Opinion No 1/2007 on the draft Commission Regulation (EC, Euratom) amending Regulation (EC, Euratom) No 2342/2002 laying down detailed rules for the implementation of Council Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the European Communities
Date: 2007-01-25
Institutions: European Court of Auditors
Subjects: financial management, financial regulation, general budget (EU), implementation of the budget

28.2.2007

EN

Official Journal of the European Union

C 46/1

I

(Resolutions, recommendations, guidelines and opinions)

OPINIONS

COURT OF AUDITORS

OPINION No 1/2007

on the draft Commission Regulation (EC, Euratom) amending Regulation (EC, Euratom)
No 2342/2002 laying down detailed rules for the implementation of Council Regulation
(EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget
of the European Communities

(submitted pursuant to Article 248(4), second subparagraph, EC Treaty)

(2007/C 46/01)

TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financial Regulation requirements insufficiently developed . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-respect of the principles of simplification and/or protection of financial interests . . . . . .

Contradiction with the requirements of the Financial Regulation . . . . . . . . . . . . . . . . . . . . . . .

Paragraph

Page

1-3

4-9

10-19

20-27

2

2

3

4

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Official Journal of the European Union

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THE EUROPEAN COURT OF AUDITORS,

Having regard to the draft Commission Regulation amending
Commission Regulation (EC, Euratom) No 2342/2002 (9),

Having regard to the Treaty establishing the European Commu-
nity, and in particular Articles 248(4) and 279 thereof,

Having regard to the Commission’s request for an opinion on the
latter addressed to the Court dated 4 July 2006,

Having regard to the Treaty establishing the European Atomic
Energy Community, notably Article 160 C, paragraph 4, and
Article 183 thereof,

HAS ADOPTED THE FOLLOWING OPINION:

Having regard to the Council Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 on the Financial Regulation
applicable to the general budget of the European Communi-
ties (1), and in particular Article 183 thereof,

Having regard to the modified proposal for amending Council
Regulation (EC, Euratom) No 1605/2002 approved by the Com-
mission on 18 May 2006 (2),

Introduction

The proposal updates the implementing rules of the cur-
1.
rent Financial Regulation to take into account the changes made
to the Financial Regulation. Both the new Financial Regulation
and the new implementing rules are intended to enter into force
in 2007, for application to the new generation of spending
programmes.

The Court has assessed the Commission’s proposal against

2.
the following principles:

Having regard to the Court’s Opinion No 4/2006 (3) on this
proposal,

— consistency with the Financial Regulation;

Having regard to the Council Regulation (EC, Euratom)
No 1995/2006 of 13 December 2006 amending Regulation (EC,
Euratom) No 1605/2002 on the Financial Regulation applicable
to the general budget of the European Communities (4),

— compliance with the principles of

sound financial

management;

— simplification of administrative procedures without compro-

mising the protection of financial interests.

Having regard to the Court’s Opinion No 2/2004 on the ‘single
audit’ model (and a proposal for a Community internal control
framework) (5),

3.
The Court considers that in most cases the proposed
amendments meet these conditions. However, the Court has con-
cerns about a number of issues where:

Having regard to the Court’s Opinion No 1/2006 on the proposal
for a regulation of the European Parliament and of the Council
laying down the rules for the participation of undertakings,
research centres and universities in actions under the Seventh
Framework Programme and for the dissemination of research
results (2007 to 2013) (6),

— the new or amended Financial Regulation requirements are

insufficiently developed;

— the amendments go against the principles of simplification

and/or protection of financial interests; or

Having regard to Commission Regulation (EC, Euratom)
No 2342/2002 of 23 December 2002 laying down detailed rules
for the implementation of Council Regulation (EC, Euratom)
No 1605/2002 on the Financial Regulation applicable to the gen-
eral budget of the European Communities (7), as last amended by
Commission Regulation (EC, Euratom) No 1248/2006 of
7 August 2006 (8) (hereafter the ‘implementing rules’),

(1) OJ L 248, 16.9.2002 (corrected by OJ L 25, 30.1.2003, p. 43).
(2) Commission document COM(2006) 213 final.
(3) OJ C 273, 9.11.2006, p. 2.
(4) OJ L 390, 30.12.2006.
(5) OJ C 107, 30.4.2004.
(6) OJ C 203, 25.8.2006.
(7) OJ L 357, 31.12.2002.
(8) OJ L 227, 19.8.2006, p. 3.

— there is a contradiction with the requirements of the Finan-

cial Regulation.

Financial Regulation requirements insufficiently developed

The implementing rules are intended as an indispensable
4.
accompaniment to the Financial Regulation, setting out the
detailed and more technical rules which are essential for applying
the Financial Regulation. As such, they should cover all Financial
Regulation requirements which may otherwise be susceptible
to inappropriate or inconsistent application. The Court identified
the following areas where it considers that this was not the case.

(9) Commission document SEC(2006) 866 final.

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Article 23a sets out a definition of the characteristics of
5.
effective and efficient internal control. The Court welcomes this
initiative but considers the reference to ‘best international prac-
tices’ is insufficient, given that formally established best practices
do not exist for some of the key issues, such as the verification of
the legality and regularity of underlying transactions. The Court
recommends that the implementing regulations include the main
principles of effective control as set out in the Court’s Opinion
No 2/2004, notably common principles and standards of control,
the basic components of systems and control procedures, the
definition of responsibilities and procedures for ensuring the
quality of each control level as well as the overall supervision of
systems.

given, although the Commission summary has to be prepared by
15 June of year n + 1; the addressees of the reports are not speci-
fied; nor are the requirements for their publication. Furthermore,
there are other annual reporting requirements, such as the report
on compliance with time limits as set required by Article 106.6
and the reporting requirements of Articles 54 and 87.5 which
could be included in the annual activity report. This is currently
specified for the Commission only. In the Court’s opinion the
resulting multitude of annual activity and other reports with dif-
ferent form, content, timing and publication goes against the
principle of simplification.

6.
Articles 35.4 and 43.6(a) refer respectively to ‘interna-
tionally accepted standards’and ‘international standards’ on pro-
curement procedures. As such standards do not formally exist,
this formulation could cause uncertainty and inconsistency. The
Court therefore recommends that the principal standards — addi-
tional to those set out in Article 43.6(a) — intended by the ref-
erence are stipulated in the implementing regulations.

11.
To ensure consistency and simplification, the Court rec-
ommends that the implementing rules should set out the content
and publication requirements of annual activity reports for appli-
cation by all institutions alike, incorporating the annual report-
ing requirements cited in the previous paragraph.

7.
Article 42b recognises that the Commission has no
responsibilities regarding the efficiency of internal control proce-
dures where the costs of controls are not charged to the Commu-
nity budget. However, the basic elements for an efficient system
outlined in Article 23a.2 are also relevant to effectiveness, and
the Commission does have responsibilities in the latter regard.
The Court therefore recommends that a clear distinction is made
between the Member States’ and Commission’s responsibilities as
established by the Treaty.

Article 43.4(g) requires that agreements concluded with
8.
international organisations include ‘the detailed arrangements for
Commission scrutiny’. They should also cover the right of access
of the Court of Auditors to sufficient information to allow it to
rely on the audit of the organisation, or where necessary to audit
the activity directly, in accordance with international auditing
standards.

12.
Article 117.1 fourth indent states ‘In sectors subject to
a rapid price and technological evolution framework contracts
without reopening of competition shall contain a stipulation on
a mid-term review. If the conditions initially laid down are no
longer geared to the price or technological evolution, the con-
tracting authority may not use the concerned framework contract
and shall take appropriate measures to terminate it’. This provi-
sion should only apply to framework contracts whose specific
contracts are awarded without reopening of competition. The
framework contract should also specify what happens with ongo-
ing specific contracts in the case of its termination. This provi-
sion risks being the source of litigation because of the vagueness
instead of providing for a mid-term
of its terms. Therefore,
review, the implementing rules should insist on the fact that the
length of framework contracts should be adapted to suit areas
subject to rapid technological or economic change and include a
clause for revision of prices. Additionally, contracts involving sev-
eral economic operators should provide that the specific contracts
be awarded with the reopening of competition.

Article 43.6(b) stipulates that grants must involve cofi-
9.
nancing. To ensure consistency, the Article should make reference
to the derogations from the principle of cofinancing as set out in
Article 253.

Non-respect of the principles of simplification and/or protection
of financial interests

13.
Article 118.4 second indent (ii) is superfluous as
Article 158a requires a standstill period of ten days to be
observed with effect from the day following the publication of the
contract award notice in the Official Journal of the European Union.

10.
Article 60.7 of the Financial Regulation sets out the
obligation for authorising officers by delegation to provide an
annual activity report. The implementing rules do not provide
sufficient guidance. For example: the summary of the annual
activity reports is only required for the Commission, whereas this
may also be appropriate for those other institutions that prepare
(such as Parliament
more than one annual activity report
and Council); no deadline for the production of the reports is

14.
Article 130.4(c), which proposes a change to the model
contract as regards the law to be applied, is superfluous because
the contracting parties will be automatically bound by the trea-
ties and applicable decisions and regulations, without this need-
ing to be specified. Furthermore, since this change is only appli-
cable for the Commission, the other institutions are no longer
required to indicate the applicable law in their contracts. The
Court therefore recommends that the existing text of the Article is
maintained.

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Official Journal of the European Union

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Article 93.2(b) of the Financial Regulation requires
15.
subcontractors to comply with the same criteria as main contrac-
tors as regards exclusion from participation in procurement pro-
cedures. However, Article 130.5 provides insufficient protection
of the financial interests of the Communities. Firstly, the candi-
date or tenderer is only required to submit information on the
‘financial and operational capacities’ of subcontractors, rather
than on the ‘financial, economic, technical and professional
capacity’ required under Article 135.2 for assessing the contrac-
tor or tenderer. Secondly, the information to be provided under
Article 130.5 does not include the information required to assess
whether or not the subcontractors would be excluded from par-
ticipating in the tender under Article 93.1 of the Financial
Regulation. In the absence of sufficient information there is a
risk that a candidate who would be excluded from direct partici-
pation would be accepted through indirect means as a
subcontractor.

16.
Article 145 and 146 set out the obligations in respect of
interinstitutional procurement procedures. As currently drafted,
each participating institution would be required to establish com-
mittees for opening and for evaluating offers, representing an
unnecessary duplication of tasks. The Court recommends that the
contracting authority responsible for the interinstitutional pro-
curement procedure should be given the power to nominate
single interinstitutional opening and evaluation committees.

17.
Article 158a.1 states that requests or comments from
unsuccessful or aggrieved tenderers or candidates ‘must be
received during the 10 calendar days following the notification of
the rejection or award decisions (…)’. This will be 10 days follow-
ing the receipt of the notification by the tenderer, which there-
fore may not coincide with the ten day standstill period before
which a contract can be signed which runs ‘from the day after the
simultaneous dispatch of the award decision (…)’. The Court rec-
ommends that the two requirements be harmonised to ensure
transparency and avoid legal uncertainty.

18.
Article 169a sets out a number of measures the Com-
mission should take to provide information and advice to appli-
cants for grants. Some of them, such as monitoring the ‘size and
readability of the application forms’ and the organisation of semi-
nars for applicants could be the source of appeals for failed appli-
cants, potentially complicating management and causing delays
in the process. The Court recommends that such details are set
out in the operational instructions only.

Article 172a sets out eligibility criteria. Those in para-
19.
graph 1 contain repetition, such as (a) with (c) and (d) with (e).
Those in paragraph 2 constitute unnecessary detail as, being non-
binding, they will be set out in the basic act. The Court recom-
mends rationalising and simplifying the requirements along the
lines set out in the attached annex.

Contradiction with the
Regulation

requirements of

the Financial

20.
Article 3.2 sets out thresholds for recovery of interest on
prefinancing for external actions (1) (250 000 euro) and humani-
tarian aid (750 000 euro) at much higher amounts than the gen-
eral rule (50 000 euro). In the case of amounts under these
thresholds the potential exists for significant interest income, con-
trary to the non-profit principle set out in Article 109.2 of the
Financial Regulation. In order to respect this principle, while
avoiding complex interest recovery processes, the Court recom-
mends that all interest on prefinancing amounts held should be
assigned by the beneficiary to the programme or action
concerned.

21.
Article 35.6 states that the ‘independent external audit’
should be carried out by ‘an audit service functionally indepen-
dent of the entity’ being audited. The use of the term ‘functional’
could be interpreted as allowing internal audit services to perform
such audits, which would be contrary to the Financial Regulation
principle that the auditor should be external. Furthermore, the
Court suggests the implementing rules should make reference to
the norms the auditor is expected to follow — such as interna-
tional auditing standards — and specifically provide for access by
the Commission and the Court to the auditor’s working papers.

22.
Article 43.2 (d) defines the European Investment Bank
and the European Investment Fund as international organisations
under Article 53 of the Financial Regulation. However, this con-
tradicts Article 54.2(b) of the Financial Regulation in which
these organisations are referred to as ‘specialised Community
bodies’ and which should be the basis for all delegated powers.

Article 118.4 third indent covers the situation where
23.
framework contracts are below the thresholds laid down by
Article 158 for publishing, whereas the specific contracts based
thereon exceed those limits. However, in order to comply with
Article 90 of the Financial Regulation — and to help prevent
inappropriate use of the framework contract — the contracting
authority must have estimated the value of the contracts expected
to be signed under the framework contract before the latter is
concluded. As such, the proposed rules are in contradiction with
the Financial Regulation, or, as a minimum, superfluous.

(1) The draft regulation continues to use the headings of the 2000-2006
financial perspectives, whereas these have been superceded by new
headings in the 2007-2013 financial framework.

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Article 125c allows institutions to decide that ‘proce-
24.
dural rules applicable to the contracting authority from a Mem-
ber State shall apply provided that they can be considered as
equivalent to those of the institution’. This is in contradiction
with Article 91 of the Financial Regulation which makes no
provision for the use of procedures other than those set out in the
Financial Regulation. Furthermore, the proposed article does not
sufficiently develop the rules to implement Article 91 of the
Financial Regulation: ‘the procurement procedure may be car-
ried out jointly by the institution and this contracting authority,
as specified in the implementing rules’. For example, it does not
define who should makes the final award decision or which legal
system would prevail in the event of litigation.

Article 160e.1 states that the ‘annual work programme
25.
shall determine whether grants shall be only covered by a deci-
sion or also by a written agreement.’ The use of the word ‘also’
appears to be in contradiction with Article 108 of the Financial
Regulation where it is stated that grants ‘shall be covered either

by a written agreement or by a Commission decision notified to
the successful applicant.’ The Court recommends that this ambi-
guity be removed.

Revised Article 122 of the Financial Regulation states
26.
that the report on budgetary and financial management should
include information on the rate of implementation of appropria-
tions and summary information on transfers. However,
Article 185 of the implementing rules does not define the infor-
mation to be provided, but sets out other requirements — the
achievement of objectives and events with an influence on activi-
ties. The Court recommends the implementing rules cover all
aspects of reporting.

27.
In addition to the above points, the changes made to the
proposed Financial Regulation Articles 28a, 30a, 33, 72, 73a,
96 and 166.3(a) must be reflected in the corresponding imple-
menting rule Articles 23a, 23b, 78, 84, 85b, 134b and 233a.1(i).

This Opinion was adopted by the Court of Auditors in Luxembourg at its meeting of
25 January 2007.

For the Court of Auditors
Hubert WEBER
President

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Official Journal of the European Union

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ANNEX

Proposed eligibility criteria for Article 172a

‘Eligible costs are costs actually incurred and paid by the beneficiary of a grant which meet the following conditions:

(a) were incurred during the duration of the action or work programme, with the exception of costs related to the prepa-

ration of final reports and provision of audit certificates, when provided for in the basic act;

(b) were incurred for the purpose of achieving the objectives of the action or the work programme which is the subject of

the grant;

(c)

are identifiable and verifiable, in particular being recorded in the accounting records of the beneficiary and determined
according to the applicable accounting standards of the country where the beneficiary is established and determined
according to the usual cost accounting practices of the beneficiary;

(d)

comply with the requirements of applicable tax and social legislation;

(e)

(f)

are reasonable, justified and comply with the requirements of sound financial management, in particular regarding
economy and efficiency;

exclude costs that do not meet the conditions referred to in points (a) to (e), including recoverable indirect taxes, duties,
interest paid, provisions for future losses or charges, exchange losses, costs incurred for other Community projects and
excessive or reckless expenditure.

The costs declared as cofinancing in kind by beneficiaries or third parties should comply with the provisions of this Article.

A general budget setting out estimated eligible costs is submitted with the proposal and, subject to verification by the Com-
mission, is included in the grant agreement or decision.’