The Court of Auditors' Statement of Assurance
Date: 2006-09-14
Institutions: European Court of Auditors
Subjects: auditing, budgetary control, consolidated account, financial year, general budget (EU)

C 264/140

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Official Journal of the European Union

31.10.2006

STATEMENT OF ASSURANCE

(2006/C 264/02)

I.
Pursuant to the provisions of Article 248 of the Treaty the Court has examined the ‘Final
annual accounts of the European Communities’ consisting of the ‘Consolidated financial statements
and the consolidated reports on implementation of the budget’ for the financial year ended 31
December 2005 (1).

II.
In accordance with the Financial Regulation of 25 June 2002, the ‘Consolidated financial state-
ments’ for the financial year 2005 are prepared for the first time on the basis of accounting rules
adopted by the Commission's Accounting Officer which adapt accruals based accounting principles
to the specific environment of the Communities (2), while the ‘Consolidated reports on implementa-
tion of the budget’ continue to be primarily based on movements of cash. The change-over to
accruals based accounting required a restatement of the opening balance sheet as at 1 January 2005
and important changes in the presentation (3) and content (4) of the ‘Consolidated financial state-
ments’.

III.
The ‘Final annual accounts of the European Communities’ are consolidated by the Commis-
sion's Accounting Officer and approved by the Commission. The Court's responsibility is to
provide, based on its audit, 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.

The Court carried out its audit in accordance with its own policies and standards which are
IV.
based on international standards that have been adapted to the Community context. Through its
audit, the Court has obtained a reasonable basis for the opinion expressed below. In the case of
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 secondly, the audits of traditional own resources cannot cover the imports that have not
been subject to custom supervision.

Reliability of the accounts

V.
In the Court's opinion, the ‘Final annual accounts of the European Communities’ were drawn
up in accordance with the provisions of the Financial Regulation of 25 June 2002 and accounting
rules adopted by the Commission's Accounting Officer. Except for the effects of the observations in
in all material respects the financial position of the
paragraphs VI to VIII, they present fairly,
Communities as of 31 December 2005, and the results of their operations and cash flows for the
year then ended.

VI.
The Court notes that, in the context of a complex exercise (see paragraph II), the existing
financial reporting framework has not been consistently applied, in particular for cut-off, and that
accounting systems in certain Directorates-General of the Commission were not able to ensure the
quality of financial
information which led to multiple corrections after the presentation of the
provisional accounts (see paragraphs VII and VIII).

(1) The ‘Final annual accounts of the European Communities’ make up Volume I of the annual accounts of the

European Communities financial year 2005.

(2) The accounting rules adopted by the Commission's Accounting Officer are inspired by International Public
in their
Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or,
absence, International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued
by the International Accounting Standards Board.

(3) The ‘Consolidated financial statements’ comprise the balance sheet, the economic outturn account (including

segment reporting), the cash flow table and the statement of changes in net assets.

(4) The main new elements are pre-financing, accounts payable and cut-off.

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VII.
The Court's audit has identified errors in amounts registered in the accounting system as
invoices/cost statements and pre-financing which, after corrections made to the provisional
accounts, still have the following net financial impact on the elements of the consolidated financial
statements listed below (see also paragraph VIII):

(a) The consolidated opening balance sheet as at 1 January 2005, which adjusted the consolidated
closing balance sheet as at 31 December 2004 on the basis of the new accruals based
accounting principles, overstates the accounts payable by some 47 million euro and overstates
the total amount of long-term and short-term pre-financing by some 179 million euro. As a
result, the net assets are overstated by some 132 million euro.

(b) The errors identified in (a) above affected the consolidated closing balance sheet as at
31 December 2005 which overstates the accounts payable by some 508 million euro and the
total amount of long-term and short-term pre-financing by some 822 million euro. As a result
the net assets are overstated by some 314 million euro.

VIII.
The Court's audit also confirmed the general reservation of the Director-General for Educa-
tion and Culture covering the lack of assurance as regards the correctness of its share of the total
amounts, included in both the consolidated opening balance sheet as at 1 January 2005 (assets
amounting to 572,5 million euro and liabilities amounting to 198,5 million euro) and the consoli-
dated closing balance sheet as at 31 December 2005 (assets amounting to 382,7 million euro and
liabilities amounting to 187,3 million euro). Given the incidence of omissions and double or wrong
postings within this Directorate-General, it is not possible to quantify the over- or understatement
in its share of the assets and liabilities.

Legality and regularity of the underlying transactions

IX.
In areas where the supervisory and control systems are implemented in a manner which
provides for an adequate risk management, the transactions underlying the final annual accounts of
the European Communities, taken as a whole, are legal and regular. This is the case for revenue,
commitments and payments for administrative expenditure and pre accession strategy with the
exception of the SAPARD Programme. Moreover, for Common Agriculture Policy (CAP) expendi-
ture 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.

X. Without calling into question the opinion expressed in paragraph IX, the Court emphasises
that, in the area of pre-accession strategy, significant risks still exist at the level of the implementing
organisations in the acceding and candidate countries for all programmes and instruments.

The Court notes that in the other areas, payments are still materially affected by errors and
XI.
the Commission and the Member and other beneficiary states need to make an increased effort to
implement adequate supervisory and control systems, so as to improve the handling of the atten-
dant risks. These areas are listed below, namely: Common Agricultural Policy, Structural measures,
Internal policies and External actions.

(a) In CAP expenditure, the Court found evidence that expenditure which is not subject to IACS, or
where IACS is not properly applied or where it has only been recently introduced poses greater
risk because control systems are not as effective. In addition, IACS inspection results are insuffi-
ciently verified and validated by an independent body and claims for EU aid are not usually
checked on the spot by the latter. Clearance systems and 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.

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(b) In structural measures, the Court again found that the Commission does not maintain effective
supervision to mitigate the risk that the controls delegated to Member States fail to prevent
reimbursement of overstated or ineligible expenditure. For both programming periods (1994 to
1999 and 2000 to 2006), the Court found that expenditure was not free of material irregulari-
ties. Some programs for the 1994 to 1999 period were closed without a sound basis.

(c) In internal policies, despite the progress made in certain areas, the Court's audit revealed weak-
nesses in the supervisory and control systems which led to a material incidence of errors in
payments to beneficiaries. Errors arise mainly from complicated cost reimbursement systems
and unclear procedures and instructions governing the different programmes.

(d) In external actions, the improvements of the Commission's supervisory and control systems
have not yet had an impact at the implementing organisation level, where a material level of
errors still exists, which can be attributed to the lack of a comprehensive approach to the super-
vision, control and audit of these organisations.

14 September 2006

Hubert WEBER

President

European Court of Auditors

12, rue Alcide De Gasperi, L-1615 Luxembourg