Report from the Commission to the Council on the follow-up to 2004 Discharge Decisions (Summary) - Council Recommendations {SEC(2006) 1377}
Date: 2006-10-26
Institutions: European Commission
Subjects: budgetary discharge, financial regulation, interinstitutional relations (EU), management accounting, management audit, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 26.10.2006 
COM(2006) 642 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 

on the follow-up to 2004 Discharge Decisions 
(Summary) - Council Recommendations 

{SEC(2006) 1377} 

EN 

   EN 

 
 
 
  
 
 
TABLE OF CONTENTS 

PREAMBLE ...............................................................................................................................3 

I. 

Council recommendation on the General Budget.........................................................4 

a) Introduction (Commission working document, points 1-5)....................................................4 

b) The statement of assurance (DAS) and supporting information  

(Commission working document, points 6-12) ..........................................................................4 

c) Budgetary management (Commission working document, points 13-16) .............................5 

d) Revenue (Commission working document, points 17-20) .....................................................5 

e) The Common Agricultural Policy (Commission working document, points 21-28)..............6 

f) Structural measures (Commission working document, points 29-37) ....................................6 

g) Internal Policies, including research (Commission working document, points 38-42)..........7 

h) External actions (Commission working document, points 43-45) .........................................7 

i) Pre-accession aid (Commission working document, points 46-48) ........................................7 

j) Administrative expenditure (Commission working document, points 49-52) ........................8 

k) Financial instruments and banking activities  

(Commission working document, points 53-54) ........................................................................8 

II. 

III. 

IV. 

Recommendations concerning individual agencies  
(Commission working document, points 55-57) ..........................................................8 

Conclusions on the follow-up of the 2003 discharge  
(Commission working document, points 58-63) ..........................................................9 

Court of Auditors’ special reports (Commission  
working document, points 64-79).................................................................................9 

EN 

2 

   EN 

 
PREAMBLE 

According  to  Article  276  of  the  EC  Treaty  and  Article  180b  of  the  Euratom  Treaty,  the 
“Commission  shall  take  all  appropriate  steps  to  act  on  the  observations  in  the  decisions  giving 
discharge  and  on  other  observations  by  the  European  Parliament  relating  to  the  execution  of 
expenditure, as well as on comments accompanying the recommendations on discharge adopted by 
the Council. At the request of the European Parliament or the Council, the Commission shall report 
on  the  measures  taken  in  the  light  of  these  observations  and  comments  and  in  particular  on  the 
instructions given to the departments which are responsible for the implementation of the budget. 
These reports shall also be forwarded to the Court of Auditors"1 

The  Commission  has  accordingly  prepared  Follow-up  Reports,  which  relate  to  the  Council 
recommendation  of  14  March  2006  and  the  Resolutions  voted  by  the  European  Parliament  on 
27 April 2006. The present Follow-Up Report deals with the recommendations made by the Council 
in  relation  to  the  2004  Discharges.  A  separate  Follow-up  report  deals  with  the  recommendations 
made by Parliament in relation to the Discharges given for the 2004 financial year2. 

The  summary  Follow-up  Reports,  which  are  published  in  all  EU  official  languages,  are 
complemented  by  Commission  working  documents  giving  detailed  answers  to  each  specific 
recommendation of both Council and Parliament. The replies indicate actions that the Commission 
intends to take or has already taken and also the recommendations that the Commission will not or 
is not able to follow up. Due to translation constraints the detailed working documents are published 
in English, French and German. Each chapter of the summary reports includes cross-references to 
the relevant recommendation numbers in the working documents. 

In the context of the 2004 discharge, the Commission has identified a total of 79 recommendations 
made by the Council to the Commission. The Commission considers that for 38 recommendations 
the required action has already been taken. For another 39 recommendations the Commission agrees 
to 
the  Commission  cannot  accept 
the  action  recommended  by  Council.  Finally, 
2 recommendations and will therefore not be taking the requested action3. 

take 

1 
2 
3 

See also Article 147 of the Financial Regulation 
2004 General Budget Discharge, 2004 EDF Discharge, 2004 Agencies Discharge 
See recommendations 24 and 61. 

EN 

3 

   EN 

 
                                                 
I. 

COUNCIL RECOMMENDATION ON THE GENERAL BUDGET 

A) Introduction (Commission working document, points 1-5) 

Like Council, the Commission regrets that in 2004 the Court of Auditors was again unable to give a 
Statement  of  Assurance  (DAS)  in  relation  to  most  of  the  expenditure.  For  this  reason,  the 
Commission  has  launched  its  “Action  plan  towards  an  Integrated  Internal  Control  Framework” 
(COM(2006) 9). The objective of the Action Plan is to ensure that supervisory systems and controls 
are in place to keep the risk of illegality or irregularity inunderlying transactions within reasonable 
limits and to provide the Court of Auditors with reasonable assurance to that effect. 

The Action Plan includes 16 actions under four broad themes aimed at simplifying and harmonising 
control practices, via information sharing and the use of a ‘single-audit’ approach to better target the 
limited control resources available. At this stage, priority actions have been launched, while others 
which depend on the results of prior actions will be developed during 2007. Sufficient progress is 
expected to be made by the beginning of 2009. The first half-yearly progress report to Parliament 
and Council was issued on 19 July 2006 (SEC(2006) 1001). 

B)  The  statement  of  assurance  (DAS)  and  supporting  information  (Commission  working 

document, points 6-12) 

The  Commission's  “Action  Plan  towards  an  Integrated  Internal  Control  Framework”  sets 
simplification as a goal for the next programming period. The Commission’s proposal for the Rules 
for Participation for the 7th Framework Programme foresees that greater recourse would be made to 
the use of flat rates (including scale of unit costs) and lump sums within the terms of the Financial 
Regulation.  As  regards  low-value  contracts  and  grants,  the  Commission  proposes  to  let  the 
authorising  officer  decide  on  the  need  to  verify  exclusion  criteria  depending  on  his/her  risk 
assessment.  The  legislative  authority  should  pay  the  necessary  attention  to  the  feasibility  of 
expected  controls  and  their  cost/benefit,  so  that  the  correct  application  of  controls  is  as 
straightforward as possible. 

In  the  2005  Synthesis  of  the  annual  activity  reports  the  Commission  welcomed  the  overall 
improvement in the annual activity reports (AAR), which were generally more focused and explicit. 
This is the result of improved guidanceto increase accountability through explicit declarations and 
an  appraisal  of  the  inherent  nature  and  characteristics  of  the  management,  risk  and  control 
environment  in  which  Directorates-General  operate,  and  of  the  elements  and  results  of  the 
management and control system which support the assurances required in the declaration. 

The results of Action 3a of the Commission’s action plan (specification of control components) will 
be considered for the AAR circular with a view to improving the information on key elements of 
internal control and the management of risks in the 2006 AARs. The ongoing work on materiality 
criteria  will  also  contribute  to  improved  reporting.  In  addition,  work  is  proceeding  on  the  2004 
Synthesis action on objectives and indicators for the legality and regularity of operations. 

As regards the Commission’s new accounting system, which became operational in January 2005, 
the  Commission  established  its  opening  balance  sheet  and  it  was  included  as  part  of  the  2005 
provisional  annual  accounts.  These  accounts  were  presented  on  time  to  the  Court  of  Auditors  on 
31 March 2006, as required by the Financial Regulation. 

EN 

4 

   EN 

 
c) Budgetary management (Commission working document, points 13-16) 

The  Commission  notes  Council’s  satisfaction  with  the  overall  progress  in  the  Commission’s 
budgetary  management.  The  Commission  always  aims  to  provide  accurate  and  realistic  budget 
estimates, on the basis of the best available information. In 2005, more accurate budget estimates 
were reflected in a significant improvement in the implementation rate of payment appropriations, 
which rose to 98% (100% for structural operations). 

The  Commission  regularly  updates  its  analysis  of  outstanding  budgetary  commitments  for 
Structural  Funds  and  will  continue  to  do  so.  The  analyses  take  into  account  the  latest  available 
implementation data and expected developments. In its latest assessment the Commission has given 
due  regard  to  the  switch  to  a  new  programming  period.  An  extensive  analysis  of  the  outstanding 
budgetary  commitments  for  the  Structural  Funds  is  published  every  year  in  a  Commission  Staff 
Working Paper (DG Budget) "Analysis of the budgetary implementation of the Structural Funds". 
The analysis for 2005 was published in May 2006 and also includes an analysis on the operation of 
the  n+2  rule.  In  the  present  programme  period  the  n+2  rule  provides  a  powerful  incentive  to 
Member  States  to  ensure  that  implementation  proceeds  at  a  sufficently  high  rate,  as  funds  not 
implemented  in  good  time  are  decommitted.  Member  States  and  the  Commission  are  aware  that 
vigilance is needed to ensure that the switch between programme cycles is made smoothly, both in 
terms of ensuring programme implementation, and of tackling the additional workload related to the 
establishment of new programmes.  

D) Revenue (Commission working document, points 17-20) 

Like Council, the Commission is pleased that the Court again in 2004 considered the overall results 
satisfactory concerning the reliability of the accounts and the legality and regularity of underlying 
transactions for revenue. 

Moreover, the Commission has taken or is taking the actions recommended by Council as regards 
own  resources.  The  Commission  has  requested  Member  States  to  improve  their  fall-back 
mechanisms for electronic customs clearance systems. In the longer -term action is also being taken 
as part of the project to introduce a modernised customs code by 2009. This new code will contain 
clearer provisions relating to the drawing up of rules for fallback procedures in the implementing 
provisions. 

As  regards  the  control  mechanisms  for  sugar  levies,  audits  have  taken  place  in  twelve  Member 
States since 2004. No serious problems were found apart from in one Member State. The new sugar 
regime, effective from 1 July 2006, abolishes the production levies to be paid by the manufacturers 
for the quantities produced under quota. In the new implementing regulations, the Commission has 
strengthened the provisions on controls and sanctions in the event of infringements. 

The Commission is in constant contact with Member States with a view to lifting reservations on 
Member States’ VAT statements as rapidly as possible. However, the pace of this work depends on 
the ability of national administrations to find and use better data, indeed any data at all in certain 
cases,  or  a  suitable  or  more  suitable  methodology.  The  Commission  provides  regular  advice  to 
Member States on these matters. 

As  regards  the  GNI  resources,  the  Commission  will  discuss  the  issue  of  supervisory  and  control 
systems related to national accounts with the Member States in the GNI Committee in 2006. The 
Commission will then make suggestions for promoting best practices in 2007. 

EN 

5 

   EN 

 
E) The Common Agricultural Policy (Commission working document, points 21-28) 

The Commission is committed to addressing the remaining shortcomings in the control system in 
the different areas of the CAP that are not checked through IACS. The CAP reforms of 2003 and, 
for Mediterranean products, of 2004 reduce the overall risk by extending the expenditure covered 
by IACS to 89% by 2013. 

As regards the Annual Activity Report of the Director-General the Commission does not intend to 
indicate  separately  in  the  Director-General's  declaration  verified  expenditure  and  expenditure 
subject to further checks. 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. In their 2004 and 2005 AARs DGs clearly set 
out the basis for the Director General’s annual declaration of assurance. The entire chain of controls 
and in the DG AGRI’s AAR the clearance of accounts procedures were presented in detail, showing 
how these elements contribute to the overall assurance, which is built on all sources of information 
at  the  disposal  of  the  Director-General.  Furthermore,  in  the  2005  AAR,  DG  AGRI  gives  an 
indication of the level of financial corrections likely to be imposed on Member States for the 1999-
2005 period. The same is true of the annual accounts, where the Commission makes the necessary 
disclosure of the amounts it still expects to be recovered through the clearance of accounts process. 

The weaknesses identified by the Court of Auditors in the area of spending on animal premiums do 
not  concern  the  effectiveness  of  the  IACS  control  system  in  itself.  Indeed  the  direct  testing 
performed by the Court did not reveal any significant errors. The problem identified consists mainly 
in  high  percentages  of  errors  identified  at  farmers’  level  by  the  IACS  inspections,  particularly  in 
certain Member States. The Commission will continue to identify more precisely the reasons why 
IACS  statistics  show  high  rates  of  mis-declaration  or  over-declaration  of  animals  for  certain 
Member States and will recommend appropriate actions. 

Although  the  use  of  the  prefinancing  system  has  become  economically  insignificant,  with  the 
exception of the beef sector, predominantly for its control function, the Commission is working on 
the necessary steps to abolish the system of prefinancing export refunds, while for the beef sector an 
alternative production and storage control system will be introduced. These measures should be in 
place by the end of 2006. 

F) Structural measures (Commission working document, points 29-37) 

A review of the control systems for the Structural Funds was carried out in 2005 in preparation for 
the  Action  Plan.  A  number  of  the  actions  in  the  Action  Plan  seek  to  improve  the  effectiveness, 
economy and efficiency of systems. Ofparticular importance for systems in the Structural Funds are 
the analysis of the quality of existing controls and declarations (action 13), to be completed by the 
end  of  2006,  and  the  survey  of  the  costs  of  controls  (action  10),  to  be  completed  by  September 
2007.  In  early  2006  the  Commission  issued  notes  on  good  practices  in  day-to-day  checks  by 
management  and  in  paying  authorities'  work  before  certifying  payment  claims,  which  by  setting 
benchmarks should help Member States to make the controls more effective and avoid overlap. The 
work being undertaken to coordinate audit standards (action 16) and intensify the sharing of audit 
results (action 9) should also foster economy and efficiency as well as helping to make the control 
system function more effectively.  

EN 

6 

   EN 

 
Moreover,  the  Commission's  audit  work,  monitoring  of  the  audit  results  of  national  audit  bodies, 
and dissemination of good practice are all designed to bring about the necessary improvements in 
systems so that the objective of financial control - that the expenditure reimbursed is as free of error 
and irregularity as reasonably possible - is achieved. 

The  closure  of  the  2000-2006  programmes  has  been  prepared  by  the  Commission  and  Member 
States and the Commission has issued a detailed guidance document. 

G) Internal Policies, including research (Commission working document, points 38-42) 

The Commission is continuously working on the development and adaptation of its internal control 
system in order to manage the risks linked to its environment. Major steps were taken in 2005 to 
introduce a systematic approach for risk analysis, assessment and management.  

A risk framework was developed in 2005. A comprehensive strategic risk analysis was conducted, 
and is currently being implemented in the annual management plan 2006. 

Simplification of the procedures with a growing use of IT tools has also been implemented. 

The services concerned used the audit results also to evaluate the control environment in which the 
programmes are being managed. In this context, the issue of the frequency of errors in cost claims 
has been taken into account to improve the controls in FP6 (e.g. the introduction of audit certificates 
and penalties contributes to reduce the number of errors in the declarations of costs presented by the 
beneficiaries) and to simplify the upcoming FP7 (e.g. more use of lump sums and flat rates). 

Following  the  2005  Gap  Assessment  exercise,  the  services  are  contributing  to  the  Commission’s 
Action  Plan  with  a  set  of  specific  measures.  The  main  areas  of  work  will  be  ex-post  control 
strategy, the use of audit results to develop management and control systems, the financial circuits, 
the  overall  system  of  supervision  put  in  place  in  the  financial  domain  and  the  monitoring  and 
reporting systems. 

H) External actions (Commission working document, points 43-45) 

The  Commission  has  continued  its  efforts  to  improve  its  supervisory  and  control  systems  in  the 
field  of  external  actions  and,  in  particular,  it  has  further  strengthened  external  audits  as 
recommended  by  Council.  Clear  instructions  to  the  external  auditors  are  established  in  terms  of 
reference and audit results are monitored and followed up. 

EuropeAid has introduced measures to improve the follow-up of audits and this year produced an 
analysis of audit reports finalised in 2005. Moreover, as regards CRIS-Audit, a specific module of 
EuropeAid’s Common Relex Information System (CRIS), aiming at providing a database on audit 
information,  the  Commission  intends  to  further  improve  its  operation  with  a  view  to  allowing  a 
better exploitation of the system at both Headquarters and Delegations. 

I) Pre-accession aid (Commission working document, points 46-48) 

The Council welcomed the Court of Auditors’ statement that supervisory and control systems at the 
level  of  the  Commission’s  central  services,  Delegations  and  certifying  authorities  were  basically 
sound and worked in practice for all pre-accession instruments (Phare, Turkey, ISPA and Sapard) 
and that no material errors in the underlying transactions tested were identified. 

EN 

7 

   EN 

 
The Court invited the Commission to continue its efforts to ensure sound financial management of 
these 
the  pre-accession 
recommendations, e.g. by drawing the attention of the national authorities to the need to take urgent 
corrective measures in relation to the present Decentralised Implementation System (DIS) with ex 
ante control on procurement and award decisions. 

instruments.  The  Commission  has  already 

taken  action  on 

J) Administrative expenditure (Commission working document, points 49-52) 

The  Commission  has  taken  due  note  of  Council’s  recommendations  concerning  administrative 
expenditure. In particular as regards the implementation of the Internal Control Standards adopted 
in  2000,  the  Commission  undertakes  a  yearly  follow-up  of  the  implementation  of  the  related 
baseline requirements. According to self-assessments of the Commission’s services, in 2005 95% of 
the  baseline  requirements  were  complied  with  compared  to  93%  in  2004,  which  –  in  an  ever 
changing environment – could be considered as being practically fully implemented. 

Under  this  heading  Council  has  also  included  two  recommendations  concerning  the  regulatory 
agencies. The agencies are independent institutions and it is their responsibility to comply with the 
relevant  rules  and  procedures  for  staff  recruitment,  public  procurement  and  accounting. 
Nevertheless,  the  Commission  gives  guidance  and  support  to  the  agencies,  e.g.  on  accounting, 
procurement,  staff  policy  and  audit,  and  where  the  agencies  request  it,  the  Commission  provides 
specific assistance, e.g. to help them to understand and interpret the rules4. The agencies should also 
be  encouraged  to  further  develop  their  inter-agency  cooperation  whenever  appropriate  in  order  to 
share costs and knowledge. 

K)  Financial 

instruments  and  banking  activities 

(Commission  working  document, 

points 53-54) 

As  regards  the  European  Investment  Fund  (EIF),  the  participation  on  the  Board  of  Directors  of 
senior officials from the three services with the greatest policy interest in the EIF activities is the 
best  assurance  of  the  protection  of  the  Community  interest.  The  introduction  in  mid  2005  of  a 
Compliance  Function  in  the  EIF  with  a  particular  mandate  to  ensure  appropriate  compliance 
arrangements  are  in  place  with  respect  to  EU  policies  and  legislation  further  enhances  this 
assurance. The Commission is working closely with the EIF to help ensure the effectiveness of this 
new function. 

II. 

RECOMMENDATIONS  CONCERNING 
document, points 55-57) 

INDIVIDUAL  AGENCIES  (Commission  working 

The  Commission  is  taking  the  action  recommended  by  Council.  In  particular  as  regards  the 
Translation  Centre  for  the  Bodies  of  the  European  Union  and  the  payment  of  employer’s 
contributions  in  respect  of  its  employees’  pension  rights,  the  Commission  has  repeatedly  tried  to 
arrive  at  a  solution,  proposing  approaches  to  the  Management  Board  of  the  Translation  Centre, 
including  offers  for  a  negotiation  on  some  periods  under  consideration.  None  of  these  was 
successful and the Commission has now decided to lodge a complaint before the Court of Justice. 

4 

See also the examples mentioned in points 49 and 50 of the annexed working document. 

EN 

8 

   EN 

 
                                                 
III. 

CONCLUSIONS  ON  THE  FOLLOW-UP  OF  THE  2003  DISCHARGE  (Commission  working 
document, points 58-63) 

The  Commission  is  taking  the  recommended  actions  to  follow  up  the  conclusions  on  the  2003 
discharge,  for  instance  as  regards  the  approach  to  risk  management,  the  production  of  adequate 
indicators for activity-based management and the implementation of the new accounting system. 

In line with Article 131 of the Financial Regulation, the Commission already provides a report on 
implementation of the budget to the Budget Authority three times a year, but does not in this report 
include  a  specific  analysis  of  the  cumulative  state  of  implementation  of  major  Community 
programmes  as  requested  by  Council.  The  Commission  provides  such  an  analysis  annually  in  its 
Report on the budgetary and financial management. 

IV. 

COURT  OF  AUDITORS’  SPECIAL  REPORTS 
points 64-79) 

(Commission  working  document,  

The Commission will take the actions recommended by Council as regards the Court of Auditors’ 
special  reports  on  the  devolution  of  EC  external  aid  management  to  the  Commission  Delegations 
(SR  10/2004),  the  management  of  the  European  Anti-Fraud  Office  (OLAF)  (SR  1/2005),  the 
verification of agri-environment expenditure for rural development (SR 3/2005) and interpretation 
expenditure incurred by the Parliament, the Commission and the Council (SR 5/2005). 

* * * 

EN 

9 

   EN