Report from the Commission - Member States' replies to the Court of Auditors' 2004 Annual Report {SEC(2006)524}
Date: 2006-04-20
Institutions: European Commission
Subjects: EU Member State, European Commission, European Court of Auditors, activity report, financial year, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.4.2006 
COM(2006) 184 final 

REPORT FROM THE COMMISSION 

Member States' replies to the Court of Auditors' 2004 Annual Report 

{SEC(2006)524} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

4.1. 

4.2. 

5. 

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

Preparation of the Court’s Annual report..................................................................... 4 

Audit and Control framework ...................................................................................... 5 

Substantive findings in 2004........................................................................................ 7 

Agriculture policy ........................................................................................................ 8 

Structural actions.......................................................................................................... 8 

Conclusion ................................................................................................................... 9 

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1. 

INTRODUCTION 

The European Court of Auditors (‘the Court’ or ‘ECA’) published its Annual report 
concerning the financial year 2004 (‘2004 Annual report’) on 15 November 20051. 
In  the  report,  the  Court  presented  its  Statement  of  Assurance  (‘the  DAS’)  and  the 
supporting information, including observations concerning management in Member 
States. 

As obliged by the Financial Regulation2, the  Commission informed  Member States 
immediately  of  such  observations  as  well  as  the  findings  identified  by  the  Court 
during  its  audits  and  attributed  to  Member  States.  Member  States  were  invited  to 
submit  their  replies  by  15  December  2005.  The  vast  majority  of  Member  States 
replied within or shortly after the very tight deadline, in many cases submitting very 
detailed comments. 

As time was needed for translation and thorough analysis of the replies received, the 
Commission  was  not  able  to  present  its  summary  report  by  15  February  2005,  but 
Vice-President  KALLAS  informed  the  European  Parliament  and  the  Council 
(ECOFIN) of the preliminary findings3. 

2006 brings two challenges in the area of external audit and discharge. One challenge 
is to implement the Action Plan towards an Integrated Internal Control Framework4 
(‘Action Plan’) adopted by the Commission on 17 January 2006. The objective is to 
provide the Court with reasonable assurance that EU funds are spent in a legal and 
regular manner. However, the Action Plan will not deliver the expected results unless 
all relevant actors, i.e. the European Parliament, the Court of Auditors, the Member 
States and the Commission - taking into account their respective responsibilities and 
independence - each contribute to the implementation of the 16 actions. 

Another challenge is the new and tighter deadline for preparing the Court’s Annual 
report. As set out by the Financial Regulation5, the Annual report must from now on 
be  published  by  31  October  at  the  latest,  i.e.  one  month  earlier  than  so  far.  This 
increases  the  demands  on  all  involved  parties in the preparation of  the  report – i.e. 
the  Court,  the  Commission  and  Member  States  –  to  ensure  that  the  preceding 
exchange  of  views  on  preliminary  findings  of  the  Court  is  done  in  an  efficient 
manner.  

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5 

The  report  was  published  in  the  Official  Journal  C  301  of  30.11.2005.  It  is  available  on  the  Court’s 
website: www.eca.eu.int. 
Article  143(6)  in  The  Financial  Regulation  applicable  to  the  general  budget  of  the  European 
Communities, Council Regulation (EC, Euratom) No 1605/2002 of 25.6.2002. 
Cf.  letter  of  15  February  2006  from  Vice-President  KALLAS  to  Mr.  Karl-Heinz  GRASSER, 
President ECOFIN.  
COM(2006) 9 of 17 January 2006. 
Article 143(5). 

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Section  2  considers  the  difficulties  linked  to  the  stricter  deadlines  the  Court  has  to 
meet on the Annual report. Section 3 presents  remarks  made  by  Member  States  on 
the  audit  and  control  framework.  Section  4  contains  an  analysis  of  substantive 
findings attributed to Member States within agriculture policy and structural actions. 
Conclusions are drawn in section 5.6 

2. 

PREPARATION OF THE COURT’S ANNUAL REPORT 

Time available for preparing the 2005 Annual report is one month less than in earlier 
years  due  to  the  obligation  to  publish  the  report  already  by  31  October.  This  has 
implications for the Court as well as for the Commission and Member States. 

During the financial year or shortly after, the Court carries out audits on procedures 
and transactions in the Commission and the Member States.  In the  Member States, 
the Court checks that the final beneficiary fulfils the conditions for aid (for example, 
that the area of a field or number of animals is correct, or that the project financed by 
the Structural Funds has been carried out) and that proper control procedures are in 
place. 

After  each  audit  mission,  the  Court  analyses  the  findings  and  forwards  its 
preliminary observations in so-called PF7 letters to the relevant Commissioner or to 
the national supreme audit institution, depending on whether funds are managed at a 
central or Member State level. Typically, the Court requests the Commission or the 
Member State to reply within 2 months. There is no obligation to reply to the Court 
but it is common practice – albeit many replies arrive later than the deadline set by 
the Court. 

Until  now,  the  Court  had  to  receive  Member  States’  replies  during  spring  or  early 
summer in order to be able to translate, analyse and to the extent possible incorporate 
the comments in the Annual report to be published by 30 November. This was due to 
the  time  needed  for  internal  proceedings  in  the  Court,  the  contradictory  procedure 
with the Commission in June-September as well as translation of the report into now 
20 languages.  

However,  as  regards  the  financial  year  2004,  most  Member  States  submitted  their 
replies to substantive findings8 in June or later. This was on the one hand due to the 
Court sending out a significant share of the PF letters in May-July9, and on the other 
hand  due  to  Member  States  in  many  cases  transmitting  replies  more  than  60  days 
after the receipt of the PF letter.  

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7 
8 
9 

The analyses underlying this summary report are contained in Working document from the Commission: 
Analysis of Member States’ replies to the Court of Auditors’ 2004 Annual Report (SEC(2006) 524). 
Statement of Preliminary Findings. 
I.e. findings with financial consequences for the general budget of the European Union. 
The  Court  has  so  far  been  obliged  by  the  Financial  Regulation  (article  143(2))  to  transmit  its 
observations to Member States before 15 July. From the financial year 2005 onwards, the deadline is 
15 June. 

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As a consequence, some Member States found that their replies were not taken into 
account by the Court. For instance, Finland in its observations on the 2004 Annual 
report pointed out “that responses to the Court of Auditors’ preliminary observations 
have not always been taken into account in the conclusions presented in the annual 
report.  For  this  reason,  some  of  the  conclusions  are  clearly  wrong.  Producing  the 
responses and explanations often involves going to a lot of trouble compared to the 
minimum effect they then have on the Court of Auditors’ final conclusions.” 

This was supported by Poland which said that “..we are concerned that the Court of 
Auditors has not taken account of our explanation of the errors found after the ECA 
inspection  mission.  As  a  result,  the  explanatory  material  now  being  sent  to  the 
European Commission is much the same as that previously sent to the Court.”  

The Court as a rule informs Member States of its analysis of the reply received from 
the  national  authorities.  Such  follow-up  seems  to  be  of  importance  in  order  to 
motivate Member States to react to the findings identified by the Court. As Poland 
points out “.. in those cases where the Member State does not agree with the Court’s 
assessment of the facts, and has no indication whether the explanation provided by 
the institutions subject to inspection has been accepted, it can hardly be expected to 
answer questions about the nature of the errors found and whether remedial action 
has been taken or is planned.”. 

In  light  of  the  even  tighter  deadlines  from  now  on,  specific  consideration  should 
perhaps be given to improve exchange of information on findings between the Court, 
the  Commission  and  Member  States,  considering  the  particular  problems  linked  to 
the timetable when preparing the Annual report. The implementation of actions 7, 8 
and 9 of the Action Plan10, focused on sharing of audit and control results, will also 
contribute to an increased efficiency of such an exchange of information. 

3. 

AUDIT AND CONTROL FRAMEWORK 

The Court must each year provide the European Parliament and the Council “with a 
statement  of  assurance  as  to  the  reliability  of  the  accounts  and  the  legality  and 
regularity  of  the  underlying  transactions”11.  The  statement  is  provided  through  the 
Annual report. The Court bases its statement on four sources of evidence12: 

(a) An examination of the way in which the supervisory and control 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; 

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12 

Action  7:  Promote  best  practices  for 
level. 
Action 8: Facilitate additional assurance from SAIs. Action 9: Construct effective tools for sharing audit 
and control results and promote the single audit approach. 
Cf. article 248(1) in the Treaty establishing the European Community. 
Cf. paragraph 1.46 in the 2004 Annual report. 

increasing  cost-benefit  of  audits  at  project 

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

(d)  Where  possible,  an  examination  of  the  work  of  other  auditors  who  are 
independent of Community management procedures. 

Some  Member  States  have  in  their  replies  to  the  Commission  on  the  2004  Annual 
report taken the opportunity to make comments on the overall approach to audits and 
controls.  

For instance, the United Kingdom proposes that audits be set up “more as system and 
benefit  cost  audits  rather  than  transaction  tracing  audits  […].  Transaction  tracing 
audits  bring  up  specific  timed  errors,  often  of  minor  amounts,  which  when 
extrapolated  can  make  it  look  as  though  the  whole  programme  is  in  error.  These 
errors  are  also  often  corrected  later  but  this  is  not  recognised  when  checks  take 
place within a specific period.” 

France  seeks  more  information  on  the  Court’s  sampling  method  when  auditing 
structural actions. The French authorities have not found any mention of the method 
in the Annual report and point out that “general conclusions are drawn from findings 
relating to a very limited number of isolated operations, many of which involve very 
small amounts”. 

Denmark  considers  it  extremely  important  that  the  work  of  the  Member  States’ 
Supreme  Audit  Institutions  is  incorporated  in  the  Court’s  DAS  audit  wherever 
possible. It says that the Danish National Audit Office for the first time has provided 
a statement on the use of EU funds in Denmark13 saying that “Overall the National 
Audit Office takes the view that the administration, payment, accounting and control 
of EU funds were satisfactory and complied with the orders and regulations.”  

Germany stresses that costs of controls are considerable. It proposes that “the cost of 
management  and  control  systems  in  Member  States  should  be  assessed  by  the 
Commission to ensure that cost is proportionate to the results obtained.”  

These comments show the need to resolve issues such as: 

•  How to resolve the possible conflict between the Court’s annual statement and the 
fact that some internal controls are devised to operate over the duration of multi-
annual programmes? 

•  How  to  ensure  an  appropriate  balance  between  costs  and  benefits  and  that  this 

balance is taken into account in the statement of assurance? 

•  How  to  make  good  use  of  existing  controls  and  the  expertise  and  resources 

existing in Supreme Audit Institutions at the national level? 

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The statement is included as a section (D) in the report on the audit of the national budget for 2004. 

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•  The  Action  Plan  tries  to  tackle  these  issues  from  several  angles,  in  particular 
actions  3,  4,  7,  8  and  1014.  The  Action  Plan  focuses  on  the  promotion  of 
operational  management  declarations  and  synthesis  reports  at  national  level 
(action 5). 

4. 

SUBSTANTIVE FINDINGS IN 2004 

The Court provided information on the findings it made concerning the financial year 
2004.  As  the  Court  did  not  indicate  the  method  used  to  make  the  sample  of 
transaction, conclusions as to whether the level of findings was significant could not 
be drawn.  

The Commission asked Member States to comment in more detail on the substantive 
findings, i.e. findings with financial consequences for the EU budget. Most Member 
States provided the information but in some cases it was not possible for the Member 
States  to  recognize  the  findings  in  the  provided  lists  as  the  codes  attributed  by  the 
Court to the findings were not known to the Member State and did not match project 
numbers used by Member States and/or the Commission.  

The audits performed reflect the different policies. Grants to farmers are often linked 
to the size of a field or the number of animals. Thus, within agriculture policy, the 
Court  often  goes  on  the  spot  to  measure  a  field  with  the  use  of  GPS  equipment  or 
count animals in order to verify if the farmer has declared the proper figures.  

Within structural actions, grants are awarded to projects often at a regional level. The 
scale,  design,  timetable  and  types  of  final  beneficiaries  may  vary  significantly 
between projects. In these cases, the Court goes  on the spot to verify if  the  project 
has  actually  been  completed  (has  the  bridge  or  motorway  been  built),  if  payments 
have  been  made  correctly  (is  expenditure  eligible,  does  an  audit  trail  exist),  if 
tendering  procedures  have  been  respected  (was  a  tender  carried  out,  was  the  right 
tenderer chosen), if the required checks have been made etc.  

The variety of structural actions creates scope for differences in the interpretation of 
the  rules  and  of  the  audit  evidence  which  seems  to  be  reflected  in  Member  States 
tending  to  agree  less  with  the  Court  in  such  cases  than  in  cases  concerning 
agriculture  policy.  When  the  Commission  later  follows  up  the  Court’s  findings,  it, 
too, is led on occasion to draw a different conclusion from the Court. 

Sections 4.1 and 4.2 summarise comments made on findings concerning agriculture 
policy and structural actions. Sections on own resources and pre-accession aid have 
not been included as very few substantive findings have been identified for these two 
areas,  reflecting  the  fact  that  these  two  sectors  received  a  positive  statement  of 
assurance from the Court in 2004. 

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Action 3: Establish and harmonise better the presentation of control strategies and evidence providing 
reasonable  assurance.  Action  4:  Initiate  interinstitutional  dialogue  on  risks  to  be  tolerated  in  the 
underlying transactions. Action 7: Promote best practices for increasing cost-benefit of audits at project 
level. Action 8: Facilitate additional assurance from SAIs. Action 10: Conduct an initial estimation and 
analysis in the cost of controls. 

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4.1. 

Agriculture policy 

For  Member  States,  2  in  3  substantive  findings  within  agriculture  policy  in  2004 
related  to  overdeclaration  of  the  surface  of  a  piece  of  land.  Roughly  speaking,  the 
difference between the area declared and the area measured by the Court during its 
audit was less than 2 per cent in one quarter of the cases, was between 2 and 10 per 
cent in half the cases and more than 10 per cent in the remaining cases. 

The  total  number  of  substantive  findings  identified  by  the  Court  related  to  11 
Member States. Most agreed with the Court – albeit in a few cases only partly due to 
inter alia difference of opinions on measuring methods. In some cases, the findings 
of  the  Court  led  to  recovery  of  sums  from  farmers.  However,  in  several  cases, 
Member  States  did  not  initiate  recoveries  as  they  found  the  financial  impact  of  the 
finding too small (Germany had a case representing less than EUR 100). 

Although  Member  States  tended  to  accept  the  conclusions  of  the  Court,  some  did 
indicate  that  deviations  in  measurement  of  fields  were  to  be  expected/accepted. 
Checks sometimes took place in the next farm year when the farmer had changed the 
use  and  division  of  his  fields,  making  it  difficult  to  re-construct  the  field  that  was 
declared  originally.  In  other  cases,  farmers  had  declared  the  size  of  a  field  as 
registered  in  the  official  land  register  but  these  registers  were  not  necessarily  in 
accordance  with  the  measurement  made  by  the  Court.  This  problem  may  be 
amplified  by  the  continuing  improvement  of  measurement  instruments.  Finally, 
Germany  had  a  case  where  it  based  its  opinion  on  the  measured  surface  with  two 
decimals whereas the Court used a three-decimal  figure.  In  the  particular  case,  this 
was  enough  to  change  the  classification  of  the  measurement  from  acceptable  to  a 
finding. 

Two  of  the  11  Member  States  tended  to  disagree  with  the  Court.  Only  one 
substantive  finding  was  attributed  to  the  first  Member  State  (Netherlands)  which 
disagreed  with  the  Court’s  decision  to  regard  the  lack  of  proof  for  the  slaughter  of 
one  cow  as  a  finding  even  though  proof  was  provided  to  the  Court  after  the  audit 
mission.  More  findings  were  attributed  to  the  other  Member  State  (Greece)  which, 
however,  found  that  some  of  the  underlying  problems  were  of  a  temporary  nature 
(e.g. money in bank accounts not yet paid to producers or returned to the EU budget). 
It also disagreed with the Court on other issues such as whether a farmer was entitled 
to  a  subsidy  if  he  did  not  hold  the  deed  on  a  piece  of  the  land  but  had  agreed  to 
exchange the land with another farmer.  

4.2. 

Structural actions 

In 2004, Member States tended to agree with the Court in only a bit more then 1 of 3 
cases  with  substantive  findings  within  structural  as  opposed  to  around  2  of  3  cases 
within agriculture policy. 

Typical  examples  where  Member  States  disagreed  or  did  not  agree  fully  with  the 
Court  included  the  classification  of  expenditure  (is  it  eligible  or  not),  proof  of  co-
financing and the existence of an audit-trail. 

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There  seemed  to  be  extremely  few  cases  where  the  Court  claimed  that  a  wrong 
classification of expenditure was intentional. However, the findings indicated a need 
to  clarify  the  rules  and  provide  additional  guidance  in  this  area.  As  the  Belgian 
authorities pointed out in one specific case where they did not agree with the Court: 
“As far as we know, the concept of expenditure which does not comply with the rules 
has  not  been  debated  or  defined  in  the  regulations  which  apply  to  ESF  [European 
Social Fund] structural aid, and it is therefore necessary to consider the nature of the 
foundation  for  declaring  that  expenditure  does  not  comply,  particularly  since  the 
auditors themselves recognise that this expenditure does not entail any indication of 
irregularity or illegality.”.  

Member  States  also  pointed  out  difficulties  arising  from  the  differences  in  the 
requirements  for  audit  and  control  structures  between  programming  periods.  Spain 
mentioned that “when the auditor concludes that ‘the audit trail was deficient’, this 
entails applying to the period 1994-1999 concepts which had not been defined until 
the period 2000-2006.”. 

In  addition  to  carrying  out  checks  on  transactions,  the  Court  attempted  to  verify  if 
Member  States  performed  the  compulsory  5  per  cent  checks,  i.e.  checking  projects 
representing 5 per cent of the value of a programme. The Court found that the checks 
were often delayed and based on incomplete risk analysis. 

The  Member  States  mostly  acknowledged  that  checks  were  delayed  but  Sweden 
pointed out that “there is no requirement under the Regulation that checks in relation 
to the respective funds must reach 5 per cent at a particular point in time.” 

The  financial  consequences  of  substantive  findings  within  structural  actions  tended 
to vary a lot more than for substantive findings within agriculture. In some cases, the 
findings may not have real financial consequences, for example because expenditure 
declared by the Member State and considered ineligible by the Court could be offset 
by  additional  expenditure  not  yet  declared.  Such  cases  are  clarified  by  the 
Commission in its follow-up.  

This  also  raises  the  issue  of  multi-annuality.  As  an  example,  Germany  had  a  case 
where  it  acknowledged  the  finding  and  would correct  it  by  applying  a  reduction  to 
the  following  payment  request.  It  would  not  accept  that  the  finding  had  incurred  a 
financial loss to the EU budget as the finding would ultimately have been discovered 
when  the  evidence  of  expenditure  was  checked  at  the  final  closure,  if  not  before. 
However, the Court maintained that - as of the audit date - there was a finding. 

5. 

CONCLUSION 

The Commission welcomes the many full replies received from Member States. This 
annual feedback from Member States provides a valuable opportunity to pick up on 
horizontal issues linked to the Court of Auditors’ Annual report. Based on the replies 
to the 2004 exercise, the Commission would like to drawn attention to four issues: 

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(1) 

(2) 

(3) 

Some  Member  States  found  it  unsatisfactory  that  their  replies  were  not 
reflected in the Court of Auditors’ 2004 Annual report. This is partly due to 
the  tight  deadline  which  must  be  respected  by  the  Court  of  Auditors  when 
preparing its Annual report. In the considerations on how to make better use 
of  the  expertise  of  the  national  Supreme  Audit  Institutions  and  on  how  to 
achieve  a  single  audit  approach15,  this  particular  problem  should  be 
addressed. 

Some Member States made comments on the control structure as well as the 
DAS  method  itself,  indicating  that  –  in  their  opinion  -  the  benefits  did  not 
match  costs.  This  issue  should  be  addressed  at  an  operational  level  when 
estimating the costs of controls16 but also the strategic level when discussing 
risks to be tolerated17.  

The  more  qualitative  analysis  of  substantive  findings  within  the  areas  of 
agriculture policy and structural actions has been made with the objective of 
identifying patterns across Member States. The analysis shows that there is a 
need  to  resolve  or  clarify  issues  such  as:  1)  what  is  the  right  method  to 
measure  the  size  of  a  field,  2)  what  is  eligible  expenditure  within  structural 
actions, 3) when shall the so-called 5 per cent checks for structural actions be 
made.  Due  to  this  uncertainty,  the  Commission  in  its  follow-up  may  not  be 
able  to  confirm  the  Court’s  findings.  These  issues  are  to  a  larger  extent 
sector-specific  gaps  that  are  also  intended  to  be  addressed  by  the  Action 
Plan18. 

(4)  Member  States  tended  to  disagree  more  with  the  Court’s  findings  in  the 
structural actions area than within agriculture policy. The reason for this may 
be that Member States and the Court disagreed on what should be considered 
to be a wrongdoing in this area. Or it may be that the Member States and the 
Court disagreed on the level of risk to be accepted within structural actions. 
As  the  Court’s  sample  was  designed  to  check  individual  transactions  –  not 
verify  if  systems  were  in  place  and  working  –  reasons  for  the  disagreement 
could  not  be  established.  This  highlights  the  need  to  undertake  an 
interinstitutional  dialogue  on  risks  to  be  tolerated  in  the  underlying 
transactions and the effects this may have on the Court’s DAS method19. 

Not only the Commission and Member States but also the Court of Auditors and to 
some  extent  the  national  Supreme  Audit  Institutions  need  to  engage  in  order  to 
resolve the issues raised by Member States. A framework for this cooperation is set 
out by the Action Plan which defines 16 specific actions to be implemented during 
2006  and  2007  -  of  course  in  full  respect  of  the  roles,  responsibilities  and 
independence of all concerned. 

15 
16 
17 
18 
19 

Actions 8 and 9 in the Action Plan. 
Action 10 in the Action Plan. 
Action 4 in the Action Plan. 
Actions 12-16 in the Action Plan. 
Actions 3 and 4 in the Action Plan. 

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