u
o
i
r
e
s

d
n
i
f

o
t

s
e
u
n
i
t
n
o
c

t
r
u
o
C
e
h
T

e
s
o
p
o
r
p

o
t

e
u
n
i
t
n
o
c

l
l
i

w
d
n
a

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

d
e
i
r
d

r
o
f

s
r
o
r
r
e

s
u
o
i
r
e
s

d
n
i
f

o
t

s
e
u
n
i
t
n
o
c

t
r
u
o
C
e
h
T

,
e
r
u
d
e
c
o
r
p
s
t
n
u
o
c
c
a
-
f
o
-
e
c
n
a
r
a
e
l
c

e
h
t
h
t
i

w
n
o
i
t
c
e
n
n
o
c

h
t
o
b

n

i

n
o

d
e
t
r
o
p
e
r

,
e
c
e
e
r
G

(

s
e
p
a
r
g

d
e
i
r
d

r
o
f

s
e
i

d

-
i
s
b
u
s
n

i

d
n
u
o
f

s
e
i
c
n
e
i
c
i
f
e
d

r
o
f

s
n
o
i
t
c
e
r
r
o
c

l
a
i
c
n
a
n
i
f

l
a
u
n
n
A

2
0
0
2

e
h
t

n

i

n
o

d
e
t
r
o
p
e
r

,
)
e
c
e
e
r
G

(

s
e
p
a
r
g

m
o
r
f

s
n
o
i
t
a
g
o
r
e
d

l
a
n
o
i
g
e
r
y
n
a

t
a
h
t

e
r
u
s
g
n
i
k
a
m
e
l
i

h
w

.
)

4
5
4

.

(

)
s
t
r
o
p
e
R

l
a
u
n
n
A
3
0
0
2

d
n
a

2
0
0
2

.
)

5
4
4

.

(

s
e
p
a
r
g

d
e
i
r
d

r
o
f

s
e
i
d

.
)

5
4
4

.

(

t
r
o
p
e
R

30.11.2005

EN

Official Journal of the European Union

C 301/127

s
n
o
i
t
a
d
n
e
m
m
o
c
e
R

s
n
o
i
t
a
v
r
e
s
b
O

s
e
i
l

p
e
r

’

s
n
o
i
s
s
i

m
m
o
C

e
h
T

s
n
o
i
t
a
v
r
e
s
b
O

4
0
0
2

e
r
o
f
e
b

s
r
a
e
y

d
n
a

3
0
0
2

d
n
u
o
f

s
r
o
r
r
e

e
h
t

p
u
w
o

l
l

o
f

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

e
h
T

g
n
i
y
f
i
t
r
e
c

e
h
t

e
r
u
t
i

d
n
e
p
x
e

t
n
e
m
p
o
l
e
v
e
d

l
a
r
u
r

r
o
F

g
n
i
y
l
r
e
d
n
u
e
h
t

y
d
e
m
e
r
o
t
n
o
i
t
c
a

e
t
a
i
r
p
o
r
p
p
a

e
k
a
t
d
n
a

e
h
t

n
o

i

n
o
n
p
o

i

t
i

d
u
a

r
i
e
h
t

d
e
i
f
i
l
a
u
q

e
v
a
h

s
e
i

d
o
b

s
e
m

i
t
e
m
o
s

h
c
i
h
w

s
n
o
i
t
i

d
n
o
c

y
t
i
l
i

b

i
g
i
l
e

x
e
l
p
m
o
c

y
l
e
v
i
t
a
l
e
r

e
v
a
h

y
l
t
n
e
u
q
e
r
f

d
n
i
k

s
i
h
t

f
o

s
e
m
e
h
c
S

t
n
e
m
p
o
l
e
v
e
d

l
a
r
u
R

e
h
t

g
n
i
y
f
i
l
a
u
q

r
o
f

s
n
o
s
a
e
R

.

d
e
t
i

m

i
l

s
i

t
c
a
p
m

i

e
l

b

i
g
i
l
e
n

i

,
s
r
o
r
r
e

l
a
i
r
e
t
a
m

e
r
e
w

s
t
n
u
o
c
c
a

s
t
n
e
m
u
c
o
d

g
n
i
t
r
o
p
p
u
s

g
n
i
s
s
i

m

,
e
r
u
t
i

d
n
e
p
x
e

.
)

8
4
4

.

d
n
a

7
4
4

.

(

s
e
s
s
e
n
k
a
e
w

l
a
i
c
n
a
n
i
f

e
h
t

f
i

n
e
v
e

,
s
e
i
c
n
e
g
a

g
n
i
y
a
p
2
1
f
o
s
t
n
u
o
c
c
a

.
)

1
4
4

.

(

s
r
a
e
y

l
a
r
e
v
e
s

r
e
v
o

d
e
k
c
e
h
c

e
b

o
t

d
e
e
n

s
e
r
u
s
a
e
m

t
n
e
m
n
o
r
i
v
n
e
-
i
r
g
a

y
l
t
s
o
m

d
e
n
r
e
c
n
o
c

.
)

7
4
4

.

(

y
r
t
s
e
r
o
f

d
n
a

e
r
u
t
l
u
c
i
r
g
a

n

i

s
t
n
e
m

t
s
e
v
n

i

d
n
a

d
n
a

.
)

8
4
4

.

(

t
s
o
c

e
l
b
a
n
o
s
a
e
r

a

t
a

e
c
n
a
r
u
s
s
a

e
r
a

t
r
o
p
p
u
s

t
n
e
m
p
o
l
e
v
e
d

l
a
r
u
r
o
t

s
t
n
e
m
e
l
t
i
t
n
e

t
s
o
M

o
t
n

i

d
e
r
e
t
n
e

s
t
n
e
m

t
i

m
m
o
c

f
o

t
c
e
p
s
e
r

n
o

t
n
e
d
n
e
p
e
d

i

g
n
m
r
a
f
d
o
o
g
f
o
t
c
e
p
s
e
r

s
a
h
c
u
s

,
s
e
i
r
a
i
c
i
f
e
n
e
b
e
h
t
y
b

n

i

e
b

f
o

s
e
i
d
o
B

g
n
i
y
f
i
t
r
e
C

e
h
t

y
b

d
e
t
h
g
i
l

h
g
i
h

s
r
o
r
r
e

e
h
T

t
i

d
u
a

r
i
e
h
t

d
e
i
f
i
l
a
u
q

e
v
a
h

s
e
i

d
o
b

g
n
i
y
f
i
t
r
e
c

e
h
T

l
l
i

w

e
r
u
t
i

d
n
e
p
x
e

t
n
e
m
p
o
l
e
v
e
d

l
a
r
u
r

f
o

t
c
e
p
s
e
r

e
c
n
a
r
a
e
l
c

e
h
t

f
o

k
r
o
w
e
m
a
r
f

e
h
t

n

i

p
u

d
e
w
o

l
l

o
f

h
c
i
h
w

s
r
o
r
r
E

s
e
i
c
n
e
g
a

e
e
r
h
t

f
o

s
t
n
u
o
c
c
a

e
h
t

n
o

i

n
o
n
p
o

i

.
s
e
r
u
s
a
e
m

t
n
e
m
p
o
l
e
v
e
d

l
a
r
u
r

n

i

e
s
i
l
a
i
c
e
p
s

n
o

e
h
t

t
r
o
p
e
r

l
a
i
c
e
p
S

s
’
t
r
u
o
C

e
h
T

.
s
e
c
i
t
c
a
r
p

e
b

l
l
i

w
s
n
o
i
t
c
e
r
r
o
c

l
a
i
c
n
a
n
i
f
d
n
a

e
r
u
d
e
c
o
r
p
s
t
n
u
o
c
c
a

e
r
a

e
r
u
t
i

d
n
e
p
x
e

t
n
e
m
p
o
l
e
v
e
d

l
a
r
u
r

g
n
i
t
c
e
f
f
a

t
a
h
t

s
e
d
u
l
c
n
o
c

s
e
r
u
s
a
e
m

t
n
e
m
n
o
r
i
v
n
e
-
i
r
g
a

e
h
t

r
o
f

k
s
i
r

a

y
l
p
m

i

o
t

d
n
u
o
f

e
r
a

y
e
h
t

f
i

d
e
s
o
p
o
r
p

e
v
i
f

r
e
h
t
r
u
f

a

f
o

n
o
i
t
a
c
i
f
i
l
a
u
q

t
i
d
u
a

e
h
t

n

i

d
e
d
u
l
c
n

i

r
a
l
u
c
i
t
r
a
p

s
e
s
o
p

e
r
u
t
i

d
n
e
p
x
e

h
c
u
s

f
o

n
o
i
t
a
c
i
f
i
r
e
v

e
l
b
a
n
o
s
a
e
r

o
t

d
a
e
l

y
l
e
r
a
r

n
a
c

t
i

t
a
h
t

d
n
a

s

m
e
l
b
o
r
p

.
)

2
4
4

.

(

d
n
u
F

.
)

2
4
4

.

(

s
e
i
c
n
e
g
a

C 301/128

EN

Official Journal of the European Union

30.11.2005

s

i

m
u
m
e
r
p

l
a
m
n
A

i

d
i
a

a
e
r
A

2
X
E
N
N
A

s
t
n
e
m
e
l
e

g
n
i
r
o
t
i
n
o
m
S
C
A

I

y
t
i
l
i

b
a
i
l
e
r

d
n
a

n
o
i
t
a
r
a
p
e
r
P

s
n
o
i
t
c
e
p
s
n

i

n
o

s
c
i
t
s
i
t
a
t
s

f
o

s
t
l
u
s
e
r

d
n
a

d
n
a

l

y
g
o
o
d
o
h
t
e
m
n
o
i
t
c
e
p
s
n
I

s
t
l
u
s
e
r

l
a
u
d
i
v
i
d
n

i

f
o

g
n
i
t
r
o
p
e
r

n
o
i
t
c
e
l
e
s

d
n
a

s
i
s
y
l
a
n
a

k
s
i
R

s
n
o
i
t
c
e
p
s
n

i

r
o
f

s
e
r
u
d
e
c
o
r
p

s
e
r
u
d
e
c
o
r
p

e
v
i
t
a
r
t
s
i
n
m
d
A

i

t
c
e
r
r
o
c

e
r
u
s
n
e

o
t

s
l
o
r
t
n
o
c

d
n
a

y
t
i
l
i

b
a
i
l
e
r

d
n
a

n
o
i
t
a
r
a
p
e
r
P

s
n
o
i
t
c
e
p
s
n

i

n
o

s
c
i
t
s
i
t
a
t
s

f
o

t
n
e
m
y
a
p

s
t
l
u
s
e
r

d
n
a

d
n
a

l

y
g
o
o
d
o
h
t
e
m
n
o
i
t
c
e
p
s
n
I

s
t
l
u
s
e
r

l
a
u
d
i
v
i
d
n

i

f
o

g
n
i
t
r
o
p
e
r

n
o
i
t
c
e
l
e
s

d
n
a

s
i
s
y
l
a
n
a

k
s
i
R

s
n
o
i
t
c
e
p
s
n

i

r
o
f

s
e
r
u
d
e
c
o
r
p

s
e
r
u
d
e
c
o
r
p

e
v
i
t
a
r
t
s
i
n
m
d
A

i

t
c
e
r
r
o
c

e
r
u
s
n
e

o
t

s
l
o
r
t
n
o
c

d
n
a

t
n
e
m
y
a
p

1
1

5
1

5
2

7

0
1

4
2

1

1

4
1

3
2

3

6

9

3
1

7
1

2
2

1
2

2

5

0
2

1

1

1

1

9
1

)

6
5
4

.

h
p
a
r
g
a
r
a
p

e
e
s
(

e
c
e
e
r
G
n

i

d
e
t
n
e
m
e
l
p
m

i

y
l
b
a
i
l
e
r

t
o
n

l
l
i
t
s

s
i

S
C
A

I

8
1

e
p
e
k
e
p
O

,
e
c
e
e
r
G

4

8

2
1

6
1

y
c
n
e
g
a

g
n
i
y
a
P

n
ó
e
L

y

a
l
l
i
t
s
a
C

A
G
N

I
/
p
a
d
a
f
I

d
a
r
e
e
S

,

d
n
a
l
t
o
c
S

n
e
g
n
i
r
ü
h
T

d
n
a
l
r
a
a
S

o
d

s
e
t
a
t
S

r
e
b
m
e
M
e
m
o
S

.
s
i
s
y
l
a
n
a

k
s
i
r

f
o

t
n
e
m
e
l
e

l
a
i
t
n
e
s
s
e

n
a

e
b

o
t

n
o
i
t
a
u
l
a
v
e

s
i
h
t

s
r
e
d
i
s
n
o
c
A
C
E

e
h
t

)

5
0
0
2

r
a
e
y

t
n
e
m
y
a
p
(

4
0
0
2

r
a
e
y

n
g
i
a
p
m
a
c
m
o
r
f

y
l
n
o

y
r
o
t
a
g
i
l

b
o

s
i
h
t

s
e
k
a
m
4
0
0
2

y
r
a
u
n
a
J

3
2

f
o

4
0
0
2
/
8
1
1

o
N

)

C
E
(

n
o
i
t
a
l
u
g
e
R

n
o
i
s
s
i

m
m
o
C

h
g
u
o
h
t
l

A

.
a
i
r
e
t
i
r
c

k
s
i
r

l
a
u
d
i
v
i
d
n

i

f
o

s
s
e
n
e
v
i
t
c
e
f
f
e

f
o

n
o
i
t
a
u
l
a
v
e

.
s
r
o
r
r
e

t
n
a
c
i
f
i
n
g
i
s

d
e
r
i
u
q
e
r

s
t
n
e
m
e
v
o
r
p
m

i

r
o
n
m

i

r
o
w
e
f

,
l
l
e
w
s
k
r
o
W

y
r
a
s
s
e
c
e
n

e
r
a

s
t
n
e
m
e
v
o
r
p
m

i

t
u
b

,
s
k
r
o
W

d
e
d
n
e
t
n

i

s
a

k
r
o
w

t
o
n

s
e
o
D

e
t
a
u
q
e
d
a
n
I

e
s
y
l
a
n
a

t
o
n

A

B

C

.
s
n
o
i
t
c
e
p
s
n

i

p
e
e
h
s

f
o
%
0
4

d
n
a

e
n
i
v
o
b

f
o
%
3
2

n

i

n
e
v
i
g

s
a
w
e
c
i
t
o
n

r
o
i
r
p

s
r
u
o
h

8
4

n
a
h
t

e
r
o
M

.
)
d
e
w
e
i
v
e
r

s
t
r
o
p
e
r

n
o
i
t
c
e
p
s
n

i

l
l
a

f
o
%
7
4

(

s
t
l
u
s
e
r

n
o
i
t
c
e
p
s
n

i

f
o

e
r
u
t
p
a
c

a
t
a
d

n

i

s
r
o
r
r
e

f
o

r
e
b
m
u
n

h
g
i
h

a

s
a
w
e
r
e
h
T

.
)
s
n
o
i
t
c
e
p
s
n

i

l
l
a

o
t

l
a
r
e
n
e
g
(

e
t
a
d

f
o

t
u
o

r
o

)
s
n
o
i
t
c
e
p
s
n

i

i

m
u
m
e
r
p

r
e
t
h
g
u
a
l
s

r
o
f
(

e
t
e
l
p
m
o
c
n

i

d
n
u
o
f

s
a
w
s
n
o
i
t
c
e
p
s
n

i

g
n
i
r
u
d

e
s
u

r
o
f

e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

m
o
r
f

d
e
t
c
a
r
t
x
e

n
o
i
t
a
m
r
o
f
n
I

.
s
k
c
e
h
c

e
v
i
t
a
r
t
s
i
n
m
d
a

i

r
o
f

d
e
i
l

p
p
a

e
r
a

)
e
r
a
t
c
e
h

2
m
u
m
i
x
a
m

r
o
%
2

(

s
e
c
n
a
r
e
l
o
t

a
e
r
a

,
s
n
o
i
t
a
l
u
g
e
r
U
E

n

i

d
e
d
i
v
o
r
p

t
o
n

h
g
u
o
h
t
l

A

.
s
k
c
e
h
c

s
s
o
r
c

f
o

n
o
i
t
e
l
p
m
o
c

e
r
o
f
e
b

s
t
n
e
m
y
a
p

g
n
i
k
a
m
o
t

e
u
d
m
u
m
e
r
p

i

n
o
i
t
a
c
i
f
i
s
n
e
t
x
e

f
o

t
n
e
m
y
a
p
r
e
v
O

.
s
t
l
u
s
e
r

g
n
i
s
n
e
s

e
t
o
m
e
r

l
a
n
i
g
i
r
o
m

r
i
f
n
o
c

t
o
n

d
d

i

s
r
o
t
i
d
u
a

e
h
t

y
b

d
e
r
u
s
a
e
m
e
r

s
l
e
c
r
a
p

8

f
o

6

,
s
r
o
t
c
a
r
t
n
o
c

g
n
i
s
n
e
s

e
t
o
m
e
r

r
e
v
o

s
l
o
r
t
n
o
c

y
t
i
l
a
u
q

t
n
e
i
c
i
f
f
u
s
n
I

.
s
k
c
e
h
c
-
s
s
o
r
c

e
v
i
t
a
r
t
s
i
n
m
d
a

i

e
r
u
t
u
f

n

i

e
s
u

r
o
f

e
s
a
b
a
t
a
d

e
h
t

o
t
n

i

d
e
f

t
o
n

e
r
a

s
n
o
i
t
c
e
p
s
n

i

g
n
i
r
u
d

d
e
h
s
i
l

b
a
t
s
e

s
l
e
c
r
a
p

f
o

s
e
r
u
t
a
e
f

e
l
b
i
g
i
l
e
n

i

t
n
e
n
a
m
r
e
P

.
s
e
s
a
b
a
t
a
d

e
n
i
v
o
b

l
a
r
t
n
e
c

d
n
a

l
a
n
o
i
g
e
r

n
e
e
w
t
e
b

s
e
i
c
n
a
p
e
r
c
s
i

d

,
e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

n
o

s
t
n
e
m
e
v
o
m

l
a
m
n
a

i

n
o

a
t
a
d

o
t

g
n
i
t
a
l
e
r

s
e
i
l
a
m
o
n
A

.

d
e
t
n
e
m
u
c
o
d

y
l
r
o
o
p

s
t
l
u
s
e
r

l

o
r
t
n
o
c

g
n
i
s
n
e
s

e
t
o
m
e
r

l
a
i
t
i
n

i

f
o

e
d
i
r
r
e
v
o

,

d
e
c
n
e
d
i
v
e

t
o
n

s
t
l
u
s
e
r

d
n
a

s
e
r
u
d
e
c
o
r
p

l

o
r
t
n
o
c

y
t
i
l
a
u
Q

.
e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

n
o

d
e
d
r
o
c
e
r

t
o
n

e
r
a

r
e
t
h
g
u
a
l
s

t
c
e
r
i
d

r
o
f

s
e
t
a
t
S

r
e
b
m
e
M

r
e
h
t
o
m
o
r
f

g
n
i
v
i
r
r
a

s
e
n
i
v
o
B

.
e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

n

i

a
t
a
d

e
h
t

d
n
a

s
n
o
i
t
c
e
p
s
n

i

t
o
p
s
-
e
h
t
-
n
o

f
o

s
t
l
u
s
e
r

e
h
t

n
e
e
w
t
e
b

s
e
i
c
n
a
p
e
r
c
s
i
d

e
v
l
o
s
e
r

o
t

r
e
d
r
o

n

i

e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

o
t

e
d
a
m
e
b

o
t

s
n
o
i
t
c
e
r
r
o
c

f
o

g
n
i
r
o
t
i
n
o
m

t
n
e
i
c
i
f
f
u
s
n

i

,
s
n
o
i
t
c
e
p
s
n

i

r
o
f

d
e
t
c
e
l
e
s

n
e
h
w
m
e
t
s
y
s

r
e
t
u
p
m
o
c

e
h
t

n

i

d
e
k
c
o
b

l

y
l
l
a
c
i
t
a
m
o
t
u
a

t
o
n

e
r
a

s
e
l
i
f

m
i
a
l
C

.
s
r
o
r
r
e

s
u
o
i
v
b
o

s
a

d
e
t
a
e
r
t

s
e
s
a
c

r
o
f

l
i
a
r
t

t
i
d
u
a

e
t
a
u
q
e
d
a
n

i

,
s
n
o
i
t
c
e
p
s
n

i

r
o
f

d
e
t
c
e
l
e
s

n
e
h
w
m
e
t
s
y
s

r
e
t
u
p
m
o
c

e
h
t

y
b

d
e
k
c
o
b

l

y
l
l
a
c
i
t
a
m
o
t
u
a

t
o
n

e
r
a

s

m
i
a
l
c

,
e
r
u
t
p
a
c

a
t
a
d

r
o
f

d
e
t
p
e
c
c
a

s
e
t
a
r

r
o
r
r
e

h
g
i
H

.
s
r
o
t
i
d
u
a

e
h
t

o
t

d
e
d
i
v
o
r
p

a
t
a
d

g
n
i
y
l
r
e
d
n
u

d
n
a

n
o
i
s
s
i

m
m
o
C

e
h
t

o
t

d
e
t
t
i

m
b
u
s

a
t
a
d

n
e
e
w
t
e
b

s
e
c
n
e
r
e
f
f
i
d

r
o
n
M

i

.
s
i
s
y
l
a
n
a

k
s
i
r

f
o

s
s
e
n
e
v
i
t
c
e
f
f
e

f
o

n
o
i
t
a
u
l
a
v
e

o
N

.

n
o
i
t
a
l
s
i
g
e
l

U
E

e
h
t

n

i

r
o
f

d
e
d
i
v
o
r
p

s
r
e
t
e
m
a
r
a
p

k
s
i
r

l
l
a

f
o

t
n
u
o
c
c
a

e
k
a
t

t
o
n

d
d

i

s
i
s
y
l
a
n
a

k
s
i
R

.

w
o
d
n
w

i

l

o
r
t
n
o
c

g
n
i
s
n
e
s

e
t
o
m
e
r

d
i
a

a
e
r
a

e
h
t

o
t

d
e
t
a
r
t
n
e
c
n
o
c

e
r
e
w
s
n
o
i
t
c
e
p
s
n

i

l
a
m
n
a

i

f
o
%
0
7

n
a
h
t

e
r
o
M

.
e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

n

i

a
t
a
d

e
h
t

d
n
a

s
n
o
i
t
c
e
p
s
n

i

t
o
p
s
-
e
h
t
-
n
o

f
o

s
t
l
u
s
e
r

e
h
t

n
e
e
w
t
e
b

s
e
i
c
n
a
p
e
r
c
s
i
d

e
v
l
o
s
e
r

o
t

r
e
d
r
o

n

i

e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

o
t

e
d
a
m
e
b

o
t

s
n
o
i
t
c
e
r
r
o
c

f
o

g
n
i
r
o
t
i
n
o
m

t
n
e
i
c
i
f
f
u
s
n
I

.
)

%
3
3
1

,

f
o

d
a
e
t
s
n

i

%
2
5
1

,

s
a
w
d
e
t
r
o
p
e
r

e
t
a
r

l

o
r
t
n
o
c
(

d
e
t
a
t
s
r
e
v
o

s
a
w

t
u
o

d
e
i
r
r
a
c

s
n
o
i
t
c
e
p
s
n

i

f
o

r
e
b
m
u
n

e
h
T

.

y
d
o
b

d
e
t
a
g
e
l
e
d

r
e
v
o

l

o
r
t
n
o
c

y
t
i
l
a
u
q

t
n
e
i
c
i
f
f
u
s
n
I

.

d
e
t
a
d
p
u

y
l
l
a
c
i
t
a
m
e
t
s
y
s

t
o
n

r
e
t
s
i
g
e
r

l
e
c
r
a
P

t
u
p
n

i

a
t
a
d

f
o

y
l
o
p
o
n
o
m
e
v
a
h

.
l
i
a
r
t

s
n
o
n
u

i

’

s
r
e
m
r
a
f

;
l
e
v
e
l

t
o

l
i

t
a

y
l
t
n
e
i
c
i
f
f
e
n

i

y
l
n
o

t
u
b

l
e
v
e
l

l
e
c
r
a
p

t
a

e
n
o
d

t
o
n

s
a
e
r
a
m
u
m
i
x
a
m

f
o

n
o
i
s
i
v
r
e
p
u
s

;
e
l
b
a
i
l
e
r

t
o
n

d
n
a

e
t
e
l
p
m
o
c
n

i

s
i

m
e
t
s
y
s

n
o
i
t
a
c
i
f
i
t
n
e
d

i

l
e
c
r
a
p

d
n
a
l

,
s
e
i
t
l
a
n
e
p
m
i
a
l
c

e
t
a
l

f
o

n
o
i
t
a
c
i
l

p
p
a

i

d
o
v
a

o
t

t
i
d
u
a

y
n
a

t
u
o
h
t
i

w
e
r
u
d
e
c
o
r
p

e
h
t

t
u
o
h
g
u
o
r
h
t

i

s
n
o
n
U
y
b

e
d
a
m
e
r
a

s
n
o
i
t
c
e
r
r
o
c

d
n
a

s
n
o
i
t
a
c
i
f
i
d
o
m

f
o

s
r
e
b
m
u
n

e
g
u
h

,
e
m

i
t

y
n
a

t
a
m
e
t
s
y
s

r
e
t
u
p
m
o
c

n

i

a
t
a
d
m
i
a
l
c

e
t
e
l
p
m
o
c

r
o

y
f
i
d
o
m
n
a
c

y
e
h
T

.

m
e
t
s
y
s

e
h
t

y
b

d
e
t
a
r
e
n
e
g

d
e
s
u

s
t
s
i
l

y
l
l
a
c
i
t
a
m
e
t
s
y
s

d
n
a

e
l
b
a
i
l
e
r
n
u

s
i

s

m
i
a
l
c

f
o

n
o
i
t
a
r
t
s
i
g
e
r

r
o
f

r
o
r
r
e

f
o

g
n
i
r
a
e
l
c

n

i

e
l
o
r

y
e
k

a

y
a
l
p

d
n
a

,
)
a
t
a
d

n
o
i
t
c
e
p
s
n

i

e
r
u
d
e
c
o
r
P

d
n
a
m
i
a
l
c
(

.
s
n
o
n
u

i

’

s
r
e
m
r
a
f

o
t

n
w
o
n
k

e
r
a

g
n
i
s
n
e
s

e
t
o
m
e
r

r
o
f

d
e
t
c
e
l
e
s

s
n
o
i
g
e
R

y
b

d
n
a

s
n
o
i
t
c
e
p
s
n

i

e
c
n
a
m
r
o
f
r
e
p
e
r

n
w
o

’

s
y
c
n
e
g
a

g
n
i
y
a
p

y
b

d
e
m

r
i
f
n
o
c

s
i

s
n
o
i
t
c
e
p
s
n

i

n
o
i
t
a
u
t
i
s

o
t

s
d
a
e
l

m
e
t
s
y
s

e
c
n
e
r
e
f
e
r

l
e
c
r
a
p

l
a
u
d

;
t
n
e
m
e
r
u
s
a
e
m

f
o

d
o
h
t
e
m
d

i
l
a
v

a

e
b

f
o

o
t

d
e
r
e
d
i
s
n
o
c

s
i

t
n
e
m
e
r
u
s
a
e
m
p
e
t
s

;

y
t
i
l
a
e
r

r
i
e
h
t

t
u
o
b
a

s
t
b
u
o
d

s
u
o
i
r
e
s

e
r
a

e
r
e
h
t

s
n
o
i
t
c
e
p
s
n

i

y
n
a
m

r
o
f

;
s
n
o
i
t
c
e
p
s
n

i

r
e
v
o

l
e
v
e
l

l
a
c
o

l

t
a

l

o
r
t
n
o
c

y
t
i
l
a
u
q

o
n

s
i

e
r
e
h
t

;

d
e
t
n
e
m
u
c
o
d

y
l
d
a
b

e
r
a

y
e
h
t

,

y
t
i
l
a
u
q

r
o
o
p

f
o

e
r
a

s
n
o
i
t
c
e
p
s
n

i

t
o
p
s
-
e
h
t
-
n
O

y
t
i
l
a
u
q

r
o
o
P

.
s

m
e
t
s
y
s

e
c
n
e
r
e
f
e
r

o
w

t

e
h
t

n
e
e
w
t
e
b

k
n

i
l

o
n

s
i

e
r
e
h
t

d
n
a

l
e
c
r
a
p

a

f
o

e
c
n
e
r
e
f
e
r

c
i
h
p
a
r
g
o
t
r
a
c

l

d
o

f
o

s
i
s
a
b

e
h
t

n
o

t
u
o

d
e
i
r
r
a
c

e
r
a

s
n
o
i
t
c
e
p
s
n

i

t
s
l
i

h
w
e
d
o
c

e
c
n
e
r
e
f
e
r

d
e
s
i
l
a
t
i
g
i
d

e
h
t

e
s
u

y
l
e
v
i
s
u
l
c
x
e

s
k
c
e
h
c
-
s
s
o
r
c

r
e
t
u
p
m
o
c

e
r
e
h
w

.
s
r
o
t
i
d
u
a

y
b

t
u
o

d
e
i
r
r
a
c

s
n
o
i
t
c
e
p
s
n

i

e
c
n
a
m
r
o
f
r
e
p
e
r

.

g
n
o
r
w
y
l
l
a
i
t
n
a
t
s
b
u
s

e
r
e
w
s
t
l
u
s
e
r

g
n
i
s
n
e
s

e
t
o
m
e
r

d
n
a

s

m
i
a
l
c

e
t
a
l

f
o

r
e
b
m
u
n

n
o

d
e
t
r
o
p
e
r

s
e
r
u
g
i
F

y
b

a
t
a
d

n
o
i
t
c
e
p
s
n

i

d
n
a
m
i
a
l
c

f
o

t
u
p
n

i

n

i

s
r
o
r
r
e

t
n
a
c
i
f
i
n
g
i
S

.

g
n
i
s
s
e
c
o
r
p

t
n
e
m
y
a
p

r
o
f

d
e
s
u

s
n
o
i
t
c
e
p
s
n

i

d
n
a

s

m
i
a
l
c

r
o
f

a
t
a
d

e
g
n
a
h
c

n
a
c

h
c
i
h
w

,
s
n
o
i
t
a
i
c
o
s
s
a

s
r
e
m
r
a
f

y
b

t
u
p
n

i

a
t
a
d

d
n
a

s

m
i
a
l
c

f
o

t
p
i
e
c
e
r

r
e
v
o

l

o
r
t
n
o
c

e
t
a
u
q
e
d
a
n
I

.
s
n
o
i
t
c
e
p
s
n

i

d
n
a

s
l
o
r
t
n
o
c

e
v
i
t
a
r
t
s
i
n
m
d
a

i

h
t
o
b

f
o

t
c
e
f
f
e

s
e
c
u
d
e
r

h
c
i
h
w
e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
t
a
d
-
f
o
-
t
u
O

.
s
e
i
t
l
a
n
e
p

n
i
a
t
r
e
c

f
o

n
o
i
t
a
c
i
l

p
p
a

t
c
e
r
r
o
c
n

i

,

i

m
u
m
e
r
p

n
o
i
t
a
c
i
f
i
s
n
e
t
x
e

f
o

t
n
e
m
y
a
p
r
e
v
o

c
i
t
a
m
e
t
s
y
s

,
s
a
t
o
u
q

l
a
m
n
a

i

l
a
u
d
i
v
i
d
n

i

r
e
v
o

l

o
r
t
n
o
c

r
o
o
P

.
l
e
v
e
l

l
a
c
o

l

t
a

s
k
c
e
h
c

e
v
i
t
a
r
t
s
i
n
m
d
a

i

e
t
a
u
q
e
d
a
n

i

d
n
a

l
e
v
e
l

l
a
r
t
n
e
c

t
a

s
k
c
e
h
c

e
v
i
t
a
r
t
s
i
n
m
d
a

i

e
t
e
l
p
m
o
c
n
I

.
s
n
o
i
t
a
i
c
o
s
s
a

s
r
e
m
r
a
f

e
h
t

l
a
i
c
e
p
s

d
e
m
i
a
l
c
r
e
v
o

f
o
%
9
6

.
s
l
o
r
t
n
o
c

e
v
i
t
a
r
t
s
i
n
m
d
a

i

y
b

d
e
i
f
i
t
n
e
d

i

e
r
e
w
h
c
i
h
w
s
r
o
r
r
e

y
f
i
t
n
e
d

i

o
t

d
e
l
i
a
f

n
e
t
f
o

s
n
o
i
t
c
e
p
s
n
I

,
e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

n
o

d
n
a
m
r
a
f

n
o

s
l
a
m
n
a

i

n
e
e
w
t
e
b

s
e
c
n
e
r
e
f
f
i
d

n
i
a
l
p
x
e

d
n
a

y
f
i
t
n
e
d

i

t
o
n

d
d

i

s
n
o
i
t
c
e
p
s
n
I

.
s
n
o
i
t
c
e
p
s
n

i

r
i
e
h
t

e
r
a
p
e
r
p

o
t

e
s
a
b
a
t
a
d

e
n
i
v
o
b

e
h
t

o
t

s
s
e
c
c
a

c
i
t
a
m
e
t
s
y
s

e
v
a
h

t
o
n

d
d

i

s
r
o
t
c
e
p
s
n
I

.
s
n
o
i
t
c
e
p
s
n

i

y
t
i
l
a
u
q

r
o
o
p

o
t

d
e
t
u
b
i
r
t
n
o
c
m
a
r
g
o
r
p

k
r
o
w
s
u
o
i
t
i
b
m
a

s
i
h
T

.

3
0
0
2

n

i

d
e
t
c
e
p
s
n

i

s
a

d
e
t
r
o
p
e
r

e
r
e
w
s

m
i
a
l
c

e
n
i
v
o
b

l
l

A

.
s
c
i
t
s
i
t
a
t
s

i

m
u
m
e
r
p

r
e
t
h
g
u
a
l
s

t
c
e
r
r
o
c
n
I

.
)
s
l
a
m
n
a

i

d
e
m
i
a
l
c

>

s
l
a
m
n
a

i

d
e
t
c
e
p
s
n

i

d
e
t
r
o
p
e
r

.

g
.
e
(

.
s
c
i
t
s
i
t
a
t
s

i

m
u
m
e
r
p

r
e
t
h
g
u
a
l
s

d
n
a
w
o
c

r
e
l
k
c
u
s

n

i

s
e
i
c
n
e
t
s
i
s
n
o
c
n

i

t
n
a
c
i
f
i
n
g
i
S

.

n
o
i
t
c
e
p
s
n

i

l
a
n
i
g
i
r
o

e
h
t

n
o

d
e
t
c
e
t
e
d

t
o
n

e
r
e
w
s
n
o
i
t
c
e
p
s
n

i

e
c
n
a
m
r
o
f
r
e
p
e
r

’

s
y
c
n
e
g
a

g
n
i
y
a
p

e
h
t

y
b

d
e
i
f
i
t
n
e
d

i

i

s
l
a
m
n
a
w
o
c

r
e
l
k
c
u
s

d
n
a

f
e
e
b

r
e
b
m
e
M

e
t
a
t
S

S
E

T
P

K
U

E
D

E
D

L
E

1

2

3

4

5

6

7

8

9

0
1

1
1

2
1

3
1

4
1

5
1

6
1

7
1

8
1

9
1

0
2

1
2

2
2

3
2

4
2

5
2

.
s

m
e
t
s
y
s

S
C
A

I

y
c
n
e
g
a

g
n
i
y
a
p

f
o
w
e
i
v
e
r

,
s
r
o
t
i
d
u
A

f
o

t
r
u
o
C

:
e
c
r
u
o
S

30.11.2005

EN

Official Journal of the European Union

C 301/129

CHAPTER 5

Structural measures

TABLE OF CONTENTS

Introduction

Structural measures funding and objectives

Management and control systems for structural measures: the main regulations and pro-
cesses

Specific assessment in the context of the Statement of Assurance

Objective and scope of the audit

Audit of the management and control systems

Paragraph

5.1-5.12

5.1-5.7

5.8-5.12

5.13-5.56

5.13

5.14-5.34

Implementation of the internal control standards: progress made although further efforts
required

5.14-5.18

Implementation of operational programmes: systems improvements necessary in the cur-
rent period to achieve compliance with the regulations

5.19-5.27

Closing of 1994 to 1999 programmes: delays and systems weaknesses in complying with
the regulations

Results of substantive tests of projects

Work of other auditors

5.28-5.34

5.35-5.36

5.37-5.38

Annual activity reports and declarations of the Directors-General: better information but
inadequate reservations

5.39-5.45

Follow-up of observations from previous Statements of Assurance: further action to be
taken by the Commission

5.46

Conclusions and recommendations

Conclusions

Recommendations

5.47-5.54

5.47-5.51

5.52-5.54

The implementation of the Instrument for Structural Policies for pre-accession: the Com-
mission has identified shortcomings in the management and control systems

5.55-5.56

Follow-up to observations in Special Report No 3/2002 concerning the Community Initiative
Employment — Integra

5.57-5.59

Follow-up to observations in Special Report No 4/2002 on local actions for employment

5.60-5.64

C 301/130

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

Structural measures funding and objectives

5.1.
Structural measures support the economic and social devel-
opment of the European Union and its applicant countries. The
measures are financed by 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 Instru-
ment for Fisheries Guidance (FIFG); and by the Instrument for
Structural Polices for Pre-accession (ISPA) and the Cohesion Fund.

5.2. The Structural Funds co-finance socioeconomic develop-
ment programmes (1) in the Member States. The Cohesion Fund
co-finances projects to improve the environment and develop
transport infrastructure in Member States whose per capita gross
national income is less than 90 % of the Union average (2). ISPA
supports the development of transport and environmental pro-
tection projects in applicant countries (3).

5.3.
Each programme or project must be approved by the Com-
mission and is accompanied by an indicative financial plan which
specifies the amount of Community aid and the contribution by
the Member State or applicant country. The assistance is provided
in the framework of multiannual periods corresponding to the
Financial Perspectives. Expenditure in the Community budget in
2004 mainly concerns ongoing payments for the current pro-
gramme period (2000 to 2006) and final payments for the pre-
vious programme period (1994 to 1999).

5.4.
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 606 Structural
Funds programmes, 1 163 Cohesion Fund projects and 72 ISPA
projects (4). The measures
implemented can vary widely.
Examples are major infrastructure projects (ERDF, Cohesion Fund
and ISPA), work training for individual persons (ESF), marketing
of agricultural products (EAGGF-Guidance) or the adjustment of
the fishing effort (FIFG).

(1) Programmes may be national or regional and are made up of a series
of measures, under which potential beneficiaries may apply for fund-
ing.

(2) In EU15: Greece, Spain, Ireland (up to 31.12.2003) and Portugal. Since
1 May 2004 also: Cyprus, Czech Republic, Estonia, Latvia, Lithuania,
Hungary, Malta, Poland, Slovenia and Slovakia.

(3) In 2004: Bulgaria and Romania. For the new Member States, former

ISPA projects were transferred to the Cohesion Fund.

(4) In Bulgaria and Romania.

30.11.2005

EN

Official Journal of the European Union

C 301/131

Graph 5.1 — Breakdown of commitments by budgetary area in 2004 (1)

(1) Excluding ISPA.
Source: 2004 Commission report on budgetary and financial management.

Graph 5.2 — Breakdown of payments by budgetary area in 2004 (1)

(1) Excluding ISPA.
Source: 2004 Commission report on budgetary and financial management.

C 301/132

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.5.
For the 2000 to 2006 period total budgeted expenditure
for the Structural Funds is 230 463 million euro, for the Cohe-
sion Fund 28 154 million euro and for ISPA 6 149 million
euro (5) (figures at 2004 prices). Most of the expenditure is
directed towards the three priority policy objectives of the Struc-
tural Funds:

— Objective 1: promoting the development and structural
adjustment of regions whose development is lagging behind;

— Objective 2: supporting the economic and social conversion

of areas facing structural difficulties;

— Objective 3: supporting the adaptation and modernisation of
policies and systems of education, training and employment.

5.6.
For the 1994 to 1999 and previous programme periods,
contributions from the Structural Funds (6) were paid in the form
of advances (based on progress achieved with implementation, as
evidenced by the expenditure declarations submitted by the Mem-
ber States) and final payments, the latter constituting the ‘closure’
of the programmes. Community financing in the 2000 to 2006
programme period takes the form of a single initial advance pay-
ment of 7 % (raised to 16 % for the new Member States) of the
total contribution to the programme, followed by reimburse-
ments of expenditure declared by the Member States on a regular
basis each year and a single final payment at closure of the pro-
gramme. The periodic reimbursements are called ‘interim pay-
ments’. For the Structural Funds, each payment by the Commis-
sion concerns a given Fund and a given programme.

5.7.
Structural measures are subject to ‘shared management’.
This means that, while the Commission implements the Commu-
nity budget on its own responsibility, management and control of
the measures is shared by the Commission (7) and the Member
States. Thus, the Member States are responsible in the first
instance for the management of operations and control of expen-
diture and for ensuring the correctness and legality of the

(5) 2 787 million euro (in current prices) of this figure, representing the
allocations of ISPA funding to eight of the new Member States over the
period 2000 to 2003 are, under the Accession Treaty, now managed
as Cohesion Fund appropriations.

(6) For the Cohesion Fund and ISPA, the payments system is based on a
single advance, interim payments corresponding to actual expenditure,
and a final payment.

(7) Four Directorates-General of the Commission are concerned: the
Directorate-General for Regional Policy (DG REGIO) for the ERDF, the
Cohesion Fund and ISPA; the Directorate-General for Employment,
Social Affairs and Equal Opportunities (DG EMPL) for the ESF;
the Directorate-General
for Agriculture and Rural Development
(DG AGRI) for EAGGF-Guidance and the Directorate-General for Fish-
eries and Maritime Affairs (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 guid-
ance to Member States.

30.11.2005

EN

Official Journal of the European Union

C 301/133

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

underlying transactions through the functioning of systems veri-
fied by national audit bodies. The Commission seeks to obtain its
assurance through the certification by the national paying author-
ity of the expenditure declared and the statement (the winding-up
declaration) by the independent audit body at closure, through
the annual control reports of the Member States and through the
audit work of its own services to check the effectiveness and com-
pliance of the national systems.

Management and control systems for structural measures: the main
regulations and processes

5.8. The basic elements required of the management and con-
trol systems for the 1994 to 1999 period are set out in the Finan-
cial Regulation (8) and the framework regulations (9). Commis-
sion Regulation (EC) No 2064/97, which entered into force in
November 1997, introduced a number of specific requirements
for the management and control arrangements for structural
measures expenditure for
the 1994 to 1999 programme
period (10). The principal points are:

(a)

the requirement for the Member States to put in place man-
agement and control systems which provide satisfactory cer-
tification of the validity of claims for payments (the expen-
diture declarations) and including in particular;

(i)

a sufficient audit trail, permitting the reconciliation of
declarations of expenditure made to the Commission
and the accounting records in the Member States, as well
as the identification of the allocation of the Community
funding;

(8) Financial Regulation applicable to the general budget of the European

Communities (OJ L 356, 31.12.1977, p. 1).

(9) Council Regulation (EEC) No 2081/93 of 20 July 1993 amending
Regulation (EEC) No 2052/88 on the tasks of the Structural Funds
and their effectiveness and on coordination of their activities between
themselves and with the operations of the European Investment Bank
and the other existing financial instruments (OJ L 193, 31.7.1993,
p. 5); Council Regulation (EEC) No 2082/93 of 20 July 1993 amend-
ing Regulation (EEC) No 4253/88 laying down provisions for imple-
menting Regulation (EEC) No 2052/88 as regards coordination of the
different Structural Funds between themselves and with the opera-
tions of the European Investment Bank and the other existing finan-
cial instruments (OJ L 193, 31.7.1993, p. 20).

(10) Commission Regulation (EC) No 2064/97 of 15 October 1997 estab-
lishing 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). The Cohesion Fund systems are gov-
erned by Council Regulation (EEC) No 1164/94 of 16 May 1994
establishing a Cohesion Fund (OJ L 130, 25.5.1994, p. 1).

C 301/134

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(ii) a minimum level of checks (at least a 5 % sample), addi-
tional to the day-to-day checks of operations, to verify
the effectiveness of the management and control systems,
the respect of Community requirements and the accuracy
of the expenditure declarations;

(iii) at the closure of each programme, the presentation to the
Commission by the Member States of a statement drawn
up by a person or organisation functionally independent
of the implementing service; this statement should sum-
marise the conclusions of the checks made in the previ-
ous years and provide an overall conclusion as to the
legality and regularity of the operations underlying the
final declaration of expenditure;

(b) the requirement for the Commission to ensure, in coopera-
tion with the Member States, that the financial control objec-
tives set out in Regulation No (EC) 2064/97 are achieved.

5.9.
For the 2000 to 2006 period, the new framework Council
Regulation (EC) No 1260/1999 (11), implemented by Commis-
sion Regulations (EC) Nos 438/2001 (12) and 448/2001 (13),
maintained and developed these principles. In particular, provi-
sions have been added to require the Member States to issue guid-
ance to managing and paying authorities (14) and to provide for a
clear definition, allocation and separation of functions. Member
States also have to take responsibility in the first instance to make
any necessary financial corrections. The checks carried out dur-
ing the implementation of projects (the day-to-day management
checks) and the sample checks to verify the effectiveness of the

(11) 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).

(12) 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). ISPA systems are governed by Council Regulation (EC)
No 1267/1999 of 21 June 1999 establishing an Instrument for Struc-
tural Policies for Pre-accession (OJ L 161, 26.6.1999, p. 73).

(13) 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
corrections to assistance granted under the Structural Funds (OJ L 64,
6.3.2001, p. 13).

(14) Regulation (EC) No 1260/1999 specifically requires Member States to
appoint managing and paying authorities. The managing authority is
a public or private authority or body at national, regional or local
level designated by the Member State to manage a programme (typi-
cally a department within a national government ministry or regional
or local authority). The paying authority is a national, regional or
local authority or body designated by the Member State for the pur-
poses of drawing up and submitting payment applications and receiv-
ing payments from the Commission (for example a department out-
side the managing authority in the national, regional or local
authority).

30.11.2005

EN

Official Journal of the European Union

C 301/135

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.10. The Commission agrees that there is an inherent risk under
shared management which involves the delegation of responsibilities to
the Member States and subsequent delegation of tasks and functions
within Member States. This risk is addressed in the Structural Funds
regulations through the requirements on Member States to set up and
apply effective systems for management and control, and through the
exercise by the Commission of its powers to verify their functioning and
where necessary to suspend payments and make financial corrections. The
Communication on a roadmap to an integrated control framework
(COM(2005) 252) includes further measures to strengthen shared
management.

There are necessarily numerous conditions governing the eligibility of
operations and expenditure, and the Commission rules set out common
provisions in certain important areas. The Commission provides guid-
ance on eligibility issues both generally and on precise questions.

systems and the accuracy of expenditure declarations (the inde-
pendent 5 % sample checks) have been more clearly differentiated
(see paragraph 5.11). Furthermore, the Commission is explicitly
required to satisfy itself that the management and control systems
meet the regulatory standards and to regularly review the opera-
tion of the systems. As a whole, the legislative framework pro-
vides a sound basis for the management and control of structural
measures expenditure.

5.10. The main inherent risks to the legality and regularity of
expenditure for structural measures arise from the shared man-
agement by the Commission and the Member States, the variety
of bodies and authorities which intervene in the management
process, the large number of programmes each of which may
contain several thousand projects, implemented over a period of
years, and the scope for potential weaknesses in the management
and control systems. In addition, there are a large number of con-
ditions governing the eligibility of expenditure which are not
always clear, giving rise to the risk of divergent interpretations.

5.11. The roles of the Commission and the Member States in
the management and control systems for the 2000 to 2006
period can be summarised as follows:

(a)

the managing authority in the Member State receives appli-
cations from potential beneficiaries (15) for EU and national
co-financing for projects;

(b)

the managing authority in the Member State approves or
refuses the projects;

(c)

(d)

(e)

for each approved project, the beneficiary submits periodic
declarations of expenditure incurred by the project in order
to claim the co-financing;

the managing authority performs checks that expenditure
incurred by projects is legal and regular and is eligible for
co-financing (day-to-day management checks);

the paying authority satisfies itself that the expenditure meets
all the required conditions before certifying the aggregated
declarations which it sends to the Commission;

(15) Applicants may range from private individuals to associations, pri-
vate or public companies to local, regional or national bodies.

C 301/136

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(f) bodies (16) in the Member State, independent of the services
responsible for implementation and payment procedures, per-
form audits of the management and control systems and
sample checks of the expenditure declarations, covering at
least 5 % of the total eligible expenditure of each programme
(independent checks);

(g) at the closure of each programme, a body (which may be the
same as referred to in (f)) in the Member State independent of
the implementing service submits a declaration to the Com-
mission, which assesses the validity of the application for pay-
ment of the final balance and the legality and regularity of the
transactions;

(h) on the basis of the systems descriptions and annual control
reports supplied by the Member States, and its own audit
work, the Commission reviews the operation of the manage-
ment and control systems in the Member States in order to
satisfy itself that the systems meet the standards required by
the regulations.

5.12. Besides the specific requirements on the Structural Funds,
there are other requirements for the Commission which are
intended to improve its general control environment. All
Directorates-General are required to comply with a set of internal
control standards.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Objective and scope of the audit

5.13. 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 Court examined in particular the management
and control systems at the Commission and in a sample of Mem-
ber States and analysed to what extent the internal controls built
into these systems give assurance on the legality and regularity of
the underlying transactions. On the basis of a random selection
of programmes and projects from the prior (1994 to 1999)
and current (2000 to 2006) programme periods, the Court per-
formed tests of underlying transactions (substantive testing) as an
independent check and in order to obtain further evidence on the
operation of the funds. The Court examined:

— the internal control environment at the Commission (inter-

nal control standards);

(16) Such as a financial service or internal audit unit within the national,

regional or local authority.

30.11.2005

EN

Official Journal of the European Union

C 301/137

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— whether, for payments made in 2004, management and con-
trol systems relating to the 1994 to 1999 and 2000 to 2006
programme periods were operating in accordance with the
relevant regulations;

— whether programmes from the 1994 to 1999 programme
period were closed in accordance with the relevant regula-
tions;

— the Annual Activity Reports and declarations of

the

Directors-General;

— the action taken by the Commission in response to the pre-

vious observations of the Court.

Audit of the management and control systems

Implementation of the internal control standards: progress
made although further efforts required

Examination by the Court

5.14. The audit examined the operation of the internal controls
at the Commission, in particular the key controls relating to the
legality and regularity of expenditure. The audit reviewed the
structural measures Directorates-Generals’ implementation of the
internal control standards (see also paragraphs 1.80 to 1.83).

5.15. The Court reviewed the implementation by the structural
measures Directorates-General of the eight internal control stan-
dards (out of a total of 24) of particular importance for the legal-
ity and regularity of expenditure (17).

Incomplete implementation of internal control standards

5.16.
For the Directorates-General for Regional Policy (DG
REGIO) and for Employment, Social Affairs and Equal Opportu-
nities (DG EMPL), the implementation of the standards was gen-
erally satisfactory. However, measures to improve effectiveness
could be taken in the application of Standard 11 (Risk analysis
and management) and shortcomings were identified for Stan-
dard 17 (Supervision), as explained below.

(17) Standard 11 ‘Risk analysis and management’, Standard 12 ‘Manage-
ment information’, Standard 14 ‘Reporting improprieties’, Stan-
dard 17 ‘Supervision’, Standard 18 ‘Exception reporting’, Standard 20
‘Recording and correction of internal control weaknesses’, Stan-
dard 21 ‘Audit reports’ and Standard 22 ‘Internal audit capability’.

5.16. The Directorates-General have taken steps as indicated below
to improve the effectiveness of risk management and consider for the rea-
sons set out below that the implementation of Standard 17 is compliant
with the baseline requirements.

C 301/138

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.17.
For example, at both Directorates-General the Internal
Audit Units have noted that further work is required on raising
awareness among staff of actions for mitigating risk and identi-
fying and reporting weaknesses. In the opinion of the Court, both
DG REGIO and DG EMPL performed insufficient on-the-spot
checks of projects to reach a sound view of the operation of the
management and control systems (for 2000 to 2006). DG EMPL
has introduced a computerised system for the follow-up of rec-
ommendations arising from its audits. The Court notes that the
application in practice of this computerised system needs to be
improved.

5.17. With regard to Standard 11, the Directorate-General
for
Regional Policy adopted an action plan to assist middle management in
the identification and mitigation of risks and to raise awareness of the
procedures in place, particularly those for reporting and correcting inter-
nal control weaknesses. A risk assessment was also made early in 2004
and an action plan implemented to reduce the risks identified in the
exercise.

Concerning the same Standard, surveys by the Internal Audit Capability
of the Directorate-General for Employment, Social Affairs and Equal
Opportunities, show that, following the actions taken, there is continu-
ous progress in staff’s knowledge of the internal control standards.

With regard to Standard 17, the assessment by the Directorates-General
for Regional Policy and Employment, Social Affairs and Equal Oppor-
tunities of the operation of management and control systems is not solely
based on the on-the-spot audit work of the Commission services, but also
on their desk-checks of systems descriptions, on the audit activity of the
Member States and on the national annual control reports.

As part of their systems audits both Directorates-General carry out desk
checks of a large number of project files at the level of the responsible
authorities, together with compliance tests of a sample of transactions.

In 2004, the Directorate-General for Regional Policy did not audit
projects of the 2000 to 2006 period, but carried out system reviews in
the first phase of an enquiry which are being completed by a second phase
of project audits in 2005. With regard to the ESF, the Directorate-
General for Employment, Social Affairs and Equal Opportunities feels
that its audit methodology enables it to use its resources efficiently and
thus to form an opinion on a maximum number of systems involving a
large number of projects (see also reply to 5.42).

5.18. The Directorate-General for Fisheries and Maritime Affairs
(DG FISH) had not fully complied with the baseline requirements
on implementation for five of the internal control standards at the
end of 2004 (standards 11, 12, 17, 20 and 22). The Directorate-
General for Agriculture and Rural Development (DG AGRI) in its
self-assessment for 2004 concluded that all standard and baseline
requirements had been met. The Court examined eight of those
standards and found that four of them showed room for improve-
ment (see paragraphs 4.33 and 4.34).

5.18. The Directorate-General for Fisheries and Maritime Affairs
acknowledges the observations of the Court concerning the incomplete
compliance with baseline requirements for five internal control standards
and has already taken action to remedy this situation.

30.11.2005

EN

Official Journal of the European Union

C 301/139

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Implementation of operational programmes: systems
improvements necessary in the current period to achieve
compliance with the regulations

Examination by the Court

5.19. As part of its specific assessment of structural measures
expenditure, the Court examined the operation of the manage-
ment and control systems for both the 1994 to 1999 and 2000-
2006 programme periods on the basis of a random sample of 15
Structural Fund programmes and one Cohesion Fund project
(1994 to 1999 programmes: 3 ERDF, 2 ESF, 1 EAGGF-Guidance
and 1 Cohesion Fund; 2000 to 2006 programmes: 5 ERDF
(including 1 Interreg IIIA Community Initiative), 3 ESF and 1
EAGGF-Guidance) for which payments were made by the Com-
mission in 2004 (in Belgium, France, Germany, Greece (2),
Spain (3), Italy (3), Portugal, Finland, Sweden and the United
Kingdom (2)). As mentioned above (paragraphs 5.8 to 5.9), the
regulatory requirements for the management and control systems
for the 2000 to 2006 programmes were increased by compari-
son to the 1994 to 1999 period.

Failures to respect regulatory requirements

5.20. The Court’s audit identified various failures in the Mem-
ber States to respect the regulatory requirements for the manage-
ment and control systems across all the programmes in its sample
for both the 1994 to 1999 and 2000 to 2006 programme peri-
ods. When compared to the previous programme period, the
Commission has since implemented various measures to achieve
more effective management and control systems for 2000
to 2006 expenditure. However, important failures still remain, as
demonstrated by the results of the review of the selected 2000
to 2006 programmes (see Annex 1). The following findings
illustrate the kind of problems which the Court found for both
periods.

Unclear definition, allocation and separation of functions

5.21.
In four of the 16 programmes audited, the Court noted
problems related to the definition, allocation and separation of
functions. In two cases, checks underlying the certification of
expenditure by the paying authority were made by a department
which was not independent from the authorising service (18).
For another programme,
the unit responsible for the 5 %
sample checks reported to the departmental head also having

(18) 2000 to 2006: Sweden (Södra Skogslän) ESF Objective 1
Italy (Puglia) EAGGF-Guidance Objective 1

1999SE161DO002;
1999IT161PO009.

5.19. The Commission is examining the Court’s findings in these cases
in the light of the replies of the authorities of the Member States con-
cerned and any additional information obtained where necessary. Once
it has completed this examination it will take whatever action is
necessary. The Commission considers that the periods 1994 to 1999
and 2000 to 2006 should be distinguished for the purposes of drawing
conclusions. There were significant differences in the requirements for the
two periods; for example, separate managing and paying authorities were
only introduced in the 2000 to 2006 period. In many cases the struc-
tures were changed by Member States for the current period.

5.20. The Commission notes that for certain aspects of the manage-
ment and control systems, in particular recovery procedures and indepen-
dence of the winding-up body, arrangements were generally satisfactory.
It also notes the positive conclusions on the audit trail and independent
checks in the report referred to in point 5.37.

5.21. The Commission notes that two of the programmes were for the
1994 to 1999 period and two for the 2000 to 2006 period. It con-
siders that for the 1997 to 1999 Western Scotland programme the
structure met the minimum requirements laid down for the 1994
to 1999 period.

For Puglia (footnote 18), the Directorate-General for Agriculture and
Rural Development in its audit mission in March 2004 found similar
problems concerning the separation of functions. The Annual Activity
Report (AAR) of the Directorate-General for Agriculture and Rural
Development for 2004 included a reserve for expenditure in Puglia, and
this issue is under review with the Italian authorities on the basis of ele-
ments provided to the Commission.

C 301/140

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

responsibility for the management and payment of assistance (19).
In a further programme, the management and the payments
teams reported to the same head of division (20). The failure to
ensure the proper implementation of these basic elements of
management and control increases the risk of allowing the dec-
laration and certification of expenditure which is not legal and
regular.

Failure to provide a sufficient audit trail

5.22. The Court identified problems with the audit trail in seven
programmes. In one programme, the audit trail was deficient for
three of the ten projects examined (21) and in another for three
out of eight projects audited (22). In one case, a break in the audit
trail was found for two projects and, for the same programme,
expenditure records were not retained, contrary to the regulatory
requirement (23). In another case, for two programme measures
examined, the Court identified a lack of reconciliation between
payments by the managing authority and expenditure by
projects (24). For three projects in one programme, invoices and
proofs of payment were not retained, contrary to the regulatory
requirement, and evidence of the expenditure could only be
obtained through the internal accounting system of the benefi-
ciary itself (20). In one programme, audit trail problems were iden-
tified in most of the projects audited by the Court (25). For another
programme, the amount certified to the Commission did not rec-
oncile with the total in the programme accounts (26). In the
absence of an adequate audit trail, there is no straightforward
basis for certification of expenditure by the Member State.

Failure to carry out adequate checks

5.22. The Commission notes that four of the cases relate to the 1994
to 1999 period and three to the 2000 to 2006 period.

for Belgium
With regard to the 2000 to 2006 programme
(1999BE053DO002), since the audit by the Court, the managing
authority has reconstituted the expenditure declared to the Commission
for one of the three files in question and the two other projects are under
examination. Concerning the 1994 to 1999 Finnish programme
(956001FI8), following a special audit on the social allowances by the
Commission in November 2002, the system was also deemed insuffi-
cient. Thereupon, Finland started modifying its system for the current
period. The progress has been monitored by the Commission services and
the situation has improved since then.

Concerning the 1994 to 1999 Spanish programme (940112ES1), the
Member State’s underdeclaration has not had a negative financial effect
on the Community budget.

5.23.
In nine cases in the Court’s sample, the day-to-day man-
agement checks of operations were found not to be working or
to contain shortcomings. The Court’s sample included two cases
where this control was not working and there was no evidence of
day-to-day management checks (27). In these cases a number of
errors were found by the Court while auditing individual projects.
In another case, during their on-the-spot checks, the managing

5.23. The Commission notes that two cases concern the 1994
to 1999 period and seven the 2000 to 2006 period. With regard to the
Greek programme, the Commission, following its examination of the
management and control system in Greece, is now satisfied that the mea-
sures taken adequately ensure the establishment of procedures for man-
agement checks that meet the requirements of the regulations.

the

2000

programme,
Concerning
(1999SE161DO002),
the
improvements made also include the verification of the actual implemen-
tation of the operations.

the Commission will make sure that

Swedish

2006

to

(19) 1994 to 1999: United Kingdom (Western Scotland) ERDF Objec-

tive 2 97UK16004.

(20) 1994 to 1999: Spain (Asturias) ERDF Objective 1 94ES16002.
(21) 2000 to 2006: Belgium ESF Objective 3 1999BE053DO002.
(22) 2000 to 2006: Sweden (Södra Skogslän) ESF Objective 1

1999SE161DO002.

(23) 2000 to 2006: United Kingdom (North-East England) ERDF Objec-

tive 2 2000GB162DO004.

(24) 1994 to 1999: Spain (Valencia) EAGGF-Guidance Objective 1

94ES06019.

(25) 1994 to 1999: Finland ESF ADAPT 956001FI8.
(26) Spain ESF 940112ES1.
(27) 2000 to 2006: United Kingdom (North-East England) ERDF
Objective 2 2000GB162DO004; Greece ERDF Interreg IIIA
2000CB16OPC013.

30.11.2005

EN

Official Journal of the European Union

C 301/141

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

authorities had not verified the actual implementation of the
activities funded (22). For this case, there was no proof of the
delivery of the services co-financed. These findings demonstrate
the importance of making checks at the premises of beneficiaries,
rather than relying solely on centralised checks of documentation.

Shortcomings in day-to-day management checks were
5.24.
identified in six cases. In one case, insufficient day-to-day checks
had been performed (20). In three other cases, the content and
depth of checking were not sufficient and aspects of eligibility of
the expenditure were not properly covered (28). A number of
errors were found for one of these cases which is a closed pro-
gramme for which the final expenditure had been certified (29). In
a further two cases, no checks were made of activities performed
by third parties and the Court found no evidence that this expen-
diture was eligible (30).

5.25.
For the 2000 to 2006 programmes audited, satisfactory
progress was achieved on the 5 % checks except in one case where
the checks were lagging behind in terms of coverage (31). Never-
theless, the Court also identified weaknesses in the independent
checks in 11 programmes in its sample. In seven cases, the risk
analysis underlying the sampling was incomplete or could not be
explained and the checks did not sufficiently cover all aspects of
eligibility (32). In another case, there were no audit working
papers allowing the Court’s auditors to verify the application of
the sampling methodology and the audit work performed (33).
Delays in reporting the results of the checks were noted in two
cases (34). For one programme, the checks did not sufficiently
cover the whole programme period and the sampling did not take
account of risk analysis (35).

5.24. With regard to the 2000 to 2006 programme for Belgium
(1999BE053DO002), the Commission will ensure that the beneficiary
provides the Managing Authority, on the basis of his analytic accounts,
with the details of the actual costs included in internal invoicing, as the
Managing Authority has checked the eligibility and grounds for this
expenditure.

5.25. The Commission notes that six of the 11 cases concern the
1994 to 1999 period and five the 2000 to 2006 period.

Before making the final payment for the 1994 to 1999 Industria e
Servizi progamme, the Commission, noting the lack of audits of projects
below LIT 3 billion in value, required further audits of such projects
and in the final payment, based on the average rates of error found by
measure, applied financial corrections to all projects in this category.

5.26. Checks made by the paying authority before certifying
statements of expenditure were found not to be working or
to contain shortcomings in seven cases. In one case, the paying
authority certified expenditure, relying solely on the checks done

5.26. With respect to the Greek Interreg programme, this problem has
now been remedied following the actions referred to in the reply to
point 5.23. The paying authority now requires information on manage-
ment checks and independent audits on projects before it certifies expen-
diture from the projects.

(28) 1994 to 1999: United Kingdom (Western Scotland) ERDF Objective 2

With regard to
Italy
(1999IT161PO011), quarterly reports detailing these controls are now
being sent to the paying authority.

the 2000 to 2006 programme

for

97UK16004;
2000
to
1999DE161PO006;
1999IT161PO009.

2006: Germany

1
Italy (Puglia) EAGGF-Guidance Objective 1

ERDF Objective

(Sachsen)

(29) 1994 to 1999: United Kingdom (Western Scotland) ERDF Objec-

tive 2 97UK16004.

(30) 2000 to 2006: Italy (Sicily) ESF Objective 1 1999IT161PO011;

Belgium ESF Objective 3 1999BE053DO002.

(31) 2000 to 2006: Sweden (Södra Skogslän) ESF Objective 1

1999SE161DO002.

(32) 1994 to 1999: Spain (Valencia) EAGGF-Guidance Objective 1
94ES06019; United Kingdom (Western Scotland) ERDF Objective 2
97UK16004; Spain (Asturias) ERDF Objective 1 94ES16002; Italy
(Industria e Servizi) ERDF Objective 1 94IT16030;
2000 to 2006: Greece ERDF Interreg IIIA 2000CB16OPC013; Italy
(Puglia) EAGGF-Guidance Objective 1 1999IT161PO009; France
(Réunion) ERDF Objective 1 1999FR161DO001.

(33) 1994 to 1999: Finland ESF 956001FI8 (ADAPT 1995-1999).
(34) 2000

ERDF Objective

Portugal

(Norte)

2006:

to

1

1999PT161PO017; Belgium ESF Objective 3 1999BE053DO002.

(35) 1994 to 1999: Spain ESF 940112ES1.

C 301/142

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

by the managing authority and without performing further veri-
fication (21). In two other cases, the paying authority had no over-
view of the day-to-day management checks which had been car-
ried out on the programme concerned (36). In another case,
expenditure was certified in the absence of management checks
and of systems checks by the paying authority (37). For one pro-
gramme, the unit within the paying authority responsible for per-
forming checks had no formally defined working procedures
and insufficient checks had been done (38). For a further pro-
gramme, the coverage of the checks by the certifying body had
not been specified and checklists failed to cover aspects of eligi-
bility (39). In another case, there was no evidence that any checks
had been performed (23).

5.27.
If adequate checks are not performed at the various lev-
els, there is an increased risk that expenditure which is not legal
and regular will be declared to the Commission.

5.27. The adequacy of the checks is assessed by the independent body
at the closure of the programmes for the purposes of the closure state-
ment. The Commission also took measures to address this risk in the pro-
cedures for closure of the 1994 to 1999 programmes.

Closing of 1994 to 1999 programmes: delays and systems
weaknesses in complying with the regulations

Examination by the Court

5.28. The Court reviewed the action taken by the Commission
in closing programmes from the 1994 to 1999 programme
period. The examination was done at
the Commission
and included the 6 Structural Fund programmes and one Cohe-
sion Fund project sampled by the Court (see paragraph 5.19), plus
an additional sample of 23 closed programmes (40). The Court
also examined the audit work carried out by the Commission,
based on a sample of audit reports across the structural measures
Directorates-General. A sample of programmes not yet closed
were examined to identify the reasons for delay.

Weaknesses and delays in closing programmes

5.29. The examination by the Court of the action taken by the
Commission in 2004 in making final payments for 1994 to 1999
programmes has identified programmes closed by DG REGIO
and DG EMPL although the closure statements submitted by

5.29. The Commission considers that the closure process has gener-
ally been carried out to a good standard despite some delays. The exami-
nation of Article 8 statements was only one part of the Commission’s
strategy for the closure of 1994 to 1999 programmes. Before the

(36) 2000 to 2006: Italy (Siciliy) ESF Objective 1 1999IT161PO011; Swe-

den (Södra Skogslän) ESF Objective 1 1999SE161DO002.
(37) 2000 to 2006: Greece ERDF Interreg IIIA 2000CB16OPC013.
ERDF Objective
(38) 2000

(Réunion)

France

(39) 2000

2006: Germany

(Sachsen)

ERDF Objective

to
2006:
1999FR161DO001.
to
1999DE161PO006.

1

1

(40) 3 ERDF, 10 ESF, 5 FIFG, 5 EAGGF-Guidance.

30.11.2005

EN

Official Journal of the European Union

C 301/143

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

the Member States did not contain full details of the methodol-
ogy applied (41). This concerns in particular the use of the risk
analysis and the representativity of sampling for the minimum
5 % checks carried out by the Member State authorities before
certifying the final expenditure for the programmes.

5.30. The Court observed last year that the variable quality of
the closure documentation submitted by the Member States con-
tributed to the slow progress in closing 1994 to 1999 pro-
grammes (42). In 2004, delays have persisted. This is partly
because Member States have been slow to respond to enquiries
from the Commission (particularly regarding completion of suf-
ficient independent checks of the management and control sys-
tems and expenditure declarations), but also because the Commis-
sion has failed to take timely action in a number of cases (43).

closure process, the Commission had carried out systems audits in all
Member States. It also issued general guidance on these requirements
and on the closure process.

With regard to the 1997 to 1999 Lorraine programme, nearly 20 %
of expenditure had been checked by the Member State. As far as the
Zuid-Limburg programme is concerned, 24 out of 100 projects had
been checked in a first systems review by the national audit body
and 12 % of expenditure was subject to in-depth checks. Accordingly, in
both cases the Directorate-General for Regional Policy is satisfied that it
had a sound basis for the closure.

Given the information available to it (following a thorough analysis of
the closure documents on the basis of the checklists and the results of the
Commission audit), the Directorate-General for Employment, Social
Affairs and Equal Opportunities feels that it had sufficient details to close
the programmes in question.

5.30. As noted in its reply to points 5.37 and 5.67 of the Court’s
report for 2003, the Commission checked closure documentation thor-
oughly, consulted OLAF to ensure that all irregularity cases had been
resolved, and required further information or audit work where neces-
sary. This has inevitably delayed the date of closure in some cases, espe-
cially where Member States have contested the Commission’s closure pro-
posals involving financial corrections.

For the Directorate-General for Employment, Social Affairs and Equal
Opportunities, four of the cases mentioned refer to programmes which
had been closed and in respect of which the delays were the result of the
constraints linked to the appropriate handling of irregularities.

Concerning the closure of the 5 FIFG programmes mentioned by the
Court in footnote 48, one is already closed, for two the closure proposal
will shortly be sent to the Member States concerned and for the other two
the closure procedure is ongoing.

For the ERDF cases mentioned there were complex points which required
exchanges with national authorities and which were protracted because
of the overall work volume in the closure process.

(41) Austria ESF 955501AT5; Italy ESF 940016I1; Spain ESF 940127ES1;
Spain ESF 940112ES1; United Kingdom ESF 98001UK4; United
Kingdom ESF 979203UK8; Netherlands ESF 972005NL2; Nether-
lands (Zuid-Limburg) ERDF Objective 2 1997-1999 970713006;
France (Lorraine) ERDF Objective 2 1997-1999 970313012.

(42) Court of Auditors - Annual Report concerning the financial year

2003, paragraphs 5.29 to 5.39 and 5.67.

(43) DG FISH: Spain 94ES14101; Italy 94IT14101; United Kingdom
Objective 1 94EU16002, 94UK16003; France Objective 5a
94FR14105. DG REGIO: Portugal 94PT161PO007; Peace and Rec-
onciliation Special Support Programme 1995EU161PC005; Luxem-
bourg 97L162DO001. DG EMPL: United Kingdom 972103UK2,
979203UK8;
Netherlands
972005NL2; Portugal 942000P1.

942601F1;

949701F8,

France

C 301/144

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.31. Table 5.1 provides information on the closed pro-
grammes for each of the Structural Funds as at 31 December
2004 and 31 March 2005. It shows that DG AGRI closed
137 programmes during 2004, so that 158 of its 388 pro-
grammes remained open at the end of 2004. DG FISH closed
three programmes, leaving 41 out of 52 open. DG EMPL closed
335 programmes (out of a total of 786) in 2004 and 264
remained to be closed. DG REGIO closed 317 programmes (out
of a total of 944) during 2004,
leaving 333 programmes
open (44).

5.31. The tables show programmes that have been completely closed
in the sense that both the final payment and the final decommitment
have been made. The amounts shown as payments are only payments
made to completely closed programmes, not including those made to pro-
grammes for which the final decommitment has not yet been effected.
Where a Member State contests the Commission’s determination of the
final payment due, the Commission cannot make the final decommit-
ment until this has been settled, which in some cases means at the end of
a formal procedure under Article 24 of Regulation (EEC) No 4253/88.
The total level of outstanding commitments for the 1994 to 1999
period — net of payments to open programmes not included in Table 5.1
— was reduced by two thirds in 2004 and at the end of the year stood
at 3,3 billion euro, or around 5 % of the original budgeted amount (see
paragraphs 2.16 and 2.20 of the 2004 report).

Table 5.1a — Structural measures: European Regional Development Fund programmes 1994-1999
closed at 31 December 2004 and 31 March 2005

Total

Closed before 2004

Closed at 31 December 2004

Closed at 31 March 2005

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Objective 1

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

44

70

13

0

0

0

25

1

12 221 092 714

3 504 374 582

841 930 911

0

0

0

1 050 903 786

149 180 357

94

79

48

0

0

0

62

2

37 550 653 114

103

40 455 135 472

4 194 775 934

3 132 569 307

0

0

0

2 458 401 459

333 854 319

82

51

0

0

0

68

2

4 581 143 406

3 410 651 545

0

0

0

2 787 738 557

333 854 319

Objective 2 94-96

Objective 2 97-99

Objective 3

Objective 4

Objective 5 (a)

Objective 5 (b)

Objective 6

Community
Initiatives

520

9 223 064 769

141

1 177 790 541

326

3 916 629 881

355

4 187 134 731

Total

944

82 775 943 121

294

18 945 272 891

611

51 586 884 014

661

55 755 658 030

(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.

(44) Where more than one Fund contributes to the same programme, each
Fund part of the programme is closed separately. Thus the figures do not
reconcile to the total number of programmes given in paragraph 5.4.

30.11.2005

EN

Official Journal of the European Union

C 301/145

Table 5.1b — Structural measures: European Social Fund programmes 1994-1999
closed at 31 December 2004 and 31 March 2005

Total

Closed before 2004

Closed at 31 December 2004

Closed at 31 March 2005

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Objective 1

102

22 806 888 948

82

72

56

16

0

83

2

1 597 251 132

2 112 708 834

13 221 222 835

2 614 128 525

0

1 057 483 760

177 902 801

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

59

79

43

30

11

0

54

2

9 800 246 487

1 341 684 839

732 343 850

6 568 750 561

1 324 982 251

0

489 410 848

161 300 249

59

80

45

34

11

0

58

2

9 800 246 487

1 359 322 253

785 221 571

7 079 666 326

1 324 982 251

0

530 457 498

161 300 249

Objective 2 94-96

Objective 2 97-99

Objective 3

Objective 4

Objective 5 (a)

Objective 5 (b)

Objective 6

Community
Initiatives

373

4 664 895 421

68

568 697 469

Total

786

48 252 482 256

187

7 246 278 950

244

522

1 497 206 934

21 915 926 019

252

541

1 510 102 428

22 551 299 063

(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 5.1c — Structural measures: European Agricultural Guidance and Guarantee Fund,
Guidance Section programmes 1994-1999 closed at 31 December 2004 and 31 March 2005

Total

Closed before 2004

Closed at 31 December 2004

Closed at 31 March 2005

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Objective 1

69

14 301 716 000

Objective 2 94-96

Objective 2 97-99

Objective 3

Objective 4

Objective 5 (a)

Objective 5 (b)

Objective 6

Community
Initiatives

0

0

0

0

66

84

2

0

0

0

0

5 544 906 000

3 163 701 000

288 794 000

167

1 156 618 000

Total

388

24 455 735 000

4

0

0

0

0

30

21

0

38

93

565 075 313

34

4 721 652 121

34

4 721 652 121

0

0

0

0

421 287 186

693 559 284

0

0

0

0

0

43

46

1

0

0

0

0

1 728 707 188

1 772 582 355

211 137 456

0

0

0

0

43

48

1

0

0

0

0

1 728 707 188

1 790 545 748

211 137 456

132 882 889

1 812 804 672

106

230

534 783 853

8 968 862 973

106

232

534 783 853

8 986 826 366

(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.

C 301/146

EN

Official Journal of the European Union

30.11.2005

Table 5.1d — Structural measures programmes 1994-1999 closed at 31 December 2004
and 31 March 2005 — FIFG

Total

Closed before 2004

Closed at 31 December 2004

Closed at 31 March 2005

Budgetary area (1)

Number
of pro-
grammes

Planned Community
contribution (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Number
of pro-
grammes

Total Community
contribution
paid (EUR)

Objective 1

18

1 797 039 031

Objective 2 94-96

Objective 2 97-99

Objective 3

Objective 4

Objective 5a

Objective 5 (b)

Objective 6

Community
Initiatives

Total

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

1

0

0

0

0

2

0

1

4

8

32 744

0

0

0

0

23 715 837

0

3 523 447

2 245 131

3

0

0

0

0

2

0

1

5

127 659 610

0

0

0

0

23 715 837

0

3 523 447

14 058 058

5

0

0

0

0

3

0

1

8

199 177 066

0

0

0

0

46 725 040

0

3 523 447

15 527 939

29 517 159

11

168 956 952

17

264 953 492

(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.

The Commission’s programme of closure audits

5.32. The Court noted long delays (over eight months in some
cases) by the Commission in reporting the results of the audits to
the Member States (45). Such delays increase the time required for
the Commission to make any necessary proposals for appropri-
ate financial corrections and subsequently recover irregular
expenditure.

5.32. The Commission services endeavour to send audit reports to
Member States within a reasonable time. All of the ERDF cases men-
tioned by the Court concern closure audits where not all documentation
was available on the spot and had to be submitted some weeks after the
on the spot visit. In some of the FIFG cases, the time taken to report the
audit results was due to long discussions with national authorities prior
to issue of the audit report.

5.33. DG EMPL made a limited examination of closure proce-
dures in four Member States. In one case (46), DG EMPL closed the
programme with a minimal financial correction, although seri-
ous deficiencies were found by the national control authority.

In the Directorate-General for Employment, Social Affairs and
5.33.
Equal Opportunities audit strategy for 2004, given the audit resources
available, the audit priority was given to the coverage of the 2000
to 2006 period because of their preventive effects.

Closure audits for the remaining Member States are being carried out
from 2005.

For the Belgian case mentioned, the Directorate-General for Employ-
ment, Social Affairs and Equal Opportunities considers that the flat rate
correction made by the Member State was sufficient in regard to the
problems found for the years audited by the Member State’s independent
authority.

Sweden

(45) For the audits by DG FISH concerning Finland (95FI14105,
95FI16002),
Kingdom
(96SE14115)
(94UK16002, 94UK16005, 95UK16005); DG REGIO: France
(Haute Normandie) 97FR16010 SPD Objective 2 1997-1999,
Spain (Andalucia) 1994ES161PO001 1994-1999, Netherlands
(Flevoland) 940713001 SPD Objective 1 1994 to 1999 and United
Kingdom (Greater Manchester) 97UK16008 SPD Objective 2 1997
to 1999.

and United

(46) Belgium ESF 943010B3.

30.11.2005

EN

Official Journal of the European Union

C 301/147

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.34. By the end of 2004, DG REGIO had carried out ex post
audits in all the EU15 Member States of 56 programmes cover-
ing 35 % of the ERDF contribution. It found significant levels of
error in programmes in nine Member States. In the opinion of the
Court, the quality of these audits was satisfactory.

Results of substantive tests of projects

Examination by the Court

5.35. The Court carried out substantive tests of 167 projects in
the Member States, under the programmes it had selected for
audit (paragraph 5.19 above), in order to obtain further evidence
on the operation of the Funds.

Various problems found by the Court

5.36. The weaknesses in the management and control systems
outlined above (paragraphs 5.20 to 5.27) give rise to an increased
risk as regards the legality and regularity of the underlying
expenditure. The problems found by the Court in its tests on
frequently occurring
projects are wide-ranging. The most
examples include a large number of instances of the declaration
of ineligible items of expenditure (47), declaring expenditure

(47) Declaration of ineligible items of expenditure:

Declaration of costs unrelated to the programmes or projects con-
cerned:
— 1994 to 1999: Greece Cohesion Fund 970961015; Spain
(Asturias) ERDF Objective 1 94ES16002; Finland ESF 956001FI8
(ADAPT 1995-1999); Spain (Valencia) EAGGF-Guidance Objec-
tive 1 94ES06019; Spain ESF 940112ES1;

5.36. The Commission is examining the Court’s findings in these cases
taking into account the replies of the Member States. In many cases it
cannot yet take a position and will complete its analysis and obtain fur-
ther information where necessary. It will take appropriate action, includ-
ing the application of corrections for those cases where there is a finan-
cial impact.

ESF

Italy

(Sicily)

Objective

— 2000 to 2006:

Italy (Puglia) EAGGF-Guidance Objective 1
1999IT161PO009;
1
1999IT161PO011; Sweden (Södra Skogslän) ESF Objective 1
1999SE161DO002; Belgium ESF Objective 3 1999BE053DO002;
Germany (Sachsen) ERDF Objective 1 1999DE161PO006.
Declaration of expenditure incurred outside the eligible period:
— 1994 to 1999: United Kingdom (Western Scotland) ERDF
Objective 2 97UK16004; Spain (Asturias) ERDF Objective 1
94ES16002;
Italy (Industria e Servizi) ERDF Objective 1
94IT16030;

— 2000

to
2006:
1999PT161PO017;
1999FR161DO001.

Portugal
France

(Norte)
(Réunion)

ERDF Objective
1
ERDF Objective 1

Declaration of recoverable value added tax:
— 1994 to 1999: Spain (Valencia) EAGGF-Guidance Objective 1

94ES06019;

— 2000 to 2006: United Kingdom (North-East England) ERDF

Objective 2 2000GB162DO004.

Declaration of expenditure although funds had not been paid out to
projects by the final beneficiaries:
— 1994 to 1999: United Kingdom (Western Scotland) ERDF
Objective 2 97UK16004; Spain (Asturias) ERDF Objective 1
94ES16002;
Italy (Industria e Servizi) ERDF Objective 1
94IT16030;

— 2000 to 2006: Germany

(Sachsen) ERDF Objective 1

1999DE161PO006.

Failure to take account of potential generation of revenue or other
income:
— 1994 to 1999: United Kingdom (Western Scotland) ERDF Objec-
tive 2 97UK16004; Finland ESF 956001FI8 (ADAPT 1995-1999);
Spain (Valencia) EAGGF-Guidance Objective 1 94ES06019; Spain
ESF 940112ES1;
— 2000 to 2006:

Italy (Puglia) EAGGF-Guidance Objective 1
1999IT161PO009;
1
1999PT161PO017; United Kingdom (North-East England) ERDF
Objective 2 2000GB162DO004.

ERDF Objective

Portugal

(Norte)

C 301/148

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

twice (48), non-respect of rules relating to State aid schemes (49)
and to public procurement (50), inadequate supporting documen-
tation held at projects (51)and failure to use a duly justified and
equitable method for the allocation of overhead expenditure to
projects (52).

Work of other auditors

5.37.
In December 2004 a ‘Report on the Parallel Audit of the
Management and Control Systems for Assistance Granted under
the Structural Funds’ was produced by a Working Group on
Structural Funds of the Contact Committee of the Heads of the
Supreme Audit Institutions of the EU Member States and the
European Court of Auditors (53). The results were intended to be

(48) Declaring expenditure twice:

— 1994 to 1999:

Italy (Industria e Servizi) ERDF Objective

1 94IT16030; Spain ESF 940112ES1;

— 2000 to 2006: United Kingdom (North-East England) ERDF Objec-
tive 2 2000GB162DO004; Italy (Puglia) EAGGF-Guidance Objec-
tive 1 1999IT161PO009.

(49) Non-respect of rules relating to State aid schemes:

— 1994 to 1999: United Kingdom (Western Scotland) ERDF Objec-

tive 2 97UK16004;

— 2000 to 2006:

Italy (Puglia) EAGGF-Guidance Objective

1 1999IT161PO009.

(50) Failure to respect Community rules on the award of public contracts:
— 1994 to 1999: Spain (Asturias) ERDF Objective 1 94ES16002;
ERDF Objective

United
2 97UK16004; Greece Cohesion Fund 970961015;

Kingdom (Western

Scotland)

— 2000 to 2006: United Kingdom (North-East England) ERDF Objec-
IIIA
ERDF Objective

tive 2 2000GB162DO004; Greece
2000CB16OPC013; Germany
1 1999DE161PO006.

(Sachsen)

Interreg

ERDF

(51) Inadequate supporting documentation held at projects:

— 1994 to 1999: Spain (Valencia) EAGGF-Guidance Objective 1
94ES06019; United Kingdom (Western Scotland) ERDF Objec-
tive 2 97UK16004; Spain (Asturias) ERDF Objective 1
94ES16002;
Italy (Industria e Servizi) ERDF Objective 1
94IT16030; Finland ESF 956001FI8 (ADAPT 1995-1999);
Spain ESF 940112ES1;

— 2000 to 2006: United Kingdom (North-East England) ERDF
Objective 2 2000GB162DO004; Greece ERDF Interreg IIIA
2000CB16OPC013;
1
1999IT161PO011; Germany (Sachsen) ERDF Objective 1
Objective
1999DE161PO006;
3
1999BE053DO002;
ERDF Objective 1
1999PT161PO017; Sweden (Södra Skogslän) ESF Objective 1
1999SE161DO002.

Objective

Portugal

Belgium

(Norte)

(Sicily)

Italy

ESF

ESF

(52) Failure to use a duly justified and equitable method for the allocation

of overhead expenditure to projects:
— 1994 to 1999: United Kingdom (Western Scotland) ERDF Objec-
tive 2 97UK16004; Finland ESF 956001FI8 (ADAPT 1995-1999);
Spain ESF 940112ES1;

— 2000 to 2006: United Kingdom (North-East England) ERDF Objec-
Italy (Sicily) ESF Objective 1
tive 2 2000GB162DO004;
1999IT161PO011; Sweden (Södra Skogslän) ESF Objective 1
1999SE161DO002; Germany (Sachsen) ERDF Objective 1
1999DE161PO006; Belgium ESF Objective 3 1999BE053DO002.
(53) The report is published on the websites of the Supreme Audit Insti-

tutions of the participating Member States.

30.11.2005

EN

Official Journal of the European Union

C 301/149

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

used by Member States in the development of their own manage-
ment and control systems. The Working Group, comprising nine
Member States (54), carried out parallel audits in 2003 to 2004 to
examine how two specific regulatory requirements (55) for the
management and control systems for the 2000 to 2006 pro-
gramme period were applied in their countries - provision of a
sufficient audit trail (Article 7) and organisation of independent
sample checks of operations (Articles 10 to 12).

5.38. Among their main conclusions were:

5.38.

— in most countries there is a sufficient audit trail as defined by
the Regulation. Although some weaknesses were noted when
examining individual projects, these were not usually system-
atic weaknesses but individual project failings. The most sig-
nificant weaknesses identified were the lack of complete
documentation of examinations carried out, and the lack of
definition of the distinction between irregularities and simple
errors;

— in most countries the execution and reporting of the inde-
pendent sample checks complied with the Regulation. Where
this was not the case the Working Group stated that the rel-
evant authorities have taken appropriate steps to ensure that
the required checks would be carried out by the end of the
programme period. The independence of the organisations
carrying out the checks was guaranteed in all programmes
examined. However, the implementation of the checks has
been relatively slow;

— the legal framework leaves room for ambiguous or even con-
tradictory interpretations. Furthermore, the Working Group
expressed concern at the increased bureaucracy in the imple-
mentation of the provisions for the 2000 to 2006 pro-
gramme period, resulting in increased staff and other costs.

— Regulation (EC) No 1681/94 on the reporting of irregularities is
being amended in order to provide a clear definition of irregularity.

— The Commission agrees with this assessment, which is supported by

its own audit work.

— The Commission answers questions from Member States on the
interpretation of regulatory requirements and issues guidance.
Forthcoming guidance notes include those on the closure of 2000
to 2006 programmes and the certification function. The detailed
implementation of the control framework in the 2000 to 2006
period is a matter for Member States. The more rigorous require-
ments may involve additional staff and other costs, but this should
be proportionate to the benefits resulting from better overall man-
agement and control. Part of these costs may be covered by techni-
cal assistance funding.

(54) Denmark, Germany, Spain, Italy, Netherlands, Portugal, Finland, Swe-

den and United Kingdom.

(55) Under Commission Regulation (EC) No 438/2001 of 2 March 2001.

C 301/150

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Annual activity reports and declarations of the Directors-General:
better information but inadequate reservations

5.39. The Court examined the information presented by the
structural measures Directors-General
in their annual activity
reports and associated declarations for 2004. The Commission
again recognises the risk that the management and control sys-
tems in the Member States are not implemented with sufficient
rigour to guarantee that the underlying operations for the pro-
gramme period 2000 to 2006 are legal and regular.

5.40. The Director-General of DG REGIO states that he has rea-
sonable assurance of the legality and regularity of expenditure. He
confirms the two reservations made in 2003 about the manage-
ment and control systems in Greece, respectively for the ERDF
and the Cohesion Fund. For the ERDF in Greece, the procedure
giving rise to a suspension of interim payments was launched in
December 2004.

5.41. As an improvement compared to last year, the reserva-
tions made by DG REGIO have been quantified, especially con-
cerning the payments made in 2004. The reservations are based
on desk controls of the systems descriptions submitted to the
Commission and on audits in the Member States. It should be
noted that DG REGIO carried out only eight systems audits on
2000 to 2006 programmes (compared to the 15 scheduled) in
2004, with limited substantive testing of projects.

5.41. Certain audits planned by the Directorate-General for Regional
Policy for 2000 to 2006 programmes had to be carried over to 2005
because of a particular staff shortage in the last part of the year and the
need to concentrate resources on completing closure audits on 1994
to 1999 programmes. The 2000 to 2006 system audit enquiry pro-
vides for substantive testing by on-the-spot audits of a sample of projects
to be done in a second phase of the audit starting in 2005. The Director-
General’s assurance in a given year is not based solely on the audit work
carried out in the course of the year concerned, but on the assurance built
up over previous years’ audit work under the Directorate-General’s audit
strategy, as well as the assurance provided from the audit work of Mem-
ber States.

5.42. The audits performed by DG EMPL in the Member States
by the end of 2004 represent 70 % of the total ESF contribution
for the programmes (EU15, 2000 to 2006 period). However, the
DG performed insufficient checks of projects to support the con-
clusions made on the operation of the management and control
systems. The declaration of the Director-General includes a res-
ervation for those management and control systems for which
serious weaknesses were identified. This identification in the dec-
laration constitutes an improvement compared to last year,
although it is not quantified.

5.42. The systems audits of the Directorate-General for Employment,
Social Affairs and Equal Opportunities systematically cover also the veri-
fication of a large number of project files at the level of the responsible
authorities. These tests make it possible to form a precise opinion of the
way in which decisions approving projects are taken and the way in
which declarations of expenditure are analysed and checked. The audit
methodology applied by the Directorate-General for Employment, Social
Affairs and Equality of Opportunities aims to make efficient use of the
resources available and to form an opinion on a maximum number of
systems involving a large number of projects.

The validity of the audit work carried out by the Directorate-General for
Employment, Social Affairs and Equality of Opportunities is shown by
the fact that the improvements in the systems requested have been made
by the Member States and significant financial corrections have been car-
ried out (by the Member States themselves or by the Commission each
time where necessary); this has increased the degree of assurance. Thus,
for the period 2000 to 2006, ignoring the procedures under way, cor-
rections involved 266 million euro.

30.11.2005

EN

Official Journal of the European Union

C 301/151

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Directorate-General for Employment, Social Affairs and Equal
Oppportunities pointed out in its annual declaration how difficult it was
to quantify the financial impact of reservations connected with systemic
weaknesses in the Member States. Nevertheless, the Directorate-General
for Employment, Social Affairs and Equal Opportunities, on the basis
of the Commission guidelines (C(2001) 476 final), feels that the weak-
nesses identified by the systems audits would point to a maximum poten-
tial risk of 261 million euro, i.e. 3,4 % of the payments made under the
ESF in 2004. Formal suspension and/or financial correction decisions
may be taken after the contradictory procedures with the Member States.
In several cases the Member State has improved its systems and/or made
the necessary financial corrections itself. The systemic weaknesses detected
by the Directorate-General for Employment, Social Affairs and Equal
Opportunities and the corrective measures taken prompted the Director-
General to maintain his reservation in his declaration.

5.43. The Directorate-General for Fisheries and Maritime Affairs
acknowledges the observations of the Court and will take them on board
to further improve future Annual Activity Reports.

5.45. The Commission considers that the absence of a reservation is
justified given the rigorous procedures applied in the Directorates-
General and the closure audits which have been and are being carried out
to verify the reliability of the closure statements. Where following the
completion of the follow up of audit findings with Member States a sig-
nificant error level is determined, financial corrections are applied to the
programmes concerned.

5.43.
For DG FISH, the Court noted an improvement in the
level of detail and clarity of the information provided in the
annual activity report in comparison to previous years. However,
the report did not include complete information on the status of
actions required to address recommendations arising from audits
both by the Court and by the DG’s internal audit unit.

For DG AGRI, there remains a reservation for EAGGF-
5.44.
Guidance expenditure for 2000 to 2006, as there was in 2003.
Although the DG has made progress in clearing the issues under-
lying the original reservation, and there is no longer a general res-
ervation on EAGGF-Guidance expenditure, there remains an
insufficient basis for giving assurance on the expenditure in 2004
for a certain number of programmes. The report of the Director-
General gives a clear indication of the amount subject to the res-
ervation.

5.45.
Similarly to 2003, no reservation is made by the struc-
tural measures Directors-General for the 1994 to 1999 pro-
gramme period (56), although - for example - the ex post audits
performed by DG REGIO for this period show a significant level
of error in nine Member States (paragraph 5.34).

Follow-up of observations from previous Statements of Assurance:
further action to be taken by the Commission

5.46. The Court reviewed the action taken by the Commission
concerning observations made under recent specific assessments
in the context of the Statement of Assurance. Annex 2 gives an

5.46. The Commission provides detailed replies to the observations of
the Court on the Commission’s follow-up of previous general observa-
tions in Annex 2.

(56) Annual Report concerning the financial year 2003, paragraph 5.62.

C 301/152

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

indication of further actions required from the Commission con-
cerning the key observations made by the Court. As regards the
specific problems identified by the Court’s tests of projects,
although the Commission has generally given a satisfactory
follow-up to these problems, in some cases there have been sig-
nificant delays in taking a final position or launching any neces-
sary recovery procedures (57). One of these cases relates to a find-
ing by the Court in its Statement of Assurance for 1998.

The situation regarding the follow-up of the individual cases of error
detected in the Court’s audits for the DAS of previous years is as follows.
For the case from the 1998 Statement of Assurance referred to, the
Member State had previously indicated that required action had been
taken and this was checked by the Commission on final closure of the
programme in 2004 in order to close this case. For the other three cases
concerning ERDF, the Commission has communicated its position and
the closure of the cases will depend on whether or not the Member State
takes the appropriate measures, which will determine whether a finan-
cial correction decision is necessary.

For OP 94IT16002 — Italy (Sardinia), the procedure pursuant to
Article 24 of Regulation (EEC) No 4253/88 is ongoing.

Conclusions and recommendations

Conclusions

5.47. The Commission has continued its efforts to improve its
internal control environment. Nevertheless, some further mea-
sures are required in the application of the internal control stan-
dards (see paragraphs 5.14 to 5.18).

5.48. The Court found some weaknesses in the management
and control systems across all the programmes in its sample for
both the 1994 to 1999 and the 2000 to 2006 periods. Concern-
ing the 2000 to 2006 period, as in last year’s Annual Report, the
Court’s findings this year again show that most of the systems
examined need varying degrees of improvement in order to fully
comply with the fundamental regulatory requirements for effec-
tive day-to-day management checks and/or independent sample
checks of operations (58). The Court also detected numerous
errors of legality and regularity in the expenditure included in the
declarations leading to payments by the Commission in 2004 (see
paragraphs 5.19 to 5.27 and 5.35 to 5.36).

5.47. The Commission is taking action to improve effectiveness where
necessary.

5.48. The Structural Funds DGs have addressed the risk of systems
weaknesses in the Member States for the 1994 to 1999 period through
their respective strategies for the closure of the programmes and in par-
ticular their treatment of the closure statements issued by the indepen-
dent bodies. The Commission’s audit strategy for 2000 to 2006 focuses
on verifying the effective functioning of the key elements of the control
systems in Member States. Shortcomings in the day-to-day management
checks and delays in the independent audits have been found in some
programmes or regions also. For example, out of 103 ESF programmes
audited in (EU-15) 49 have led to recommendations concerning the
implementation of management checks. In such cases the Commission
has taken action to ensure that action plans are implemented by the
national authorities to remedy the problems including the exclusion of
irregular expenditure already declared where justified. The Commission
is using its powers to suspend payments and make corrections when nec-
essary. The Commission will in 2005 issue a note on good practice on
management checks based on its audit work in order to promote further
the effectiveness of this key control.

(57) ERDF: Germany (Bayern) Objective 5b 1994-1999 (DAS 1998), Italy
(Piemonte) SPD 1994-1996 (DAS 2000), OP Algarve (DAS 2001);
Greece Competitiveness OP 2000-2006 (DAS 2001); EAGGF-
Guidance: Italy (Sardinia) 94IT16002 (DAS 2000).

(58) Annual Report concerning the financial year 2003, paragraphs 5.14

to 5.27, 5.47 to 5.56 and 5.67 to 5.69.

30.11.2005

EN

Official Journal of the European Union

C 301/153

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.49. The closing of Structural Fund programmes and Cohesion
Fund projects from the 1994 to 1999 programme period has
been a lengthy and laborious process which was still not com-
pleted at the end of 2004. Member States were slow to respond
to enquiries from the Commission, but the Commission also
failed to take timely action in some cases. The Court found that
the Commission closed some programmes although the closure
statements submitted by the Member States did not contain com-
plete information (see paragraphs 5.28 to 5.34).

5.49. The Commission considers that the closure process has gener-
ally been carried out to a good standard despite some delays. The thor-
ough scrutiny of closure documents and the other parts of the closure
strategy have reduced the risk of irregular final payments. The lessons
learnt will stand the Commission and the Member States in good stead
for the closure of the current generation of programmes. The cases of
shortcomings have to be considered in the context of the high number of
programmes to be closed and the complexity of the process.

5.50. Despite some improvements in the information provided
in the annual activity reports and declarations of the Directors-
General for structural measures, further effort is required, nota-
bly concerning the scope and impact of the reservations (see para-
graphs 5.39 to 5.45).

5.51. The action taken by the Commission to follow up previ-
ous observations of the Court has been generally satisfactory,
although some delays have been noted (see paragraph 5.46).

Recommendations

5.52.
For structural measures, as an area of shared manage-
ment, the necessary improvements in management and control
require a joint effort by the Commission and the Member States.
The Commission should in particular, in cooperation with the
Member States:

5.50. The Directorates-General concerned are working together to
develop a more consistent and documented approach to the reservations.

5.52. The Commission approved on 15 June 2005 a communication
on the ‘roadmap to an intregrated Community internal control frame-
work’, designed to identify any gaps in the current and future regulatory
requirements and the actions required to make the management and con-
trol systems for shared management expenditure in particular more effec-
tive. The ‘roadmap’ will be discussed with the discharge authority in the
autumn of 2005 in order to reach a ‘common understanding’ of the
action required.

— ensure a more rigorous approach to checking the legality and
regularity of expenditure. It is especially important that the
front line checks — the day-to-day management checks —
are strictly applied,

— The Commission focuses its audit work on this key element in
national systems. It refers to the proposed compilation of good prac-
tices in this area (see point 5.48).

— ensure that the lessons learned from the closing of pro-
grammes for the 1994 to 1999 period are applied for the
2000 to 2006 and subsequent periods. This requires that the
Member States ensure the submission of adequate closure
documents in due time and that the structural measures
Directorates-General apply a coherent and effective approach
to the examination of the final payment requests.

— The Commission agrees that lessons should be learned, and is issu-
ing guidance on the closure of 2000 to 2006 period with that
objective. Nevertheless, the process of closure of 1994 to 1999 pro-
grammes was closely coordinated between the Directorates-General.
It refers to its reply at paragraph 5.49.

C 301/154

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.53. The Commission has made significant advances in recent years
in coordination on management and control matters within the Com-
mission and with the Member States which it will continue to build on.
For example there is a joint audit strategy for the Structural Funds
Directorates-General for 2005, joint audits are being carried out in the
new Member States, and the quality and timeliness of the annual con-
trol reports has improved. These measures all contribute to progress on
the single audit approach.

5.54. The Commission presented its proposals for Council regulations
for the Structural and Cohesion Funds in July 2004 in order to ensure
that the new framework was in place well before the beginning of the
next period. The draft Commission regulation has already been presented
to Member States, but cannot be adopted before the adoption of the
general Council regulation.

5.53. The Commission should also make further efforts
to improve the effective implementation of its supervisory duties.
Its ability to properly monitor structural measures expenditure
would be enhanced by increased coordination between the
responsible Directorates-General
in matters of management
and control.

5.54. The Court notes that proposals for new framework regu-
lations for the 2007 to 2013 programme period have been pro-
duced by the Commission in 2004. The Court has issued an
Opinion on these proposals (59). The adoption of the regulations
and detailed rules for their implementation as regards the man-
agement and control systems before the start of the programme
period (which was not done for 1994 to 1999 and 2000 to 2006)
would provide an opportunity to ensure that the systems are put
in place and reviewed ahead of the approval of programmes
and commitment of expenditure.

The implementation of the Instrument for Structural Policies for
pre-accession: the Commission has identified shortcomings in the
management and control systems

5.55. The Court performed a review of the implementation of
the pre-accession instrument ISPA. The examination was carried
out at the Commission. The Commission’s management of pay-
ments was examined on the basis of an assessment of the checks
made by the Commission and a review of the declarations of
expenditure submitted by the applicant countries for eight
selected payments made in 2004 (Bulgaria five payments and
Romania three payments). The Court’s review did not give rise to
particular observations.

5.56. The Court notes that the Commission interrupted pay-
ments to Romania several times during 2004 and that the
Director-General maintained the reservation expressed in 2003
for Romania due to important shortcomings in the set-up and
functioning of the management and control systems.

FOLLOW-UP TO OBSERVATIONS IN SPECIAL REPORT
NO 3/2002 CONCERNING THE COMMUNITY INITIATIVE
EMPLOYMENT — INTEGRA

5.57. The Court’s Special Report examined the effectiveness of
management processes, namely, the targeting and selection of
projects, and the monitoring, evaluation, and dissemination of
information, in relation to the Community Initiative Integra.

(59) Opinion No 2/2005.

30.11.2005

EN

Official Journal of the European Union

C 301/155

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.58. A principal conclusion of the Court’s report was that sys-
tematic weaknesses existed regarding evaluation and monitoring.
In consequence, it was not possible to establish the extent to
which the Integra initiative had resulted in new knowledge con-
cerning the combating of exclusion from the labour market and
whether such knowledge had been effectively disseminated to
political decision-makers.

5.59. The final evaluation report on Integra, which was pub-
lished in 2003, corroborated the Court’s findings in relation to
weaknesses in the programme’s evaluation structures and the
absence of an adequate feedback mechanism. These weaknesses,
according to the evaluation, resulted in a probable loss of knowl-
edge being transferred between implementing organisations.

5.58. The Commission has moved to ensure that the monitoring and
evaluation of experimental programmes such as Integra is improved. In
Equal, the successor programme to Integra, harmonised criteria have
been developed for evaluation and monitoring, including follow up via
thematic networks and groups, with the specific goal of validating the
results of the programme. A clear and realistic timetable for evaluations
has been agreed between the Commission and the Member States to
ensure that the results needed are provided at the correct time, and that
these results are brought to the attention of the key people responsible for
policy formation in the fields concerned.

5.59. The Commission, through its procedures for constant feedback,
monitoring and evaluation of the implementation of Structural Fund
programmes, had been aware of the weaknesses inherent in the design of
Integra even before the end of its period of operation. In its design of the
Equal Community Initiative (2000 to 2006) the Commission had
moved to improve those areas identified as weak in the previous pro-
grammes. The Equal Initiative includes in its design an obligation for
the Member States to describe the lessons learnt from the Employment
programme.

FOLLOW-UP TO OBSERVATIONS IN SPECIAL REPORT
NO 4/2002 ON LOCAL ACTIONS FOR EMPLOYMENT

5.60. The Court’s Special Report examined the Commission’s
management of EU policy concerning local employment creation
and its financial management of innovative projects in this area.

5.61. The Court’s main recommendations were that:

(a) a comprehensive assessment of the likely added value of local
employment policy should be undertaken on all policy
implementation levels;

(b) Commission-managed actions in the area of innovative
projects should be rationalised, along with a tightening of
financial management procedures to ensure the regularity
and cost effectiveness of funding.

5.62. The Commission carried out a number of comprehensive
evaluations and studies pertaining to EU local employment policy.
In 2003 it produced a report of a study into the availability of
data for the measurement of employment performance at local
level, while in 2004 a horizontal evaluation of local employment
development, assessing the added-value of EU local development
policy, was carried out.

C 301/156

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.63. Additional steps were also taken to tighten financial
management procedures concerning innovative actions. These
included an increase in on-the-spot audits of projects by the Com-
mission in 2003, and a rationalisation of the funding provision
in this area.

5.64. The Court considers that these actions constitute a satis-
factory follow-up to its recommendations and that they will posi-
tively contribute to the cost effectiveness of Community funding
in the policy area of local employment creation.

5.64. The Commission welcomes the favourable comments from
the Court on its follow-up to the special report on local actions for
employment.

30.11.2005

EN

Official Journal of the European Union

C 301/157

1
X
E
N
N
A

s
e
r
u
s
a
e
m

l
a
r
u
t
c
u
r
t
S

s

m

e
t
s
y
s

l
o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
M

-
e
g
a
n
a
m

f
o

n
o
i
t
a
n
m
a
x
E

i

-
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m

r
o
f

n
o
i
t
a
r
a
p
e
r
p

n

i

s

m
e
t

t
a

n
o
i
t
a
r
a
l
c
e
d

i

g
n
d
i
v
o
r
p

e
m
m
a
r
g
o
r
p

f
o

e
r
u
s
o
l
c

)

6
1

e
l
c
i
t
r
A

(

e
c
n
e
d
n
e
p
e
d
n
I

s
d
r
a
d
n
a
t
s

g
n
i
t
i
d
u
a

d
n
a

-
a
l
c
e
d

i

g
n
u
s
s
i

y
d
o
b

f
o

f
o

e
r
u
s
o
l
c

t
a

n
o
i
t
a
r

e
m
m
a
r
g
o
r
p

)

5
1

e
l
c
i
t
r
A

(

s
k
c
e
h
c
%
5

f
o

)

2
1
-
0
1

s
e
l
c
i
t
r
A

(

e
l
b
i
g
i
l
e

l
a
t
o
t

e
r
u
t
i
d
n
e
p
x
e

)

0
1

e
l
c
i
t
r
A

(

n
o
i
t
a
s
i
n
a
g
r
o

e
t
a
u
q
e
d
A

f
o
%
5

t
s
a
e
l

t
a

r
e
v
o
c

o
t

s
k
c
e
h
c

f
o

s
s
e
r
g
o
r
P

y
t
i
l
i

b
a
i
l
e
r

f
o

e
c
n
a
r
u
s
s
A

f
o

s
e
t
a
c
i
f
i
t
r
e
c

f
o

e
r
u
t
i
d
n
e
p
x
e

)

9

e
l
c
i
t
r
A

(

y
r
e
v
o
c
e
r

e
t
a
u
q
e
d
A

s
e
r
u
d
e
c
o
r
p

)

8

e
l
c
i
t
r
A

(

l
i
a
r
t

t
i
d
u
a

t
n
e
i
c
i
f
f
u
S

)

7

e
l
c
i
t
r
A

(

y
a
d
-
o
t
-
y
a
d

y
r
o
t
c
a
f
s
i
t
a
S

y
f
i
r
e
v

o
t

s
e
r
u
d
e
c
o
r
p

y
t
i
r
a
l
u
g
e
r

d
n
a

y
t
i
l
a
g
e
l

d
e
c
n
a
n
i
f
-
o
c

f
o

s
n
o
i
t
a
r
e
p
o

)

4

e
l
c
i
t
r
A

(

-
a
c
o

l
l
a

,

n
o
i
t
i
n
i
f
e
d

r
a
e
l
C

f
o

n
o
i
t
a
r
a
p
e
s

d
n
a

n
o
i
t

s
n
o
i
t
c
n
u
f

)

3

e
l
c
i
t
r
A

(

d
n
u
F
/
n
o
i
g
e
R
/
e
t
a
t
S

r
e
b
m
e
M

9

8

7

6

5

4

3

2

1

s
a
e
r
A

t
i
d
u
A
y
e
K

d
e
t
i
s
i
v

s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

n

i

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m
e
h
t

r
o
f

1
0
0
2
/
8
3
4

o
N

)

C
E
(

n
o
i
t
a
l
u
g
e
R

n
o
i
s
s
i

m
m
o
C

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

i

f
o

t
r
u
o
C

e
h
t

y
b

t
n
e
m

s
s
e
s
s
A

)
t
/
n

(

)

1

(

d
e
r
i
u
q
e
r

s
t
n
e
m
e
v
o
r
p
m

i

r
o
n
m

i

r
o
w
e
f

,
l
l
e
w
s
k
r
o
W

y
r
a
s
s
e
c
e
n

s
t
n
e
m
e
v
o
r
p
m

i

t
u
b

,
s
k
r
o
W

k
r
o
w

t
o
n

s
e
o
D

)
d
n
a
l
g
n
E

E
-
N

(

i

m
o
d
g
n
K
d
e
t
i
n
U

F
D
R
E

F
D
R
E

)
e
t
r
o
N

(

l
a
g
u
t
r
o
P

i

e
c
n
a
d
u
G
F
G
G
A
E

)
a
i
l
g
u
P
(

y
l
a
t
I

g
e
r
r
e
t
n
I
-
F
D
R
E

e
c
e
e
r
G

F
D
R
E

)

n
e
s
h
c
a
S
(

y
n
a
m
r
e
G

F
D
R
E

)

i

n
o
n
u
é
R

(

e
c
n
a
r
F

F
S
E

)
y
l
i
c
i
S
(

y
l
a
t
I

F
S
E
m
u
i
g
l
e
B

F
S
E
n
e
d
e
w
S

s
h
p
a
r
g
a
r
a
p

e
e
s

s
l
i
a
t
e
d

r
o
F

)
a
(

)
b
(

)
c
(

.

.

7
2
5
-
9
1
5

.

.
e
t
a
r
e
p
o

o
t

d
a
h

t
o
n

e
v
a
h

y
e
h
t

s
a

d
e
t
s
e
t

t
o
n

s
e
r
u
d
e
c
o
r
P

)

1

(

.

d
e
t
s
e
t

t
o
N

)
t
/
n

(

C 301/158

EN

Official Journal of the European Union

30.11.2005

d
n
a

s
e
i
g
e
t
a
r
t
s

t
i
d
u
a

r
i
e
h
t

h
t
i

w
e
c
n
a
d
r
o
c
c
a

n
i

t
u
o

d
e
i
r
r
a
c

k
r
o
w

t
i
d
u
a

h
g
u
o
r
h
t

e
c
n
a

y
t
i
l
a
g
e
l

e
h
t

f
o

e
c
n
a
r
u
s
s
a

t
n
e
i
c
i
f
f
u
s

e
d
i
v
o
r
p

t
o
n

o
d

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
e
i
l
p
p
a

e
r
a

s
e
r
u
d
e
c
o
r
P

.
s
e
i
d
o
b

t
i
d
u
a

l
a
n
o
i
t
a
n

h
t
i

w
n
o
i
t
a
r
e
p
o
o
c

d
e
s
a
e
r
c
n
i

h
g
u
o
r
h
t

.
e
r
u
t
i
d
n
e
p
x
e

r
a
l
u
g
e
r
r
i

t
c
e
r
r
o
c

o
t

r
o

s
e
i
c
n
e
i
c
i
f
e
d

y
d
e
m

e
r

o
t

.
e
r
u
t
i
d
n
e
p
x
e

f
o

y
t
i
r
a
l
u
g
e
r

d
n
a

d
n
a

2
X
E
N
N
A

e
c
n
a
r
u
s
s
A

f
o

s
t
n
e
m
e
t
a
t
S

t
n
e
c
e
r

n

i

s
n
o
i
t
a
v
r
e
s
b
o

y
e
k

f
o

p
u
-
w
o

l
l

o
F

s
e
s
s
e
n
k
a
e
w
m

e
t
s
y
s

e
h
t

,
d
e
n
r
e
c
n
o
c

e
r
a

s
e

m
m
a
r
g
o
r
p

9
9
9
1

o
t

4
9
9
1

e
h
t

s
a

r
a
f

s

A

-
p
o
l
e
v
e
d

e
h
t

e
r
u
s
n
e

l

d
u
o
h
s

s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

d
n
a

n
o
i
s
s
i

m
m
o
C

e
h
T

t
n
e
m
e
g
a
n
a
m

e
h
t

f
o

n
o
i
t
a
t
n
e
m
e
l
p
m

i

e
h
t

s
w
e
i
v
e
r

n
o
i
s
s
i

m
m
o
C

e
h
T

o
t

e
u
n
i
t
n
o
c

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m

e
h
t

n

i

s
e
s
s
e
n
k
a
e
w

e
h
T

-

m
o
C
e
h
t

d
o
i
r
e
p

t
n
e
r
r
u
c

e
h
t

r
o
F

.
)

w
o
l
e
b

e
e
s
(

y
g
e
t
a
r
t
s

e
r
u
s
o
l
c

e
h
t

y
b

d
e
s
s
e
r
d
d
a

e
r
a

a

,
r
a
l
u
c
i
t
r
a
p
n
I

.
s

m
e
t
s
y
s

l

o
r
t
n
o
c
d
n
a

t
n
e
m
e
g
a
n
a
m

t
s
u
b
o
r

e
r
o
m

f
o
t
n
e
m

d
e
t
i

m

i
l

f
o

s
t
i
d
u
a

i

g
n
d
u
l
c
n

i

,
s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

y
b

s

m
e
t
s
y
s

l

o
r
t
n
o
c

d
n
a

-
s
y
s

e
h
t

f
o

s
t
n
e
m
e
l
e

y
e
K

.
e
r
u
t
i
d
n
e
p
x
e

f
o

y
t
i
r
a
l
u
g
e
r

d
n
a

y
t
i
l
a
g
e
l

e
h
t

t
c
e
f
f
a

,
s
t
n
e
m
e
v
o
r
p
m

i

y
r
a
s
s
e
c
e
n

e
h
t

t
u
o
b
a

g
n
i
r
b

o
t

s
t
r
o
f
f
e

s
t
i

g
n
i
u
n
i
t
n
o
c

s
i

n
o
i
s
s
i

m

.

d
e
r
i
u
q
e
r

s
i

e
r
u
t
i
d
n
e
p
x
e

f
o

g
n
i
k
c
e
h
c

e
h
t

o
t

h
c
a
o
r
p
p
a

s
u
o
r
o
g
i
r

e
r
o
m

i

-
d
u
g

e
m
o
s

d
e
d
i
v
o
r
p

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

.
s
e
m
m
a
r
g
o
r
p

f
o

s
r
e
b
m
u
n

-
c
n
u
f

f
o

n
o
i
t
a
r
a
p
e
s

e
t
a
u
q
e
d
a
(

s
d
r
a
d
n
a
t
s

y
r
a
s
s
e
c
e
n

e
h
t

t
e
e
m
o
t

l
i
a
f

s

m
e
t

y
l
p
e
r

’

s
n
o
i
s
s
i

m
m
o
C

t
r
u
o
C

e
h
t

y
b

s
t
n
e
m
m
o
C

n
o
i
s
s
i

m
m
o
C

e
h
t

y
b

n
e
k
a
t

n
o
i
t
c
a

f
o

y
r
a
m
m
u
s

t
r
u
o
C

t
r
u
o
C

e
h
t

y
b

n
o
i
t
a
v
r
e
s
b
o

y
e
K

s
t
n
e
m
y
a
p

n
i

s
r
o
r
r
e

t
n
e
t
s
i
s
r
e
p

,
l
o
r
t
n
o
c

d
n
a

t
n
e
m
e
g
a
n
a
m
n
i

s
e
s
s
e
n
k
a
e

W

h
g
u
o
r
h
t

,
s
e
t
a
t
S

r
e
b
m
M

e

f
o

t
a
h
t

h
t
i

w

d
e
t
a
n
i
d
r
o
o
c

,
k
r
o
w

t
i
d
u
a

n
w
o

s
t
i

h
g
u
o
r
h
t

-
n
a
n
i
f

d
n
a

s
t
n
e
m
y
a
p

f
o

n
o
i
s
n
e
p
s
u
s

e
k
a
m
o
t

r
e
w
o
p

e
h
t

y
b

p
u

d
e
k
c
a
b

s
n
a
l
p

n
o
i
t
c
a

a
e
r
a

l
a
i
c
u
r
c

e
h
t
n
i

e
l
p
m
a
x
e

r
o
f

,
s
e
c
i
t
c
a
r
p
d
o
o
g
s
e
t
a
n
i
m

e
s
s
i
d
o
s
l
a

t
I

.
s
n
o
i
t
c
e
r
r
o
c

l
a
i
c

e
u
s
s
i

o
t

d
e
n
n
a
l
p

s
i

t
i

.

h
c
i
h
w

n
o

,
t
r
u
o
C

e
h
t

y
b

o
t

d
e
r
r
e
f
e
r

s
k
c
e
h
c

t
n
e
m
e
g
a
n
a
m

f
o

.

5
0
0
2

n
i

e
c
i
t
c
a
r
p

d
o
o
g

f
o

s
e
l
p
m
a
x
e

-
s
y
s

e
r
e
h
w
s
e
s
a
c

n

i

s
t
n
e
m
y
a
p

d
n
e
p
s
u
s

o
t

s
r
e
w
o
p

s
t
i

d
e
s
u

s
a
h

d
n
a

e
c
n
a

d
n
a

s
k
c
e
h
c

t
n
e
m
e
g
a
n
a
m
y
a
d
-
o
t
-
y
a
d

e
v
i
t
c
e
f
f
e

f
o

e
c
n
a
m
r
o
f
r
e
p

e
h
t

,
s
n
o
i
t

.
s
d
n
u
f
y
t
i
n
u
m
m
o
C

f
o
e
s
u
r
e
p
o
r
p
m

i

f
o
k
s
i
r

a

e
s
o
p
y
a
m

s
e
s
s
e
n
k
a
e
w
s

m
e
t

e
h
t

y
f
i
r
e
v

o
t

d
e
n
g
i
s
e
d

s
k
c
e
h
c

e
l
p
m
a
s

t
n
e
d
n
e
p
e
d
n

i

f
o

n
o
i
t
a
s
i
n
a
g
r
o

e
h
t

-
c
e
d

e
r
u
t
i
d
n
e
p
x
e

e
h
t

f
o

s
s
e
n
t
c
e
r
r
o
c

e
h
t

d
n
a

s

m
e
t
s
y
s

e
h
t

f
o

s
s
e
n
e
v
i
t
c
e
f
f
e

d
n
u
o
f

s
r
o
r
r
e

e
h
t
y
b
d
e
t
a
r
o
b
o
r
r
o
c

e
r
a

s
e
s
s
e
n
k
a
e
w
s

m
e
t
s
y
s

e
s
e
h
T

.
)
s
n
o
i
t
a
r
a
l

9
9
9
1

o
t

4
9
9
1

e
h
t

h
t
o
b

f
o

s
e
m
m
a
r
g
o
r
p

r
o
f

,
s
t
c
e
j
o
r
p

l
a
u
d

i
v
i

d
n

i

t
a

,

2
0
0
2

t
r
o
p
e
R

l
a
u
n
n
A

;

4
6
3

.

o
t

6
5
3

.

s
h
p
a
r
g
a
r
a
p

,

1
0
0
2

t
r
o
p
e
R

l
a
u
n
n
A

(

7
2
5

.

o
t

2
1
5

.

s
h
p
a
r
g
a
r
a
p

,

3
0
0
2

t
o
r
p
e
R

l
a
u
n
n
A

;

2
3
5

.

o
t

2
2
5

.

s
h
p
a
r
g
a
r
a
p

.
s
d
o
i
r
e
p

e
m
m
a
r
g
o
r
p

6
0
0
2

o
t

0
0
0
2

d
n
a

)

6
5
5

.

o
t

1
4
5

.

d
n
a

s
e

m
m
a
r
g
o
r
p

9
9
9
1

o
t

4
9
9
1

g
n
i
s
o
l
c

n
i

s

m

e
l
b
o
r
p

d
n
a

s
y
a
l
e

D

,
s
t
i
d
u
a

e
c
n
a
i
l
p
m
o
c

e
r
u
s
o
l
c
-
e
r
p

g
n
i
v
l
o
v
n
i

–

y
g
e
t
a
r
t
s

e
r
u
s
o
l
c

s
’
n
o
i
s
s
i

m
m
o
C

e
h
T

-

m
o
C
e
h
t
y
b
d
e
t
a
r
e
p
o
s
l
o
r
t
n
o
c

e
h
t

t
a
h
t
d
e
t
a
r
t
s
n
o
m
e
d
t
i
d
u
a

s
’
t
r
u
o
C
e
h
T

d
e
m
r
o
f
r
e
p

d
n
a

s
t
n
e
m
u
c
o
d

e
r
u
s
o
l
c

e
h
t

d
e
k
c
e
h
c

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

y
h
t
g
n
e
l

a
n
e
e
b

s
a
h
d
o
i
r
e
p
s
u
o
i
v
e
r
p
e
h
t

m
o
r
f

s
e
m
m
a
r
g
o
r
p
f
o
e
r
u
s
o
l
c

e
h
T

t
n
e
m
y
a
p

l
a
n
i
f

g
n
i
y
n
a
p
m
o
c
c
a

y
d
o
b

t
n
e
d
n
e
p
e
d
n
i

e
h
t

y
b

s
n
o
i
t
a
r
a
l
c
e
d

f
o

g
n
i
k
c
e
h
c

f
o

g
n
i
c
n
a
n
i
f
-
o
c

y
t
i
n
u
m
m
o
C

f
o

k
s
i
r

e
h
t

e
h
t

e
t
a
n
m

i

i
l
e

t
o
n

o
d

n
o
i
s
s
i

m

A

.
s
n
o
i
t
c
e
r
r
o
c

l
a
i
c
n
a
n
i
f

f
o

l
a
s
o
p
o
r
p
e
h
t
o
t

i

g
n
d
a
e
l

,
s
e
s
a
c

e
m
o
s
n

i

s
t
i
d
u
a

-
s
i

m
m
o
C
e
h
t
o
t
d
e
t
t
i

m
b
u
s
n
o
i
t
a
t
n
e
m
u
c
o
d
e
r
u
s
o
C

l

.
s
s
e
c
o
r
p
s
u
o
i
r
o
b
a
l

d
n
a

s
n
o
i
t
c
e
r
r
o
c

l
a
i
c
n
a
n
i
f

y
b

d
e
w
o
l
l
o
f

s
e

m
m
a
r
g
o
r
p

d
e
s
o
l
c

f
o

s
t
i
d
u
a

t
s
o
p

x
e

d
n
a

,
s

m
i
a
l
c

i

-
a
n
m
a
x
e
y
l
e
m

i
t

l

e
r
u
s
n
e
d
u
o
h
s
n
o
i
s
s
i

m
m
o
C
e
h
T

.
e
r
u
t
i
d
n
e
p
x
e

e
l
b
i
g
i
l
e
n

i

d
n
e

e
h
t

t
a

d
e
s
o
l
c

e
b

o
t

d
e
n
i
a
m
e
r

s
e
m
m
a
r
g
o
r
p

f
o

r
e
b
m
u
n

t
n
a
c
i
f
i
n
g
i
s

r
e
h
t
r
u
f

g
n
i
k
a
m
n
e
t
f
o

,

y
t
i
l
a
u
q

e
l
b
a
i
r
a
v

f
o

s
a
w
s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

y
b

n
o
i
s

s
a
h

s
s
e
c
o
r
p

e
r
u
s
o
l
c

e
h
T

.
s
t
n
e
m
y
a
p

e
u
d
n
u

f
o

k
s
i
r

e
h
t

d
e
c
u
d
e
r

y
l
t
n
a
c
i
f
i
n
g
i
s

s
a
h

–

-
s
i

m
m
o
C
e
h
T

.
s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

y
b

d
e
t
t
i

m
b
u
s

n
o
i
t
a
t
n
e
m
u
c
o
d

f
o

n
o
i
t

-
v
a
h
d
o
i
r
e
p
e
l
b
a
n
o
s
a
e
r

a
n
i
h
t
i

w
y
l
l
a
r
e
n
e
g
d
n
a
d
r
a
d
n
a
t
s
d
o
o
g
a

o
t

t
u
o
d
e
i
r
r
a
c
n
e
e
b

e
h
t

m
o
r
f

d
e
n
r
a
e
l

s
n
o
s
s
e
l

e
h
t

y
l
p
p
a

l

d
u
o
h
s

s
e
t
a
t
S

r
e
b
m
e
M

d
n
a

n
o
i
s

.
d
e
k
c
e
h
c

s
e
u
s
s
i

e
h
t

f
o

y
t
i
x
e
l
p
m
o
c

e
h
t
d
n
a

s
e

m
m
a
r
g
o
r
p
f
o

r
e
b
m
u
n
e
h
t

o
t
d
r
a
g
e
r
g
n
i

-
o
r
p

6
0
0
2

o
t

0
0
0
2

f
o

e
r
u
s
o
l
c

e
h
t

r
o
f

s
s
e
c
o
r
p

e
r
u
s
o
l
c

9
9
9
1

o
t

4
9
9
1

-
d
i
u
g
A

.
e
r
u
s
o
l
c

t
x
e
n
e
h
t
n
i

d
e
i
l
p
p
a

e
b

l
l
i

w
d
n
a

t
n
r
a
e
l

e
b

s
s
e
l
e
h
t
r
e
v
e
n
n
a
c

s
n
o
s
s
e
L

.
d
e
r
a
p
e
r
p

g
n
i
e
b

y
l
t
n
e
r
r
u
c

s
i

e
t
o
n

e
c
n
a

.
s
e
m
m
a
r
g

.

4
0
0
2

f
o

h
g
u
o
h
t
l
a

s
t
n
e
m
y
a
p

l
a
n
i
f

e
d
a
m

s
a
h
n
o
i
s
s
i

m
m
o
C
e
h
T

.

y
r
a
s
s
e
c
e
n
s
e
i
r
i
u
q
n
e

,

3
0
0
2

t
r
o
p
e
R

l
a
u
n
n
A

;

8
3
5

.

o
t

6
3
5

.

s
h
p
a
r
g
a
r
a
p

,

2
0
0
2

t
r
o
p
e
R

l
a
u
n
n
A

(

.

d
e
t
c
e
p
s
e
r

e
r
e
w
s
n
o
i
t
a
l
u
g
e
r

e
h
t

f
o

s
t
n
e
m
e
r
i
u
q
e
r

l
l
a

t
o
n

)

9
3
5

.

o
t

8
2
5

.

s
h
p
a
r
g
a
r
a
p

t
n
e
m
e
g
a
n
a
m

e
h
t

f
o

n
o
i
t
a
r
e
p
o

e
h
t

n
o

e
c
n
a
r
u
s
s
a

s
’
n
o
i
s
s
i

m
m
o
C
e
h
t

n
i

s
n
o
i
t
a
t
i

m
i
L

s

m

e
t
s
y
s

l
o
r
t
n
o
c

d
n
a

-
r
u
s
s
a

p
u

d
l
i
u
b

o
t

s
i

l
a
r
e
n
e
G
-
s
e
t
a
r
o
t
c
e
r
i

D
d
n
u
F

l
a
r
u
t
c
u
r
t
S

e
h
t

f
o

h
c
a
o
r
p
p
a

e
h
T

t
n
e
m
e
g
a
n
a
m
e
h
t

t
u
b
r
e
d
a
o
r
b
e
m
o
c
e
b
s
a
h
e
c
n
a
r
u
s
s
a

’

s
n
o
i
s
s
i

m
m
o
C
e
h
T

s
t
i

d
n
a

s

m
e
t
s
y
s

e
h
t

f
o

t
n
e
m

s
s
e
s
s
a

s
t
i

d
e
u
n
i
t
n
o
c

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

-
s
y
s

l
a
n
r
e
t
n

i

e
h
t

t
a
h
t

m

r
i
f
n
o
c

l
a
r
e
n
e
G
-
s
r
o
t
c
e
r
i

D
s
e
r
u
s
a
e
m

l
a
r
u
t
c
u
r
t
s

e
h
T

.
s
e
t
a
t
S

r
e
b
m
e
M
e
h
t

n

i

s
t
i
d
u
a

f
o

e
m
m
a
r
g
o
r
p

d
n
a
y
t
i
l
a
g
e
l

e
h
t
n
o
e
c
n
a
r
u
s
s
a

e
l
b
a
n
o
s
a
e
r

e
d
i
v
o
r
p
n
o
i
s
s
i

m
m
o
C
e
h
t

t
a

s

m
e
t

e
h
t
n
o
e
c
n
a
r
u
s
s
a

l
l

u
f

e
k
a
t

t
o
n
o
d
t
u
b

,
s
n
o
i
t
c
a
s
n
a
r
t
g
n
i
y
l
r
e
d
n
u
f
o
y
t
i
r
a
l
u
g
e
r

.
s
e
t
a
t
S

r
e
b
m
e
M
e
h
t
n

i

s

m
e
t
s
y
s

l

o
r
t
n
o
c
d
n
a

t
n
e
m
e
g
a
n
a
m
e
h
t

f
o
n
o
i
t
a
r
e
p
o

s
n
o
i
t
a
v
r
e
s
e
r

o
n

e
d
a
m

l
a
r
e
n
e
G
-
s
r
o
t
c
e
r
i

D
e
h
t

,

9
9
9
1
-
4
9
9
1

d
o
i
r
e
p

e
h
t

r
o
F

s
n
o
i
t
a
v
r
e
s
b
o

e
h
t

h
t
i

w

t
n
e
t
s
i
s
n
o
c
n

i

s
i

s
i
h
T

.
s
d
n
u
F

l
a
r
u
t
c
u
r
t
S

r
u
o
f

e
h
t

r
o
f

s

m
e
t
s
y
s

s
u
o
r
e
m
u
n
g
n
i
t
a
c
i
d
n

i

,

n
o
i
s
s
i

m
m
o
C
e
h
t
y
b
d
e
m

r
i
f
n
o
c

,
t
r
u
o
C
e
h
t

f
o

.
s
e
s
s
e
n
k
a
e
w

s
i

s
e

m
m
a
r
g
o
r
p

9
9
9
1

o
t

4
9
9
1

e
h
t

o
t

d
r
a
g
e
r

h
t
i

w

e
c
n
a
r
u
s
s
a

s
’
n
o
i
s
s
i

m
m
o
C

e
h
T

s
i
n
o
i
s
s
i

m
m
o
C
e
h
T

.
e
v
o
b
a

o
t

d
e
r
r
e
f
e
r

y
g
e
t
a
r
t
s

e
r
u
s
o
l
c

e
v
i
s
n
e
h
e
r
p
m
o
c

e
h
t
n
o

d
e
s
a
b

-
o
r
p

r
o
f

s
n
o
i
t
c
e
r
r
o
c

l
a
i
c
n
a
n
i
f

g
n
i
y
l
p
p
a

d
n
a

e
r
u
s
o
l
c

r
e
t
f
a

s
t
i
d
u
a

t
u
o

g
n
i
y
r
r
a
c

-

m
o
c
n
e
e
b

e
v
a
h

t
o
n
d
l
u
o
w

t
I

.
d
e
t
c
e
t
e
d

s
i

e
r
u
t
i
d
n
e
p
x
e

e
l
b
i
g
i
l
e
n
i

h
c
i
h
w
n
i

s
e

m
m
a
r
g

s
t
i
d
u
a

y
l
l
a
c
i
t
a
m

e
t
s
y
s

t
u
o

y
r
r
a
c

o
t

s
t
n
e
m
y
a
p

g
n
i
k
a
m
n
o
n
o
i
t
a
g
i
l
b
o

s
t
i
h
t
i

w
e
l
b
i
t
a
p

t
u
o

d
e
i
r
r
a
c

r
e
v
e
w
o
h

e
r
e
w

s
k
c
e
h
c

k
s
e

D

.
s
t
n
e
m
y
a
p

g
n
i
k
a
m

e
r
o
f
e
b

s
e

m
m
a
r
g
o
r
p

f
o

.
s
e
s
a
c

l
l
a

n
i

s
t
n
e
m
u
c
o
d

e
r
u
s
o
l
c

n
o

d
n
a

p
u
-
w
o
l
l
o
f

r
o
t
i
n
o
m
o
t

s
n
o
i
t
a
c
i
l
p
p
a

r
e
t
u
p
m
o
c

d
e
c
u
d
o
r
t
n
i

s
a
h
n
o
i
s
s
i

m
m
o
C
e
h
T

.
y
l
e

m

i
t

d
n
a

e
v
i
s
n
e
h
e
r
p
m
o
c

s
i

t
i

t
a
h
t

e
r
u
s
n
e

p
l
e
h

i

g
n
d
o
v
a

i

,

p
u
-
w
o

l
l

o
f

e
v
i
s
n
e
h
e
r
p
m
o
c

a

e
r
u
s
n
e

l

d
u
o
h
s

n
o
i
s
s
i

m
m
o
C

e
h
T

s
y
a
l
e
d

h
g
u
o
h
t
l
a

,

d
e
v
o
r
p
m

i

s
a
h

n
o
i
t
c
a

p
u
-
w
o

l
l

o
f

’

s
n
o
i
s
s
i

m
m
o
C

e
h
T

e
h
t

o
t

p
u
-
w
o

l
l

o
f

’

s
n
o
i
s
s
i

m
m
o
C

e
h
t

t
u
b

,

d
e
t
o
n

n
e
e
b

e
v
a
h

s
t
n
e
m
e
v
o
r
p
m

I

s
g
n
i
d
n
i
f

t
i
d
u
a

s
’
t
r
u
o
C

e
h
t

f
o

n
o
i
s
s
i

m
m
o
C

e
h
t

y
b

p
u
-
w
o
l
l
o
f

d
e
t
i

m
i
L

.
s
y
a
l
e
d

e
u
d
n
u

y
n
a

.
t
s
i
s
r
e
p

e
h
T

.
e
t
e
l
p
m
o
c

r
o

e
t
a
i
r
p
o
r
p
p
a

,

y
l
e
m

i
t

s
y
a
w
l
a

t
o
n
s
i

i

s
g
n
d
n
i
f

t
i
d
u
a

s
’
t
r
u
o
C

-

m
a
x
e

s
e
l
p
m
a
s

e
h
t

d
n
o
y
e
b

s
n
o
i
t
a
g
i
t
s
e
v
n

i

s
t
i

s
d
n
e
t
x
e

y
l
e
r
a
r

n
o
i
s
s
i

m
m
o
C

e
v
a
h
y
a
m
d
n
u
o
f

s
r
o
r
r
e

t
a
h
t

s
t
s
i
x
e

e
c
n
e
d
i
v
e
n
e
h
w
n
e
v
e

,
t
r
u
o
C
e
h
t

y
b
d
e
n

i

,

3
0
0
2

t
r
o
p
e
R

l
a
u
n
n
A

;

2
5
5

.

o
t

4
4
5

.

s
h
p
a
r
g
a
r
a
p

,

2
0
0
2

t
r
o
p
e
R

l
a
u
n
n
A

(

)

5
6
5

.

o
t

3
6
5

.

s
h
p
a
r
g
a
r
a
p

.
t
c
e
f
f
e

c
i
m
e
t
s
y
s

a

t
a
h
t

s
n
o
i
t
a
v
r
e
s
b
o

s
’
t
r
u
o
C

e
h
t

o
t

d
e
i
l

p
e
r

y
l
t
n
e
u
q
e
r
f

s
a
h

n
o
i
s
s
i

m
m
o
C

e
h
T

-
o
r
p

9
9
9
1
-
4
9
9
1

f
o

e
r
u
s
o
l
c

e
h
t

t
a

t
u
o

d
e
i
r
r
a
c

e
b

l

d
u
o
w
s
k
c
e
h
c

e
t
a
u
q
e
d
a

-
r
e
d
n
u
n
o
s
k
c
e
h
c

t
u
o
y
r
r
a
c
o
t

s
n
a
l
p
n
o
i
s
s
i

m
m
o
C
e
h
t

,
r
e
v
e
w
o
H

.
s
e
m
m
a
r
g

n

i

y
l
n
O

.
e
d
a
m

n
e
e
b

e
v
a
h

s
t
n
e
m
y
a
p

l
a
n
i
f

r
e
t
f
a

e
r
u
t
i

d
n
e
p
x
e

g
n
i
y
l

e
t
a
t
S

r
e
b
m
e
M
e
h
t
n

i

s
k
c
e
h
c

e
k
a
m
n
o
i
s
s
i

m
m
o
C
e
h
t

l
l
i

w
s
e
s
a
c

l
a
n
o
i
t
p
e
c
x
e

t
r
o
p
e
R

l
a
u
n
n
A

;

.

.

1
2
5
d
n
a
4
1
5
o
t
0
1
5
s
h
p
a
r
g
a
r
a
p

.

,

2
0
0
2
t
r
o
p
e
R

l
a
u
n
n
A

(

.

g
n
i
y
a
p

e
r
o
f
e
b

)

2
6
5

.

o
t

7
5
5

.

d
n
a

0
4
5

.

s
h
p
a
r
g
a
r
a
p

,

3
0
0
2

30.11.2005

EN

Official Journal of the European Union

C 301/159

CHAPTER 6

Internal policies, including research

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Audit objectives and scope of the audit

Evaluation of supervisory and control systems

Risk analyses

Implementation of the Commission’s Internal Control Standards

Appraisal in selected areas of activity

Analysis of the Commission ex post financial audits in the IP area

Results of the test of underlying transactions in the IP area

Review of the Annual Activity Reports and the Directors-Generals’ Declarations

Follow-up of previous observations in the context of DAS

Conclusions and recommendations

Follow-up of Special Report No 11/2003 ‘LIFE’

Paragraph

6.1-6.2

6.3-6.47

6.3

6.4-6.24

6.4-6.5

6.6-6.8

6.9-6.17

6.18-6.24

6.25-6.35

6.36-6.39

6.40-6.41

6.42-6.47

6.48-6.50

C 301/160

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

6.1. The budgetary area of Internal Policies, including Research
(IP) covers a wide range of activities contributing to the develop-
ment of the single market leading to 9 010 million euro commit-
ments (see Graph 6.1) and 7 255 million euro payments (see
Graph 6.2) in 2004. More than half of these appropriations
related to Research and Technological Development (RTD).

6.2. The majority of the IP actions are directly managed by the
Commission (1). As a general rule, IP are implemented through a
variety of multi-annual programmes allocating grants to private
and public beneficiaries for the completion of specific actions.
Some actions, such as research, are complex in nature. The grants
are usually paid through advances followed by successive interim
and final payments.

Graph 6.1 — Breakdown of commitments by budgetary area in 2004

Source: 2004 annual accounts.

(1) The main exception is the European Refugee Fund, for which the
management is shared with the Member States; see Annual Report
2003, paragraph 6.15.

30.11.2005

EN

Official Journal of the European Union

C 301/161

Graph 6.2 — Breakdown of payments by budgetary area in 2004

Source: 2004 annual accounts.

SPECIFIC ASSESSMENT IN THE CONTEXT
OF THE STATEMENT OF ASSURANCE

Audit objectives and scope of the audit

6.3. To contribute to the Court’s Statement of Assurance on the
general budget, the audit assessed the extent to which the Com-
mission’s internal controls give assurance on the legality and
regularity of the underlying transactions. The audit focused on (2):

(a)

the operation of selected supervisory and control systems:

— eight of the Commission’s 24 Internal Control Standards
for three Directorates-General: Research (DG RTD),
Information Society and Media (DG INFSO) and Health
and Consumer Protection (DG SANCO),

(2) As in the Internal Policies area the major EU-funded programmes are
managed directly by the Commission. The National Audit Institutions
in general do not cover this area.

C 301/162

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— management and control systems of the sixth frame-
work programme (FP6) for Research and Technological
Development (RTD) (3), of the European Refugee Fund
(ERF) in the area of Justice, Freedom and Security (4) and
of Community actions in the area of Public Health
and Consumer Protection (SANCO) (5),

— reports of the Commission’s ex post financial audits;

(b)

(c)

tests of a sample of commitments and payments authorised
in 2004;

the Annual Activity Reports and Declarations of
Directors-General (6).

the

Evaluation of supervisory and control systems

Risk analyses

6.4.
In the IP area, payments are mainly based on the reim-
bursement of the costs reported by the beneficiary. Under this
system, the principal inherent risk for legality and regularity of
underlying transactions is that beneficiaries overstate their cost
declarations. Unless detected by the Commission’s internal con-
trols, this can lead to over-payments. This risk is amplified due to
a multiplicity of contractual provisions, insufficiently clear defi-
nitions of eligible costs and a lack of sanction mechanisms.

6.4. The annual activity reports by the Directors-General confirm that
the frequency of errors in declarations presented by the beneficiaries is
indeed a problem. These errors sometimes relate to over declarations and
sometimes to under declarations. Specific measures are continuing to be
taken in this connection.

With regard to FP6, simplified rules should also improve the situation
in the future (see point 6.44).

(3) FP6 supports direct and indirect RTD actions that address targeted sci-
entific areas and promote the development and coordination of
national research policies in the European Union. FP6 is jointly man-
aged by five Directorates-General of the Commission (Directorates-
General for Research, for Information Society and Media, for Energy
and Transport, for Enterprise and Industry, and for Fisheries and Mari-
time Affairs). During 2004, the total budget of FP6 which covers the
period 2002 to 2006 was increased from 17 500 to 19 235 million
euro, following the enlargement of the European Union to 25 Mem-
bers. The governing Decisions are: No 1513/2002/EC of the European
Parliament and of the Council (OJ L 232, 29.8.2002, p. 1) and Coun-
cil Decision 2002/668/Euratom (OJ L 232, 29.8.2002, p. 34).

(4) The programmes carried out by Directorate-General Justice, Freedom
and Security relate to budget title 18 (Area of Freedom, Security
and Justice). The Commitment appropriations amounted to 511 mil-
lion euro in 2004.

(5) Directorate-General for Health and Consumer Protection is responsible
for carrying out Community activities in the area of Public Health
and Consumer Protection, as well as food safety, veterinary and plant
health measures.

(6) Directorate-General for Research (DG RTD), Directorate-General for
Information Society and Media (DG INFSO), Directorate-General for
Energy and Transport (DG TREN), Directorate-General for Health
and Consumer Protection (DG SANCO), Directorate-General for Enter-
prise and Industry (DG ENTR), Directorate-General for Employment,
Social Affairs and Equal Opportunities (DG EMPL), Directorate-
General for Education and Culture (DG EAC), Joint Research Centre
(JRC), Directorate-General for Justice, Freedom and Security (DG JLS),
Directorate-General for Environment (DG ENV), Directorate-General
for Competition (DG COMP), Directorate-General for Internal Market
and Services (DG MARKT).

30.11.2005

EN

Official Journal of the European Union

C 301/163

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.5. The controls performed by the Commission consist mainly
of checks on the cost declarations prior to the payment (ex ante
controls) and financial audits at the final beneficiary level after the
payment was made (ex post financial audits). In-depth ex ante con-
trols could reduce the risk of over-payments. The risk of non-
detection remains significant as certain types of errors can only
be detected by ex post financial audits.

6.5.
Following action 1 in the 2001 summary report by the Commis-
sion, ex ante controls were stepped up. In particular, on the basis of risk
analysis documentary evidence in support of the declaration of expendi-
ture can be demanded from the beneficiary. The extra ex post audits put
in place under the same action plan not only reduce the risk of errors in
the declarations submitted but also act as a preventive measure. The
introduction of audit certificates should also be noted.

Implementation of the Commission’s Internal Control
Standards

Scope of the audit

6.6. The implementation and functioning of the Internal Con-
trol Standards is essential for the IP area given that most of the
funds concerned are directly managed by the Commission itself.

6.7. The Court reviewed the implementation of eight (7) out of
24 Standards in DG RTD, DG INFSO and DG SANCO. The scope
of the audit was to verify whether the minimum requirements of
Internal Control Standards (baseline requirements) were in place.

Further improvements required on the implementation of the Internal Control
Standards

In general, the baseline requirements for the selected eight
6.8.
Standards at DG RTD, DG INFSO and DG SANCO were complied
with, but further improvements are needed particularly in the
cases below:

6.8.

— The audit at DG RTD revealed that Standard 11 ‘Risk man-
agement’ was not yet fully complied with in 2004. Neverthe-
less, steps have been taken to facilitate compliance with this
standard in 2005.

— In 2004 DG Research, in accordance with ICS 11, analysed the
risks connected with its activities, namely: an ex post analysis of
the management risks by the inspectors at the level of each direc-
torate and analysis of the risks by the internal audit capability for
the preparation of its annual audit plan. Moreover, in 2005, these
two analyses will be supplemented by a strategic risk analysis started
in 2004.

(7) Internal Control Standard (ICS) 11 ‘Risk analysis and management’,
ICS 12 ‘Adequate management information’,
ICS 14 ‘Reporting
improperties’, ICS 17 ‘Supervision’, ICS 18 ‘Recording exceptions’, ICS
20 ‘Recording and correction of internal control weaknesses’, ICS 21
‘Audit reports’, ICS 22 ‘Internal audit capability’.

C 301/164

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— The audit confirmed the observation made in the Annual
Report 2003 (8) regarding the insufficient compliance with
Standard 12 ‘Adequate management information’. The man-
agement information available at DG RTD does not provide
certain data about FP6 which the Court considers essential to
ensure a proper monitoring of such a programme (e.g. basic
data on contract management) (9).

— DG RTD has taken action to improve this situation in 2005 and
has set up a working group with a view to make an inventory of the
scoreboards developed at DG and Directorates levels and to make
recommendations in order to improve and harmonise the existing
tools. In addition, since March 2005, contract data regarding FP6
is included in the monthly scoreboard report.

— At DG SANCO, Standard 22 ‘Internal audit capability’ was
not complied with. Two out of three posts were vacant for
part of 2004 in the internal audit unit, which hindered the
execution of the annual audit work plan.

— Staff shortages had in fact an impact on the planned audit sched-
ules. DG SANCO has taken the necessary measures to minimise
the impact, although some adjustments of the audit programme
were unavoidable.

— DG SANCO complied only partially with Standard 18
‘Recording exceptions’ since the procedure in place was lim-
ited to exceptions regarding financial and contractual proce-
dures.

— SANCO will establish further guidelines for dealing with excep-
tions to non financial procedures, in particular, as regards the level
of authorisation, formal requirements for recording and follow up
actions.

Appraisal in selected areas of activity

6.9. The Court examined the management and control proce-
dures of the sixth framework programme for Research and Tech-
nological Development (FP6), for the European Refugee Fund
(ERF) and for Community actions in the area of Public Health
and Consumer Protection (see Annex 2). The operation of the
most important controls was verified based on a sample of trans-
actions (10) (see paragraphs 6.25 to 6.35).

Sixth Framework Programme for Research and Technological Development
(FP6)

Common IT system still not fully operational

6.10. The use of a common IT system is a key factor for the
effectiveness of the Commission’s internal controls (11). The Com-
mission initiated in 2002 the development of such a system for

(8) See Annual Report 2003, paragraph 6.5, first indent.
(9) See recommendations made by the Court in its Special Report
No 1/2004 on the Management of indirect RTD actions under the
fifth framework programme (FP5), paragraph 135.

(10) For FP6: a sample of 14 payments selected to ensure coverage across
sub-programmes and services. For ERF: A sample of payments for
eight Member States, extending the verification to the final beneficiary
for interim payments in three Member States. For Public Health
and Consumer Protection: a sample of 20 payments at Commission
level, and in five cases extending the verification to the final benefi-
ciary level.

(11) See recommendations made by the Court in its Special Report
No 1/2004 on the Management of indirect RTD actions under the
fifth framework programme (FP5), paragraphs 124 to 126.

6.10. The IT system for FP6, has to be developed keeping in perspec-
tive the heterogeneous needs of internal integration of business proce-
dures within each DG with the needs of external integration across DGs.
In summer 2004 a common management structure for supervision of
the development of the FP6 IT System was agreed between all research
DGs.

However, differentiated needs and business procedures between research
DGs led to date to integrated rather than a common system.

The Commission considers that the development of an integrated IT sys-
tem is important for the management of indirect RTD actions and will
continue its efforts in this area, notably as regards processes which
impinge on relations with proposers and contractors and which are rel-
evant for reporting and management information.

30.11.2005

EN

Official Journal of the European Union

C 301/165

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Concerning specifically the authorisation of FP6 commitments and pay-
ments workflow tools exist, either centrally or locally, to ensure that the
appropriate approvals are given.

The question relating to Standard 12 concerns DG RTD and is dealt
with in 6.8.

the different stages of the management of indirect RTD actions
(proposal evaluation, negotiation and selection, contract and
project management). In 2004, two years before the end of the
FP6 programming period, neither a common nor an integrated IT
system was fully operational, despite the Commission’s declared
intention to do so (12). This situation (already detected during
2003 (13)) affects the efficient operation of the internal controls
concerning all management areas of FP6, especially those related
to the authorisation of commitments and payments and the pro-
duction of management indicators in relation to Internal Control
Standard 12. This was confirmed by a proposal for qualification
in one of the Authorising Officers’ declarations in relation to the
IT system and by the difficulties encountered by the Commission
in providing detailed data on FP6 actions.

Obligation to provide audit certificates

6.11. One of the main modifications introduced by FP6 in order
to reduce the risk of errors at final beneficiary level is the require-
ment to have the costs declared to the Commission certified by
an external auditor (14). These certificates are part of the Commis-
sion’s control systems. The audits carried out by the Court
detected ineligible costs (15) which had not been identified in the
corresponding audit certificates submitted to the Commission to
support the payment request.

6.11. The principal function of audit certificates is to provide addi-
tional assurance to the Commission regarding the reality and accuracy
of costs declared. However, it cannot realistically eliminate all possible
errors. The effectiveness of audit certificates in detecting errors is likely
to improve with experience and the Commission intends to accelerate the
process of improvement through targeted information to beneficiaries and
auditors and a continuous assessment of the contribution of the audit
certificates in the general control system.

European Refugee Fund (ERF)

Obligatory checks of actions by the Member State not fulfilled

6.12. The Member States should ensure, by checks covering at
least 20 % of the total eligible expenditure, that the action is man-
aged in accordance with the applicable Community rules, and
that the funds are placed at its disposal in accordance with

(12) See Annual Report 2003, paragraph 6.9, and Special Report

No 1/2004, paragraphs 82 to 85.

(13) See Annual Report 2003, paragraph 6.9.
(14) Article 14 of Regulation (EC) No 2321/2002 of the European Parlia-
ment and of the Council of 16 December 2002 concerning the rules
for the participation of undertakings, research centres and universi-
ties in, and for the dissemination of research results for, the imple-
mentation of the European Community sixth framework programme
(2002 to 2006). The cost for the certification is reimbursed in full by
the Community fund concerned.

(15) The number of audits certificates issued for FP6 in 2004 was about
10. The ineligible costs concern the two cases audited by the Court.
Furthermore, on one of these two cases auditors fail to detect the fact
that the advance payment had been invested in mutual funds and that
the related interest was not reported. The amounts were not really sig-
nificant, but this reflects a limitation of the certification process.

6.12. The Commission assists the Member States in improving the
systems for monitoring the European Refugee Fund (ERF) in particular
during monitoring visits and on-the-spot controls. In addition, the Com-
mission will organise work meetings on the themes of control systems
and good management practices: programming actions, monitoring
projects, checking expenditure, etc.

The Commission feels that on-the-spot inspection visits is a good prac-
tice even if the ERF rules do not explicitly provide for it. Since the 2004
programme came into force, the Member State in question checks all
projects on the spot.

C 301/166

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

the principles of sound financial management (16). Contrary to
the requirements of the underlying rules, in one Member State
visited, checks on supporting documents are not followed by
on-the-spot controls of the actions. This confirms the observa-
tions in the Annual Report 2003 (17) relating to ‘weaknesses of
control systems identified in the Member States’.

Delegation of tasks not in line with Financial Regulation
in one Member State

6.13. As already discovered by the Commission during a moni-
toring visit to one Member State, certain core tasks of the man-
agement of the ERF actions had been delegated by the national
authority to a private company (18). This is not in conformity
with the Financial Regulation as regards delegation of tasks to
third parties. The corrective action recommended by the Com-
mission was implemented late.

Non-eligibility of expenditure

6.13. The excessive nature of the delegated tasks was identified by the
Commission during a monitoring visit and immediately reported to the
national authorities. The kind of tasks delegated was adjusted during the
new contract procedure when services were being renewed.

6.14.
Last year (19) the Court identified weaknesses in the man-
agement of the repatriation measures related to the non-respect
of eligibility criteria. This year additional questions arose regard-
ing the non-respect of the eligibility of the target groups, which
can only be solved by changes in the legal framework (see para-
graph 6.34).

6.14. Generally speaking, the Commission tried to assist Member
States in applying strictly the existing rules on the eligibility of the tar-
get groups and it analyses expenditure declarations with great care. For
instance, following an ex post control in a Member State, a financial
correction was applied with regard to ineligible expenditure for a reason
of that kind.

The Commission feels that the eligibility criteria are applied in the case
of asylum seekers whose requests have been rejected. (see reply to 6.34).

Moreover, the legal framework relating to the concept of country of ori-
gin was clarified in Council Directive 2004/83/EC and in the new legal
basis of ERF2 adopted in December 2004.

(16) Article 18 of Council Decision 2000/596/EC of 28 September 2000
establishing a European Refugee Fund and Article 5 of 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.

(17) See Annual Report 2003, paragraphs 6.16.
(18) Delegated tasks included: signature of contracts, recovery of funds,
payments without prior authorisation by the national authority,
which is in contradiction with Article 57 of the Financial Regulation:
The tasks which may be entrusted by contract to external private-
sector entities or bodies other than those which have a public-service
mission are technical expertise tasks and administrative, preparatory
or ancillary tasks involving neither the exercise of public authority
nor the use of discretionary powers of judgment.
(19) See Annual Report 2003, paragraphs 6.12 to 6.26.

30.11.2005

EN

Official Journal of the European Union

C 301/167

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Community actions in the area of Public Health and Consumer Protection

6.15. A large part of the budget for the Public Health Pro-
gramme (20) is spent on cofinancing projects selected following
annual calls for proposals. In the area of Consumer Protec-
tion (21), an annual call for proposals for specific projects is
issued. However, most of the annual budget is implemented via
direct contracting for studies or services, and actions imple-
mented jointly with Member States. Both areas are the responsi-
bility of DG SANCO.

Analysis of procedures

6.16. The management and control of the implementation of
these activities is mostly carried out by the individual directorates.
However, at the central level of the Directorate-General, an addi-
tional ex ante verification of financial transactions is performed on
a sample basis, a ‘Committee of Public Procurement’ issues opin-
ions on the conformity of the tendering procedures and an ex post
financial control cell carries out audits at the final beneficiary
level. The internal audit function provides opinions to the
Director-General on the quality of management and internal con-
trol systems.

6.17. The Court analysed the procedures introduced in 2004
and found them to be adequate. However, errors detected in test-
ing the underlying transactions (see paragraph 6.29) point to the
fact that the procedures were not continuously and consistently
applied in the past. The Financial Regulation (FR) was not fully
complied with, in particular:

— the Financial Regulation provides that all payments should
be subject to verification. As regards advance payments, there
was no evidence of a systematic a priori verification made by
the authorising officer;

— the procedures do not include the drawing up of an estimate
of the amounts receivable as interest on pre-financing pay-
ments, as required by the FR (see paragraph 6.28).

(20) The current Public Health Programme with a total budget of 312 mil-
lion euro for the period 2003 to 2008 replaced eight different action
programmes implemented prior to 2003. The projects aim at improv-
ing information about public health issues, enhancing the capability
of responding to health threats or addressing health determinants.
(21) The framework decision for financing Community actions in support
of Consumer Policy sets aside a budget of 72 million euro for the
years 2004 to 2007.

6.17.

See 6.29.

— SANCO’s financial circuits are designed in compliance with the
Financial Regulation and take into account the risks involved in the
different financial transactions. In the case of advance payments, it
is the responsible Authorising officer who exercises personally the
necessary verifications before authorising the expenditure. The docu-
mentation of these controls will be improved.

— The Commission has recognised the problem of proportionality and
proposes to change the existing FR and IR to introduce thresholds
of pre-financing payments below which no estimate of amounts
receivable needs to be established or the interest effectively yielded
does not need to be recovered. In the meantime SANCO will bring
the procedures as regards the estimate of revenue for interest in line
with the Financial Regulation.

C 301/168

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Analysis of the Commission ex post financial audits
in the IP area

6.18.
In Internal Policies programmes, most of the grants are
paid directly to the final beneficiary with no other public
co-financing. Therefore assurance needs to be obtained by carry-
ing out ex post financial audits at the beneficiary level. These
audits, either carried out by the audit services of the different
Directorates-General or by external audit firms (EAF) on behalf of
the Commission, focus on the cost statements that beneficiaries
submit for reimbursement. In addition, in some budget areas, the
Commission required beneficiaries to submit a certificate (see
paragraph 6.11) from an independent auditor in support of the
cost statements (22).

6.19. The Court’s audit covered:

— the analysis of the evolution of the number, the results and

the coverage of audits compared to previous years;

— the analysis of audit results on a sample of audit reports from

EAF;

— a review of a sample of Commission audit reports concern-
ing indirect research contracts and measures funded by DG
ENV.

Evolution of audits carried out

6.20. The Court’s analysis revealed that:

6.20.

— whereas some Directorates-General have increased their level
of audit activities, the overall level has been reduced in 2004
(Table 6.1), from 552 completed audits in the previous year
to 496, (which corresponds to 2 % of open contracts), but
the recoverable amounts actually increased (23);

— The situation varies greatly from one Directorate-General

to
another; Chapter 6 covers several different policies. It is observed
that no external audit capacity for the RTD framework programmes
was available for the major part of 2004. A new contract is now
operational.

— audits made by five Directorates-General in the last six years
suggest that the amount recoverable following a financial
audit seems to be positively correlated with the number of
audited contracts (see Graph 6.3). Therefore it is worth not-
ing that the Commission’s own stated target to audit 10 % of
all contractors under FP5 has not been achieved (see
Table 6.2) (24).

— The programme of audits for FP5 is under implementation and the
set date for the target is end of 2007. The Commission is continu-
ing its intensive ex post audits. It confirms nevertheless that, even
if the target has been exceeded by some DGs, it will have to recon-
sider its overall target of auditing 10 % of the FP5 contractors,
because the final number of auditable FP5 contractors is consider-
ably higher than anticipated.

(22) This measure is applied in the Sixth Framework Programme for
Research and for the LIFE programme. In the RTD area the certificate
is normally necessary only for FP6 final payment requests of each
instalment of the contracts. In 2004 only very few final payments
under the sixth framework programme had been effectuated yet.
(23) Excluded the 95,5 million euro recoveries for veterinary actions in

2003.

(24) See Annual Report 2003, paragraph 6.43.

30.11.2005

EN

Official Journal of the European Union

C 301/169

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

4
0
0
2

3
0
0
2

e
h
t

f
o

r
u
o
v
a
f

n

i

s
t
s
o
c

e
l
b
i
g
i
l
e

e
h
t

f
o

s
t
n
e
m

t
s
u
d
A

j

s
t
n
e
m

j

t
s
u
d
a
(

s
t
i
d
u
a

e
h
t

f
o

t
l
u
s
e
r

a

s
a

n
o
i
s
s
i

m
m
o
C

)
t
n
u
o
c
c
a

o
t
n

i

n
e
k
a
t

t
o
n

s
r
o
t
c
a
r
t
n
o
c

e
h
t

f
o

r
u
o
v
a
f

n

i

)
o
r
u
e

n
o

i
l
l
i

m

(

)
o
r
u
e

n
o

i
l
l
i

m

(

s
t
c
a
r
t
n
o
c

s
t
c
a
r
t
n
o
c

s
t
i
d
u
a

s
t
c
a
r
t
n
o
c

n
e
p
o

f
o

e
u
l
a
V

s
t
c
a
r
t
n
o
c

d
e
t
i
d
u
a

f
o

e
u
l
a
V

n
e
p
o

f
o

r
e
b
m
u
N

d
e
t
i
d
u
a

f
o

r
e
b
m
u
N

d
e
t
e
l
p
m
o
c

f
o

r
e
b
m
u
N

l
a
r
e
n
e
G
-
e
t
a
r
o
t
c
e
r
i

D

)
1
(
4
0
0
2

n

i

d
e
t
e
l
p
m
o
c

n
o
i
s
s
i

m
m
o
C
e
h
t

)
f
o

f
l
a
h
e
b

n
o

r
o
(

y
b

s
t
i
d
u
A
—

a
e
r
a

s
e
i
c
i
l
o
P

l
a
n
r
e
t
n
I

—
1
6

.

e
l
b
a
T

f
o

e
u
l
a
v
%

d
e
t
i
d
u
a

s
t
c
a
r
t
n
o
c

s
t
n
u
o
m
A

n
o

i
l
l
i

m

(

)
o
r
u
e

f
o

e
u
l
a
v
%

d
e
t
i
d
u
a

s
t
c
a
r
t
n
o
c

0
0

,

5
4

,

2
1

,

0
3

,

6
2

,

8
2

,

5
9

,

1
8

,

3
4

,

1
7

,

1
1

,

1
3

,

s
t
n
u
o
m
A

n
o

i
l
l
i

m

(

)
o
r
u
e

)
6
(

0
0
0

,

0
4
1

,

4
1
0

,

)
9
(

1
9
4
1

,

0
0
1

,

7
5
0

,

)
4
(

6
1
1

,

2
6
1

,

0
2
0

,

0
2
8

,

9
7
2

,

9
9
1
3

,

5
2

,

5
2

,

6
2

,

8
4

,

0
0

,

6
0

,

3
5

,

0
0

,

9
6

,

,

7
1

1
3

,

0
9
3

,

,

1
0
0
7
2

,

3
4
3
3
2

,

3
2
2
1

0
2
4
7

,

8
3
2

5
7
0

,

3
4
2

,

4
5
2
4

,

7
8
2
5

,

,

0
3
0
4
7

,

8
8
3
4
7

,

8
1
6
1

0
2
1
3

,

8
7
9
2

,

6
4
5
9

,

5
4
2

8
6
2

4
8
8
5
1

4
2
4
9
1

8
1
0

,

,

6
5
9
3
1

,

0
9
5
2
1

3
5
1
1

,

1
1
7

,

9
3
6
1

9
5
5
1

)
8
(

3
5
2

,

,

0
0
0
6
8
1

,

5
6
1
6
0
2

,

0
0
4
0
5

2
9
2
5

,

8
0
5
1

0
3
6
1

2
0
0

,

1
2
0

,

,

6
9
1
2
2

,

6
4
2
6
1

,

7
8
5
8
3

,

5
6
2
5
3

2
1
8
3

,

5
2
0
2

,

,

6
6
9
3

,

8
6
5
3

4
8
6
1

8
4
7
1

3
6
4
1

1
1
7
1

,

1
2
2

0
8
0

,

,

0
0
7
1
1

8
8
5
9

,

3
9
9
1

,

2
6
3

,

0
0
0

,

,

0
9
3
5
1

,

0
6
3
2
1

0
6
4

,

0
0
0

,

9
4
4

,

5
0
3

,

)
5
(

,

0
0
5
4
7
1

,

0
0
0
4
0
3

,

7
3
5
1
1

,

9
3
1
5
4
3

,

0
0
5
4
0
3

,

0
4
3
6
2

9
6
4
6

,

,

5
3
1
8
1

0
2
3
2

6
9
6
7

6
3
8
1

,

,

3
5
7
2
1
9

,

1
3
7
3
0
0
1

,

1
8
6
3
0
1

,

7
4
4
8
5

5
8
3
4
3

2
8
2
8
3

1
0
9

2
2
5

6
1
2

3
2
9

d
n

9
5
8
2

9
2
2
8

6

0
8

7
2

9
8

4
6

3
7

1
4

7
4

2
1

0
3
2

7
6
1

6
3
8

9
1

3
7
1

9
1

7
3

1
4

2
5

4
6

0
3

0

7
9
1

8
5
2

0
9
8

5

5
7

5
2

9
5

3
4

2
4

8
1

8

8

5
9

8
1
1

6
9
4

6
2
1

)
3
(

2
1

7
1

5
2

8
2

3
2

1
3

8

0

4
7

8
0
2

2
5
5

e
r
u
t
l
u
C
d
n
a

n
o
i
t
a
c
u
d
E
—
C
A
E

d
n
a

l

t
n
e
m
y
o
p
m
E
—
L
P
M
E

s
r
i
a
f
f

A

l
a
i
c
o
S

e
r
u
t
l
u
c
i
r
g
A
—

I

R
G
A

d
n
a

y
g
r
e
n
E
—
N
E
R
T

t
r
o
p
s
n
a
r
T

e
s
i
r
p
r
e
t
n
E
—
R
T
N
E

y
r
t
s
u
d
n
I

d
n
a

t
n
e
m
n
o
r
i
v
n
E
—
V
N
E

d
n
a

s
e
i
r
e
h
s
i
F

—
H
S
I
F

)
2
(

s
r
i
a
f
f

A
e
m

i
t
i
r
a
M

l
a
t
o
T

d
n
a
m
o
d
e
e
r
F

,
e
c
i
t
s
u
J

—

S
L
J

y
t
i
r
u
c
e
S

)
7
(

n
o
i
t
c
e
t
o
r
P

r
e
m
u
s
n
o
C

d
n
a

h
t
l
a
e
H
—
O
C
N
A
S

y
t
e
i
c
o
S

n
o
i
t
a
m
r
o
f
n
I

—
O
S
F
N

I

h
c
r
a
e
s
e
R
—
D
T
R

a
i
d
e
M
d
n
a

:
e
l
b
a
t

s
i
h
t

n

i

d
e
s
u

s
n
o
i
t
i
n
i
f
e
D

)
1
(

d
e
t
e
l
p
m
o
C

.
r
a
e
y

e
h
t

g
n
i
r
u
d

d
e
t
e
l
p
m
o
c

t
o
n

e
r
e
w

t
a
h
t

r
a
e
y

e
h
t

f
o

i

g
n
n
n
i
g
e
b

e
h
t

t
a

n
e
p
o

e
r
e
w

t
a
h
t

s
t
c
a
r
t
n
o
c

f
o

r
e
b
m
u
n

l
a
t
o
t

e
h
t

s
u
p

l

d
e
t
e
l
p
m
o
c

n
e
e
b

t
e
y

t
o
n

e
v
a
h

t
a
h
t

r
a
e
y

e
h
t

n

i

d
e
n
g
i
s

s
t
c
a
r
t
n
o
c

.
e
d
a
m
n
e
e
b

s
a
h

t
n
e
m
y
a
p

l
a
n
i
f

e
h
t

d
n
a

d
e
t
e
l
p
m
o
c

n
e
e
b

e
v
a
h

s
w
e
i
v
e
r

l
a
c
i
n
h
c
e
t

d
n
a

l
a
i
c
n
a
n
i
f

l
l
a

,

d
e
l
l
i
f
l
u
f

n
e
e
b

e
v
a
h

t
c
a
r
t
n
o
c

e
h
t

f
o

f
o

r
e
b
m
u
n

:
s
t
c
a
r
t
n
o
c

n
e
p
o

f
o

r
e
b
m
u
N

s

m
r
e
t

e
h
t

e
r
e
h
w

t
c
a
r
t
n
o
c

=

t
c
a
r
t
n
o
c

.
)
d
e
h
c
a
e
r

n
e
e
b

s
a
h

t
n
e
m
e
e
r
g
a

l
a
i
c
n
a
n
i
f

a

e
r
e
h
w

(

s
e
i
d
i
s
b
u
s

d
n
a

)
s
e
r
u
d
e
c
o
r
p

t
n
e
m
e
r
u
c
o
r
p

c
i
l

b
u
p

e
h
t

h
g
u
o
r
h
t

d
e
d
r
a
w
a

t
c
a
r
t
n
o
c

a

r
o

n
o
i
t
c
a

t
s
o
c
-
d
e
r
a
h
s

a

r
e
h
t
i
e
(

s
t
c
a
r
t
n
o
c

h
t
o
b

s
e
t
o
n
e
d

’
t
c
a
r
t
n
o
c

‘

d
r
o
w
e
h
T

e
h
t

t
a

t
o
p
s
-
e
h
t
-
n
o
d
e
t
i

d
u
a

s
t
c
a
r
t
n
o
c

e
s
o
h
t

y
l
n
o
d
n
a

,
t
i

f
o
e
r
a
h
s

s
’
t
n
a
p
i
c
i
t
r
a
p
d
e
t
i
d
u
a

e
h
t

t
u
b

t
c
a
r
t
n
o
c

e
h
t

f
o
e
u
l
a
v

l
a
t
o
t

e
h
t

t
o
n

(

d
e
t
i
d
u
a

r
o
t
c
a
r
t
n
o
c

e
h
t

r
o
f

t
o
p
s
-
e
h
t
-
n
o
d
e
t
i
d
u
a

s
t
c
a
r
t
n
o
c

e
h
t

y
l
n
o
f
o
e
u
l
a
v

l
a
u
t
c
a

e
h
t

:
s
t
c
a
r
t
n
o
c

d
e
t
i
d
u
a

f
o
e
u
l
a
V

.

4
0
0
2

r
a
e
y

e
h
t

g
n
i
r
u
d

d
e
u
s
s
i

s
a
w

t
r
o
p
e
r

t
i
d
u
a

l
a
n
i
f

a

e
r
e
h
w
y
r
a
i
c
i
f
e
n
e
b

l
a
u
d
i
v
i
d
n

i

y
n
a

i

g
n
n
r
e
c
n
o
c

s
t
i
d
u
a

l
a
i
c
n
a
n
i
f

f
o

r
e
b
m
u
n

:

d
e
t
e
l
p
m
o
c

s
t
i
d
u
a

f
o

r
e
b
m
u
N

—

—

—

—

.

d
e
u
s
s
i

e
b

l
l
i

w
s
t
r
o
p
e
r

t
i
d
u
a

l
a
n
i
f

e
h
t

n
e
h
w
5
0
0
2

n

i

d
e
t
r
o
p
e
r

e
b

l
l
i

w
3
0
0
2

n

i

d
e
t
c
u
d
n
o
c

s
t
i
d
u
a

e
h
t

f
o

t
l
u
s
e
r

e
h
t

s
a

4
0
0
2

n

i

d
e
r
e
v
o
c
e
r

e
r
e
w

t
a
h
t

s
t
n
u
o
m
a

e
h
T

.
s
e
r
u
s
a
e
m

l

o
r
t
n
o
c

y
r
e
h
s
i
f

d
n
a

)

4
0
0
2

n

i

s
e
r
u
s
a
e
m
e
s
e
h
t

g
n
i
t
i
d
u
a

d
e
t
r
a
t
s

s
a
h
H
S
I
F
G
D

(

s
e
r
u
s
a
e
m
n
o
i
t
c
e
l
l

o
c

a
t
a
d

,
s
e
r
u
s
a
e
m
h
c
r
a
e
s
e
r

g
n
i
s
i
r
p
m
o
C

.

0
6
3
-
1
B

i

g
n
d
a
e
h

t
e
g
d
u
b

f
o

n
i
a
p
S

d
n
a

s
d
n
a
l
r
e
h
t
e
N
e
h
t

n

i

)
s
l
a
m
n
a

i

f
o

n
o
i
t
a
c
i
f
i
t
n
e
d
i
(

’

a
e
d
I
‘

f
o

s
t
i
d
u
a

2

s
e
d
u
l
c
n

i

s
t
i
d
u
a

f
o

r
e
b
m
u
n

e
h
T

.
)

n
o
i
s
s
i

m
m
o
C
e
h
t

h
t
i

w
s
t
c
a
r
t
n
o
c

l
a
t
o
t

r
i
e
h
t

t
o
n

d
n
a

r
o
t
c
a
r
t
n
o
c

.
s
t
c
a
r
t
n
o
c

n
e
p
o

e
h
t

f
o

s

m
u
s

i

g
n
d
n
a
t
s
t
u
o

e
h
t

o
t

s
d
n
o
p
s
e
r
r
o
c

t
n
u
o
m
a

e
h
T

.

g
n
i
t
r
o
p
e
r

f
o

e
m

i
t

e
h
t

t
a

e
v
i
t
a
c
i
d
n

i

e
r
a

s
t
n
u
o
m
a

e
h
T

.

o
r
u
e

n
o

i
l
l
i

m
2
8
0

,

.

o
r
u
e

n
o

i
l
l
i

m
1
7

,

s
i

s
i

e
t
a
r

g
n
i
c
n
a
n
i
f
-
o
c

e
h
t

e
t
a
r

g
n
i
c
n
a
n
i
f
-
o
c

e
h
t

f
o

f
o

n
o
i
t
a
c
i
l

p
p
a

e
h
t

r
e
t
f
a

t
n
u
o
m
a

e
l
b
a
r
e
v
o
c
e
r

e
h
T

.
e
t
a
r

g
n
i
c
n
a
n
i
f
-
o
c

e
h
t

n
o
i
t
a
c
i
l

p
p
a

e
h
t

r
e
t
f
a

t
n
u
o
m
a

e
l
b
a
r
e
v
o
c
e
r

e
h
T

.
e
t
a
r

g
n
i
c
n
a
n
i
f
-
o
c

e
h
t

f
o

f
o

n
o
i
t
a
c
i
l

p
p
a

e
h
t

e
r
o
f
e
b

e
r
u
g
i
f

e
h
t

n
o
i
t
a
c
i
l

p
p
a

e
h
t

e
r
o
f
e
b

e
r
u
g
i
f

e
h
t

o
t

o
t

s
d
n
o
p
s
e
r
r
o
c

t
n
u
o
m
a

s
i
h
T

:

N
E
R
T
G
D

s
d
n
o
p
s
e
r
r
o
c

t
n
u
o
m
a

s
i
h
T

:

N
E
R
T
G
D

.
s
t
s
o
c

e
l
b
i
g
i
l
e
n

i

f
o

t
r
a
p
U
E

e
h
t

e
r
a

e
l
b
a
r
e
v
o
c
e
r

s
t
n
u
o
m
A

.

i

g
n
d
n
u
f

U
E

e
h
t

f
o

t
n
u
o
m
a

e
h
t

s
i

s
t
c
a
r
t
n
o
c

d
e
t
i
d
u
a

f
o

e
u
l
a
v

e
h
T

.
s
a
e
r
a

n
o
i
t
c
e
t
o
r
P

r
e
m
u
s
n
o
C
d
n
a

h
t
l
a
e
H
c
i
l

b
u
P

y
l
n
o

s
e
d
u
l
c
n
I

)
2
(

)
3
(

)
4
(

)
5
(

)
6
(

)
7
(

)
8
(

)
9
(

.

n
o
i
s
s
i

m
m
o
C
n
a
e
p
o
r
u
E

:
e
c
r
u
o
S

C 301/170

EN

Official Journal of the European Union

30.11.2005

Table 6.2 — Directorates-General operating the RTD framework programmes — Summary table
of FP5-related audits closed (2001 to 2004)

Directorate-General in charge

DG RTD

DG INFSO

DG TREN

DG ENTR (1)

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

Total number of FP5-related audits closed

Total number of FP5 contracts audited

2001
1
1
2
0
0
0
0
0
0
0
0
0
1
0
1
2
1
3

2002
25
88
113
4
8
12
0
7
7
0
5
5
15
0
15
44
108
152

2003
19
177
196
2
58
60
1
7
8
0
21
21
20
0
20
42
263
305

2004
12
100
112
2
91
93
0
41
41
0
34
34
16
0
16
30
266
296

Total
57
366
423
8
157
165
1
55
56
0
60
60
52
0
52
118
638
756

2001
1
1
2
0
0
0
0
0
0
0
0
0
1
0
1
2
1
3

2002
28
105
133
4
10
14
0
17
17
0
5
5
17
0
17
49
137
186

2003
23
218
241
2
159
161
1
13
14
0
25
25
24
0
24
50
415
465

2004
18
142
160
2
225
227
0
58
58
0
51
51
30
0
30
50
476
526

Total
70
466
536
8
394
402
1
88
89
0
81
81
72
0
72
151
1 029
1 180

(1) Note that 17 audits closed by DG ENTR in 2003 (covering 20 FP5 contracts) have been transferred to and closed by DG INFSO in 2004. The number of audits closed by DG

ENTR during 2003 (together with the number of contracts audited) has been modified accordingly.

Note: Total number of FP5 contractors (EC and Euratom) is 23 375. Therefore, Commission’s FP5 target is 2 337 audits closed.

However, the number of 23 375 has to be refined as it contains duplications of contractors.
It contains a substantial number of less important contractors, i.e., contractors with a contribution of less than 20 000 euro.

Source: Commission.

Graph 6.3 — Audits by the Commission

Source: Annual Reports 1999 to 2003; Figures given by the Directorate-Generals for 2004.

30.11.2005

EN

Official Journal of the European Union

C 301/171

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Audits carried out by external audit firms: scope and timing

6.21. The results of the audits carried out by external audit firms
on behalf of the Commission were examined in order to assess
whether they constitute a valid source of information for the
appraisal of the legality and regularity of underlying transactions.
A sample of 31 files of audits were examined in the Directorates-
General concerned (DG RTD, DG TREN, DG INFSO and
DG ENTR).

6.22. The contractual mandate of the external audit firms is lim-
ited to the verification of the cost statements at the level of the
beneficiary. Other issues impacting the legality and regularity of
the transactions, such as the achievement of contractual objec-
tives or the timely provision of contractually agreed deliverables
by the beneficiary which could be verified in some cases by the
external auditor, are not covered by such audits.

6.22. The achievement of (scientific/technical) objectives is monitored
by the Commission’s scientific officers who assess the periodic reports
from the beneficiaries. Scientific reviews are also done by a panel of inde-
pendent experts who check if the scientific deliverables comply with the
contractual provision. Financial auditors have not the required expertise
to assess the scientific deliverables so that their work is limited to veri-
fying if the amounts are claimed in accordance with the financial provi-
sions of the contract.

6.23. The analysis of a sample of audit reports showed an aver-
age delay of 416 days between the initiation and the completion
of the audit. While a certain delay is inevitable to complete the
audit process, some of the delays observed are excessive (ranging
from 94 to 770 days) (25) (see Table 6.3). Given that nearly all
audits identified errors in cost statements, such long delays pre-
vent the timely recovery of unduly received grants or, vice versa,
the timely payments from the Commission to the beneficiaries.

6.23. The procedure is that, when batch audits are launched, all
selected contractors are informed by the Commission that an audit will
be carried out by the EAF on behalf of the Commission. The actual audit
field work starts more than three months (on average 100 days) later in
function of the planning of the EAF. Such time should be deducted from
the audit productive time. The completion of the report is followed by the
consultation period of 30 days with the contractor (Article 26.3 of the
Annex II of the FP5 model contract). The time frame between initiation
and completion of an audit therefore ranges in the order of 12
to 15 months (365 to 450 days). In rare cases where the resolution of
complicated audit and contractual issues is required or when new decla-
rations of costs are re-introduced, this period may be exceeded.

The completion time of batch audits through the external auditors typi-
cally ranges between 9 and 12 months (270 to 365 days) in line with
the contract with the EAF. The contractual arrangements with the audi-
tors give room for the application of financial penalties for the non-
completion of the agreed work within the agreed time frame (1,5 % of
contract value for each month of delay). The Commission has system-
atically applied these penalties.

(25) Similar observations were already noted in the Court of Auditors’
Annual Report 2002 paragraph 6.52 concerning DG RTD and 2003
for DG EAC’s audits (see paragraph 6.33).

C 301/172

EN

Official Journal of the European Union

30.11.2005

Table 6.3 — Number of days for completion of Commission financial audits

Average of number of days

Total delays

DG

Number of audits
in the sample

From informing
the contractor to
the auditor report

From the auditor
report to the
implementation
decision (1)

INFSO

RTD

TREN

ENTR

10

12

7

2

31

4 DGs

357

334

244

168

310

149

47

148

101

106

Total

506

381

392

269

416

Min

355

247

301

94

94

Max

770

605

475

443

770

(1) This delay includes the contradictory period with the contractor. The implementation decision is the basis for starting corrective actions; the audit results are distributed to

operational units for implementation.

Source: Court of Auditors Analysis.

Inadequate follow-up procedures for ex post financial audits
at the Directorate-General for Environment

6.24. The Court’s analyses of audit reports and files at DG ENV,
established by the audit unit of this Directorate-General, leads to
following observations (26):

6.24.

— Finalised ex post audit reports are sent to the operational unit(s),
who inform the beneficiary of the results of the audit and invite
them to provide with further comments or additional documenta-
tion. Only when the beneficiary has replied, the Authorising Officer
by Sub-delegation takes the decision as regards the issuing of a
recovery order. As prescribed by the Financial Regulation, a prior
information letter must also be sent to the beneficiary before issu-
ing the recovery order and debit note. Taking into account this con-
sultation process, a delay of several weeks between the receipt of the
audit report and the taking of corrective action is unavoidable.

— It is agreed that the follow-up of audit findings needs to be subject

to a more formal and measurable procedure in DG ENV.

The ex post audit unit has set up since the end of 2004 a moni-
toring format and method in order to remind technical units on a
regular basis to send information on action taken on the basis of
audit reports.

— recovery orders are launched too late:

In 2003,

the
Commission’s own auditors recommended the recovery of
391 000 euro. By November 2004, only 54 % of this amount
had actually been recovered from the beneficiaries, due in
part to a pending OLAF investigation. Although the average
delay between the receipt of the final audit report and the
establishment of a recovery order went down from 152 days
in 2003 to 138 in 2004, this delay is still excessive. In con-
trast, the beneficiaries paid on average within 50 days from
the issue of the recovery order,

— inadequate monitoring of contracts: most of the Commission
files that were examined did not show any evidence that
feedback had been sent from the technical units to the audit
units regarding the follow-up actions. Where problems have
been noted by the technical units or documented in the audit
reports, there is a long delay before the services concerned
decide on an adequate action such as undertaking verifica-
tion at the beneficiary, reducing the final payment or launch-
ing a recovery order. In one case, the decision to launch an
audit on the spot was taken only 16 months after the final
payment was made,

(26) The analysis covered a sample of 58 reports established in 2003
and 2004, including 90 projects. The corresponding projects con-
tracts were signed between 1994 and 2003 (of which the majority
between 1998 and 2001).

30.11.2005

EN

Official Journal of the European Union

C 301/173

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— for contractors receiving EU funds through more than one
contract, where an audit reveals errors that can be considered
as systematic, there are no procedures foreseen to inform the
other Commission services concerned or undertake audits of
the other contracts (27).

— With the implementation of the accounting reform (and in particu-
lar the creation of a register on contracts and legal entities), the
development of a more general information exchange network could
be envisaged at Commission level.

Results of the test of underlying transactions in the IP area

6.25. A review of the Commission files was performed on a
general sample of 107 payments (28) and eight commitments
selected in the IP area; for 25 interim and final payments of this
sample, the audit was extended at final beneficiary level. The find-
ings corroborate the weaknesses identified in the systems (see
paragraphs 6.9 to 6.17).

At Commission level errors were frequent but not material.

6.26. The review of Commission files revealed that 58 out of
the 107 payments were affected by issues of legality and regular-
ity (29). Most of the irregularities were already identified last
year (30) and the most frequent relate to:

Payments delayed for periods exceeding one month

6.27. The Financial Regulation was not complied with for 20 %
of payments, which were made late and in most cases the delay
exceeded one month (31). The Commission did not assess the
amount of interest due for late payments and did not enter a pro-
vision for this liability into its accounts.

(27) As already noticed in the Annual Report 2003, paragraph 6.33, for
audits conducted by DG EAC. This weakness exists similarly for the
audits undertaken by external audit firms in the Research DGs.
(28) A general sample of 67 payments taken at random in the IP area plus
specific samples representing a total of 40 additional payments: for
FP6 (four payments), for Justice, Freedom and Security area (16 pay-
ments including eight payments for ERF), for Public Health and Con-
sumer Protection (20 payments).

(29) In the general sample of 67 payments the observations raised con-
sisted of: late payments by the Commission (15 cases), late payments
by the coordinator of the project to the other participants (five), errors
not detected by Commission controls (10), no estimate of interests
generated by prefinancing payments (nine),
issues regarding the
award procedure (five), issues regarding the contract or the Commis-
sion decision (four)…

(30) See Annual Report 2003, paragraphs 6.20 and 6.22.
(31) In the general sample of 67 payments, the delays for the 15 late pay-
ments were spread as follows: below one month (six occurrences),
above one month (three), above two months (two), above three
months (two), above five months (two).

6.27. The Commission accepts that payment times are sometimes too
long and should be shortened. In many cases referred to by the Court in
footnote 31, it has explained the reasons for this.

The Commission has decided to tackle the problem and measures have
been taken both in the internal financial circuits and in the operational
methods with those involved. Because of the extremely low level of inter-
est claimed on late payments it is not necessary to enter a provision.

C 301/174

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Non-compliance with the Financial Regulation regarding
the interest generated by prefinancing payments

6.28. The Financial Regulation requires that the interest yielded
by the advance payment of Community funds should be esti-
mated and entered into the Community budget (32). In most pro-
grammes the preliminary estimates are not carried out in a con-
sistent way or are not calculated at all. Moreover, the current
definition of interest in the contracts is too vague to permit the
Commission services to estimate properly the interest gener-
ated (33).

Failure to respect the procedures for the award of grants

6.29. Out of 43 grant award procedures reviewed four were not
regular due to the composition of the Evaluation Committee, the
ineligibility of the beneficiary, the absence of a financing decision
taken by the institution or the award of a grant outside any call
for proposals. In another five cases concerning the award of
grants for Public Health actions, it could not be established that
for the funded projects complete proposals had been submitted
within the deadline, and in six cases the procedure and results of
the proposal evaluation were not adequately documented.

High number of errors at final beneficiary level

As in previous years the beneficiaries over-declare the costs (34)

6.30. On average, costs reported for the seven FP5 actions
audited at final beneficiary, representing an amount of 6 million
euro, were overstated by more than 12 % due to ineligible costs
or absence of supporting documentation. This rate of over-
declaration is higher than the average rate of 3,1 % resulting from
the audits undertaken by the Commission (see Table 6.1). For
FP5, the Commission’s 286 financial audits resulted in an aver-
age rate of overdeclaration of 4,6 %.

6.31. When over-declarations of costs were detected, the Court
also noted that the checks carried out by the Commission on the
cost statements presented by the beneficiaries before the payment
were in most cases limited to a simple arithmetic check, as
opposed to the reconciliation of cost statements to a sample of
supporting documents (like time recording or supporting
invoices). This kind of checks on selected documents would have

(32) Article 5(4) of the Financial Regulation and Article 4(3) of the imple-

menting rules of the Financial Regulation.

(33) This was also confirmed by the analysis of supervisory and control

systems for the sixth framework programme.

(34) See Court of Auditors’ Annual Report 2003, paragraphs 6.23

and 6.26.

6.28. The Commission has recognised the problem of proportionality
and proposes to change the existing FR and IR to introduce thresholds
of pre-financing payments below which no estimate of amounts receiv-
able needs to be established or the interest effectively yielded does not need
to be recovered. With regard to the defintion of interest, the Commission
feels that it is sufficiently clear and the the beneficiaries are required to
declare it.

In the area of research, the case noted by the Court concerns the
6.29.
awarding of the grant to an applicant who had declared he had obtained
his diploma before he actually got it. The situation is being regularised.

In the Public Health area, the weaknesses identified by the Court refer to
grants awarded in 2000, 2001 and 2002 under the previous eight
separate public health programmes. Decision No 1786/2002/EC
replaced the eight programmes by one programme for Community action
in the field of public health (2003 to 2008). At the same time the rules
and procedures for the funding of actions were considerably improved and
the necessary steps were taken to avoid similar problems in the future.

6.30. With regard to two of the seven cases audited by the Court, the
Commission accepts the comments made and is going to take corrective
measures. In four cases, consultations with the beneficiaries are in
progress. In one case, the Commission does not agree with the Court’s
interpretation.

Payments are made on the basis of cost declarations submitted
6.31.
by the beneficiaries. Some Directorates-General perform already plausi-
bility checks on these declarations and request supporting documents for
a subset of the costs.

In order to further strengthen the desk control function in the area of
research, DG INFSO and ENTR launched a pilot exercise of in-depth
desk controls in 2003, which was executed throughout 2004, and is
being evaluated in 2005, in particular from a cost/benefit angle. In the
further information was
context of
requested, e.g. time sheets, supporting documentation on hourly rates and
travel expenses. Thus additional assurance could be gained, although the
scope and dimension of desk controls remain by definition limited.

these in-depth desk controls,

30.11.2005

EN

Official Journal of the European Union

C 301/175

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

made it possible to detect inconsistencies or even errors in the
cost statements. It would also help the beneficiaries to comply
with their obligations to properly document their expenses.

Frequent absence of justification for personnel costs charged on
the project

In most IP programmes, personnel and related costs rep-

6.32.
resent the major category of the costs reimbursed:

6.32.

— for RTD actions, beneficiaries are required to record and cer-
tify the time charged on the project. In 50 % of the cases
audited by the Court, the system put in place by the benefi-
ciary did not meet the contractual requirements or in some
cases did not exist at all. In addition to the lack of relevant
audit evidence, this also means that important information is
missing for checking the necessity of costs incurred to carry
out the work defined in the description of work. The exist-
ence of a time recording system is verified mainly by ex post
audit at the beneficiary level,

— in the area of Public Health and Consumer Protection, most
of the beneficiaries audited on the spot (four out of five) were
unable to provide sufficient evidence that all personnel costs
declared had been actually incurred and were relevant for the
project. This is in part due to the absence of an explicit pro-
vision in the grant agreements which would require benefi-
ciaries to record time and keep accounts attributing costs to
a specific project. In consequence, the amount of personnel
costs declared to and co-financed by the Commission is fre-
quently only an estimate.

— The contractual provisions foresee that all costs claimed from the
Commission for reimbursement need to be adequately substantiated
by the contractors. For FP5, the practice of the Commission’s audit-
ing services is to take into account the seriousness of the non-
compliance with contractual provisions before deciding on sanctions
to be applied.

— Putting a stricter obligation on the beneficiaries to keep analytical
accounting would add an important administrative burden on some
of them but would not necessarily provide a greater assurance to the
Commission. Instead, DG SANCO is investing more effort in the
description and analysis of the proposed projects. Projects are now
subdivided into work packages which are easier to evaluate and rec-
oncile. It increases the accuracy and consistency of the agreed bud-
gets of the projects with the resources estimated necessary for their
successful achievement.

Other issues

Sixth Framework Programme for Research and Technological
Development

6.33.
Errors detected by the testing of transactions at Commis-
sion and final beneficiary levels reflecting weaknesses of the con-
trol system were:

6.33.

— the Commission charged payments related to actions under
previous framework programmes (FP4 and FP5) to opera-
tional budgetary appropriations of FP6. This is not consis-
tent with the principle of specification of the budget (35). The
majority of the cases detected (36) had been financed using
the budgetary appropriations accruing from contributions to
FP6 from non-European Economic Area countries,

— Despite the fact that budget headings for FP6 should ordinarily
only finance actions of FP6, there have been some cases where these
lines were justifiably used for expenditure related to contracts of pre-
vious framework programmes. The majority of those transactions
have been validated during the first half of the year 2003 (first
effective year of FP6). Where appropriate local codes are used in cer-
tain DGs to monitor these cases.

Clear instructions are available, especially through internal control
standard 15. In this respect, the checklists for commitments foresee
a verification of the budget heading, financial year, budget article

(35) Appropriations are earmarked for specific purposes. See Article 21

to 26 of the Financial Regulation.

(36) 26 cases for DG TREN amounting to 10 million euro.

C 301/176

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— the coordinator of a research action transferred its contrac-
tual duties to a third party without any legal base and with-
out the Commission’s approval, with the consequence that
related costs (37) are not eligible.

and any other subdivision for the attribution of the expenditure. In
some DGs, a reminder of the rules related to the specialisation of
budget lines was sent to the operational directorates.

— The Commission will carefully examine the scientific and adminis-
trative implications of the request by the coordinator to integrate the
third party to the contract when such a request is received, but this
would have the consequence that the corresponding costs would
become eligible to the contract. An audit on the spot might then be
envisaged to further verify the underlying expenses declared.

This situation could not have been detected by the Commission
when the payment was made, as no audit certificate was requested
with interim payments, but it would have come probably to light at
the time of the final payment, where the audit certificate is compul-
sory.

European Refugee Fund

6.34. The audit of payments at national level revealed ineligible
expenditure:

6.34.

— contracts concluded by one national authority concerning
repatriation measures included also asylum applicants who
have exhausted all appeal procedures and whose application
and appeal were eventually refused by the Member State
where they had applied for asylum. These persons do not fall
within the target groups specified in Council Decision
2000/596/EC (38) and the corresponding expenditure cannot
be eligible for the ERF,

— contrary to the legal requirements that only expenditure
related to voluntary returns to the country of origin are eli-
gible, one national programme also financed some voluntary
departures to third countries due to specific cases.

— The Commission considers that expenditure incurred for the volun-
tary return of asylum seekers whose requests had been rejected is eli-
gible for cofinancing under the European Refugee Fund.

— With regard to certain cases referred to by the Court, the legal basis
of the ERF, which refers to the concept of the ‘country of origin’ is
interpreted as covering specific situations which go beyond a strict
reference to ‘country of nationality’. This is the case of stateless per-
sons where a narrow interpretation is nonsensical; moreover, the
Geneva Convention introduced the concept of country of habitual
residence. Likewise, other specific circumstances closely linked to the
protection of persons can justify a wider interpretation as, for
example, the case of the former Yugoslavia.

Public Health and Consumer Protection

6.35.
Substantive tests performed on the sampled actions
revealed that in six cases the beneficiary had not respected the
contractual reporting requirements by submitting reports late or
not providing the required level of detail within the contractual
deadlines (reports being one base for launching the Commission’s
payments).

6.35. DG SANCO accepts this delay in most of the cases on condi-
tion that reasonable assurance exists that it will finally benefit the qual-
ity of the report. In cases where reports are received not providing the nec-
essary quality standard no payment will be done until the required quality
has been delivered.

(37) Costs amounting to 270 000 euro.
(38) Article 3 of Council Decision 2000/596/EC.

30.11.2005

EN

Official Journal of the European Union

C 301/177

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Review of the Annual Activity Reports and the Directors-Generals’
Declarations

Scope of the review

6.36. The Court analysed the Annual Activity Reports and the
Declarations of 11 Directors-General (39). The Court analysed in
more detail the consistency of the information contained in the
2004 Annual Activity Reports for three Directorates-General (40),
comparing it with the results of the audits on the supervisory
and control systems carried out.

Weaknesses in the formulation of reservations by Directors-General persist

6.37. The analysis confirmed a further improvement in the
structure, presentation and quality of the reports and the Decla-
rations of Directors-General.

6.38. All Directorates-General in the Internal Policies area stated
that they had reasonable assurance that the internal control pro-
cedures put in place gave the necessary guarantees concerning the
legality and regularity of the underlying transactions.

6.39. Out of the 11 Directorates-General, six included one or
more reservations to their declaration (41). The Court found that
all reservations made were justified and the underlying reasons
were mostly well explained. However, for two Directorates-
General that did not make any reservations, the Court considers
that following reservations would have been justified:

6.39.

— following the analysis of the report of DG EAC, the Court
considers that a reservation should have been made regard-
ing the assurance that the Directorate-General can give in
relation to programmes managed by National Agencies in
Member States (42). The audit of about one third of all

— On the basis of the systems audits which were launched in 2004 in
accordance with the action plan accompanying the 2003 reserva-
tion, the Director-General of EAC did not consider it appropriate
to maintain in 2004 the earlier reservation of principle which was
prompted mainly by the uncertainty connected with the absence of
such controls.

Moreover, following these audits in 2004 (which intentionally
included agencies where it was thought shortcomings might exist),
the agencies audited which showed weaknesses began improving
their operating methods; with regard to the three agencies which
presented significant deficiencies, the Commission took ad hoc mea-
sures before the end of the financial year.

Given these reactions as well as the volume of funds involved in the
three agencies with significant deficiencies, the DG, referring to the
results of the controls in the AAR, did not consider it appropriate
to extend the 2003 reservation.

(39) DG RTD, DG INFSO, JRC, DG TREN, DG ENTR, DG JLS, DG EAC,

DG ENV, DG SANCO, DG COMP, DG MARKT.

(40) DG RTD, DG INFSO, DG SANCO.
(41) DG RTD, DG INFSO, JRC, DG JLS, DG ENTR, DG TREN.
(42) For some parts of the programmes Socrates, Leonardo and Youth the
Commission delegates the implementation to National Agencies in
the Member States. This procedure is named ‘Indirect Centralised
Management’.

C 301/178

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

National Agencies for EAC programmes (43) revealed that in
about half of the National Agencies audited, weaknesses and
recurring difficulties requiring an action plan were found. In
about 10 % of the National Agencies audited, significant and
obvious shortcomings were detected that led the Commis-
sion to take measures to safeguard its financial interests.
More than 50 % of the budget of DG EAC is implemented
through indirect centralised management,

— the internal audit function of DG SANCO had advised a res-
ervation regarding the risk of errors in grant management in
the Public Health area in his contribution to the 2004 report.
The need for such a reservation has been confirmed by audits
carried out by the Court regarding the Community actions in
the area of Public Health and Consumer Protection that
revealed a high incidence of errors in the management of
grants in the Public Health area (44). The Court is therefore of
the opinion that a reservation should have been made or that
a least the reasons for not making this reservation should
have been explained in the Annual Activity Report.

— DG SANCO has carefully considered the issue of the materiality of
the findings of the grant management audit carried out by its Inter-
nal Audit Capability. It was concluded that important improve-
ments were made and were on going and that although all issues
had not been solved or were still pending in 2004, they were known
and sufficiently under control. Whereas the Court of Auditors
mainly focuses on the regularity and legality of the underlying
transactions, the Directors’ General opinion is based on the overall
assurance provided by the different control systems that the impor-
tant risks (impact and likelihood) are sufficiently managed or con-
trolled to prevent them from materialising and harming the Com-
mission.

Follow-up of previous observations in the context of DAS

6.40. Regarding ex post audits of final beneficiaries participat-
ing in RTD framework programmes, the Commission is recon-
sidering its intention to reach the target of auditing 10 % of the
FP5 contractors in 2006/2007 (see paragraph 6.20) and has
adopted a common FP6 audit approach. FP6 measurable audit
objectives still need to be defined and an FP6 audit framework
contract has yet to be agreed with an external audit firm (see
Annex 1.1.a).

6.40. The Commission refers to its comment in relation to point 6.20
above but also underlines that an important audit activity on FP5 con-
tracts is still going on at present, as the Research DGs have launched in
2005 together some 280 additional audits. These audits will be carried
out by the external audit firm with whom a framework contract for
auditing services was concluded towards the end of 2004.

The role of the external audit units in FP6 by comparison with FP5
needs to reflect the introduction of audit certificates. External audit must
first verify the functioning and the reliability of the audit certificate sys-
tem and follow-up on specific audit requests expressed by the operational
services, rather than provide the assurance on cost declaration on a speci-
fied number of contractors as has been the case for FP5. The Commis-
sion’s audit objective for FP6 will need to take account of this develop-
ment.

(43) Directorate-General for Education and Culture ‘Annual Activity
Report 2004’, p. 37. Directorate-General EAC made a reservation in
the AAR 2003 stating that it could not comply with the requirement
of Article 35 of the Implementing Rules of the Financial Regulation
to make prior checks on the internal control systems of the National
Agencies in the area of indirect centralised management. This reser-
vation was not maintained in the AAR 2004. The action plan to rem-
edy this reservation foresaw the audit of all National Agencies over
2004 to 2006. About one third have been audited during 2004.

(44) Eight transactions out of 11 audited revealed errors.

30.11.2005

EN

Official Journal of the European Union

C 301/179

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.41. Regarding the TEN-T programme, key aspects previously
observed relate to ex post audits of TEN-T actions and verification
of eligibility of costs. DG TREN should take further action to
reach its audit target, to define model cost statements or financial
progress reports and to clearly distinguish between the scope of
the two main forms of aid, i.e. studies and works (see Annex 1.1.b
and 1.2).

6.41. DG TREN has audited 50 % of the total amounts related to
final payments, which largely exceeds the target of 35 %.

As a result of the risk assessment and the geographical coverage that
were at the basis of the audit selection process, the target to audit 20 %
of the projects finalised in 2003 has not been fulfilled completely in
2004.

This target will be re-evaluated for 2005 and adapted if necessary.

DG TREN has now developed a standard cost statement which has to
be certified and a form for the technical and financial evaluation. Both
of them are annexes to the financial decisions 2005.

Clear definitions of works and studies are contained in the application
forms and in the draft for the new TEN Regulation COM(2004) 475
(Article 2, paragraphs 5 and 6).

6.42. The Commission endeavours to ensure that the European Refu-
gee Fund is applied uniformly in the Member States. It should also be
recalled that the points raised by the Court of Auditors relate to only one
Member State; corrective measures have already been taken.

The Commission is continuing its efforts to improve its management sys-
tems, in particular its implementation of internal control standards (see
point 6.6 to 6.9).

6.43. The Commission will have to reconsider its overall target of
auditing 10 % of the FP5 contractors, because the final number of aud-
itable FP5 contractors is considerably higher than anticipated, see answer
to point 6.20. Timely implementation of corrective actions is closely
monitored.

6.44.
It is no longer possible to change the legal and financial frame-
work applicable to FP5 projects examined here. Nevertheless, the Com-
mission has endeavoured, particularly in the context of the inter-service
group set up by the AAR 2001 Action Plan, to improve the manage-
ment of projects by Commission services and by contractors. For FP6 and
FP7, simplifications have been introduced or are proposed. Progress has
been made and these issues continue to be carefully followed up.

Conclusions and recommendations

6.42. The evaluation of the supervisory and control systems
revealed that, despite progress achieved, not all baseline require-
ments of the Internal Control Standards in the IP area are fully
operational yet (see paragraphs 6.6 to 6.8), and specific weak-
nesses exist in the systems of FP6, ERF and SANCO (see para-
graphs 6.9 to 6.17).

6.43. The weaknesses detected in the supervisory and control
systems and by the results of the Court’s substantive testing point
to the importance of the ex post audit function as an effective ele-
ment of the Commission’s internal control system. Thus it is not
justified to reduce the number of audits, which has been the case
in some areas of IP in 2004 (see paragraph 6.20). Also, as reported
already in the previous years, the follow-up of audits, in particu-
lar recovery of the Community funds is often too slow (see para-
graphs 6.23 and 6.24).

6.44. As in the previous years, the testing of transactions in the
Internal Policies area for 2004 revealed a high incidence of errors
at beneficiary level, that affected the legality and regularity of
transactions. No major improvement has been noted in that area,
which also corroborates with the Commission’s own audit find-
ings. Cases of over-declaration of costs, declarations of ineligible
expenditures and non-respect of payment delays were noted in all
Internal Policies areas examined by the Court. These errors stem
often from complicated governing rules and guidelines as well as
from instructions which are not sufficiently clear or detailed (see
paragraphs 6.25 to 6.35).

C 301/180

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

6.45. Annual Activity Reports in 2004 improved in structure,
presentation and content compared to 2003. The reservations
made in the declarations by the Directors-Generals were justified.
However, in two cases (see paragraphs 6.36 to 6.39) additional
reservations would have been called for.

6.45.
In the first case, on the basis of the monitoring of the action
plan put in place in connection with the 2003 reservation, it no longer
seemed necessary to maintain a reservation in 2004 about a manage-
ment method on which appropriate comments have, however, been made
in the body of the 2004 report. As regards the second case, the Director-
General considered that the issues identified were adequately controlled
and did not call for a reservation.

Overall conclusion

6.46. Despite progress being made in certain areas, the audit
findings related to the supervisory and control systems and the
results of testing underlying transactions in the Internal Policies
area do not provide sufficient assurance on the legality and regu-
larity of underlying transactions. As in previous years this con-
clusion is supported by the Commission’s own audit findings and
the reservations made by the Directors-General.

6.46. The Commission is continuing to try to reduce the frequency
and impact of errors in declarations made by the beneficiaries. Internal
controls are being improved as called for in the Commission communi-
cation ‘on a roadmap to an integrated internal control framework’. With
regard to FP7, one aim of the Commission proposal is to simplify sys-
tems.

6.47. The Commission is recommended to continue its efforts
in order to reduce the risk of errors:

— to change the legal framework in order to simplify cost reim-
bursement systems by extending the use of ‘lump-sum’, ‘unit-
scales’ and ‘flat-rate’ payments (45),

6.47. To address these recommendations, the Commission intends as
announced in its Communication on a roadmap towards an integrated
internal control framework to present by the end of the year an action
plan to address the gaps which in its view exist between the control
framework in place and the general principles identified by the Court in
its opinion No 2/2004 on the ‘single audit’ model.

— Generally speaking, the proposals for revision of both the Financial
Regulation and the Implementing Rules are designed to simplify
rules and procedures, in particular, with regard to small grants. It
is planned that the revised Financial Regulation and Implementing
Rules will come into force on 1 January 2007.

In this case, the rules of participation to be proposed for FP7 will
be able to take advantage of the new possibilities opened up by the
revised FR.

— to clarify procedures and instructions governing the differ-

— Part of the simplification efforts of the Commission include the

ent programmes,

clarification of procedures.

— to use the errors detected by the ex post audits for improving

— Efforts in this respect will be continued by the DGs concerned.

the management and control systems,

— to take prompt action in cases where audits reveal potential

for recovery,

— The implemented procedures foresee timely action regarding the
recovery of unduly paid amounts. This is subject to regular man-
agement reports.

— to ensure the effective implementation of Internal Control

Standards.

— Ensuring effective implementation of ICS is a permanent action.
This objective will be pursued by the Commission’s services avoid-
ing an excessive administrative burden.

(45) See also Opinion No 3/2005 on the draft Regulation (EC) of the Com-
mission amending implementation rules on the Financial Regulation,
paragraph 13. See also Annual Report 2003, paragraph 6.59.

30.11.2005

EN

Official Journal of the European Union

C 301/181

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

FOLLOW-UP OF SPECIAL REPORT No 11/2003 ‘LIFE’

6.48. The Court’s Special Report No 11/2003 focused in par-
ticular on the management of the second phase of the Financial
Instrument for the Environment (LIFE II, 1996 to 1999) (46).

6.49. The Court’s main recommendations were to:

— better define the programme objectives and clarify the link

with Community environmental strategy,

— improve the management organisation by generalising the
use of outside experts, reinforcing complementarity with
other Community measures and reviewing eligibility rules,

— reinforce monitoring, control and evaluation, through better
use of external auditors, and implement strategies for the dis-
semination of results.

6.50. Most of the Court recommendations have been addressed;
however

6.50.

— the programme’s objectives have still to be better defined,

— whilst the number of audited LIFE contracts increased in the
years following the publication of the Special Report, the
audit visits are still of a financial nature and do not assess the
achievements,

— the Commission has still to set-up a sound financial manage-
ment practice for the evaluation of the project results.

— The Council and European Parliament adopted Regulation (EC)
No 1682/2004 on 15 September 2004 extending the Life III
programme until 31 December 2006. This sets out more clearly
the programme’s objectives (1).

— (second and third indent) The Commission would consider that the
overriding purpose of audit visits is one of financial verification, by
checking that costs claimed are eligible and supported by adequate
documentation. Technical achievements of projects are already
evaluated both by the external expert technical assistance teams and
by Commission staff. However, the Commission has also developed,
and is currently trialling, a score card to evaluate projects according
to a number of specific criteria. This template, whose role is to iden-
tify better projects, largely for communication purposes, is applied
by the external monitoring teams at the time of the final report.

(46) The current phase of LIFE III has been extended for two years until
31 December 2006: Regulation (EC) No 1682/2004 of the European
Parliament and of the Council of 15 September 2004 amending
Regulation (EC) No 1655/2000 concerning the Financial Instrument
for the Environment (LIFE).

(1) Specifically, for example, Article 1(2)(b) indicates that guidelines shall be
established by the Commission (that) indicate priority areas and objectives for
demonstration projects.

C 301/182

EN

Official Journal of the European Union

30.11.2005

Internal policies (including research) — Assessment of key aspects previously observed

Observations

Action taken in 2004

Action to be implemented

1.a Supervisory and control systems — ex post audits of final beneficiaries participating in RTD framework programmes

ANNEX 1

In 1998 the five Directorates-General operating the RTD frame-
work programmes jointly formulated an audit approach, setting
themselves for FP5 a target of auditing 10 % of the contractors (see
Annual Report 2001, 2002 and 2003 paragraph 6.30). 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 a common audit approach

for FP6;

— the continuity of the Commission’s audit activity depends on
providing for the possibility to subcontract ex post financial
audits (expiry of framework contract with external audit firm
in 2003).

As the total number of FP5 contractors
amounts to 23 375, the target amounts there-
fore to 2 337 contractors audited.

Because the final number of auditable FP5
contractors is considerably higher than antici-
pated, the Commission indicated that it will
have to reconsider the overall target of audit-
ing 10 % of FP5 contractors by 2006/2007.

In 2004, completion of 317 audits, 296 of
which were related to FP5 indirect RTD
actions. Total number of FP5 audits closed
(756) still falling short of target.

Adoption of a common audit approach for
FP6 in 2004. Definition of measurable audit
objectives for FP6, which can realistically be
achieved, still outstanding.

Award procedure for a new framework con-
tract (for FP5 indirect RTD actions). Frame-
work contract with External Audit Firms
signed in november 2004. Award of contract
for the audit of FP6 indirect RTD actions still
in progress.

Audit activities out the Commission should be sthrength-
ened to achieve audit target for FP5.

Commission should define for FP6 measurable objectives,
which can realistically be achieved.

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.

DG TREN has established a specific frame-
work contract for auditing TEN-T actions. An
audit planning has been established by DG
TREN and for eight TEN-T financing decisions
the audit has been closed. The audit of 24
decisions is ongoing and the audit of a further
20 decisions is planned.

The initiatives taken by DG TREN are welcomed. DG TREN
should inform the Court of Auditors in advance of its audit
planning and ensure that the auditors representing the
External Audit Firm are sufficiently qualified to perform
the audit work. The necessary measures should be taken to
ensure that the target set by DG TREN of auditing each
year at least 20 % of the projects and 35 % of total costs of
projects finalised in the previous year is reached.

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 car-
ries the risk that beneficiaries may maximise funding by
wrongly allocating costs to studies; and

— the absence of standardised cost statements forms complicates

the Commission’s verification work.

A new model Commission Decision has been
adopted in 2004, including:

— a definition of eligible and ineligible costs;

— a modified definition of studies and

works; and

— a table indicating the ‘Breakdown of esti-
mated eligible costs during the period of
programmed activities’ which could be
used by beneficiaries for the reporting of
costs incurred.

In addition to the measures undertaken in 2004, model
cost statements or financial progress reports should be
included in the model financing decisions which are of
obligatory use by beneficiaries. The definition of studies
and works needs to be further improved as the current
definition does not clearly delimit the scope of studies and
works.

30.11.2005

EN

Official Journal of the European Union

C 301/183

ANNEX 2

Supervisory and control systems

Area: Internal Policies (including Research)
System: Sixth Framework Programme (FP6) for Research and Technological Development, European Refugee Fund (ERF) and Health and Consumer Protection (SANCO)

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

C

B

B

—

—

—

—

—

B

C

C

C

C

B

B

C

B

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

B

B

C

C

C

B

B

C

B

B

SANCO

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

(1) B for Consumer Protection; C for Public Health.

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

B

B

B/C (1)

B/C (1)

B/C (1)

—

—

—

—

—

B

B

B

B

B/C (1)

B/C (1)

B/C (1)

B/C (1)

B/C (1)

B/C (1)

30.11.2005

EN

Official Journal of the European Union

C 301/185

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 and control systems

Implementation of internal control standards

Directorate-General ‘Humanitarian Aid ECHO’

EuropeAid Cooperation Office at central level

Supervisory and control systems at the level of the Delegations

Audit of transactions

Audit of transactions carried out at Delegation level

Audit of transactions carried out at implementing organisation level

Analysis of Annual Activity Reports and the Statements of the Authorising Officers by del-
egation

Conclusions

Recommendations

Follow-up of previous observations

Special Report No 3/2001 concerning the Commission’s management of the international
fisheries agreements

Purpose of the agreements

Cost/benefit ratio

Principal observations in Special Reports

Paragraph

7.1-7.2

7.3-7.41

7.3-7.8

7.9-7.27

7.9

7.10-7.15

7.16-7.24

7.25-7.27

7.28-7.32

7.28-7.29

7.30-7.32

7.33-7.38

7.39-7.40

7.41

7.42-7.47

7.42-7.47

7.43-7.45

7.46-7.47

7.48-7.55

Special Report No 10/2004 concerning the devolution of EC external aid management to
the Commission Delegations

7.48-7.51

Special Report No 4/2005 concerning the Commission’s management of economic coop-
eration in Asia

7.52-7.55

C 301/186

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

7.1. This chapter deals with the external aid financed from the
general budget. The main areas of interest are financial and tech-
nical cooperation with Asia, Latin America, the Mediterranean
countries, the western Balkans, the Commonwealth of Indepen-
dent States, food aid/food security, humanitarian aid and NGO
co-financing. The Directorates-General for External Relations and
for Development are responsible for formulating policies for
development cooperation and for formulating country/regional
strategies and multi-annual programming, whereas the Europe-
Aid Cooperation Office (EuropeAid) is responsible for the imple-
mentation of development cooperation. The Directorate-General
‘Humanitarian Aid ECHO’ (DG ECHO) is responsible for both the
formulation of policy and strategy as well as for the implemen-
tation of humanitarian aid. This chapter does not include the aid
provided through the European Development Funds, as it is
financed separately from the general budget (1). Table 2.1 shows
the funds spent in 2004 for financial perspective heading 4 (com-
mitments: 5 198 million euro; payments: 4 606 million euro).

7.2.
In 2004 the devolution process, by which functions and
tasks were redistributed from the Commission’s headquarters
to its Delegations, (see paragraphs 7.48 to 7.51) was completed
for the thematic programmes (2). During 2004 the process of
reorganising EuropeAid in Brussels continued, focusing on the
support and monitoring of the Delegations under the devolved
system.

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
financial perspective). The audit comprised a review of the super-
visory and control systems which are designed to ensure the legal-
ity and regularity of transactions, supported by tests of transac-
tions at the Delegations and implementing organisations, and a
review of the Annual Activity Reports of the Director-General of
EuropeAid and of the Director-General of DG ECHO.

(1) See separate report on the EDFs.
(2) Programmes financed by budget lines which are focused on certain

themes (e.g. Food aid, NGO co-financing).

30.11.2005

EN

Official Journal of the European Union

C 301/187

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.4.
For the projects audited by the Court, advance payments
are made by the Commission to implementing organisations that
can take various forms, such as NGOs, government ministries,
international organisations, etc. The more frequent use of these
intermediary organisations for the financial management and
accounting of projects and the absence of national authorising
officers are the main differences in the manner activities are
implemented as compared to the EDFs.

7.5. This audit was carried out at Commission headquarters, at
five Delegations (Bosnia, Cambodia, Kazakhstan, the Philippines
and Syria) and at 17 implementing organisations. The areas men-
tioned in paragraph 7.1 were reviewed and tested. Reconstruction
aid for Kosovo and some countries of the former Federal Repub-
lic of Yugoslavia is the subject of a separate annual audit of the
European Agency for Reconstruction.

7.6. Regarding the supervisory and control systems, 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 control, and the internal audit functions of EuropeAid and
DG ECHO.

7.7. There were some delays in the transmission, to the Court
of Auditors, of the reports prepared by the Delegations (EAMR)
which are taken into account for the preparation of EuropeAid’s
Annual Activity Report.

7.8. The Court was considerably delayed in organising one of its
on-the-spot project visits in Cambodia because the implementing
organisation, a UN agency, was reluctant to accept the Court’s
right of access to information under the verification clause of the
Financial and Administrative Framework Agreement between the
European Community and the United Nations. Consequently,
only limited work could be carried out.

Supervisory and control systems

Implementation of internal control standards

7.9.
In 2002, both EuropeAid and DG ECHO completed the
framework for the implementation of the internal control stan-
dards (ICSs) as defined by the Commission on 13 Decem-
ber 2000 (3). The introduction of the standards was supported by

(3) Supporting the reform of financial management — a new framework

for authorising officers (SEC(2000) 2203).

7.7. The Commission will seek to overcome the technical and admin-
istrative difficulties involved in transmitting these reports to the Court.

7.8. The Commission is aware of the misunderstanding that occurred
and facilitated the Court’s right of access by raising the matter with the
Agency concerned.

C 301/188

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

issuing or updating instructions and guidelines and extensive
training programmes, in particular, on the administrative and
financial procedures. In 2004, the requirement to comply with
ICSs was extended to the Delegations. According to EuropeAid,
all baseline requirements as adapted for Delegations had been
implemented by 31 December 2004. The Court’s audit confirms
the Director-General’s indication in the Annual Activity Report
that improvements are still needed at both Commission head-
quarters and Delegations (see paragraphs 7.17 to 7.27).

Directorate-General ‘Humanitarian Aid ECHO’

Risk assessment

7.10. DG ECHO carried out a satisfactory risk self-assessment,
rightly concluding that many risks in the area of humanitarian aid
were beyond its control, with the exception of the quality of the
implementing partners. Consistent with previous years, efforts to
reduce the risks were therefore concentrated on the selection pro-
cedure for implementing partners together with a system of audits
of those selected.

Audit of implementing partners

7.11. DG ECHO has a comprehensive approach of auditing the
implementing partners. The audits assessed aspects such as the
organisation, procedures and internal controls of the implement-
ing partners, as well as the accounting and finance systems, the
management culture and staff recruitment systems. This was
complemented by detailed testing of expenditure of projects
implemented by the partners.

7.12.

7.12.
In 2004, DG ECHO completed 130 audits, of which 70
had been realised at the headquarters of implementing partners.
These 70 audits, which had been contracted out to external audi-
tors, represent 344 projects that had been completed between
1998 and 2003. The remaining 60 audits related to projects
audited in the field (28 reports), grants (19 reports) and DG ECHO
offices (13 reports). The Court initially reviewed 20 audit reports,
of which 13 were contracted out. The Court then verified the
quality of these external audits by visiting three implementing
partners’ European headquarters and testing two projects at each.
This led to the following observations:

(a)

the most frequent type of finding reported by the external
auditors related to the lack of justification of expenditure in
the form of supporting documents. This was the main rea-
son for disallowing expenditure by the implementing part-
ner. The Court’s visits to implementing partners confirmed
the lack of supporting documentation as the principal source
of errors, but also revealed that this is not always reported by
the external auditors when included in their sample;

(a) The Court’s observation is based on one of the earliest audits car-
ried out by, at that time, a newly contracted external auditor. Since
then the Commission reviewed and clarified, on an ongoing basis,
the matters that should be reported on by the external auditors.

30.11.2005

EN

Official Journal of the European Union

C 301/189

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b) one case of non-respect of tendering rules was found by the
external auditor, but most of the audits did not carry out an
in-depth testing of tenders. The Court’s testing at implement-
ing partners found errors in tenders at four of the six projects
checked.

(b) Until mid 2004, the Commission’s testing of tendering procedures
was limited to the verification of the existence of the winning ten-
der. To respond to the weakness revealed, the Commission has
extended the audit checks to include the verification of offers of
organisations not succeeding in the tender process.

implementing partners

7.13. The
committed themselves
to implement the recommendations made by DG ECHO’s pro-
gramme of audits to improve their internal control systems. A
total of 0,5 million euro was considered by the Commission not
to be eligible expenditure and recovery orders were issued. These
results show that audits of implementing organisations can be an
effective instrument of DG ECHO’s supervisory and control sys-
tems.

7.14. The nature of both the observations, as far as they are
made in these audit reports and the errors found during the
Court’s own tests on the expenditure, corresponds largely to its
audit findings when testing transactions at implementing organi-
sation level (see paragraphs 7.31 and 7.32).

Internal audit capability

7.15. A single internal audit capability unit has the responsibil-
ity for both DG ECHO and EuropeAid. In 2004, it carried out
workload assessments of DG ECHO’s units (see also para-
graph 7.22 for this issue).

EuropeAid Cooperation Office at central level

Follow-up of 2003 observations

In its Annual Report on 2003 (paragraphs 7.18, 7.19,
7.16.
7.21, 7.22 and 7.23) the Court observed that not all Directorates
carried out audits of their Delegations, the headquarters’ services
did not have information, on a continuous basis, on the audits
launched by the Delegations, the internal audit capability unit had
insufficient resources to carry out the type of work that would
assist the Director-General in formulating his annual statement,
there was no evidence of cooperation between headquarters’ ser-
vices in doing ex post verifications and that information on recov-
eries and uncleared advances was not systematically monitored
by EuropeAid. The main improvement in 2004 was that the ‘Pro-
gramming, internal control and ex post control’ unit took sole
responsibility for ex post verifications (see paragraph 7.23). On the
other aspects, further improvements are needed as explained in
the following paragraphs. See Table 7.1.

Since 2003, the Commission has taken further action neces-
7.16.
sary to develop its overall audit strategy and to more clearly define its
overall strategy for supervision and control, including the function and
tasks of the services at headquarters and delegations.

The reorganisation of EuropeAid services in March 2005 aims at fur-
ther strengthening its role which has progressively evolved towards super-
vision, coordination and support to devolved management in the Com-
mission delegations. Moreover, the Commission’s monitoring and control
systems aim at ensuring the compliance of our partners with the con-
tractual requirements, and the Commission intends to further develop the
functions of its management information system.

C 301/190

EN

Official Journal of the European Union

30.11.2005

Table 7.1

(a) Court’s assessment of supervisory and control systems in 2004

DG Humanitarian Aid
ECHO

EuropeAid
Cooperation Office

Delegations

Overall concept

Procedures and manuals

Functioning in practice

Internal audits

Management reporting

A

A

A

B (2)

A

B

A

B (1)

B (2)

B (1)

(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 systems

Evidence of the use and follow-up of audit reports

—

A

B (1)

B (2)

B

A

B (1)

B (2)

B (2)

B (2)

C

B

(1) Nevertheless the number of audits increased as compared to 2003.
(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

(c) Key areas followed up by the Court of Auditors in 2004

Execution risk analysis

Carried out
previous years.

analysis

as

in

Completed 2004 self-assessment in January
2005.

DG Humanitarian Aid ECHO

EuropeAid Cooperation Office

Delegations

—

Reporting systems

Maintained good standards.

Reporting systems are improving as compared
to 2003, but need further development:
— CRIS-Audit module not linked to manage-

Delegations reported three times
during the year.

ment information;
— EAMRs incomplete.

Concept
of
and controls

external

audits

Fully implemented.

Strategy document in 2004.

Implementation of external audits
and follow-up

Audits carried out and followed-
up. Clearer instructions to be
issued.

More audits carried out; terms of reference and
follow-up to be improved.

—

—

30.11.2005

EN

Official Journal of the European Union

C 301/191

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Risk assessment

7.17. The 2004 risk self-assessment completed in January 2005
for the Annual Management Plan provided a general list of key
risks at EuropeAid. However, it did not consider the implement-
ing organisations as the level at which the highest financial risks
exist (see paragraph 7.32).

Information and reporting

7.18. Most of the financial information which is used for moni-
toring purposes is obtained from EuropeAid’s Common Relex
Information System (CRIS). The financial information focuses on
decisions, contracting, commitments and payments made at
Commission level.

7.19.
In addition, since the management and implementation of
the development actions is devolved to a large extent towards the
Delegations, they are required to provide EuropeAid’s headquar-
ters with External Actions Management Reports (EAMRs) which
also include internal control issues. In a sample of 13 EAMR
reports covering 2004 reviewed by the Court, the information on
internal control standards was only provided in five of the reports
and information on the findings of audits launched by the Del-
egation in one report.

Financial monitoring

7.17. This is not the only form of risk assessment undertaken by
EuropeAid.

The financial risk at the level of the implementing organisations is con-
sidered at the moment of the identification and financing of projects and
programmes, when an analysis of the constraints and conditions neces-
sary for the successful implementation of the project/programme, includ-
ing sustainability aspects (capacity of the final beneficiary) is carried out.
Regular monitoring allows the Commission to take appropriate measures
to correct or re-address projects.

7.19. With regard to the application of internal control standards in
delegations, the EAMR ‘request’ the Delegations to report the main
issues relating to the period and the measures to be taken. Likewise, the
delegations are not asked to inform Headquarters of all the results of
audits, but rather to highlight the key factors which could contribute to
the legality and regularity of the underlying transactions.

7.20. The finance units of the four geographic Directorates
managing devolved operations (4), carried out a varying coverage
of audits of their Delegations in the form of a review of their
financial systems for processing transactions, their contracting
system and their supervisory and control systems, completed by
an audit of transactions processed by the Delegations. Only two
Directorates had a programme for the regular audit of Delega-
tions. As indicated in last year’s annual report, such an approach
should be extended to all Directorates.

7.20. As indicated in reply to paragraph 7.18 of last year’s report, all
delegations were subject to a systematic verification exercise before devo-
lution was held to be operational (2001 to 2004). A varying combi-
nation of checks, inspections and audits can be used to meet the different
requirements of services as regards the monitoring of devolved Delega-
tion’s activities.

EuropeAid intends to develop the use of best practice for these assess-
ments, building on the experience acquired.

(4) Asia; Europe, the Caucasus and central Asia; the Mediterranean and the

Middle East; Latin America.

C 301/192

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Audit of implementing organisations

7.21.
In 2004, 143 audits of projects were launched by the vari-
ous Directorates of EuropeAid as part of the 2004 audit pro-
gramme. Most audits were still underway in early 2005. These
audits were initiated in addition to those audits carried out on
behalf of the Delegations outside the annual audit programme
or contracted directly by implementing organisations. In most
cases headquarters’ services did not have the information on a
continuous basis on the audits launched by the Delegations.
‘CRIS-audit’, a module that should contain comprehensive infor-
mation on audits, has been incorporated in EuropeAid’s CRIS
financial information system but the data is not complete and
should, as a matter of urgency, be linked to the corresponding
project monitoring information for the purpose of enabling a
continuous monitoring of legality and regularity requirements.

Internal audit capability

7.21. Delegations are required to report on audits launched by them
in their External Assistance Management Reports (EAMR), the system
has provided for headquarters to receive the information during 2004 on
a regular basis.

It is now possible to link CRIS audit information to the corresponding
project information.

In 2004, the internal audit capability unit carried out an
7.22.
update of its reviews of the internal control standards, making
highly relevant recommendations on undertaking more detailed
risk analyses and on improvements of the supervisory and con-
trol systems, and issued two reports regarding specific issues. The
unit also finalised workload assessment reports of two Delega-
tions. As already stated in the 2003 Annual Report, it is question-
able whether these assessments should be carried out by the inter-
nal audit capability unit, considering the very limited staff
resources available. The internal audit capability unit’s priority
should be geared towards evaluating the systems which should
ensure the legality and regularity of transactions and towards
assisting the Director-General
in formulating a well-founded
annual statement in particular, on the quality of the control pro-
cedures and reporting systems, both at headquarters and Delega-
tions.

7.22. The Commission Communication which set up Internal Audit
Capabilities identified three objectives for them: two relate to the control
of risk and internal control system and the third with making recom-
mendations to improve efficiency and effectiveness of operation and
ensure economy in the use of resources.

The workload assessments carried out by the IAC respond to this third
objective. Human resource management had been identified as a risk by
EuropeAid in its risk self-assessment and the Communication on decon-
centration of January 2004 required Relex IACs to jointly audit work-
load assessments in deconcentrated delegations to ensure the number of
staff can carry the new increased workload.

Ex post verifications

7.23. The ‘Programming, internal controls and ex post controls’
unit carried out ex post checks on a sample of EuropeAid pay-
ments made during the first nine months of 2004. The low level
of errors found was confirmed by the Court’s own work on these
types of transactions (see paragraph 7.29).

30.11.2005

EN

Official Journal of the European Union

C 301/193

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Transaction controls

7.24.
EuropeAid’s headquarters and Delegations carry out
checks and controls on transactions processed at that level. In
some cases, where the payment claims are accompanied by a
report by an external auditor certifying the expenditure in ques-
tion, or that have been the subject of a field audit by staff of the
Commission, the Commission assesses whether underlying trans-
actions undertaken by the implementing organisations are legal
and regular in substance. In other cases, the Commission relies on
documents provided by implementing organisations, and it
checks that the payment claim is plausible within the terms of the
contract or financing agreement and the budget foreseen.

Supervisory and control systems at the level of the
Delegations

7.25. The Court visited five Delegations (Bosnia, Cambodia,
Kazakhstan, the Philippines and Syria) to assess the supervisory
and control systems and to audit a number of transactions for
which EuropeAid was the Authorising Officer by delegation. The
review of the supervisory and control systems at the Delegations
indicated that the procedures carried out were generally sufficient
to ensure that the commitments and payments processed by the
Commission were legal and regular.

7.26. Generally, the use of and procedures for the appointment
of external auditors are provided for in the project financing
agreements. Such provisions were worded vaguely in the financ-
ing agreements whose external audit reports were reviewed by the
Court. This left the implementing organisation with a wide scope
for taking a variety of approaches for the selection of external
auditors and the setting of their objectives.

7.24. Commission’s monitoring and control systems aim at ensuring
the compliance of contract partners with the contractual requirements as
required by the financial regulations.

External audits provide an independent assurance on the quality of the
management systems put in place for project implementation and on the
eligibility of the expenses incurred. Provisions as regards audits (certifi-
cation of the accounts for certain kinds of expenditure or for the totality
of the expenditure) are contained in financing agreements and contracts.

Complementary checks and audits on the contract partners are carried out
on the basis of risk assessments since, in many cases, a detailed exami-
nation of their overall internal control systems would be disproportion-
ate on top of normal checks concerning legality and regularity of pay-
ments.

Financial procedures and controls have been set up with the aim of estab-
lishing a balance between the level of risk and the controls effected, tak-
ing into account the different management modalities.

7.26. 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. Contract provisions
for ‘certification audits’ have also been improved. For instance, in order
to keep improving control over the selection of auditors by beneficiaries
and implementing organisations, the Commission intends to introduce
appropriate conditions concerning basic criteria for the selection of audi-
tors in standardised terms of reference for audits that beneficiaries
and implementing organisations have to comply with when they select
and contract auditors.

C 301/194

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.27.
In the countries visited by the Court, 14 external audit
reports (13 contracted by implementing organisations and one by
the projects were reviewed, of which
the Commission) of
12 related to projects audited on the spot by the Court. Written
terms of reference did not exist for two of the 14 external audits.
Regarding the remaining 12, the Court’s 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 fore-
seen in their specific terms of reference. However, only one, con-
tracted by an implementing organisation, specifically stated that
compliance with EU funding requirements had to be covered. Not
surprisingly, the findings of this audit were confirmed by the
Court’s own work, whereas in the case of eight out of the
12 external audit reports of projects checked on the spot by the
Court, the Court detected errors not reported by the external
auditors.

Audit of transactions

Audit of transactions carried out at Delegation level

7.28.
For each Delegation visited, a sample of transactions was
audited at that level. These comprised 30 payments (for a total of
8,4 million euro) and 10 tenders (for a total of 12,7 million euro).

7.29. The work carried out by the Court on payments made
to implementing organisations revealed only a low level of errors.

Audit of transactions carried out at implementing
organisation level

7.30. The Court visited 17 projects managed by the implement-
ing organisations, where a sample of 237 transactions in total was
checked with the aim of concluding on their legality and regular-
ity and of verifying the functioning of their internal control sys-
tems.

7.31. The Court’s audits of the projects revealed, in three out of
17 implementing organisations visited on the spot, weaknesses in
their internal controls due to a lack of a proper segregation of
duties between the authorisation and accounting of payments.

7.32. A significant number of errors in terms of occurence or
material impact on expenditure, were found in transactions exam-
ined at the level of 11 of the projects audited. The most frequent
types were non-respect of the prescribed contracting procedures
(encountered in eight projects out of the 17 audited on the spot),
insufficient supporting documentation (five out of 17) and ineli-
gible expenditure (4 out of 17).

7.27.
EuropeAid is issuing a revised version of the Practical Guide to
EC External Aid contract procedures. The revised standard grant con-
tract will contain terms of reference for the use of beneficiaries. These
terms of reference will specifically address compliance with the contract
terms including those relating to procurement and eligibility. Standard
terms of reference of this type should be distinguished from terms of ref-
erence for audits launched by the Commission which can be drafted on a
case-by-case basis.

7.31-7.32. The Commission, over the last years, has taken action to
address deficiencies in the application of contractual procedures by imple-
menting organisations through the introduction of standard contracts,
including the introduction of audit reports according to which auditors
are required to check the respect of applicable rules by the beneficiaries.
The Commission is currently revising the template of the audit reports
and developing improved terms of reference for the auditors.

30.11.2005

EN

Official Journal of the European Union

C 301/195

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Analysis of Annual Activity Reports and the Statements of the
Authorising Officers by delegation

7.33. The Court reviewed the Annual Activity Reports and the
statements by the Director-General of EuropeAid and the
Director-General of DG ECHO. The review concentrated on the
parts of the reports which dealt with the Commission’s follow-up
of recommendations given by the Court of Auditors, the Com-
mission’s internal auditors and of the actions formulated in the
Commission’s action plan (attached to its Synthesis of Annual
Activity Reports on 2003 (5)) 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
Directors General were justified and based on sufficient evidence.

7.34. The Court found that the information presented in the
reports was accurate and that, it reflected fairly the activities car-
ried out on the follow-up to action plans and on the implemen-
tation of the internal control standards. Both DG ECHO and
EuropeAid have taken appropriate actions to remedy short-
comings identified in 2003 and to complete and improve the
compliance with the internal control standards.

7.35.
Since January 2004, Delegations have had to report to
headquarters on the external audits carried out, matters affecting
legality and regularity and the relevant actions taken. Neverthe-
less, in the sample checked by the Court, this was not always
being done consistently (see paragraph 7.19).

7.36.
EuropeAid’s Annual Activity Report gives a description of
internal control systems, mainly focusing on transactions
between the Commission and the implementing organisations,
which generally function satisfactorily. A methodology for audits
of implementing organisations was set up in 2004. However, its
practical application needs time,
in particular, the use and
follow-up of the results of the audits are not yet adequate for the
purpose of deriving assurance concerning the legality and regu-
larity of transactions managed by those organisations.

(5) Synthesis of Annual Activity Reports 2003 of DGs and Services,

COM(2004) 418 final of 9.6.2004.

7.35. The Commission refers to its reply to paragraph 7.19.

7.36.
EuropeAid improved its audit function in 2004. It set up a
comprehensive audit strategy to be applied by both EuropeAid and del-
egations, defined risk criteria for the identification of audits to be under-
taken, issued standard terms of reference for the auditors, and put in
place CRIS audit, a computerised system for supporting and monitoring
audits.

The follow-up of audit results is part of budget heading management
functions in delegations and headquarters. Audits are integrated into the
whole project management cycle.

In addition, the findings of previous audits are taken into account when
deciding whether or not to include the project in the annual audit plan,
established on the basis of a risk assessment.

Nevertheless, the Commission continues to develop and implement the
audit methodology referred to by the Court.

C 301/196

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.37. The Director-General of EuropeAid declares 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 judge-
ment and on information available to him. The Court’s audit con-
firms this statement for the systems 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 expen-
diture underlying the financial reports presented by implement-
ing organisations are still inadequate and should be strengthened
(see paragraph 7.27).

7.37. All the necessary supervisory and control systems were in place
in 2004 to enable the Director-General to give reasonable assurance as
to the legality and regularity of transactions carried out by EuropeAid in
2004.

As regards the use of audit results, external audits are not the only source
of assurance available on the legality and regularity of underlying trans-
actions. Other sources are also available, such as optional ex ante con-
trols, ex post transactional control, missions on the ground and moni-
toring reports.

These controls were considered adequate for the purpose of deriving over-
all assurance in the context of the Director-General’s Declaration.

7.38. The statement given by the Director-General of DG ECHO
includes a reservation on the non-respect of the contractual pro-
cedures by a humanitarian organisation. The statement provides
sufficient information on the underlying problem and specifies
what the potential financial impact could be.

Conclusions

7.39. During 2004, the Commission continued to improve its
supervisory and control systems in line with some of the Court’s
recommendations in the 2003 Annual Report as shown in
Table 7.1. The effects of this improvement have not yet been
completely felt at the implementing organisation level. The
Court’s audit revealed few errors affecting transactions at the level
of the Delegations (see paragraph 7.29). However, as in previous
years, weaknesses in the internal controls (see paragraph 7.31),
and a relatively high number of errors in terms of frequency and
financial impact, were detected at the level of the project imple-
menting organisations (see paragraph 7.32). The most common
error was the failure to ensure that contracting procedures, includ-
ing tenders, were in line with the Commission’s requirements. It
underlines the necessity to have a comprehensive approach to the
supervision, control and audit of these organisations.

7.39. The Commission notes that the Court considers that the Com-
mission is continuing to improve its control system and observes that the
audit carried out by the Court in the delegations confirms the Commis-
sion’s data.

The Commission, over the last years, has taken action to address defi-
ciencies in the application of contractual procedures by implementing
organisations.

7.40. The Annual Activity Reports of DG ECHO and of Euro-
peAid gave descriptions of the internal control systems in place.
DG ECHO reduced the risk of illegal or irregular transactions by
having an operational system of project audits although clearer
instructions should be given to external auditors (see para-
graphs 7.11 to 7.14). In the case of EuropeAid, the Court cannot
derive assurance from the report and the statement (see para-
graph 7.36) since essential components of the supervisory
and control systems for the legality and regularity of underlying
transactions at the level of implementing organisations need to be
further improved to be fully operational.

7.40. As regards DG ECHO, the Commission acknowledges the con-
clusion of the Court that the system of operational audits reduces the risk
of illegal or irregular transactions. The Commission reviews and clari-
fies, on an ongoing basis, the matters that should be reported on by the
external auditors.

As regards EuropeAid, the Commission agrees that all the system com-
ponents of internal control can and should be improved. However, all the
necessary supervisory and control systems were in place in 2004 to
enable the Director-General to give reasonable assurance as to the legal-
ity and regularity of transactions carried out by EuropeAid in 2004.

30.11.2005

EN

Official Journal of the European Union

C 301/197

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The steady progress made by EuropeAid in this area is acknowledged by
the Court. Audits are a supplementary assurance, in addition to the con-
formity and ‘reality checks’ carried out entirely by the services of the Com-
mission, before the payment. Such extra assurance also includes the
Annual Audit Plan, ex post transactional controls, missions on the
ground, and monitoring reports.

Recommendations

7.41. Based on the above, the Court recommends that:

7.41.

(a)

the Commission clarifies with the UN agencies the Court’s
right of access to projects managed by them (see para-
graph 7.8);

(a) The UN has been reminded that as part of its audits of the Com-
mission, the Court of Auditors may verify UN-implemented actions,
and is entitled to do so by the verification clause.

(b) EuropeAid’s risk assessment should cover the implementing

organisation level (see paragraph 7.17);

(b) At project level, the toolbox of planning and monitoring instru-
ments in use in the Commission allows due account to be given to
risks and action to be taken to manage or mitigate these risks where
they arise.

Please refer also to the reply to paragraph 7.17.

(c)

including the
the information provided by Delegations,
results of project audits, should be more systematically veri-
fied and followed up through headquarters’ audits (see para-
graphs 7.19 and 7.20);

(c) EuropeAid intends to build on the experience acquired and extend

the use of best practices.

(d)

information relating to all audits, even those contracted by
implementing organisations, should be recorded in CRIS and
linked to the corresponding project management informa-
tion (see paragraph 7.21);

(d)

It is now possible to link CRIS audit information to the correspond-
ing project information (see paragraph 7.21).

(e)

the terms of reference for the audits of projects should be
more specific in their requirements and cover checks on the
compliance with the Commission’s requirements regarding
contracting procedures, including tenders, and the eligibility
of expenditure (see paragraphs 7.11 to 7.12 and 7.32). This
would facilitate the quality control checks on external audits
that the Commission should carry out.

(e) As a result of its audit checks and risk analysis of the implement-
ing partners systems, the Commission (DG ECHO) has focused its
audit activities by emphasising the control of the tendering proce-
dures operated by the implementing partners. The Commission will
examine how it can further improve the already extensive quality
control checks on its projects and will give further instructions to the
external auditors concerning the checks to be carried out.

EuropeAid is issuing a revised version of the Practical Guide to EC
External Aid contract procedures. The revised standard grant con-
tract will contain terms of reference (ToR) for the use of beneficia-
ries. These ToR will specifically address compliance with the con-
tract terms including those relating to procurement and eligibility.

C 301/198

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Special Report No 3/2001 concerning the Commission’s
management of the international fisheries agreements

7.42. The Court published Special Report No 3/2001 concern-
ing the Commission’s management of international fisheries
agreements in July 2001. The main observations and recommen-
dations, which were taken up by the Council in the discharge pro-
cedure (6), focused on:

(a)

the purpose of the agreements: the Court pointed out that
the intertwining of the commercial role and the development
aid aspects of some agreements made them difficult to evalu-
ate; it also found a lack of consistency and poor coordina-
tion between the international agreements and the structural
aspect of the common fisheries policy;

(b) cost-benefit ratio: the Court recommended setting up a sys-
tem of ongoing monitoring and a detailed analysis of the
costs/benefits of the agreements; it also regretted the fact that
fishing opportunities are not always fully exploited.

Purpose of the agreements

Intertwining of commercial role and development aid aspects

7.43. The Commission’s views on fisheries agreements have
changed since the publication of the Special Report (7). The Com-
mission, as expressed in its communication, considers that the
coherence between the objectives of the common fisheries
policy (8) and the European development policy (9) should be
reinforced. The Commission has drawn up a draft standard agree-
ment in line with its new approach but there has not yet been a
chance to incorporate this into an agreement with a non-member
country.

(6) Council Recommendation of 5 March 2002 on the discharge to be
given to the Commission in respect of the implementation of the gen-
eral budget of the European Communities for the financial year 2000
(SN 1651/02).

(7) Communication from the Commission on an integrated framework
for fisheries partnership agreements with third countries (COM(2002)
637 final, 23.12.2002).

(8) To maintain the European presence in distant fisheries and to protect

European fisheries sector interests.

(9) To foster developing countries’ capacities to exploit their marine
resources, to increase local value added and to obtain the fairest price
for access rights to their economic exclusion zones by foreign fleets.

7.43. The Commission has already concluded the negotiations for
fisheries protocols which are in line with the new policy on Fisheries Part-
nership Agreements (e.g. with Seychelles) and for new framework agree-
ments with a fisheries protocol (e.g. Micronesia, Solomon and Comores).
These agreements are in the legislative process with the Council and the
European Parliament.

30.11.2005

EN

Official Journal of the European Union

C 301/199

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.44. However, the Parliament (10) and the Council (11) have put
forward two concepts that do not appear explicitly in the com-
munication: supplying the Community market and contributing
to employment in the EU. Thus the risk of inconsistency as
expressed in the Special Report remains.

7.44. The Fisheries Partnership agreements are an integral part of the
common fisheries policy and as such contribute to the objectives set out
in Article 33 of the Treaty.

Coordination with the structural aspect

7.45. Amendments to the structural assistance regulations (12)
have eliminated potential sources of inconsistency by eliminating
all forms of aid for modernisation of ships and creation of joint
enterprises.

Cost/benefit ratio

Introduction of an evaluation system

7.46. The Commission has had a study (13) carried out to assist
it in introducing an evaluation system for fisheries agreements.
The Commission has set up an operational evaluation system
which, however, is not yet finalised. Moreover it has not drawn
up the action plan for improving the evaluation of stocks outside
Community waters which it promised to present before the end
of 2002 (14); or put in hand a new overall evaluation of the fish-
eries agreements, as announced in its report to the Council (15).

7.46. The action plan for improving the evaluation of stocks outside
Community waters will be established once improved scientific advice is
available. Additionally, the Commission will consult the interested par-
ties in this area.

The Commission, however, systematically includes in the negotiation of
fisheries agreements and protocols provisions to reinforce the scientific
advices and stock assessments.

Effective use of fishing opportunities

7.47. The observation made in the Special Report about under-
utilisation, mainly concerned the agreements with Greenland and
Senegal.

7.47.

(a) The Commission proposed to the Council that the Greenland
Agreement should include a mechanism to allow it to

(10) European Parliament resolution of 9 October 2003 adopted the Com-
mittee on Fisheries’ report on the Commission communication.
(11) Council of the European Union, note from Coreper to the Council,
11485/04 of 15 July 2004, approved by the Council at its 2599th
meeting, 19 July 2004.

(12) Council Regulation (EC) No 2369/2002 of 20 December 2002
amending Regulation (EC) No 2792/1999 laying down the detailed
rules and arrangements regarding Community structural assistance in
the fisheries sector (OJ L 358, 31.12.2002, p. 49).

(13) Study identifying criteria and indicators for the evaluation of bilateral

fisheries agreement (Oceanic Development, December 2003).

(14) Communication from the Commission on the reform of the common
fisheries policy (roadmap) (COM(2002) 181 final, 28.5.2002).
(15) Commission Report to the Council — Measures taken by the Com-
mission in response to the comments accompanying the Council Rec-
ommendation — Follow-up report on the 2000 financial year
(COM(2002) 772, 23.12.2002).

C 301/200

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b) The revision of the fourth Protocol focused on the removal of the
theoretical fishing possibilities. Some quotas were taken out and
others were added or increased.

The Council conclusions of 24 February 2003 stated that the
financial contribution should remain unchanged and that it should
be based on real fishing possibilities for Community fishing vessels
and the need to assist Greenland in the restructuring of its sectoral
fisheries policy through a mechanism of budget support.

transfer unused quotas
from one Member State to
another (16). The Council has not adopted this proposal (17).

(b) For the same Agreement the Special Report pointed out that
many of the fishing possibilities theoretically available did
not exist anymore. Following negotiations in 2003, the
inflated figures for Greenland fish stocks have now been
removed from the Agreement. But the Union is still paying
the same amount for the right to fish.

(c) The Senegal Agreement now contains extra flexibility in the
management of licences which should help to improve the
utilisation rate.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORTS

Special Report No 10/2004 concerning the devolution of EC external
aid management to the Commission Delegations

7.48.
In May 2000, the Commission decided to devolve aid
management tasks and responsibilities to its 78 Delegations over
a period of three years to improve its delivery speed and quality.
Since mid-2004, almost every Delegation is responsible for
project preparation, contracting, and financial and technical
implementation, and they have received substantial extra human
and technical resources. The central services are moving away
from direct management of projects, towards monitoring and
supporting Delegations.

(16) Proposal for a Council Regulation on the conclusion of the Protocol
modifying the Fourth Protocol laying down the conditions relating to
fishing provided for in the Agreement on fisheries between the Euro-
pean Economic Community, on the one hand, and the Government
of Denmark and the Local Government of Greenland, on the other
(COM(2003) 609, 16.10.2003).

(17) Council Regulation (EC) No 1245/2004 of 28 June 2004 on the con-
clusion of the Protocol modifying the fourth Protocol laying down
the conditions relating to fishing provided for in the Agreement on
fisheries between the European Economic Community, on the one
hand, and the Government of Denmark and the local Government of
Greenland, on the other (OJ L 237, 8.7.2004, p. 1).

30.11.2005

EN

Official Journal of the European Union

C 301/201

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.49. The Commission’s management of the devolution process
can be considered reasonably successful, at least as far as the Del-
egations are concerned. The planning process, however, did not
incorporate a number of elements which could have facilitated
the control over that process and some problem areas need fur-
ther attention.

7.49. The toolbox of planning and monitoring instruments that has
been applied allowed due account to be given to particular situations (e.g.
regional delegations, size/complexity of portfolio, easiness/difficulty of
recruiting staff, etc.) and proved to be effective and appropriate for the
management of the devolution process.

7.50. Regarding the results of devolution, it remains necessary
to speed up, harmonise and simplify the financial procedures. Not
having prepared, at an early stage, a complete set of performance
indicators to monitor the devolution process, makes it difficult to
measure progress against the main objectives.

7.50. Devolution was just one element of the overall reform package.
The results of the reform are closely monitored, and Council and Parlia-
ment are kept regularly informed. It is not possible to dissociate the
results of devolution from the results of the rest of the package. Never-
theless, not only was devolution largely completed within the timescale
envisaged, but it did not result in the losses of quality, or reduction in
speed, which many observers feared. For instance, prior to the reform, the
number of years needed to design, implement and complete a project was
increasing since 2000, this trend has been reversed, and projects are now
completed faster.

7.51. The main recommendations made by the Court are the
following:

7.51.

(a) appropriate indicators should be introduced, relating to both

delivery speed and quality of aid;

(a) A set of indicators based primarily on financial data was put in
place from the beginning of the reform. Work on the development
of complementary indicators, to measure improvement in speed and
quality of aid delivery is ongoing.

(b)

the costs of devolution should be monitored against the esti-
mated costs;

(b) The Commission believes that at the end of 2005, after the comple-
tion of the devolution process, the monitoring of costs will allow for
a comparison with initial estimates.

(c)

recruitment procedures, salaries and other conditions of
employment should attract staff with the appropriate exper-
tise;

(c)

In recent years, major efforts have been made to improve staff man-
agement within the External Service. Other measures planned under
the administrative reform of 2002 are now gradually being imple-
mented. Efforts are underway to find more effective ways of filling
posts in reputedly difficult countries. None the less, the Commis-
sion acknowledges that improvements are still needed and is study-
ing ways of achieving them.

(d) Commission’s headquarters monitoring and support role
should be further developed, notably by improving the finan-
cial information systems and addressing outstanding train-
ing needs.

(d) The objective of the reorganisation of EuropeAid in early 2005 is
to improve the monitoring and support role of headquarters. More-
over, enhancing the role of CRIS (Common Relex Information Sys-
tem) as a planning and management tool will further strengthen
EuropeAid’s capacity in these fields. Significant efforts are being
made to ensure proper training of delegation staff. More training
sessions are now being organised overseas, and e-learning modules
are being developed.

C 301/202

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Special Report No 4/2005 concerning the Commission’s
management of economic cooperation in Asia

7.52.
EU economic cooperation expenditure in Asia is gov-
erned by Council Regulation (EEC) No 443/92. It is implemented
in two different ways: bilateral projects, between the Commission
and individual beneficiary countries, and regional programmes
covering sub-regions, or those covering the whole of Asia (Asia-
wide programmes).

7.53. The policy and the operational strategies are very broad,
resulting in a wide variety of projects covering many different
areas. Impact and output indicators concentrate on some aspects
of the process rather than on the result of the expenditure. As a
result, overall impact is difficult to mesure and there is only a lim-
ited basis to assess the effectiveness of the expenditure.

7.53. With the reform of external assistance in 2000 and the intro-
duction of country and regional strategy papers in conjunction with the
strategic communications on Asia, the Commission aims to achieve bet-
ter focus of development expenditure, including that on economic coop-
eration.

The Commission agrees with the Court that the definition and monitor-
ing of indicators could be improved and this has been addressed by the
Commission in the preparation of its Country and Regional Strategy
Papers and related indicative programmes for 2005 and 2006.

7.54. The bilateral projects have faced long delays between the
identification phase and the starting of the projects and during
their implementation. Their monitoring was not always satisfa-
tory. The Asia-wide projects, although subject
to a heavy
and complex application procedure, had produced positive results
and were generally well monitored. For many of the bilateral as
well as for the Asia-wide projects sustainability is in doubt.

7.54. The delays between the identification phase and the start of the
projects, as well as those delays that were identified in projects under
implementation, concern bilateral projects designed before the reform of
EC external assistance. As a result of this reform, including the estab-
lishment of EuropeAid (January 2001) and the devolution of aid man-
agement to the Commission Delegations, together with the New Finan-
cial Regulation (January 2003), project delays will be limited
and contained.

In the current design of projects, a monitoring, audit and evaluation plan
is obligatory. In parallel, since 2000, monitoring has also been system-
atically carried out by independent experts. Within this monitoring exer-
cise economic cooperation projects in Asia have scored well in terms of
potential for sustainability.

7.55. The Commission is of the firm view that economic cooperation
must remain an integral part of its development actions in a single devel-
opment strategy. As such, the Commission considers economic coopera-
tion as one of the intertwined components of its development assistance.
The Commission, however, recognises that economic cooperation indica-
tors could be further developed.

7.55. The Court recommends the Commission to set a clear
strategy which recognises the specific nature of the economic
cooperation and of its objectives and contains indicators allow-
ing for proper monitoring and progress assessment; to improve
the procedures for the approving, implementation, monitoring
and evaluation of the bilateral projects; to reconsider the applica-
tion procedures for the Asia-wide programmes and to extend the
successful system of monitoring the Asia-wide projects to other
projects.

30.11.2005

EN

Official Journal of the European Union

C 301/203

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Monitoring and evaluation of projects has been enhanced by obligatory
use of the logical framework tool. The requirement to conduct an evalu-
ation is now systematically included in the Financing Agreement of all
projects. The results orientated monitoring (ROM) system, introduced
since 2002, provides standardized monitoring information on projects
and programmes.

The ongoing revision of AIDCO Practical guide to contractual proce-
dures will simplify the application process for grants to the extent allowed
by the Financial Regulation, as well as clarify the role of the delegations
in the evaluation.

30.11.2005

EN

Official Journal of the European Union

C 301/205

CHAPTER 8

Pre-accession strategy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Scope of the audit of the Phare and Turkey programmes

Evaluation of supervisory and control systems

Directorate-General for Enlargement

Need for improved project design

Budgetary commitments for Bulgaria and Romania

System of closure audits

Paragraph

8.1-8.5

8.6-8.35

8.6

8.7-8.19

8.7

8.8

8.9

8.10-8.13

Observations on the operation of supervisory and control systems at EC Delegation level 8.14-8.15

The operation of the management and control systems in new Member States and can-
didate countries

The operation of systems for the control of national co-financing agreements

New reporting requirements introduced but…

…the Final Declarations come late

Need for better overview

Eligibility rules for parallel co-financing

Insufficient verification of parallel co-financing at national level

Conclusions on supervisory and control systems

Substantive tests on transactions — Payments made at the implementing level

8.16-8.19

8.20-8.28

8.21

8.22

8.23

8.24-8.26

8.27-8.28

8.29

8.30

Annual activity report and declaration of the Director-General for Enlargement

8.31-8.32

Conclusions and recommendations

8.33-8.35

Conclusions of the Court’s audit relating to the Phare and Turkey programmes

8.33-8.34

Recommendations: need for further improvements

General Conclusion on pre-accession strategy

8.35

8.36-8.37

C 301/206

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

for

(Phare,

8.1. Heading 7 of the Financial Perspective contains the appro-
priations
ISPA
the pre-accession instruments
and Sapard) for 10 Central and Eastern European countries (1)
and the pre-accession assistance programme for Turkey. For the
eight Central and Eastern European countries that became Mem-
ber States on 1 May 2004 no new expenditure was committed
after accession (except for Sapard, where commitments were
made until end 2004). Payments however will continue until at
least 2006.

8.2. The Phare programme (2) and the pre-accession assistance
programme to Turkey (3),
implemented by the Directorate-
General for Enlargement, provide support for institution-building
and investment. The programmes are mainly (4) implemented by
decentralised management, either with ex ante control of procure-
ment and award decisions (DIS (5)) or only ex post control
(EDIS (6)). Payments to contractors and beneficiaries are, under
decentralised management, made by national authorities, with
ex post control by the Commission.

8.3.
Sapard (7) has a similar objective in the field of agriculture
and rural development. The audit of this instrument is reported
upon in Chapter 4, the Common Agricultural Policy (see para-
graphs 4.69 to 4.76). The conclusions are integrated into the gen-
eral conclusions on pre-accession strategy in paragraph 8.37.

8.4.
ISPA (8) was set up to facilitate accession in the fields of
environment and transport. The audit of this instrument is

(1) Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia,

Slovakia, Bulgaria and Romania.

(2) Poland, Hungary and Restructuring in the East, Council Regulation

(EEC) No 3906/89 (OJ L 375, 23.12.1989, p. 11).

(3) Council Regulation (EC) No 2500/2001 of 17 December 2001 con-
cerning pre-accession financial assistance for Turkey (OJ L 342,
27.12.2001, p. 1, rectified by OJ L 285, 23.10.2002, p. 26).

(4) Of total Phare/Turkey payments made in 2004, approximately 80 %
concerned programmes with decentralised implementation, 8 % cen-
tralised implementation, 7 % were implemented by joint management
(mainly decommissioning of Nuclear Power Plants via the EBRD) and
the remaining 5 % is managed by the EC Delegation in Turkey
(devolved management) for the completion of former cooperation
programmes with Turkey (mainly MEDA).

(5) Decentralised Implementation System.
(6) Extended Decentralised Implementation System where the Commis-

sion’s ex ante control of tendering and contracting is waived.

(7) Special Accession programme for Agriculture and Rural Development,
Council Regulation (EC) No 1268/1999 (OJ L 161, 26.6.1999, p. 87).
(8) Instrument for Structural Policies for Pre-Accession, Council Regula-

tion (EC) No 1267/1999 (OJ L 161, 26.6.1999, p. 73).

30.11.2005

EN

Official Journal of the European Union

C 301/207

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

reported upon in Chapter 5, Structural measures (see para-
graphs 5.55 and 5.56). The conclusions are integrated into the
general conclusions on pre-accession strategy in paragraph 8.37.

8.5.
Expenditure in 2004 on pre-accession strategy totalled
3 053 million euro. Graphs 8.1 and 8.2 show a breakdown of
the funds committed 1 718 million euro and spent in 2004 (see
paragraphs 2.4 to 2.29 for observations on the budgetary man-
agement).

Graph 8.1 — Breakdown of commitments by budgetary area in 2004

Source: 2004 revenue and expenditure accounts.

Graph 8.2 — Breakdown of payments by budgetary area in 2004

Source: 2004 revenue and expenditure accounts.

C 301/208

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Scope of the audit of the Phare and Turkey programmes

8.6. The Court:

(a)

evaluated the supervisory and control systems, with a spe-
cific focus on the operation of systems for the control of
national co-financing agreements
(see paragraphs 8.7
to 8.29);

(b) carried out substantive tests on selected transactions in Bul-
garia, the Czech Republic, Poland, Romania and Turkey (see
paragraph 8.30);

(c)

examined the annual activity report and declaration by the
(see paragraphs 8.31
Director-General
and 8.32).

for Enlargement

Evaluation of supervisory and control systems

Directorate-General for Enlargement

for Enlargement

8.7. The Directorate-General
is inter alia
responsible for programming and commitment of expenditure,
payments to National Funds (9), monitoring of the full project
cycle including national co-financing, evaluations and closure
audits. The Directorate-General is also responsible for ex ante con-
trols on procurement under decentralised management. The
Court’s audit has led to observations concerning programming
and budgetary commitments (see paragraphs 8.8 and 8.9),
co-financing (see paragraphs 8.20 to 8.26) and closure audits (see
paragraphs 8.10 to 8.13).

Need for improved project design

8.8. The projects from the programming years 2000 and 2001,
to which most of the payments made in 2004 relate, suffer in
some cases from weak design, complex objectives and unclear
and unenforceable conditions, thereby increasing the risk of
errors in implementation. Consequently, the Commission had to
frequently modify the project fiches (10).

(9) 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.
(10) In 10 out of 16 Phare projects audited the Project Fiches had been

amended.

30.11.2005

EN

Official Journal of the European Union

C 301/209

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

8.9. The increase of the budgetary commitments for Bulgaria and
Romania is the outcome of a decision taken by the Heads of Member
States’ Governments at the Copenhagen summit, aiming at increasing
the speed of their accession preparations. And because the Commission
is aware of weaknesses in the implementing bodies, the increase of the
amounts is conditional on the improvement of management and control
capacity: Hence, the Commission does not exclude limiting these alloca-
tions if the condition are not fulfilled. Moreover, the Commission pays
particular attention to developments relating to the absorption capaci-
ties in its Regular and Monitoring Reports under Chapter 28 (Financial
Control).

8.11. As indicated in paragraph 8.28 it has not been established that
there are in fact significant risks in this area.

Budgetary commitments for Bulgaria and Romania

8.9. Budgetary commitments for the national Phare pro-
grammes in Bulgaria and Romania were increased from 360 mil-
lion euro in 2003 to 578 million euro in 2004 (+ 60 %), in line
with their accession roadmaps (11). When authorising commit-
ments for approved programmes under decentralised implemen-
tation, the Commission has to ensure that the countries con-
cerned have an effective internal control system in place (12). The
Directorate-General for Enlargement is aware of several weak-
nesses in the management capacity of the national authorities
and in the 2004 Annual Activity Report (see paragraphs 8.31
and 8.32) a reservation is made in respect of ‘Gaps in Romania’s
and Bulgaria’s capacity to manage and implement increasing
amounts of aid’. It is, however, inconsistent to authorise substan-
tially increased budgetary commitments in a year when it was
considered necessary to express a reservation regarding the man-
agement capacity (13).

System of closure audits

In 2001 the Directorate-General for Enlargement adopted
8.10.
a closure audit strategy. The system of closure audits is one of the
important tools for ensuring the legality and regularity of the
Phare transactions.

8.11. The follow-up of the audits has been improved, although
there are still some delays. The closure audits do not cover in suf-
ficient depth expenditure declared as parallel national
co-financing (14). This is unsatisfactory given the risk and prob-
lems in this area, as identified by the Court’s audit (see para-
graphs 8.20 to 8.28).

8.12. The number of audit reports followed up increased from
18 in 2003 to 57 in 2004, but progress with carrying out clo-
sure audits was slower in 2004 than 2003 (15). The result from
the closure audits was, however, the same in 2004 as in previous
years, with no major irregularities being found in the underlying
transactions.

(11) Communication COM(2002) 624 of 13.11.2002.
(12) Article 164 of the Financial Regulation.
(13) The Director-General for Enlargement has announced corrective
actions, amongst others a reassessment of the allocation of funds for
the period 2004 to 2006 based on a management system assessment
to be carried out in 2005.

(14) Joint co-financing implies that each project element is simultaneously
co-financed and payments are made simultaneously by the partners.
The other form is parallel co-financing, which implies that the partners
finance different project elements, possibly at different times, and
related payments are made separately.

(15) 12 draft audit reports submitted in 2004, compared with 49 in 2003.
The number of new audits launched was 32 in 2004, compared with
34 in 2003.

C 301/210

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

8.13. The Commission’s instructions to the contracted auditors
on reporting criteria were not clear enough. This reduced the rel-
evance of the audit work. Moreover, this led to delays in the
follow-up procedures in cases where the reported findings were
not sufficiently clear to allow the Authorising Officer to take a
decision concerning possible recoveries.

8.13. The Commission’s instructions on reporting are set out in the
terms of reference (TOR) of the contract concerned. More specific details
are provided for each individual assignment when they are launched,
where necessary identifying specific risks which the auditors are expected
to address. Moreover, the contracted auditors are convened once a month
to discuss progress on each audit.

In order to allow the Authorising Officer to take a decision concerning
possible recoveries, guidelines on the treatment of audit findings have
been issued in 2004.

Observations on the operation of supervisory and control
systems at EC Delegation level

8.14. The EC Delegations give their ex ante approval for tender-
ing and contracting for the DIS managed programmes. For many
years this function has been the key control to ensure the legality
and regularity of the underlying transactions. The EC Delegations’
ex ante approval generally works well. However, when contract-
ing is rushed, which is not unusual in Bulgaria and Romania, the
quality of the ex ante approval is at risk.

8.14. The concerns of the Court on Bulgaria and Romania are reflected
in the reservation in the Annual Declaration of the Director General.
Concerning the issue of the quality of ex ante approval, this is a process,
not an event, spread over the whole procurement process, sometimes sev-
eral months, the signature of the contract being the final stage. Conse-
quently, as indicated in paragraph 8.29, the Commission’s controls con-
tinue to be effective.

8.15. The amount of work needed for the Commission’s ex ante
approval reflects the quality of the management capacity of the
candidate country. In Bulgaria and Romania a heavy burden is put
on the EC Delegations to compensate for the countries’ weak-
nesses in project preparation and tender dossiers.

8.15.
Indeed, a heavy burden rests on the Delegations in Bulgaria and
Romania, but it has to be stressed that the Commission has drawn the
attention of the national authority to take urgent corrective measures in
relation to the present Decentralised Implementation System with
ex ante control of procurement and award decision.

The operation of the management and control systems in
new Member States and candidate countries

8.16. During 2004 the Directorate-General for Enlargement
carried out verification audits as the final step of the EDIS pro-
cess before the Commission decision on waiving the ex ante con-
trol on tendering and contracting. The verification audits, which
were satisfactorily carried out in accordance with the regulatory
framework, initially found some weaknesses. These weaknesses
were remedied before the Commission decision on EDIS.

8.17.
EDIS was granted to nine of the 10 new Member States
in 2004 (16). The process of implementing EDIS has been a major
step towards improving management capacity and control sys-
tems in the new Member States.

8.18. Bulgaria and Romania have drawn up action plans with
the aim of having EDIS in place by January 2006.

(16) For Poland EDIS was granted in March 2005.

30.11.2005

EN

Official Journal of the European Union

C 301/211

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

8.19.
For the first time systems put in place for DIS manage-
ment were accredited for Turkey in October 2003. The Commis-
sion has had more than five years of experience in implementing
pre-accession strategy in candidate countries However, the out-
come of the accreditation process in Turkey, as reflected in the
current situation, indicates that lessons had not been learned
despite the transfer of experience gained from DIS implementa-
tion in Phare countries. The start of the first DIS managed pro-
gramme has been delayed mainly because of staffing problems in
the Contracting and Finance Unit (CFCU) and other bodies, which
could have been eased if the authorities had learned from expe-
rience.

The operation of systems for the control of national co-financing
agreements

8.20. The Court examined the operation of the management
systems put in place for the control of national co-financing
agreements on the basis of a selection of 10 projects in five coun-
tries (17) from the 2000 Phare programme.

New reporting requirements introduced but…

8.21. The Directorate-General for Enlargement has improved
the reporting requirements for national co-financing. The
national authorities now have to certify amounts contracted and
disbursed via National Funds, compare them with the forecast
amounts agreed in Financing Memoranda and, where necessary,
explain the differences between the amounts. The final declara-
tions
should now include the total amount of national
co-financing, split into joint and parallel co-financing.

…the Final Declarations come late

8.22. However, the national authorities are late with submitting
the final declarations and the Directorate-General for Enlarge-
ment does not take sufficient action to remind them of this obli-
gation.

8.22. The National Authorities submitted to the Commission final
declarations that could have been sent within a reasonable timeframe.
Improved reporting standards required by the Commission may have a
delaying influence on submissions.

(17) Czech Republic (2), Poland (3), Slovenia (2), Bulgaria (1), and Roma-

nia (2).

C 301/212

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Need for better overview

8.23. The Directorate-General for Enlargement does not sys-
tematically file amendments to Project Fiches. It is not possible
to verify co-financing effectively without the final version of the
Project Fiche. The interim reporting on parallel co-financing is
incomplete and the Directorate-General for Enlargement is not
able to quantify the total amounts of agreed parallel co-financing.

Eligibility rules for parallel co-financing

8.24. Unlike for Structural Funds, the Commission has not laid
down a clear set of rules to define eligible expenditure for national
contributions. The Financing Memoranda, however, stipulate that
‘taxes, customs and import duties cannot be financed from
Phare’ (18) and therefore, as a corollary, this expenditure is not eli-
gible as national co-financing either. This rule is followed in the
case of joint co-financing, in which the national contribution is
managed along the same lines as the Phare money.

Parallel

co-financing

8.25.
is managed by beneficiary
ministries/authorities and is not part of the normal Phare report-
ing system. In June 2004 the Directorate-General for Enlargement
issued a note to the National Authorising Officers stating that
VAT was accepted as eligible for parallel co-financing provided
that it was specified and duly explained in the final declarations.
In the same note, expenditure provided as parallel co-financing
was accepted up to one year after the expiry date of the Financ-
ing Memoranda.

8.23. Within the Delegations the updated fiches are used to check the
co-financing declarations made in the requests for funds by the National
Authorising Officer.

Prior to 2003 programming and in particular in 2000 and 2001 when
minimum co-financing was still being introduced, parallel versus joint
co-financing was not necessarily stipulated in order to facilitate the
stretched public finances of the pre-accession countries. Therefore, coun-
tries were able to legally choose between the two forms or indeed to com-
bine them during the course of implementation, provided all other legal
requirements were fully respected (such as the 25 % minimum rule for
investment projects). As parallel co-financing can be delivered at the end
of a project there may be nothing to report in the interim context. Since
2003, parallel co-financing, has been virtually phased out in favor of
joint co-financing which is self-verifying with each joint payment. Par-
allel co-financing compliance is nevertheless monitored with each pay-
ment and lastly there is an overall check before the final payment is
made. Following risk assessment a further check may be made at the clo-
sure of accounts procedure stage.

8.24. The rules and practices regarding co-financing for Phare have
been evolving over a decade. For example, parallel co-financing allows
‘in-kind’ contributions and this by definition is excluded under joint
co-financing arrangements. Furthermore, Phare countries would chal-
lenge any legally contentious and retroactive imposition of the most
recent co-financing rules.

8.25.
In order to mitigate the more restrictive rules than those apply-
ing to Member States, in September 2002 the Commission’s guidelines
on the ‘Principles for co-financing’ also included the Structural Funds’
‘Rules of Eligibility’ (which do allow VAT under certain conditions) as a
guidance document. Subsequently, after accession the Commission con-
sidered that it had no legal means to enforce the ineligibility of VAT paid
out of parallel national co-financing. The guidelines were further stream-
lined in June 2004 and to this end a letter was sent to National Autho-
rising Officers where amongst others, the eligibility of VAT, other taxes
and duties was clarified. In fact it was aligned with those followed in the
Structural Funds as most of the recipients had become Member States.

(18) Article 13, paragraph 1, of the General conditions to the Financing

Memoranda.

30.11.2005

EN

Official Journal of the European Union

C 301/213

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

8.26. The Directorate-General for Enlargement’s acceptance of
VAT as eligible expenditure under parallel co-financing does not
have a legal basis. The Phare regulation excludes VAT from com-
munity funding, and the purpose of that exclusion would be cir-
cumvented if VAT were eligible for co-financing.

8.26. The Commission considers that treatment of VAT as eligible
expenditure, in some cases under parallel co-financing, is consistent with
the Phare regulation, since the Commission considers that this regula-
tion sets out the rules applicable to Community financing only.

Insufficient verification of parallel co-financing at national
level

8.27. The National Funds collect data on parallel co-financing
when preparing Requests for Funds. The data are not verified,
however, which may allow shortfalls in co-financing and ineli-
gible expenditure to go undetected over a long period.

8.27. This issue has been tackled as of September 2002. In June
2004, an instruction note sent to the National Authorising Officers
amended the format of the co-financing contribution statement in order
to enhance the verifications made at their level.

8.28. The Court’s audit of expenditure reported as parallel
national co-financing revealed several cases where VAT was
included, some cases where expenditure was made outside the eli-
gible time period of the Financing Memoranda and one case of an
ineligible in-kind contribution. The impact on the EU budget was
marginal. However, in Bulgaria and Romania the interim report-
ing of expenditure as parallel co-financing could not be audited
due to an insufficient audit trail and inadequate supporting docu-
mentation. In Turkey the same problem was found in a MEDA (19)
programme with an agreed in-kind contribution.

8.28.
In the Financial Memorandum, the deadlines for contracting
and disbursing refer to the ‘EC Grant’ (Article 3 says ‘the EC grant is
hereby available for contracting until …’ and ‘the deadline for disburse-
ment is …’). The National Authorities can therefore argue that these
dates are applicable only to the EU contribution and not to their
co-funding. This issue has been clarified by saying that the time-limits
applying to co-financing are the same as those for Phare and that it
could be accepted that parallel co-financing be provided up to one year
after the end of the disbursement period of the Financing Memorandum
(subject to an exchange of letters between the Commission and the
National Authorising Officer).

Conclusions on supervisory and control systems

8.29. Over the years the supervisory and control systems have
improved. For the new Member States the overall satisfactory
level of supervisory and control systems is evidenced by the
granting of EDIS after a thorough assessment and verification
process.
In Bulgaria, Romania and Turkey the supervisory
and control systems at national level are rather weak. The key ele-
ment in the Commission’s supervisory and control systems thus
continues to be the effective performance of ex ante approval by
the EC Delegations. Overall, the supervisory and control systems
provide a reasonable level of assurance as to the legality and regu-
larity of the underlying transactions, apart from the parallel
co-financing requirements.

(19) Council Regulation (EC) No 1488/96 (OJ L 189, 30.7.1996, p. 1).

C 301/214

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Substantive tests on transactions — Payments made at the
implementing level

8.30. A total of 13 projects, with Commission payments in
2004, were selected in the Czech Republic, Poland, Bulgaria,
Romania and Turkey for substantive testing of payments (20).
Overall payments were legal and regular, with only a few formal
errors such as late payments and minor non-compliance with ten-
dering rules found. These results corroborate the Court’s assess-
ment of the supervisory and control systems (see paragraph 8.29).

Annual activity report and declaration of the Director-General for
Enlargement

8.31. The reservations made in previous years have not been
maintained. Instead, the Director-General for Enlargement has
made a new reservation about weaknesses in the administrative
systems and gaps in Bulgaria’s and Romania’s capacity to manage
and implement increasing amounts of aid.

8.32. The Court agrees with the Commission’s assessment.
However, it is of the opinion that, in as far as risks for future man-
agement are referred to, these should not be expressed as a res-
ervation against the Declaration on activities in 2004, but rather
in the context of risk assessment in the annual activity report.

Conclusions and recommendations

Conclusions of the Court’s audit relating to the Phare and
Turkey programmes

8.33. The Court concluded that for Phare and Turkey pro-
grammes the Commission has continued to improve its internal
control environment. The implementation of EDIS has been a
major step towards improving the management capacity and con-
trol systems in the new Member States. The Directorate-General
for Enlargement is aware that the control systems in Bulgaria and
Romania are still weak, however.

(20) In total 60 payments were audited: Czech Republic (7), Poland (6),

Bulgaria (23), Romania (17) and Turkey (7).

8.32. As explained in the text of the reservation, the reason for mak-
ing this reservation in 2004 is that the risks refer to the future sound
financial management of budgetary commitments which were made in
2004 and were therefore subject to the Director-General’s declaration in
2004. While the Court considers that the reservation has been set for-
ward concerning the future, it is considered by the Director-General that
the 2004 risk applies to that year’s commitments, although any mate-
rialisation of the risk (in terms of possible de-commitments) is likely to
occur in later years.

30.11.2005

EN

Official Journal of the European Union

C 301/215

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

8.34. The audit did not reveal any material errors in the trans-
actions tested, which is in line with the result from the previous
year’s audit. However, the following remaining weaknesses in the
supervisory and control systems have been identified:

(a)

the Commission’s instructions to the contracted auditors on
reporting criteria were not clear enough and expenditure
declared as national parallel co-financing is not included in
sufficient depth in the scope of the audit;

(b) despite the transfer of experience form DIS implementation
in Phare countries, lessons learned by Turkish authorities
have not been sufficient;

8.34. The Commission acknowledges this observation but emphasizes
that the weaknesses pointed out have been tackled meanwhile;

(a) Updated instructions on reporting and how to assess parallel

co-financing have now been developed;

(c)

there are delays in the submission of Final Declarations,
incorrect application of eligibility rules, incomplete interim
reporting and an insufficient audit trail for expenditure
declared as parallel co-financing.

(c) The National Authorities submitted the relevant final declarations
within a reasonable timeframe. Co-financing requirements have
been strengthened as well as its monitoring and reporting. Interim
reporting on parallel co-financing that does not have to be deliv-
ered until the end of a project is by definition incomplete.

8.35. As explained more in detail in the above paragraphs, the Com-
mission has taken account of the observations. The Commission has e.g.
issued the necessary guidelines, enforced the reporting, spread best prac-
tices and provided information and training e.g. through the seminar on
‘Lessons learned’ held in 2005.

Recommendations: need for further improvements

8.35. The Commission should improve the project design,
ensure that lessons learned from previous candidate countries are
applied in new candidate countries and strengthen the control of
parallel co-financing, amongst others by including it in the scope
of the closure audits and bringing the eligibility rules in line with
the legal framework. The Commission should intensify its efforts
to improve the management and control systems in Bulgaria and
Romania through the EDIS process.

GENERAL CONCLUSION ON PRE-ACCESSION STRATEGY

8.36. The Court’s assessment on pre-accession instruments is
dealt with in the present chapter for Phare and Turkey (see para-
graphs 8.33 and 8.34),
in Chapter 4 for Sapard (see para-
graph 4.76) and in Chapter 5 for Ispa (see paragraphs 5.55
and 5.56).

8.37. The result of the Court’s work shows that for all pre-
accession instruments (Phare, Turkey, Sapard and Ispa) supervi-
sory and control systems at the level of the Commission’s central
services and delegations and certifying authorities were basically
sound, and worked in practice. However, risks of varying degrees
still exist at the level of implementing organisations in the candi-
date countries for all programmes (see paragraphs 8.29, 4.76
to 4.77 and 5.56). The Court’s audit has not identified material
errors in the underlying transactions.

30.11.2005

EN

Official Journal of the European Union

C 301/217

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

Supervisory and control systems

Observations concerning transactions

Paragraph

9.1-9.31

9.1

9.2-9.13

9.2-9.3

9.4-9.9

9.10-9.12

Annual activity reports and declarations of the authorising officers by delegation

9.13

Specific observations

Parliament

Council

Commission

Court of Justice

Court of Auditors

Economic and Social Committee

Committee of the Regions

European Ombudsman and European Data Protection Supervisor

Overall conclusions and recommendations

Principal observations in Special Reports

9.14-9.25

9.15-9.16

9.17-9.18

9.19

9.20-9.21

9.22

9.23

9.24

9.25

9.26-9.28

9.29-9.31

Special Report No 1/2005 concerning the management of the European Anti-Fraud
Office (OLAF)

9.29

Special Report No 5/2005 concerning interpretation expenditure incurred by the Parlia-
ment, the Commission and the Council

Agencies and other decentralised bodies

The European Schools

9.30-9.31

9.32-9.37

9.38-9.39

C 301/218

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

ADMINISTRATIVE EXPENDITURE OF THE INSTITUTIONS
AND COMMUNITY BODIES

Introduction

9.1. Heading 5 of the financial perspective,
‘Administrative
expenditure’, contains the institutions’ and other bodies’ admin-
istrative appropriations. These appropriations are managed
directly by each institution or body and are used to pay the sala-
ries, allowances and pensions of persons working for the Com-
munity institutions, as well as rent, purchases and miscellaneous
administrative expenditure. Expenditure in 2004 was 5 856 mil-
lion euro, as further specified in Table 9.1. This chapter includes
the specific assessment in the context of the Statement of Assur-
ance and specific observations on the institutions, the satellite
bodies and the European Schools.

Table 9.1 — Payments by institution

(million euro)

European Parliament
Council
Commission
Court of Justice
Court of Auditors
European Economic and Social Committee
Committee of the Regions
European Ombudsman
European Data Protection Supervisor

Total

2003

986
410
3 546
148
84
91
46
4
—

5 305

2004

1 166
507
3 721
216
84
92
63
5
1

5 856

Specific assessment in the context of the Statement of Assurance

Introduction

9.2. The objective of the 2004 DAS audit concerning adminis-
trative expenditure was to enable the Court to assess the reliabil-
ity of the consolidated accounts for the year ending 31 Decem-
ber 2004 (dealt with in Chapter 1) and the legality and regularity
of the transactions which underlie them. A follow-up to observa-
tions from past Annual Reports is presented in Table 9.2.

9.2.

REPLY OF THE COMMISSION

The Commission publishes a yearly report presenting the follow-up it
considers proper to the Court’s Recommendations. The report covering
the Court’s 2003 Annual Report is to be published in the autumn
2005.

9.3.
Past audits by the Court show that the errors found were
mostly of a formal nature and not due to serious weaknesses in
the control systems. However, in 2004 the adoption of new staff
regulations and of a new system for calculating staff remunera-
tions, as well as the implementation of new systems in the frame-
work of the new Financial Regulation, have introduced specific
risks (see paragraphs 9.5 and 9.6).

9.3.

REPLY OF THE COMMISSION

The phased introduction of a new salary payment system in 2003 and
early 2004 created a new risk, like any new application (see reply to
paragraph 9.5). The Commission departments addressed this situation
by making a large number of manual controls on the results of the vari-
ous provisional calculations of monthly salary payments and immedi-
ately corrected errors detected by the IT teams before the final monthly
calculation and authorisation of salaries. The number of errors found
ex post was very small.

30.11.2005

EN

Official Journal of the European Union

C 301/219

Table 9.2 — Follow-up to observations from past annual reports

Observations

Action taken

Further action needed?

Parliament’s reply

No action taken: in 2004 the inter-
nal rule allowing the possibility of
making payments using a standing
order was still in force.

Yes, all payments should be made
in accordance with the provisions
of the Financial Regulation.

Following a revision carried out on
27 April 2005, Article 10 of the Inter-
nal Rules governing the implementation
of Parliament’s budget now stipulates
that ‘payment by direct debit is permis-
sible only where it is stipulated in the
contract with the creditor as being the sole
method of payment’.

Standing orders

Annual Report concerning 2003,
paragraph 9.14:

The Parliament’s internal rules for
implementing its section of the bud-
get allows for the possibility of mak-
ing payments using a standing order.
After the payment has been made,
the authorising officer issues a ‘regu-
larisation order with a view to charg-
ing the amount against the budget’
(Article 11, paragraph 4, of the inter-
nal rules). To conform with the
Financial Regulation expenditure
must be validated and authorised
before payment.

Additional pension scheme for Members
of the European Parliament

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 created as soon as possible.

The additional pension scheme con-
tinues and no sufficient legal basis
has been created.

Yes, a legal basis should be created.

There should be clear rules estab-
lished 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.

No such rules have been estab-
lished.

Yes, appropriate rules should be
established.

The Statute for Members which will enter
into force in 2009 provides for a single
pension scheme for MEPs and will thus
ultimately lead to the discontinuation of
the additional pension scheme.

An actuarial study of the scheme in ques-
tion was carried out in spring 2005. It
should enable Parliament to identify the
measures needed to keep the fund on an
even keel. The results of the study might
also prompt a review of the respective
powers and responsibilities of Parliament
and the non-profit-making association
set up under Luxembourg law to manage
the pension fund during the period lead-
ing to the entry into force of the Statute.

Supervisory and control systems

9.4.
In 2004 all the institutions continued improving their
supervisory and control systems in order to comply with the
requirements of the new Financial Regulation. However, none of
the institutions had fully implemented Internal Control Standards
(ICS) (1).

9.4.

REPLY BY THE COUNCIL

The Internal Control Standards (ICS) for the Council were been adopted
on 20 July 2005.

(1) The Council did not set up any ICS, the Court of Justice did not im-
plement several ICS, in the other institutions full compliance with all
the ICS adopted has not yet been achieved.

C 301/220

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

9.4.

REPLY OF THE COMMISSION

The Commission adopted its internal control standards in 2000 and
does a yearly follow-up of the implementation of the related baseline
requirements; the mentioned implementation is regularly followed up
both from a compliance as well as from as an effectiveness point of view.
As the Court mentions in paragraph 1.87, 93 % of the baseline require-
ments were complied with, which could be considered as being practi-
cally fully implemented in an ever changing environment.

9.4.

REPLY OF THE COURT OF JUSTICE

The Court of Justice’s administration acknowledges that it proved
impossible to implement in full certain internal control standards in
2004. Reinforcement of qualified staff will allow swift improvement of
the situation.

9.4.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The implementation of the main measures resulting from the adoption
of the internal control standards is now scheduled over a two-year period
(2004 and 2005). They concern staff management (establishment of a
written description of all posts; updating the description of recruitment
procedures), the use of performance indicators (for which an interinsti-
tutional consultation was asked) and systematic use of a quarterly spend-
ing plan. All of these were included in a consolidated action plan,
adopted on 8 November 2004 by the Secretary-General.

9.5.

THE REPLY OF THE EUROPEAN PARLIAMENT

While the near simultaneous introduction of the new Financial Regula-
tion, the new Staff Regulations and the NAP payroll system did indeed
give rise to major problems, the real nature of the latter needs to be prop-
erly understood. The Staff Regulations, in particular, gave rise to numer-
ous problems of interpretation. Only when these difficulties had been
resolved (normally at the level of Heads of Administration) could the
NAP system be definitively adapted. The time lag involved in this pro-
cedure accounts for the greater part of the recoveries referred to. Purely
technical teething problems with the NAP, while tedious and time-
consuming for the services concerned, were speedily identified and cor-
rected. While the manual entry of payroll data does also constitute a risk,
the latter is not new and thus required no specific control measures
beyond those already in place, although the NAP is a factor in leading
Parliament to reinforce ex post controls on the payroll.

9.5.

REPLY BY THE COUNCIL

For its part, the General Secretariat of the Council (GSC) would like to
underline that it did actually reinforce controls when the old salary appli-
cation was replaced by the NAP. The GSC regrets that the conclusion on
control might distract the attention of the reader from the fact that a de-
ficient computer application was implemented at the moment that the
Staff Regulations were fundamentally modified.

9.5.
In 2004, the NAP (‘Nouvelle Application Paie’), a new com-
puter application for calculating staff remuneration created and
managed by the Commission Paymaster Office (PMO), was used
by all the institutions. The NAP presented in 2004 various tech-
nical weaknesses, which created a new risk and, in many cases,
resulted in the erroneous calculation of various elements of staff
remuneration. The most evident errors were corrected manually
before payment. Concerning one of those elements, in March
2005 NAP programmes were amended, the amounts paid in
2004 recalculated and, where necessary, corrected. These correc-
tions led to recoveries amounting, for all the institutions, to a
total of around 1,9 million euro. Manual data transferred into the
NAP from the computer systems recording the situations quali-
fying the staff for specific entitlements constituted a further spe-
cific risk of errors. However, controls were not reinforced accord-
ingly.

30.11.2005

EN

Official Journal of the European Union

C 301/221

THE COURT’S OBSERVATIONS

9.5.

REPLY OF THE COMMISSION

The phased introduction of the NAP in 2003 and early 2004 created a
new risk; such a risk is inherent in the launching of a new computer
application.

The Commission departments addressed this situation by making a large
number of manual controls on the results of the various provisional cal-
culations of the monthly salary payments and immediately corrected
errors detected by the IT teams before the final monthly calculation and
authorisation of salaries. The number of errors found ex post was very
small.

The changes to the Staff Regulations were only made by the Council on
22 March 2004, thereby leaving very little time for laying down detailed
management rules and adjusting the NAP. Nevertheless, the Commis-
sion was able to introduce, in the May 2004 salary payments, most of
the amendments made by the reform. Certain aspects could not be put in
place definitively on the day of entry into force of the Reform, as the gen-
eral implementing provisions or management rules had not been fully
laid down. Provisional modules were therefore brought in to limit the
impact on the beneficiaries. The amendments to the NAP in March
2005, which produced the corrections of 1,9 million euro referred to,
were the outcome, for example, of work which could not be carried out
earlier as the decision on the arrangements was not taken until Novem-
ber 2004.

The introduction of the NAP meant that controls of the quality of the
data fed into the pay system had to be transferred to the entitlements
management systems which now transmit the data automatically via an
interface to the NAP. In 2003, the existing controls were evaluated and
reorganised with a view to ensuring compliance from 1 January 2004
with the principle of initiation and ex ante verification as set out in the
Financial Regulation.

9.5.

REPLY OF THE COURT OF JUSTICE

The problems noted were caused by the implementation of the NAP
application. That took place at the same time as the reform of the Staff
Regulations of officials in far from perfect conditions that contributed to
a significant increase in the workload of the ‘Remunerations’ sec-
tion. Other institutions have, like the Court of Justice, encountered dif-
ficulties in the operation of that application. Those difficulties have on
several occasions been brought to the attention of the Commission staff
managing the NAP and have been discussed at regular meetings with
those services. Many of them have now been overcome for the most part.

With regard to the transfer of data in the NAP, it is to be noted that in
the Court of Justice that task is performed by the staff of the ‘Remunera-
tions’ section directly, on the basis of the various administrative decisions
creating rights and that it is subject to systematic checks within the sec-
tion. Encoding is not therefore carried out in respect of the data already
encoded within the personnel management system Centurio.

C 301/222

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

9.5.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

At the EESC, no data are entered manually into NAP. Staff data are
encoded in the personnel management computer system by one person
and validated by a second person. Validated data are transferred directly
from this system into NAP through an automated procedure. Also, indi-
vidual payments coming from NAP are electronically inserted into the
accounting information system, without any manual intervention. Fur-
thermore, like any other payment, these payments are electronically sent
to the bank, after double electronic signature, without any re-encoding.

9.6.

THE REPLY OF THE EUROPEAN PARLIAMENT

The dispersion of Parliament’s activities, over three places of work, gives
rise to particular problems with regard to missions, one consequence of
which was that it was in no position to introduce new rules by 1 May
deadline. While the new rules introduced in 2005 do provide for flat-
rate payments, Parliament’s view is that the new system strikes an appro-
priate balance between regulatory and practical requirements and is in
conformity with the legal advice tendered to it.

9.6.

REPLY BY THE COUNCIL

The GSC will examine, together with the other institutions, the possi-
bility of changing its internal rules on reimbursing accommodation costs
without supporting documents.

9.6.

REPLY OF THE COMMISSION

Payment of a flat-rate amount instead of a variable payment on the basis
of supporting documents was considered to be an implementing measure
for a provision of the Staff Regulations which, within each administra-
tion’s freedom of judgment, takes into account its cost-effectiveness.
However, the Commission is going to examine whether such a rule is
well-founded.

9.6.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The EESC’s Mission Guide is, to a large extent, based on the Commis-
sion’s Guide. Point 4.2 is exactly the same in both Guides. In order to
keep a coherent set of rules between institutions, the EESC intends to con-
tinue to apply Article 13(1) of Annex VII in the same way as the Com-
mission does.

9.7 and 9.8.

REPLY OF THE COMMISSION

The errors mentioned were found in other institutions and not in the
Commission.

9.6. The amended Staff Regulations, which entered into force
on 1 May 2004, state that accommodation costs incurred on mis-
sion are reimbursed up to a maximum fixed for each country, on
production of supporting documents (Article 13 of Annex VII to
the Staff Regulations). Contrary to this rule, all the institutions,
except the Court of Justice, the Court of Auditors and the
Ombudsman, provided in their internal rules for the payment of
a flat-rate sum, ranging from 30 % to 60 % of the maximum
allowable amount, to staff who do not produce any evidence of
having incurred accommodation costs. The amended Staff Regu-
lations also establish new, lower, scales for daily allowances.
However, two institutions maintained the system in force before
May 2004 and continued to apply the derogated scales for daily
allowances (2).

9.7. Weaknesses were noted in the control systems concerning
the transfer of part of the staff emoluments with the application
of a weighting coefficient. In various cases, transfers were granted,
which were not supported by adequate evidence of the officials’
right to the transfers requested (3). The number of cases found
was significant in some institutions (4).

(2) The Parliament until February 2005 and the Committee of the Regions

until August 2004.

(3) Court of Justice, European Economic and Social Committee, Commit-

tee of the Regions and Council.

(4) European Economic and Social Committee and Committee of the

Regions.

30.11.2005

EN

Official Journal of the European Union

C 301/223

THE COURT’S OBSERVATIONS

9.8. A lack of control procedures concerning pension payments
were noted in some institutions. Pension paid to retired officials
residing in certain Member States are increased by a weighting
coefficient. However no check had been performed in recent years
to verify the actual place of residence of former officials (5).

9.7.

REPLY OF THE COURT OF JUSTICE

This paragraph deals with cases in which the consequences of a change
in an official’s rights in respect of his family situation have not imme-
diately been reflected in changes to the right to the transfer part of remu-
neration. Nevertheless, it is to be noted that Court of Justice’s adminis-
tration carries out periodic checks and, if need be, makes corrections by
recovering the sums paid though not due.

9.7.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The analysis of the supporting documents of transfers of part of the
remuneration with a weighting coefficient is part of the systematic
ex post checks which are currently ongoing. Any correction needed is
being applied according to the new Staff Regulations.

9.8.

REPLY BY THE COUNCIL

On the basis of a risk assessment, the GSC carried out, in March 2005,
a survey concerning pension payments to United Kingdom residents lead-
ing to corrections by the administration which, in turn, resulted in two
court cases.

9.8.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

After 2002 it was decided that the control of residence of the pensioners
would be made every two years. This control was programmed for the end
of 2004 but it was delayed because of the workload resulting from the
‘Reform’ (new calculations, new transfers etc.). During this period the
EESC kept a close contact with its pensioners by mailing to them
news/information letters and monitoring their delivery, as well as with
individual correspondence whenever necessary. The full official control
will be
and October 2005. On
31 August 2005, more than 80 % of the pensioners had been con-
trolled.

carried out between July

9.9.
Except for the European Ombudsman and the European
Data Protection Supervisor, occasional weaknesses were observed
in the supervisory and control systems concerning procurement.

9.9.

THE REPLY OF THE EUROPEAN PARLIAMENT

Parliament notes the Court’s observation and will continue its efforts
to improve its procedures.

9.9.

REPLY BY THE COUNCIL

The GSC considers that there is no argument which supports the state-
ment of the Court that it found occasional weaknesses in its supervisory
and control system concerning procurement. The GSC set up an internal
organisation centred around DG A IV/procurement coordination unit
which ensures that competitive tendering procedures are conducted in
strict compliance with the rules and aiming at the most cost-effective
solution.

In the context of its annual audit, the Court made one comment on a
procurement-file which was related to the interpretation of the financial
regulation but which has no bearing on the quality of the internal con-
trol system.

(5) Council and European Economic and Social Committee.

C 301/224

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

9.9.

REPLY OF THE COMMISSION

For the Commission, all services concerned have taken remedial measures:

— the annual instructions to delegations will be reviewed in order that
all delegations provide sufficient ex ante information to head-
quarters,

— two additional controls, one ex ante and one ex post, were put in
place in order to supplement the control system in the informatics
procurement process,

— measures were taken in 2005 in what concerns office procurement
to ensure compliance with Article 126 of the Implementing Rules
of the Financial Regulation, the planning of calls for tenders over
2005 to 2006 was made and ex post controls were implemented
throughout the year.

9.9.

REPLY OF THE COURT OF JUSTICE

The Court of Justice’s administration will endeavour to strengthen yet
further its supervision of procurement contracts and to develop the train-
ing of managers in that area.

9.9.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

One underlying reason for the weaknesses concerning the planning of the
procurement activity and the operational management of the contracts
was too much decentralisation of responsibility for procurement and con-
tractual management to the different operating services, which do not
have sufficient specialist skills in this area. In early 2004, it was pro-
posed to establish a new unit responsible for coordinating financial
and contractual activity throughout the Joint Services of the European
Economic and Social Committee and the Committee of the Regions,
which manage the vast majority of public procurement activities within
the EESC. The unit was formally established on 1 November 2004 and,
following a phase of recruitment, became fully operational in February
2005. The unit includes two completely new posts specifically involved
in procurement and contractual management in the Joint Services. It
should also be noted that the considerable impact during 2004 on the
various operating services of the activity relating to the enlargement and
the change of premises of the two Committees contributed to the weak-
nesses that have been identified.

Observations concerning transactions

9.10. The Court’s audit covered staff remunerations, transfers of
a part of the salary, increased by a weighting coefficient, to bank
accounts in Member States other than the Member State where
the staff is employed, recruitments, allowances for Members of
institutions and expenditure for procurement contracts.

30.11.2005

EN

Official Journal of the European Union

C 301/225

THE COURT’S OBSERVATIONS

9.11.
Several cases producing a long-lasting financial impact
were found concerning remuneration of staff where the expendi-
ture was not justified:

9.11 and 9.12.

REPLY OF THE COMMISSION

See reply to paragraph 9.7 and paragraph 9.8.

(a) grading of staff which did not comply with the provisions of
the Staff Regulations or the Conditions of employment of
other servants (CEOS) (6), awarding of the specific salary
increase for heads of unit to persons who had no staff man-
agement tasks (4);

(b)

transfer of part of the salary with weighting coefficients
granted without the necessary justification for all or a part of
the amount transferred (7).

9.11.

(a) REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

With regard to the grading of staff, the Court’s observation refers
to an omission in the regrading of a temporary agent under the
transitional provisions of the new Staff Regulations. This error has
been corrected. Moreover, an ex post check has shown this to be an
isolated case.

With respect to the nomination of heads of Unit, the Staff Regu-
lations do not stipulate any minimum number of staff to be man-
aged by a head of unit. At the EESC, which is a small institution,
the management options are the following: in order to increase indi-
vidual motivation and collective efficiency, heads of unit have full
responsibility and are accountable for the organisation and devel-
opment of the activities in their sector as well as for the manage-
ment of their human resources. The EESC Decision No 442/04 A
states that, in order to be appointed head of unit at the EESC, a
staff member must either:

— have major responsibilities in the definition, development
and implementation of the EESC’s policies, or have major
responsibilities in sensitive areas, or

— have major responsibilities in the field of staff or financial
management, or perform the duties of authorising officer
within the meaning of the Financial Regulation in important
areas or for large amounts, or

— manage an administrative unit made up of at least nine offi-

cials.

Hence, in full compliance with the aforementioned decision, the
head of Internal Audit and the head of the Legal unit were nomi-
nated head of unit, given the scope and nature of their responsibili-
ties.

(b) REPLY BY THE COUNCIL

The Court of Auditors makes the same observation as presented in
paragraph 9.7. Moreover, since the GSC requests, every year sys-
tematically, new supporting documents, it is not correct to conclude
that the few cases found by the Court would have a long-lasting
financial impact concerning remuneration of staff.

REPLY OF THE COURT OF JUSTICE

Reference is made to the answer to paragraph 9.7.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

(6) Council, European Economic and Social Committee and Committee of

Please refer to the EESC’s comments on paragraph 9.7.

the Regions.

(7) European Economic and Social Committee, Committee of the Regions,

Court of Justice and Council.

C 301/226

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

9.12. The nature and type of errors found confirmed the weak-
nesses in the functioning of the supervisory and control systems
mentioned above and provided indications on improvements
required.

Annual activity reports and declarations of the authorising
officers by delegation

9.13.
Improvements were made in 2004 in the presentation of
the annual activity reports and declarations of the authorising
officers by delegation. Some of them included qualifications and
most of them reported some weaknesses in the supervisory
and control systems. For some institutions, the Court could not
take the annual activity reports into consideration as they had not
been produced before the Court’s audit was concluded (8).

Specific observations

9.14. The following section concerns specific observations
relating to each of the institutions.

Parliament

9.15.
Paragraphs 9.6 and 9.9 apply to the Parliament. Valida-
tion of procurement expenditure in several cases did not operate
as intended. In one of the cases the amount paid was overstated
by 0,7 million euro.

(8) Court of Justice and Committee of the Regions.

9.13.

REPLY OF THE COMMISSION

The Commission takes note of the evaluation made by the Court regard-
ing the improvements made in the presentation of its services’ annual
activity reports for 2004, which have all been produced in due time.

There were few reservations and observations entered in the Commission
services’ annual activity reports related to the overall administrative
expenditure. The Commission considers that the weaknesses reported at
the level of supervisory systems and controls do not materially affect the
legality and the regularity of the underlying transactions.

9.13.

REPLY OF THE COURT OF JUSTICE

So far as the annual activity report is concerned, it must be borne in mind
that the time limit of 15 June, laid down in Article 60(7) of the Finan-
cial Regulation for sending to the budgetary authority a summary of the
annual activity reports, is applicable to the Commission alone. The
annual activity report drawn up by the Court of Justice’s authorising
officer by delegation was forwarded to the institution on 21 June
2005. In future, if the Court of Auditors expresses a wish to have the
annual report available on a given date, the Court of Justice will make
every effort to ensure a favourable response to that wish.

9.15.

THE REPLY OF THE EUROPEAN PARLIAMENT

As regards paragraphs 9.6 and 9.9 cited by the Court, see the relevant
replies above. As regards the amount quoted, it is the result of a reduc-
tion in the VAT assessment base for the long lease conferring right in
rem for the D4-D5 building, a reduction granted by the competent Bel-
gian authorities following lengthy negotiations concluded at a very late
stage. A political agreement on the assessment base was secured shortly
before the lease was signed. It was only once notification had been given
by the competent tax authority, a few days after the payment due when
the lease was signed had been made, that the firm was able to issue a
credit note and a new invoice. As a result, the sum of 701 537,76 euro
was treated as an advance payment, in accordance with the terms of the
lease agreed with the firm.

30.11.2005

EN

Official Journal of the European Union

C 301/227

THE COURT’S OBSERVATIONS

9.16. Weaknesses were also observed, as in the past (see para-
graphs 9.21 and 9.22 of the 2002 Annual Report), in the super-
visory and control systems related to the payment of allowances
to Members of the Parliament (MEPs). The procedures applied did
not ensure that income obtained by former MEPs from certain
activities (paid office in an international institution; membership
in a national or regional government; etc) was deducted from the
temporary end-of-service allowance.

9.16.

THE REPLY OF THE EUROPEAN PARLIAMENT

As regards the secretarial assistance allowance, fresh changes to the
PEAM Rules were approved in 2004 with the aim of strengthening
checks on the use of the allowance, in particular in connection with con-
tracts for the provision of services. In July 2005, the Quaestors approved
practical arrangements for implementing these changes, which will
enable the managing service to bring them into force. As regards the
temporary end-of-service allowance, Parliament is aware that there is still
some risk of misuse. Some measures have been taken, and further mea-
sures are planned, to minimise that risk even further.

Council

9.17.
Paragraphs 9.4, 9.6, 9.7, 9.8, 9.9 and 9.11 apply to the
Council. The Council did not set up minimum Internal Control
Standards (Article 60(4) of the Financial Regulation) nor drafted
charters describing the tasks, rights and obligations of the
accounting officer and of the imprest administrator (Article 44 of
the implementing rules).

9.17.

REPLY BY THE COUNCIL

The GSC’s reactions to paragraphs 9.4, 9.6, 9.8, 9.9 and 9.11 can be
found above. In addition it should be noted that the Council recently
established a charter describing the tasks, rights and obligations of the
accounting officer as well as a manual for imprest accounts.

9.18. Additional annual
leave granted before 31 December
1997 as a compensation for overtime is paid on retirement if the
official has not taken the additional leave. As staff of the A and B
categories are not entitled to compensation for overtime, such
payments are not in accordance with Article 56 of the Staff Regu-
lation. At the end of 2004 the total annual leave granted before
31 December 1997 as a compensation for overtime and still not
taken amounted to around 11 800 days. In September 2004 a
total amount of approximately 95 000 euro was paid for addi-
tional annual leave not taken by A and B officials retiring in that
month.

9.18.

REPLY BY THE COUNCIL

The GSC envisages to gradually eliminate the stocks of compensatory
leave for staff of the A and B categories granted before 31 December
1997; the most recent step in this process is presented in staff note
80/05 of 17 May 2005. Since the beginning of 2005, these stocks
have been reduced by 2 500 days resulting in a stock of 9 317,5 on
7 September 2005.

Commission (9)

9.19.
Paragraph 9.9 applies to the Commission. The Court also
identified some weaknesses in the functioning of some supervi-
sory and control systems at the Publications Office, where differ-
ences were observed between quantities of paper recorded in
stocklists and actually existing in the warehouse, non-delivered
copies of a publication were paid and price revisions, foreseen in
the contracts in case of a decrease in the market prices of paper
or raw materials, were not asked for.

9.19.

REPLY OF THE COMMISSION

The Publications Office accepts the Court’s comment on the apparent dif-
ferences between the levels registered in its stock management system and
the actual physical stock held on two different sites. These differences are
the result of an erroneous entry in the stock management system. New
software is currently being developed to manage the stock, most of which
has now been brought back to the Office’s main premises.

(9) The Commission departments responsible for most of the administra-
tive expenditure are the following: Directorate-General ‘Personnel and
for Translation, Directorate-
Administration’, Directorate-General
General for Interpretation, Directorate-General ‘Press and Communi-
cation’, Directorate-General for External Relations, Office for Infra-
structures and Logistics — Luxembourg, Office for Infrastructures and
Logistics — Brussels, Office for the Administration and Settlement of
Individual Entitlements, European Personnel Selection Office, Publica-
tions Office.

C 301/228

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

Court of Justice

Paragraphs 9.4, 9.7, 9.9, 9.11 and 9.13 apply to the Court
9.20.
of Justice. The Court of Justice adopted the Internal Control Stan-
dards in March 2004. However five of them were not imple-
mented. In one case concerning indexation of rents, lack of
supporting documents attached to rent payment orders and insuf-
ficient follow-up of the lease contract resulted in the obligation
for the Court of Justice to pay the lessor in September 2004
716 000 euro for rent arrears, due to the non-indexation of the
rent since 1999.

9.21. The Internal Auditor exercices the function of head of the
‘verification unit’ which performs ex ante controls on the autho-
rising officer’s operations. Such an involvement in the carrying
out of financial operations is not compatible with the tasks of an
independent internal auditor. Since his appointment in 2003, the
Internal Auditor did not complete any of the audits included in
his work programme.

The Publications Office accepts the Court’s comments regarding the dis-
crepancy of 1,4 % found in the quantities delivered for one publication
and will take steps to ensure that information circuits are improved so as
to avoid repetition of this type of error.

The Publications Office accepts the Court’s comments as regards price
revisions; it will pay attention to this in the future.

9.20.

REPLY OF THE COURT OF JUSTICE

As regards internal control standards, reference is made to the answer
given to paragraph 9.4.

for the following
The observations on the indexation of rent call
replies. Until 1999, except for the years 1983, 1984 and 1994 when
a rent freeze was in force, the Court adjusted the amount of the payments
due as rent for its main building, in the light of a letter sent by the owner,
the Luxembourg State (1). Before that letter, when the preliminary draft
budget was drawn up each year, an estimate was made of the rent pay-
able for the year in question, on the basis of the estimated change in the
index used for rent review.

After the main building was evacuated in 1999, it was agreed to add a
second additional clause to the lease of the main building in order to take
account of the occupation of a replacement building (the T building) on
the same conditions as the main building.

From 2001 onwards, letters were sent to the Luxembourg authorities
requesting them, in the light of the new situation, to adopt a view on the
application of Article III of the lease which provides for adjustment of the
rent in line with variations in the reference index. It was only by letter of
28 September 2004 that the Receveur des Domaines (collector of rev-
enue from State/Crown property) replied, demanding the payment of rent
due following its adjustment to the changes in that index for the period
1999 to 2004.

9.21.

REPLY OF THE COURT OF JUSTICE

Ex ante verification activities and internal audit activities are performed
by different people. It is pointed out that, having regard to the size of the
Court, the decision was taken to place the verification agents under the
administrative authority of a single official, also appointed as internal
auditor. This administrative authority in no way affects the independence
of the internal auditor in the conduct of his audit duties.

It is true that in 2004 the internal audit division suffered from a lack of
qualified staff which made it impossible to complete the planned audit
tasks. Unflagging efforts to remedy that situation led to the appointment
in December 2004 of an auditor as a member of the auxiliary staff and,
in June 2005, of an auditor as a member of the temporary staff. Last, a
Category A* official recruited on a reserve list arrived to reinforce that
team in September 2005. The division is now in a position to carry out
its activities to the full.

(1) There is nothing extraordinary about this procedure when one considers, for
example, that the fourth subparagraph of paragraph 5.1 of the lease for the
GEOS building states: ‘The sums payable as a result of the application of
indexation shall be paid to the lessor 45 days after the date of receipt of the
request for indexation by the lessee’.

30.11.2005

EN

Official Journal of the European Union

C 301/229

THE COURT’S OBSERVATIONS

Court of Auditors

9.22. 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
2004’, accompanied by a ‘report on the administrative and
accounting procedures, the soundness of the financial manage-
ment and the internal control system’. The report states that, in
the auditor’s opinion, ‘the current internal control rules ensure
that the operational objectives are achieved satisfactorily, the
financial statements are reliably drawn up and the legal frame-
work is complied with’. Certificate and report will be published in
the Official Journal.

Economic and Social Committee

9.23.
Paragraphs 9.6, 9.7, 9.8, 9.9 and 9.11 apply to the Eco-
nomic and Social Committee. The Internal Control Standards
were approved in July 2004. Not all the measures needed to
achieve full compliance with them have been taken yet.

9.23.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

Please refer to the EESC’ comments on these points and on para-
graph 9.4.

Committee of the Regions

9.24.
Paragraphs 9.6, 9.7, 9.9, 9.11 and 9.13 apply to the Com-
mittee of the Regions. Internal Control Standards were approved
only in November 2004, but not all the measures needed to
achieve full compliance with them were taken. The internal audit
function was carried out by a member of temporary staff,
employed on the basis of renewable contracts of short duration.
In May 2005 an official was nominated internal auditor.

9.24.

THE REPLY OF THE COMMITTEE OF THE REGIONS

The Committee of the Regions undertook all possible efforts throughout
2004 to recruit a new Internal Auditor as well as the rest of the staff of
the Audit Service. However, as very few eligible officials applied for the
vacant posts, it was impossible to fill them on a permanent basis at that
time.

European Ombudsman and European Data Protection
Supervisor

9.25. The audit did not give rise to observations.

Overall conclusions and recommendations

Improvements have been made by all the institutions in
9.26.
order to adapt their supervisory and control systems to the
requirements of the new Financial Regulation. However, the risks
identified in 2003 linked to the implementation of the Financial
Regulation (10), together with the risks resulting from the intro-
duction of new Staff Regulations and computerised systems for
calculating salaries and pensions (see paragraph 9.6) had not been
adequately addressed by the supervisory and control systems in
2004.

(10) Annual Report concerning the financial year 2003, paragraph 9.68.

9.26.

THE REPLY OF THE EUROPEAN PARLIAMENT

Full compliance with the requirements of the new Financial Regulation
will take some time. The introduction of the NAP payroll system and the
new Staff Regulations increased the risks in 2004 but difficulties arose
mainly from technical teething problems with the payroll system or in
interpreting the provisions of the Staff Regulations and they were known
by the services. While the latter did indeed give rise to a significant num-
ber of recoveries, the number of real errors left appeared to be low, due in
particular to the degree of scrutiny to which appointing authority deci-
sions are subject. However, supervisory and control systems and espe-
cially ex post controls on the payroll should still be reinforced.

C 301/230

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

9.26.

REPLY OF THE COMMISSION

The phased introduction of the NAP in 2003 and early 2004 created a
new risk; such a risk is inherent in the launching of a new computer
application. The Commission departments addressed this situation by
making a large number of manual controls on the results of the various
provisional calculations of the monthly salary payments and immedi-
ately corrected errors detected by the IT teams before the final monthly
calculation and authorisation of salaries. The number of errors found
ex post was very small.

The introduction of a new payment system meant that controls of the
quality of the data fed into the pay system had to be transferred to the
entitlements management systems which now transmit the data auto-
matically via an interface to the NAP. In 2003, the existing controls
were evaluated and reorganised with a view to ensuring compliance from
1 January 2004 with the new principle of initiation and ex ante veri-
fication as set out in the Financial Regulation.

9.27. The Court identified frequent errors, mostly of a formal
nature. The errors identified concerning the legality and regular-
ity of underlying transactions did not materially affect adminis-
trative expenditure as a whole.

9.27.

REPLY OF THE COMMISSION

The Commission notes that the formal errors identified did not materi-
ally affect administrative expenditure. Nevertheless, the Commission will
continue to take the measures needed to prevent them from reoccurring.

9.28. The Court considers, as a result of its audit, and in order
to address the risks identified, that improvements should be made
in the supervisory and control systems relating to the following
areas:

9.28.

(a) documentation of procedures;

(a) REPLY OF THE COMMISSION

Following previous observations by the Court, the Commission has
launched a specific action in order to document its human resource
management administrative procedures. The results will be fully vis-
ible in the new ‘Personnel and Administration’ website, due to
appear gradually online as from the end of 2005.

(a) and (b) REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

As already mentioned in the EESC’s comments on the Court’s
annual report on the 2003 budget (paragraph 9.40(b)), many pro-
cedures do exist and are indeed documented. In the EESC’s risk-
analysis guide, the establishment of written procedures has been
identified as a standard measure to reduce risks. Hence, it has a per-
manent nature. In the consolidated action plan adopted at the end
of 2004, descriptions of several procedures are scheduled for 2005.

30.11.2005

EN

Official Journal of the European Union

C 301/231

THE COURT’S OBSERVATIONS

(b) definition of the nature of the supporting documents which
should make it possible to check that the expenditure is in
accordance with the terms of the contracts or of the regula-
tions and rules;

(b) REPLY OF THE COMMISSION

This recommendation has already been taken into account for the
drafting of new specific agreements, for instance that relating to the
framework contract for the installation of further cables and fittings
in the Jean Monnet building. The costs of services are specified more
precisely in order to avoid the risk referred to by the Court.

(c) grading of staff under the new staff regulations;

(c) and (d) REPLY OF THE COMMISSION

See reply to paragraph 9.7 and paragraph 9.8. Nevertheless, the
Commission sees that the new provisions are implemented properly.

(c) REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

Please refer to the EESC’ comments on paragraph 9.11.

(d)

remuneration, in particular payment of allowances and trans-
fers of part of the staff emoluments with the application of a
weighting coefficient.

(d) REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

Please refer to the EESC’s comments on paragraph 9.7.

9.28.

THE REPLY OF THE COMMITTEE OF THE REGIONS

The Committee of the Regions will fully implement the Court’s recom-
mendations contained in paragraph 9.28 of the draft final audit and
shall continue its efforts with a view to improving the existing documen-
tation on procedures while giving particular attention to the question of
the ex post verifications concerning the regularity of expenditure.

Principal observations in Special Reports

Special Report No 1/2005 concerning the management
of the European Anti-Fraud Office OLAF

9.29. The Court’s Special Report, together with the replies of
the Commission, were published in OJ C 202 on 18 August 2005.

Special Report No 5/2005 concerning interpretation
expenditure incurred by the Parliament, the Commission
and the Council

9.30. The purpose of the Court’s audit was to assess the sound-
ness of the financial management of interpretation services at the
Parliament, the Commission and the Council.

9.30.

THE REPLY OF THE EUROPEAN PARLIAMENT

Full multilingualism, Parliament’s preferred system, entails substantial
costs stemming, in particular, from political decisions concerning the
organisation of business (calendars and places of work) and the need to
respond quickly to sometimes unforeseen political developments. How-
ever, with a view to improving the arrangements for the use of interpre-
tation, Parliament has laid down framework provisions in a Code of
Conduct adopted in 1999 and revised in 2004.

C 301/232

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

Moreover, Parliament’s services are endeavouring to improve checks on
the costs linked to the hiring of auxiliary conference interpreters and, in
particular, their travel expenses and, the establishment of a single inter-
institutional service, responsible for all payments to such interpreters, rep-
resents a major step forward. Parliament’s services which use interpreta-
tion will also study the best practices observed in the other institutions
with a view to improving the scheduling of business, in keeping with the
political imperatives referred to above.

9.30.

REPLY BY THE COUNCIL

The GSC would like to point out that it is not only by more forethought
on the part of meeting organisers, that further savings in interpretation
could be made. According to the special report of the Court, savings can
also be made in other ways, like lower freelance interpreter (ACI) costs
or better interinstitutional cooperation.

9.31. The audit has shown that the quality of interpretation
mostly meets needs and expectations, but that a number of mea-
sures need to be taken to reduce cost and to avoid the provision
of interpretation that was requested but not used. While the insti-
tutions audited have been successful in limiting the interpretation,
further savings could be made if late cancellations, last-minute
meeting requests, unequal distribution of meetings over the
course of the week and the year, and high travel costs for auxil-
iary conference interpreters were avoided. As these elements are
largely beyond the control of the interpretation departments, sav-
ings could only be achieved by more forethought on the part of
the meeting organisers.

9.31.

REPLY OF THE COMMISSION

The Commission will continue its cost control policy through its ‘real
needs’ approach, and will reinforce its endeavours to reduce provision of
interpretation where it was requested but not used. The Commission
action will also aim at improving the use of Human Resources in coop-
eration with the interpretation services of the other institutions, and,
pending agreement of these to renegotiate the current agreements, will
seek to reduce the costs of auxiliary conference interpreters, especially
those linked to travelling.

AGENCIES AND OTHER DECENTRALISED BODIES

9.32. The audit of the European Union’s agencies and other
decentralised bodies (ADBs) is the subject of specific annual
reports (11). The ADBs’ budget totalled 872,3 million euro in
2004, as against 778 million euro in 2003. Their combined
authorised posts increased from 2 009 in 2003 to 2 233 in 2004.
The principal data on the ADBs are set out in Table 9.3 (12).

(11) In the process of being published in the Official Journal.
(12) During 2004, the budget of the European Railway Agency and the
European Network and Information Security Agency were managed
directly by the Commission. For this reason no specific annual report
will be published.

30.11.2005

EN

Official Journal of the European Union

C 301/233

Table 9.3 — EU agencies and other decentralised bodies — Principal data

Agencies and other decentralised bodies of the
European Union

Headquarters

Year of
establishment

Budget (million euro)

Authorised posts

2004

2003

2004

2003

16,6

18,1

33,6

18,4

12,2

99,1

29,8

11,3

14,7

16,8

27,5

17,2

10,5

84,2

29,0

11,1

European Centre for the Development of
Vocational Training

Thessaloniki

1975

European Foundation for the Improvement of
Living and Working Conditions

European Environment Agency

European Training Foundation

Dublin

Copenhagen

Turin

1975

1990

1990

European Monitoring Centre for Drugs and
Drug Addiction (1)

Lisbon

1993

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 Health and Safety at
Work

London

1993

Luxembourg

Angers

1994

1994

Alicante

1994

190

157,4

Bilbao

1995

10,7

14,6

European Monitoring Centre on Racism
and Xenophobia

Vienna

European Agency for Reconstruction (2)

Thessaloniki

Eurojust

European Aviation Safety Agency

European Maritime Safety Agency

European Food Safety Authority

European Network and Information Security
Agency (4)

European Railway Agency (4)

The Hague

Cologne (3)

Lisbon (3)

Parma (3)

Heraklion (3)

Valenciennes

1997

2000

2002

2002

2002

2002

2003

2003

7,9

374,6

9,3

11,3

13,3

29,1

—

—

6,6

358,6

8,1

4,7

4,5

12,6

—

—

88

91

115

104

77

314

181

38

675

38

34

114

76

95

55

138

—

—

83

88

111

104

63

287

158

35

675

33

30

120

53

80

40

49

—

—

Includes PHARE programmes.

(1)
(2) Total posts including posts made available for local staff amount to 309 in 2004 (321 in 2003).
(3)
(4)

In 2004, this body had its provisional headquarter in Brussels for all or part of the year.
In 2004, the Commission was responsible for the management of this body’s budget. There was no specific report on the implementation of this budget.

Total

885,3

778,1

2 233

2 009

9.33. Cases of non-respect of the principle of budgetary annu-
ality were identified, in particular carry-over of appropriations not
sufficiently justified. The Court also noted a few cases of non-
respect of the principle of specification (irregular or insufficiently
justified transfers of appropriations), the principle of universality
(appropriations entered in the budget were set-off against nega-
tive expenditure), and the principle of budgetary accuracy
(amounts entered in the budget which did not correspond to the
requirements of the financial year).

9.33 and 9.34.

REPLY OF THE COMMISSION

The Agencies and ‘other decentralised bodies’ are independent and have
a separate discharge procedure for their administrative expenses. Thus,
the Court’s observations are a matter for the agencies themselves. Where
they require it, the Commission can provide the necessary assistance to
help them to understand and interpret the rules as well as to introduce
internal control arrangements.

9.34. The Court noted that in certain cases the systems of inter-
nal control developed in the ADBs needed improvement, in par-
ticular because of the absence of a satisfactory risk analysis.

C 301/234

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

9.35. With regard to staff recruitment and public procurement
procedures, the Court noted a series of weaknesses: procedures
used for the selection of the candidates or contractors were incor-
rect or not duly justified; decisions concerning acceptance or
rejection of candidatures and tenderer’s offers were inadequately
substantiated. In addition, the Court’s examination of the files of
individual members of staff showed that the documents justify-
ing allowances and financial entitlements were not updated on a
systematic basis.

9.36. Almost one in three ADBs presented its financial state-
ments on an accruals accounting basis. The others are generally
on the right track to prepare accounts using this method of
accounting in 2005 as foreseen by the new Financial Regulation.
In the case of the ADBs preparing accruals based accounts, prob-
lems were noted in the identification of carry-overs to be regarded
as charges for the financial year.

9.35.

REPLY OF THE COMMISSION

The agencies are required to comply with the provisions of the general
financial rule relating to public procurement.

The year 2004 being the second year of the applicability of the new FR
and IR, several agencies, especially those recently established, had to
manage a period of transition. The Commission supported fully the
agencies and authorities during this period. A number of agencies,
though not all, have taken advantage of the services offered.

9.36.

REPLY OF THE COMMISSION

The EC accounting rules adopted by the Commission’s Accounting
Officer in December 2004 are applicable to all bodies falling under
Article 185 of the Financial Regulation.

In order to ensure that the ADBs (agencies and other decentralised bod-
ies) will be prepared for the accruals-based accounting and the consoli-
dation requirements, the Commission continues to give them regular
guidance. The Commission has provided the ADBs with specific docu-
mentation to assist them in identifying the adaptations to be carried out,
in particular an IPSAS accounting questionnaire, the future reporting
package for consolidation and a guidance document and form concern-
ing the opening balance sheet as at 1 January 2005. The communica-
tion process will be further intensified during the second semester of
2005 in order to ensure a successful first consolidation of the ADBs.

9.37. The quality of monitoring of fixed assets is inconsistent
between the ADBs. For some, a suitable monitoring system has
not yet been established while for others, the requirements of the
introduced system are insufficiently respected. This has resulted in
discrepancies between the accounts and the physical inventory.

9.37.

REPLY OF THE COMMISSION

The Commission underlines that the responsibility for the preparation of
the annual accounts is ultimately the responsibility of the accounting
officer of each ADB.

THE EUROPEAN SCHOOLS

9.38. The Court’s audit of the European Schools is the subject
of a specific report (not published in the Official Journal), which
is addressed to the Board of Governors and the head teachers of
the European Schools. The Schools’ budget of 222,1 million euro
was financed principally by Commission grants (118,4 million
euro) and by contributions from the Member States (47,3 million
euro). The principal data on the European Schools are set out in
Table 9.4.

30.11.2005

EN

Official Journal of the European Union

C 301/235

Table 9.4 — European Schools — Principal data

European School

Country

Year of
establishment

Budget (1) (2)
(million euro)

Grant received from
the Commission (2)
(million euro)

2004

2003

2004

2003

Office

Luxembourg I

Luxembourg II

Brussels I Uccle

Brussels II (Woluwé)

Brussels III (Ixelles)

Mol

Varese

Karlsruhe

Munich

Frankfurt

Alicante

Bergen

Culham

Belgium

Luxembourg

Luxembourg

Belgium

Belgium

Belgium

Belgium

Italy

Germany

Germany

Germany

Spain

Netherlands

United
Kingdom

1957

1953

2004

1958

1974

1999

1960

1960

1962

1977

2002

2002

1963

1978

Total

7,9

34,6

2,7

26,0

27,1

24,2

10,9

15,8

11,8

18,6

8,8

9,9

11,5

7,2

31,9

—

24,3

25,0

22,7

10,7

15,3

11,5

16,4

6,1

6,2

11,9

12,3

222,1

12,3

201,5

5,7

20,3

1,2

17,0

17,7

15,7

6,4

7,8

3,9

1

4,2

5,7

6,3

5,5

6,1

19,1

—

15,8

15,9

15,0

6,5

7,5

4,1

1,0

2,9

3,4

6,4

6,1

School population (3)

2004

—

3 101

827

2 394

2 917

2 773

643

1 317

1 074

1 504

809

950

664

889

2003

—

3 753

—

2 289

2 769

2 592

641

1 323

1 091

1 455

633

858

695

884

118,4

109,8

19 862

18 983

(1) Total revenue and expenditure as foreseen in the budget of each European School and the Office including all modifications made to the budgets initially adopted.
(2) Source: European Schools.
(3) Source: 2005 Annual report of the Secretary-General to the Board of Governors of the European Schools.
NB: Variations in totals are due to the effects of rounding.

For the financial year 2004 the audit of the Court did not

9.39.
reveal any material issues to be reported in its annual report.

9.39.

REPLY OF THE COMMISSION

The Commission takes note of the Court’s observation.

30.11.2005

EN

Official Journal of the European Union

C 301/237

CHAPTER 10

Financial instruments and banking activities

TABLE OF CONTENTS

Introduction

The Commission’s monitoring of its financial shareholdings

Paragraph

10.1-10.3

10.4-10.12

Overview of assets held by financial institutions on behalf of the Commission

10.13-10.18

The Guarantee Fund for external actions

The European Coal and Steel Community in liquidation

10.19-10.23

10.24-10.28

C 301/238

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

10.1. The Community financial instruments relating to bank-
ing activities are as follows:

— loans granted from budget resources or from borrowed

funds,

— interest subsidies from budgetary funds,

— guarantees on borrowings subscribed and on loans granted

by third parties,

— shareholdings in common interest bodies (1), and

— 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 frame-
work of external policies. Their main aims are to boost economic
development, improve infrastructure and create jobs, notably in
small- and medium-sized enterprises (SMEs), through measures to
enhance their access to finance. The European Coal and Steel
Community in Liquidation is involved in similar transactions.

(1) For example, the European Bank for Reconstruction and Development

(EBRD).

30.11.2005

EN

Official Journal of the European Union

C 301/239

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.3. The Court’s audit covered:

— the Commission’s monitoring of its financial shareholdings,

— the overview of assets held by financial institutions on behalf

of the Commission,

— the operation of the Guarantee Fund for External Actions (see

Table 10.1), and

— the activities of the European Coal and Steel Community in

Liquidation (ECSCi.L.) (see Table 10.2).

Table 10.1 — Guarantee Fund situation (1)

(million euro)

Financial Year

Total Guarantee outstanding at
31 December (2)

Total Fund Resources at
31 December (3)

Coverage (%)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

6 017

5 882

6 715

7 960

9 834

12 052

14 069

15 577

15 358

15 211

12 068

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

1 273,3 (4)

4,9

5,1

8,3

10,8

13,0

10,9

10,2

11,4

10,7

10,5

10,6

(1) Council Regulation (EC) No 2728/94 provides that the Guarantee Fund must reach an appropriate level (target amount) for potential payments, set from 1999 onwards 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.
(4) Following the enlargement, the Council regulation (EC) 2273/2004 of 22 December 2004 reduced the target amount of the Fund by 338,8 million euro which were trans-

ferred to the Community budget with value date 10 January 2005.

Source: Commission.

C 301/240

EN

Official Journal of the European Union

30.11.2005

Table 10.2 — ECSCi.L. Balance sheet (evolution since the expiry of the ECSC’s Treaty) and outstanding commitments of the
ECSC operating budget at 31 December 2004

ECSCi.L. Balance sheet at 31 December 2004

31 December 2004

31 December 2003

31 December 2002

23 July 2002

million euro

%

million euro

%

million euro

%

million euro

%

Assets

Loans and advances to banks

103,38

4,82

133,43

6,49

113,57

4,75

155,62

6,36

Loans and advances to customers

315,35

14,71

361,66

17,59

628,95

26,33

682,42

27,87

Bonds and other fixed-income securities

1 488,96

69,46

1 485,91

72,25

1 551,46

64,94

1 528,90

62,44

Shares and other variable-income securities

7,09

Other assets

Prepayments and accrued income

171,68

57,07

0,33

8,01

2,66

15,75

3,28

56,46

0,77

0,16

2,75

18,77

3,31

73,04

0,79

0,14

3,06

28,00

6,02

47,57

1,14

0,25

1,94

Total assets

2 143,53

100,00

2 056,49

100,00

2 389,10

100,00

2 448,53

100,00

Liabilities

Liabilities vis-à-vis third parties

456,34

21,29

468,33

22,77

764,13

31,98

801,68

32,74

ECSC operating budget

Provisions for liabilities and charges

109,24

213,22

5,10

9,95

222,46

10,82

342,56

14,34

400,92

16,37

247,15

12,02

554,74

23,22

586,01

23,93

Budget for financing coal and steel research

296,30

13,82

293,00

14,25

240,00

10,05

240,00

9,80

Reserves and surplus

1 068,43

49,84

825,55

40,14

487,67

20,41

419,92

17,15

Total liabilities

2 143,53

100,00

2 056,49

100,00

2 389,10

100,00

2 448,53

100,00

Outstanding commitments of the ECSC operating budget at 31 December 2004

Amounts at
23 July 2002

Amounts at
31 December
2002

Amounts at
31 December
2003

2004 Payments

2004
Cancellations

Readaptation

Research

Interest subsidies (Article 56)

Social measures coal (RECHAR)

132,61

121,24

180,83

158,71

16,84

70,64

16,05

46,56

75,76

99,11

11,21

36,39

Total

400,92

342,56

222,47

22,24

44,25

0,25

17,54

84,28

Source: ECSC.i. L Financial Statements at 31 December 2004.

(million euro)

Amounts at
31 December
2004

43,74

48,64

0,97

15,89

9,78

6,22

9,99

2,96

28,95

109,24

30.11.2005

EN

Official Journal of the European Union

C 301/241

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

THE COMMISSION’S MONITORING OF ITS
FINANCIAL SHAREHOLDINGS

10.4. The EU holds shares in two financial institutions being the
European Investment Fund (EIF) (2) and the European Bank for
Reconstruction and Development (EBRD) (3). These two capital
participations in related organisations totalled 277,5 million euro
at 31 December 2004 (4).

10.5. The Court audited the Commission’s monitoring (5) of its
two shareholdings in financial institutions by assessing:

(a) whether the monitoring measures taken by the Commission
(in financial terms but also in respect of future risks) are
adequate to ensure an efficient, effective and economic
follow-up of its capital participations;

(b) whether the monitoring and management information pro-
vides the Commission with reasonable assurance that the
activities of its participations in related organisations are in
compliance with EU policies and do not conflict with appli-
cable EU legislation.

(2) 20 % was called up (120 million euro valued at 176 million euro per
31 December 2004 in the Communities consolidated balance sheet)
out of the participation of 600 million euro (30 % of the authorised
capital totalling 2 000 million euro).

(3) 26,25 % was called up (157,5 million euro: 138,9 million euro were
paid and the remaining 18,6 million euro are payable during 2005
to 2009) out of the participation of 600 million euro (3 % of the
authorised capital totalling 20 000 million euro).

(4) In addition to these participations, there is a Community participation
in the ‘Galileo Joint Undertaking’ of 282 million euro (called-up
amount per 31 December 2004 valued at 192,7 million euro per
31 December 2004 in the Communities consolidated balance sheet)
out of the participation of 520 million euro (90 % of the capital total-
ling 575 million euro). Furthermore,
the Communities consoli-
dated balance sheet includes other financial fixed assets totalling
1 810,9 million euro which were not included in the monitoring audit.
(5) In respect of EU participation in the European Investment Fund, a Tri-
partite Agreement between the Court, the Commission and the EIF
applies. The agreement was renewed for a two-year period ending
25 September 2005. It can be renewed for another two-year period by
tacit agreement.

C 301/242

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.6. The Commission nominates two members (6) (and two
alternates) for the EIF’s Board of Directors who are elected by the
EIF’s General Meeting and an additional person (no alternate) as a
member of the EIF’s Audit Board. The rules of conduct of the EIF
do not normally allow them to divulge information outside the
EIF other than to persons assisting them in the discharge of their
duties as Board Members. There is no evidence proving that other
Commission services are informed and, consulted as necessary,
to check compliance with Community policies or rules.

10.6.
European Investment Fund’s (EIF) activities are primarily in
support of small- and medium-sized enterprises (SMEs). The Commis-
sion nominees to the EIF Board are senior officials in the three
Directorates-General with the greatest interest and knowledge of this sec-
tor (Enterprise and Industry, Economic and Financial Affairs and
Regional Policy). These services closely coordinate their position in
advance of each board meeting. Other services are informally consulted
on an ad hoc basis, from time to time, on specific issues (e.g. State aid)
but the Commission does not consider it necessary to systematically con-
sult those services.

However, as far as compliance with Community objectives is concerned,
the Commission believes that the creation, in mid-2005, of the Com-
pliance Function in the EIF (at the request of the Board of Directors and
strongly supported by the Commission nominees) is a further important
step in providing assurance of compliance with Community policies.

In respect of the participation in the EIF, full reliance is
10.7.
put on the reports (7) made available to the shareholders at the
general meeting of the EIF. No evidence was provided to the Court
of any subsequent monitoring of material issues arising.

10.7. With regard to financial reports in relation to the EIF, the Com-
mission has full confidence in the work performed by the independent
internal and external auditors and the EIF Audit Board. No material
issues have been raised by the auditors on the EIF financial statements.

The shareholders ordinary annual meeting deals with the approval of the
annual report and related financial statements and nominations mat-
ters. All extraordinary decisions are subject to decision by the Commis-
sion preceeded by a formal interservice consultation. All decisions by the
Shareholders are monitored by the Board of Directors as well as any rec-
ommendations arising from the Annual Report of the Audit Board.

10.8. The EIB, as majority shareholder, with around 60 % of the
shares, faces particular group requirements which the Commission with
30 % does not. This applies to the corporate plan as well as to the con-
solidation process.

The EIF Corporate Plan is first reviewed and approved by the EIF Board
of Directors before inclusion in the EIB Group Plan. The draft plan is
subject
to particularly close scrutiny by the staff supporting the
Commission-designated Directors before a position is taken on the
Board.

For the consolidation process, some financial data are made available by
the accounting services of the EIF to the EIB within the context of the very
specific consolidation need of the EIB Group accounts. The Commission
is not aware of other differences in the treatment of shareholders.

10.8. There is close cooperation between the EIF with the rel-
evant organs of EIB. The EIF operations are coordinated with the
EIB corporate plan. There is no evidence of similar coordination
In order to ensure
and cooperation with the Commission.
accountability, the Commission should be able to demonstrate
that it obtains the same information for the management of the
financial institution (EIF) as its major shareholder, the EIB, does.

(6) During 2004, the chairman of the EIF Board of Directors was nomi-
nated by the Commission. He had no function in the hierarchy of the
Commission because he had retired.

(7) For instance, the annual report and the report of the Audit Board.

30.11.2005

EN

Official Journal of the European Union

C 301/243

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

In respect of the participation in the EBRD (8), the Com-
10.9.
mission has one member (9) and one alternate member on the
EBRD’s Board of Directors who report regularly on the situation
and developments to the responsible Commissioner and the
Director-General of DG ECFIN.

10.10. According to the Commission, one of the aims of this
EU participation in the EBRD is to ensure compliance with EU
policies, for instance in respect of environmental standards that
are not legally binding in non-EU Member States. There is regular
follow-up at the level of DG ECFIN. The monitoring process
within the Commission is operational and also ensures that com-
pliance with Community policies and rules is assessed and taken
into consideration in the work of the Commission’s member on
the Board of Directors.

10.10. The EU has a main interest in the achievement of the objec-
tives assigned to the European Bank for Reconstruction and Develop-
ment (EBRD), namely to foster the transition towards market-oriented
economies and to promote private sector development. Through partici-
pation, it also ensures compliance with EU legislation, for instance in
respect of the environment, and EBRD promotion of international stan-
dards in non-EU countries, which are not bound by EU legislation.

10.11. Although the monitoring is managed by the same
Directorate-General, the level of information available in respect
of the EBRD monitoring is more detailed than for EIF and includes
the results of the consultations with other services.

10.11. The Commission considers that the monitoring of its partici-
pation in EBRD and EIF must be carried out taking into account the
legal framework specific to each institution.

As stated in paragraph 10.6, with respect to the EIF, the Commission
does not consider it necessary to systematically consultat services other
than those with nominees on the Board.

10.12. The audit revealed that the monitoring and management
information concerning the EBRD provides the Commission with
reasonable assurance that their activities are in compliance with
EU policies and do not conflict with applicable EU legislation. In
order to provide the Commission with the same level of assur-
ance concerning EIF participation the monitoring and manage-
ment information for the EIF should be improved.

10.12. As stated in paragraphs 10.6 and 10.11 the participation in
the Board of Directors of senior officials from the three services, with the
greatest policy interest in the EIF activities, explains largely the differ-
ence noted by the Court with respect to the EBRD. Participation of these
senior officials in the Board is the best assurance of the protection of
Community interest.

The introduction in mid-2005 of a Compliance Function in the EIF,
with a particular mandate to ensure appropriate compliance arrange-
ments, is in place with respect to EU policies and legislation provides an
opportunity to further enhance this assurance. The Commission will work
closely with the EIF to help ensure the effectiveness of this new function.

Furthermore, the Commission will examine the need to clarify, in the
internal procedures of the relevant service, the ad hoc consultation pro-
cess referred to in paragraph 10.6.

(8) Agreement establishing the EBRD, signed in Paris on 29 May 1990

(basic documents of the EBRD April 1991).

(9) The member of the EBRD Board nominated by the Commission is

based in London.

C 301/244

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

OVERVIEW OF ASSETS HELD BY FINANCIAL INSTITUTIONS
ON BEHALF OF THE COMMISSION

10.13. Apart from the Commission’s shareholdings, assets put
under the management of financial institutions also require close
monitoring. These assets are provided for measures that are car-
ried out by financial institutions on behalf of the Commission in
order to implement certain EU policies (10).

10.14. The Court assessed whether the Commission has a com-
plete and up-to-date overview of the assets held by financial insti-
tutions on behalf of the Commission.

10.15.
In respect of financial institutions, agreements exist in
particular with the EIB, the EBRD, the EIF, the Council of Europe
Development Bank and the German Kreditanstalt für Wiederauf-
bau (KfW). According to the Commission the amounts (11), kept
in the trust and special accounts under the supervision of
DG ECFIN, totalled 360,9 million euro at the end of 2004.

10.16. The audit revealed:

10.16.

(b) The amounts in question are included in the final annual accounts

of 2004 under the heading ‘financial intermediaries’.

(c) The amounts in question are included in the final annual accounts

of 2004 under the heading ‘financial intermediaries’.

(a)

the Commission has information on all accounts held with
the EBRD but has no complete overview of accounts held by
the EIF and the EIB on behalf of all Directorates-General;

(b) a contribution to a banking operation that the Kreditanstalt
für Wiederaufbau is carrying out in Bosnia and Herzegovina,
for which 44,25 million euro were paid, was not registered
as an asset by the Commission and therefore not recorded in
the accounts;

(c) EU funding totalling 16 million euro has been provided to
the European Agency for Reconstruction (EAR) for banking
operations in Kosovo, Montenegro and Serbia, managed by
KfW, for housing credits and finance to the rural community
and SMEs. Neither the Commission nor the EAR had included
these amounts in its provisional 2004 accounts.

Although these latter items have been corrected and do not there-
fore affect the reliability of the accounts, they are an illustration
of the lack of a complete overview of these aforementioned
accounts.

(10) Conventions are being concluded between the Commission and the
financial institutions which lay down rules in respect of the details of
the mandate (e.g. procedures, reporting obligations and the finance
from the general budget).

(11) Current accounts, fixed-term deposits and cash investments.

30.11.2005

EN

Official Journal of the European Union

C 301/245

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.17. The Commission does not have a complete overview of
existing assets held by financial institutions on behalf of the Com-
mission.

10.17.
It is the responsibility of each authorising officer to ensure that
the assets under his/her control are subject to regular and adequate moni-
toring. Thus the management and monitoring of such assets are done by
each responsible Directorate-General, which also ensure that these are
correctly and completely entered in the accounting system. Based on the
information the Directorates-General have provided, the Directorate-
General for Budget prepares the annual accounts. The accounts thus pro-
vide an overview of the various assets of the Commission, including those
held by financial institutions. However, the Commission does not report
by financial institution, but instead, and in accordance with the account-
ing rules, by asset category in the balance sheet.

10.18.
Such an overview should ensure that the assets are sub-
ject to regular and adequate monitoring. It should benefit from
the expertise that is available at DG ECFIN with the objective of
harmonising the related conventions and ensuring more transpar-
ency for the budgetary authorities.

10.18.
It is already the responsibility of each authorising officer to
ensure that the assets under his/her control are subject to regular and
adequate monitoring (See Article 60 of the Financial Regulation).
Authorising officers are also already required to include this information
in the accounting system so that it can be reported in the annual accounts.

With the introduction of the new accounting system in 2005, the author-
ising officers have better tools at their disposal to monitor the assets
under their responsibility and equally the information is better central-
ised in the system, which gives a better overview of the total situation
which should avoid the occurrence of the situation described by the Court.

THE GUARANTEE FUND FOR EXTERNAL ACTIONS

10.19. The Community budget is particularly exposed to credit
risk as regards the guarantees for loans to third countries. The
purpose of the Guarantee Fund for External Actions (12) is to
reimburse the Community’s creditors (13) in the event of a ben-
eficiary’s defaulting and to avoid direct calls on the Community
budget.

10.20. DG ECFIN carries out the administrative management of
the Fund and the EIB is responsible for the treasury management.
The Court’s audit focused on the sound financial management of
the Fund for the financial year 2004 (14).

(12) Council Regulation (EC, Euratom) No 2728/94 (OJ L 293,
12.11.1994, p. 1), as amended by Regulation No 1149/1999
(OJ L 139, 2.6.1999, p. 1), as last amended by Regulation (EC, Eura-
tom) No 2273/2004 (OJ L 396, 31.12.2004, p. 28).

(13) Principally the EIB, but also Euratom external lending and EU macro-

financial assistance (MFA) loans to third countries.

(14) The audit work carried out by the Court is based on a specific tripar-
tite agreement between the Court, the EIB and the Commission,
signed in January 1996.

C 301/246

EN

Official Journal of the European Union

30.11.2005

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.21. Table 10.1 shows the development of the Fund over the
10 years to the end of 2004. The corresponding target
amount (15) totalled 1 086 million euro at the end of 2004. The
surplus to be refunded to the budget was thus 187 million euro.

10.22. The Court found that the Guarantee Fund was managed
in a satisfactory manner during 2004.

10.23. DG ECFIN should formally define and document checks
performed on the data received from the EIB, especially on the
outstanding amounts of the loans granted to third parties under
Community guarantees.

10.23. The Commission is in discussion with the EIB in order to
obtain, in future, an audit certificate on the outstanding loans covered
by the Guarantee Fund. The manual of procedures will then be updated
to integrate document controls already carried out.

THE EUROPEAN COAL AND STEEL COMMUNITY IN
LIQUIDATION

10.24. The Treaty establishing the European Coal and Steel
Community expired on 23 July 2002. The assets and liabilities of
the ECSC were transferred to the European Community (16): their
net worth, referred to as the European Coal and Steel Commu-
nity in Liquidation (ECSCi.L.), is allocated to research in the sec-
tors related to the coal and steel industry.

10.25. The objective of the Court’s audit was to obtain reason-
able assurance as to the proper implementation of the legislation
governing the ECSCi.L.

10.26. As in previous years, the ECSCi.L. accounts have been
examined by an external auditor, who has expressed an unquali-
fied audit opinion (17).

10.27. Table 10.2 sets out the evolution of the ECSCi.L.’s bal-
ance sheet and outstanding commitments from its operating bud-
get. The winding-up of the financial operations of the ECSCi.L. is
proceeding in compliance with the relevant legislation, including
the Multiannual Financial Guidelines laid down by the Council
which fix strict rules for managing the assets of the ECSCi.L..

(15) The target amount is fixed at 9 % of the outstanding amount of guar-

anteed loans.

(16) Protocol annexed to the Treaty establishing the European Commu-

nity.

(17) In the Financial Report of the ECSC in liquidation as at 31 Decem-
ber 2004 (page 19), the external auditor concluded that: ‘(…) the
financial statements (…) faithfully reflect (…) the assets and financial situ-
ation of the ECSC.i.L as at 31 December 2004 and the outturn of the finan-
cial year ending on that date’.

30.11.2005

EN

Official Journal of the European Union

C 301/247

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.28. The Court has obtained reasonable assurance as to the
proper implementation of the provisions governing the ECSCi.L..
However, the Court notes that the Commission should fully com-
ply with the Multiannual Financial Guidelines regarding maturity
restrictions and rating limits for all securities.

10.28. The Commission already complies with all maturity restric-
tions and rating limits for the investments made since the entry into force
of the Guidelines and has rigorous procedures to ensure compliance.
Before the Guidelines came into force, the Commission entered into a spe-
cial hedging transaction with an AAA counterparty to match two long-
term borrowings. This was necessary to protect ECSC interests following
the restructuring of a major infrastructure loan in 1998, in which all
lenders were treated equally and which resulted in the conversion of three
of ECSC’s loan tranches into a variety of instruments.