Synthesis Report from the Commission - Member States' replies to the Court of Auditors' 2003 Annual Report
Date: 2005-10-17
Institutions: European Commission
Subjects: EU Member State, European Commission, European Court of Auditors, activity report, financial year, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 17.10.2005 
COM(2005) 506 final 

SYNTHESIS REPORT FROM THE COMMISSION 

Member States' replies to the Court of Auditors' 2003 Annual Report 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

3. 

4. 

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

Synthesis of Member States replies ............................................................................. 3 

Member States’ views on a Community internal control framework .......................... 3 

Member States’ views on specific observations made by the Court of Auditors ........ 6 

DAS errors ................................................................................................................... 7 

Conclusion ................................................................................................................... 8 

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1. 

INTRODUCTION 

Immediately after the Court of Auditors transmitted its Annual report concerning the 
financial  year  20031  in  November  2004,  the  Commission  informed  each  of  the 
Member States of the observations specific to them in the  report.  The Commission 
also invited Member States to reply to two general questions relating to the Court of 
Auditors’  Opinion  no.  2/2004  on  the  ‘single  audit’  model  (and  a  proposal  for  a 
Community internal control framework)2 (hereafter “the CICF opinion”). 

The  Financial  Regulation  requires  the  Commission  to  transmit  a  summary  of  the 
Member  States’  replies  to  the  Court  of  Auditors,  the  Council  and  the  European 
Parliament before 15 February3. Due to the late receipt of some replies, as well as the 
time  needed  for  translation  of  the  replies  and  of  the  report  itself,  this  deadline  was 
not  met.  The  Commission  did  nevertheless  present  the  main  conclusions  from  the 
replies  to  the  Council  before  the  Council  decided  its  recommendations  to  the 
European Parliament on the 2003 discharge4. 

19  Member  States  replied  to  both  the  two  general  questions  and  the  specific 
observations concerning them. An additional three Member States replied to only the 
specific observations.  

The  aim  of  this  report  is  to  present  a  summary  of  Member  States’  replies.  Section 
two  summarizes  the  replies  to  the  two  general  questions  and  the  Court’s  specific 
observations  on  Member  States.  Section  three  considers  the  issue  of  DAS  errors. 
Section four presents the conclusion.  

2. 

SYNTHESIS OF MEMBER STATES REPLIES  

2.1.  Member States’ views on a Community internal control framework 

The  Court  of  Auditors  published  its  CICF  opinion  in  April  2004  where  it  set  out 
some  general  principles  for  a  Community  internal  control  framework,  cf.  annex  I. 
The  Court  highlighted  the  opinion  in  the  general  introduction  to  its  2003  Annual 
Report5.  The  Commission  considers  this  opinion  a  very  important  and  valuable 

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Cf. OJ C 293 of 30.11.2004. 
Cf. OJ C 107 of 30.4.2004. 
Cf.  article  143(6)  in  the  Financial  Regulation  applicable  to  the  general  budget  of  the  European 
Communities,  Council  Regulation  (EC,  Euratom)  no.  1605/2002  of  25  June  2002  (OJ  L  248  of 
16.9.2002). 
Letter  of  15  February  2005  from  Vice  President  Siim  Kallas  to  President  of  the  Council  (ECOFIN) 
Jean-Claude Juncker. 
Cf.  point  0.5  in  Court  of  Auditors  –  Annual  report  concerning  the  financial  year  2003,  OJ  C  293  of 
30.11.2004. 

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contribution to the debate on how to further improve the Community internal control 
framework6.  

As Member States are involved in shared management of around 80 per cent of EU 
funds,  the  Commission  considered  that  an  appropriate  follow-up  to  the  Court’s 
opinion should be based on input from the Member States as well. The Commission 
therefore  invited  Member  States  to  answer  two  general  questions  relating  to  issues 
raised in the Court’s opinion. 

Question no. 1 

In  its  opinion  no.  2/2004  on  the  single  audit  model,  the  Court  has  included  a 
proposal  for  a  Community  internal  control  framework.  In  the  areas  of  shared 
management,  the  Court  is  proposing  that  a  chain  of  tasks  and  responsibilities  be 
developed, stretching from the immediate managers of the funds (primary controls) 
to  the  Commission  (supervisory  controls)  via  a  central  Member  State  control 
function. This model presupposes that each level can rely and use (i.e. has access to) 
the  results  of  the  other  control  bodies.  Do  you  support  this  chain-based  model  in 
general and would you support the development of such a chain-based model in the 
areas where it does not already exist? What can be done in practice to improve the 
co-ordination of controls (e.g. do you support the contracts of confidence proposed 
by the Commission in the area of structural funds)? 

19 Member States have replied. None reject the idea of a Community internal control 
framework but several Member States express reservations/make comments: 

•  Responsibilities of all involved should be clearly defined. The Commission shall 
remain responsible for the implementation of the EU budget, in accordance with 
article 274 of the Treaty. 

•  Several Member States stress that an internal control framework already exists 

to some extent.  

•  Common  standards  for  financial  control  and  internal  audit  must  exist  at  all 
levels  for  the  control  chain.  Such  standards  should  be  developed  in  full 
cooperation between the Commission and Member States. They should be based 
on  already  existing  international  standards.  Some  Member  States  mention  own 
resources  as  an  area  where  the  Commission  and  Member  States  cooperate 
effectively on harmonization of audit and control procedures. 

•  Costs and benefits must be reasonably balanced. Any changes to the Community 
internal control framework should make the system simpler and not increase the 
administrative  burden.  One  Member  State  proposes  that  the  EU  budget  should 
bear the costs of Member State controls. Another argues that support for audit and 
control activities within Structural Funds and the Cohesion Fund should continue 

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The  Community  internal  control  framework  is  defined  as  all  actions  taken  into  account  by  the 
Commission in its risk management. This comprises e.g. internal controls within the Commission itself, 
missions performed by the Commission itself, missions entrusted to external auditors as well as internal 
control and/or audit systems of Member States and/or National Audit Institutions. Thus, the Community 
internal control framework does not include external audit undertaken by the Court of Auditors. 

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to be financed under technical assistance measures. One Member State notes that 
accurate  estimates  of  the  costs  of  controls  by  national  authorities  are  difficult  to 
obtain  because  of  the  complex  range  of  control  activities  for  a  given  type  of 
expenditure. 

•  Several Member States say that differences in national administrative cultures 

and practices must be taken into account. 

•  Some  Member  States  indicate  that  reporting  documents  should  be  harmonized 
and pooled while others find that reports of national bodies cannot be considered 
the  property  of  the  Union.  In  a  few  cases,  Member  States  foresee  legal 
complications if such reports should be directly accessible to other control levels. 

•  Some Member States point out that imprecise legislation and lack of guidelines 

cause irregularities. 

•  Finally, some Member States argue that a change in the role of Member States in 
the  internal  control  framework  should  be  counterbalanced  by  a  different 
approach in the audit and control acitivities of the Court of Auditors and the 
Commission, such as by reducing control activities in Member States in general 
and focusing on systems audits instead of doing on-the-spot controls. 

Question no. 2 

Until  2001,  the  Court  of  Auditors  based  its  statements  of  assurance  on  the  errors 
found  in  a  limited  sample  of  payments  charged  to  a  year’s  EU  budget,  and  has 
considered that the level of irregularity found in funds managed in partnership was 
too  high.  However,  a  certain  level  of  irregularity  is  unavoidable  as  the  control 
systems are not designed to detect every irregular payment, but to limit the risk to the 
EU budget: 

- through dissuasive sanctions applied when irregularities are found in the 5 per cent 
of claims checked on the spot under the IACS system in agriculture 

- through recoveries in a later financial year when a final claim is submitted under a 
grant, or when an ex-post audit detects an irregularity 

The  Court  is  now  moving  towards  basing  its  statement  of  assurance  on  its 
assessment of the supervisory and control systems put into place to manage the risk 
of irregularity in claims, rather than on individual errors found during its audits. 

How can Member States best provide evidence that supervisory and control systems 
are  in  place  which  keep  the  risk  of  irregularity  in  EU  funds  to  within  reasonable 
limits? 

19  Member  States  have  replied.  The  content  of  the  replies  varies  as  some  Member 
States  have  described  the  current  control  framework  in  place  in  the  Member  State 
while others have commented on the role of Member States in general terms. 

Very  few  Member  States  have  presented  ideas  on  how  the  Member  States  at  an 
operational level should provide evidence that the risk of irregularity in EU funds is 

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within reasonable limits. One proposes that each Member State should have a central 
coordination body carrying out effective and constant supervision. Another proposes 
to  introduce  a  principle  of  one  audit  authority  for  each  Member  State.  And  a  third 
proposes  that  each  Member  States  should  provide  the  Commission  with  an  annual 
report  and  a  declaration,  based  on  the  same  model  as  is  used  by  the  Commission 
internally. 

All  Directors-General  in  the  Commission  must  present  an  Annual  Activity  Report 
and  sign  a  declaration  each  year  as  to  whether  funds  managed  by  the  Directorate-
General have been used for the intended purpose in accordance with the principles of 
sound  financial  management  and  that  the  control  procedures  in  place  give  the 
necessary  guarantees  concerning 
the  underlyings 
transactions. 

legality  and  regularity  of 

2.2.  Member States’ views on specific observations made by the Court of Auditors 

22  Member  States  have  replied  to  the  Court’s  specific  observations.  Almost  all 
provide  feedback  on  a  majority  of  the  specific  observations  where  a  reply  is 
expected.  In  more  than  one  in  four  cases,  Member  States  indicate  that  they  either 
disagree with the observations of the Court or they consider the issue still open for 
discussion. 

Disagreements  between  the  Court  and  the  Member  States  do  vary  in  nature,  but 
among  the  recurring  issues  are  a)  the  eligibility  of  expenditure,  b)  the  structure  of 
checks (i.e. sampling methods, risk analysis and extrapolation) and c) the estimated 
effect on the Community budget when taking into account that corrections have been 
made or will be made in later payments.  

Several  Member  States  point  out  that  the  Court  has  not  taken  their  replies  into 
account  in  the  2003  Annual  Report.  Two  find  that  they  were  not  duly  notified  of 
observations before they appeared in the 2003 Annual Report. 

Some  point  out,  that  the  Court’s  observations  are  based  on  findings  in  individual 
transactions  and  do  not  necessarily  indicate  systematic  irregularities  within  e.g.  a 
Structural  Funds  programme.  One  stresses  that  the  current  procedure  makes  it 
impossible for Member States to profit from the exercise. Instead, the Court should 
present a qualitative examination of the systems it has examined as such input would 
be of more value to the Member States. 

that 

Another  proposes 
includes  a  brief  summary  of  specific 
recommendations for clearly identified Commission follow-up actions, together with 
deadlines.  This  would  reinforce  the  multi-annual  aspect  of  the  Commission’s  work 
and provide a baseline for subsequent reports. 

the  Court 

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3. 

DAS ERRORS 

The Court of Auditors bases its statement of assurance on four elements: 

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

•  an  examination  of  samples  of  transactions  for  each  major  area  by  carrying  out 

checks down to the final beneficiary level; 

•  an analysis of the annual activity reports and declarations of the Directors-General 

and of the procedures applied in drawing them up; 

•  where  necessary,  an  examination  of  the  work  of  other  auditors  who  are 

independent of Community management procedures. 

The  Court  identifies  errors  when  it  examines  a  sample  of  transactions  (point  b) 
above). Some are attributed to the Commission itself, others to the Member States. 
Errors  are  classified  as  either  substantive  or  formal,  with  substantive  errors  having 
direct financial consequences and formal errors not. 

About  one  third  of  the  errors  identified  by  the  Court  in  2003  were  classified  as 
substantive.  Of  these,  almost  one  in  three  were  cases  with  an  error  rate  (i.e.  the 
amount in error as a share of the total amount involved in the transaction) less than 
two  per  cent.  In  the  cases  with  error  rates  higher  than  two  per  cent,  more  than  2/3 
were attributed to areas of shared management. On the basis of the replies received, 
it is not possible to present a global estimate of how many errors the Member States 
accept or contest. However,  the Commission follows up on all error findings  made 
by  the  Court  of  Auditors  in  cooperation  with  the  Member  States  concerned.  If  the 
Court’s  observations  are  confirmed,  the  necessary  financial  corrections  and 
recoveries  are  made.  Based  on  the  results  so  far  achieved  in  the  follow-up,  the 
Commission’s analysis of the errors indicates that about half of the substantive errors 
with an error rate higher than two per cent can be accepted. For the remaining half, 
the errors are either rejected or it is not yet possible to accept/reject the error because 
the cases have not been closed yet. 

In  the  vast  majority  of  the  cases  with  accepted  errors,  the  Commission/Member 
States agree with the Court of Auditors on the amount which is considered to be in 
error.  However,  it  should  be  noted  that  the  amount  in  error  (as  a  share  of  the  total 
transaction amount) is usually in the lower range; thus, in more than 60 per cent of 
the cases, the amount in error is less than 10 per cent of the total transaction amount. 

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4. 

CONCLUSION 

The Commission welcomes the Member States’ replies which in many cases are full 
and comprehensive. 

The  follow-up  to  the  European  Court  of  Auditors’  Annual  Report  is  important  as 
Member  States  in  several  cases  do  not  agree  with  the  specific  observations  of  the 
Court.  The  exercise  allows  both  the  Member  States  and  the  Commission  to  have  a 
global  overview  of  Member  States’  position  on  both  these  observations  and  DAS 
errors. An analysis of the DAS errors show that at this point in time, only about half 
of substantive errors identified by the Court with error rates higher than two per cent 
can be accepted. 

The 2003 exercise has also provided the Commission with valuable information on 
Member States’ preliminary reactions to the Court of Auditors’ CICF opinion. This 
issue  is  taken  up  in  the  Communication  on  a  roadmap  to  an  integrated  internal 
control  framework  (COM(2005)  252).  The  two  general  questions  were  an 
innovation.  Given  the  positive  results,  the  Commission  may  put  such  horizontal 
questions in the 2004 exercise. The Commission will also continue to make further 
efforts  along  with  the  Court  of  Auditors  to  ensure  that  Member  States  can  more 
easily  identify  and  thereby  comment  on  DAS  errors.  The  Commission  will  also 
continue  to  make  efforts  to  ensure  that  Member  States’  replies  to  the  Court’s 
observations are taken into account in the Court’s annual report and in the discharge 
process  but  must  acknowledge  that  this  is  often  difficult  due  to  the  timing  of  the 
procedure. 

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ANNEX I 

General  principles  for  a  Community  internal  control  framework  set  out  by  the 
Court in its opinion no. 2/2004 

Objectives 

Conditions 

Structure 

•  Should define scope, purpose, those involved, what it comprises, to what end, with what 

constraints, to what extent, how. 

•  Complete and timely corrective action must be ensured if errors in transactions and 

systems weaknesses appear. 

•  The European Union should “own” all checks, i.e. all results, supporting documents etc. 

must be available to others in the control chain. 

•  Legislation must be simple and clear. 
•  Penalties and sanctions should cover all parts of the budget. 
•  At Member State level, someone must be responsible for providing assurance that the 
control work undertaken at the local level is to the required standard and quality. 
•  The Commission must ensure that control levels in Member States (or equivalent) are 

operating effectively and as intended. 

•  Claims for reimbursement or costs should be accompanied by audit certificate from 

independent external auditor. 

Application 

•  The Commission should define minimum requirements for control systems at all levels. 
•  Common standards for controls must exist. 
•  Results must be accessible in a common format (perhaps in a database with access for 

Costs and 
benefits 

others in the control chain). 

•  The issue of risk based versus random sampling must be addressed. 
•  Beneficiaries must be well informed of the risks if cheating. 
•  Should Member States’ (or bodies undertaking controls) costs be borne by the EU 

budget? 

•  Benefits must be “measured” through estimates of illegality and irregularity. 
•  A trade-off must be struck between costs and benefits (tolerable risk of error/irregularity).  
•  Tolerable risk must be defined, e.g. by defining acceptable error rates and the intensity of 

checks. 

Roles and 
responsibilities 

•  The Commission should be responsible for promoting internal control systems in 

partnership with the Member States, i.e. it shall define common characteristics of the 
system, monitor costs and evaluate benefits. 

•  The Parliament and the Council should approve the cost/benefit balance7. 
•  The Court of Auditors should audit the internal control systems as external auditor. 

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The approval of costs may be implicit, in accepting a certain percentage of checks.  

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