Report from the Commission to the Council, the European Parliament and the European Court of Auditors on the progress of the Commission Action Plan towards an Integrated Internal Control Framework {SEC(2007) 311}
Date: 2007-03-07
Institutions: European Commission
Subjects: administrative transparency, audit, budgetary control, financial regulation, general budget (EU)

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 7.3.2007 
COM(2007) 86 final 

REPORT FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT AND THE EUROPEAN 
COURT OF AUDITORS 

on the progress of the Commission Action Plan towards an Integrated Internal Control 
Framework 

{SEC(2007) 311} 

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REPORT FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT AND THE EUROPEAN 
COURT OF AUDITORS 

on the progress of the Commission Action Plan towards an Integrated Internal Control 
Framework 

PART 1: KEY MESSAGES  

towards  an  Integrated  Internal  Control 
The  Commission's  ambitious  “Action  Plan 
Framework”1, adopted in January 2006, draws on recommendations by the European Court of 
Auditors  (ECA  opinion  No  2/20042)  and  underlines  the  Commission's  determination  to 
improve financial management and achieve an effective and efficient control framework. The 
Plan  is  not  intended  to  address  all  internal  control  issues  at  the  Commission,  but  rather 
addresses identified gaps in the framework. Other important developments took place in 2006 
with  respect  to  internal  control.  Notably,  by  adopting  its  Synthesis  report  on  Commission 
Management, the Commission assumed its full political responsibility for management by its 
Directors-General and Heads of Services, based on the assurance and reservations issued by 
them in the AARs. 

One year after the adoption of the Plan it is time to evaluate progress and make adjustments to 
actions  in  certain  areas.  Part  1  of  this  report  summarises  progress.  Further  detail  on  the  16 
original actions in the Plan is in Part 2, and a summary with completion indicators is in annex. 

The Commission has made concrete progress on the Action Plan.  

The following measures have been implemented in the past year: 

•  Improved  assessment  of  management  and  control  systems  in  the  structural 
funds.  An  assessment  of  control  components  per  Member  State  has  been 
established, as well as legality and irregularity indicators which will contribute to 
the overall analysis of controls and assurance gained. 

•  Improved  definition  and  attribution  of  control  responsibilities  in  shared 
management.  The  2007-13  legislation  for  agriculture  and  structural  measures 
contains  a  number  of  provisions  intended  to  provide  a  more  reliable  control 
structure  with a better definition of  Member  States’ responsibilities in providing 
assurance.  These  include  enhanced  reporting  of  audit  results  by  Member  States 
and  improved  coordination  of  audit  work  between  DGs  using  common  systems 
and procedures. "Contracts of confidence" covering the quality of national control 
systems, audit strategies and reporting have so far been signed in two cases. For 
management  declarations,  the  Inter-Institutional  Agreement  on  the  Financial 
Perspectives  and  the  revised  Financial  Regulation  require  Member  States  to 

1 
2 

COM(2006) 9 and SEC(2006) 49. 
OJ C107, 30.4.2004, p. 1 (the ‘Single Audit’ Opinion). 

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provide  summaries  of  available  audits  and  declarations.  In  agriculture,  this  new 
requirement has already been implemented in the sector-specific rules. 

•  Strengthened  oversight  of  paying  and  certifying  agencies 

in  shared 
management. In agriculture, the paying agencies of the new Member States have 
been  accredited  upon  accession.  Moreover,  under  the  new  rules  applicable  as  of 
financial  year  2007,  all  paying  agencies  in  EU-27  are  subject  to  a  review 
mechanism which requires the authorities competent for the accreditation to keep 
their  paying  agencies  under  constant  supervision  and  to  inform  the  Commission 
every three years of the results of that supervision, including whether the paying 
agencies continue to comply with the accreditation criteria. For Structural Funds 
for  the  new  period  every  Member  State  will  be  required  to  accredit  the 
management and control system including the managing authority and certifying 
authority. This process will be repeated on an annual basis by way of the annual 
opinion of the audit authority, working according to an audit strategy approved by 
the  Commission.  In  both  areas,  the  Commission  can,  depending  on  its  risk 
assessment,  audit  compliance  with  the  accreditation  criteria  and,  if  necessary, 
suspend financing or apply financial corrections. 

•  Improved presentation of assurance in DGs' Annual Activity Reports. A concise 
format  to  permit  consistent  presentation  of  control  strategies  and  sources  of 
assurance  has  been  developed  for  use  in  services’  2006  annual  activity  reports. 
Control  strategies,  results,  indicators  on  legality  and  regularity  and  overall 
assurance  at  DG  level  should  progressively  be  set  out  in  a  standard  way, 
facilitating the build-up to global assurance with reservations where justified.  

•  Sampling  based  on  international  standards.  A  new  sampling  approach3  for  the 
Sixth  Research  Framework  Programme  seeks  to  prioritise  the  detection  and 
correction  of  systematic  errors  among  major  beneficiaries  while  covering  an 
appropriate representative sample of the audited population.  

•  Validation  of  costing  methodologies.  To  tackle  a  key  source  of  error  in  past 
programmes, 
the  Seventh 
the  Commission  has  designed  procedures  for 
Framework  Programme  to  verify  beneficiaries'  costing  methodologies  at  the 
beginning  of  projects.  This  action  is  intended  to  reduce  errors  in  the  use  of 
average costs. 

•  Compulsory procedures for audit certification. To guarantee consistent quality of 
audit  certification,  the  Commission  has  developed  "agreed  upon  procedures"  for 
use by auditors of spending for the Seventh Research Framework Programme.  

•  Coordination  of  audit  standards  and  dissemination  of  guidance  and  good 
practice in the Structural Funds. The Commission has secured harmonisation of 
sampling  methodologies  to  be  used  by  Member  States  in  the  new  period  and 
issued guidance and good practice notes on checks by Member States' authorities, 
recoveries, closure requirements and information to beneficiaries. 

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ECA 02/2004, paragraph 48. 

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•  Improved  co-operation  with  national  Supreme  Audit  Institutions  (SAIs).  The 
Commission  provided  SAIs  with  reports  of  payments  made  in  their  countries  in 
2005 and has developed bilateral contacts with many SAIs. These will be pursued 
in  2007  to  explore  how  the  Commission  can  further  facilitate  SAIs’  work  on 
Community  funds  spent  in  Member  States4  and  how  it  can  gain  assurance  from 
this work, while respecting SAIs' independence. 

Remaining challenges  

Experience  in  the  first  year  of  implementation  of  the  action  plan  has  identified  further 
challenges  to  be  addressed.  Also,  certain  proposed  actions  were  not  supported  by  the 
legislator. As a result, some adjustments or modified actions are proposed: 

•  Strengthening the link between reasonable assurance and payments. Legislation 
provides  for  payments  to  be  suspended  and  for  financial  corrections  and 
recoveries  to  be  made  where  justified.  In  line  with  the  approach  set  out  in  its 
Synthesis Report 2005, the Commission will apply the legislative provisions and 
will clearly set out in Annual Activity Reports and communicate to the budgetary 
authority  reservations  to  global  assurance,  including  where  relevant  by  sector  or 
Member State, and information on corrections and recoveries made.  

•  Clarifying  the  importance  of  recoveries.  During  2006,  the  Court  of  Auditors 
clarified that it considered recoveries to be relevant for the DAS. The Court also 
considered  that  the  amount  of  recoveries  made  by  Commission  and  Member 
States  was  too  low  compared  to  the  assumed  overall  level  of  errors.  To  help 
strengthen the Commission’s performance on recoveries, an additional sub-action 
will identify, for direct centralised management and the structural funds, amounts 
recovered  in  2005  and  2006  and  their  coherence  with  errors  identified  during 
controls.  

•  Ensuring  cost  of  control  is  commensurate  with  risk  of  error.  The  concept  of 
"tolerable  risk"  (linked  to  cost  effectiveness  of  control)  was  not  taken  by  the 
legislator  into  the  revised  Financial  Regulation.  However,  the  Commission  still 
wishes to ensure that control resources are used cost effectively and that the cost 
of  control  is  justified  in  terms  of  the  observed  error  rate,  the  dissuasive  effects, 
and other qualitative benefits. Work is underway to determine the cost of controls 
in agriculture and the Structural Funds on the basis of a common methodology. In 
the research area, costs of controls are also being assessed and a pilot study added 
to Action 10 will focus on the design of control strategies, including the study of 
'reasonable' vs. 'absolute' assurance and the impact of risk on this. 

4 

Kontrola Państwowa Special issue December 2006 
http://www.nik.gov.pl/docs/kp/kp_2006_referaty_calosc.pdf 

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•  Simplification and clarification of rules. The complexity of simplifying detailed 
legislation  in  terms  of  eligibility  requirements,  and  the  advanced  stage  of 
negotiations,  meant  that  limited  simplification  was  possible  for  the  2007-13 
programming  period.  Nevertheless,  in  certain  sectors,  significant  simplifications 
had been negotiated beforehand, reducing the risk of error particularly in shared 
management.  The  challenge  now  is  to  simplify  and  clarify  the  operation  of  the 
new rules in practice. 

•  Sharing  of  audit  data.  Building  on  the  data  sharing  already  taking  place  in  the 
research and structural funds area, the Commission will continue to explore how 
to  make  the  sharing  of  audit  information  more  effective,  including  on  planned 
audits  and  on  results  of  systems  audits  of  beneficiaries  funded  under  different 
programmes. 

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PART 2: DETAILED REVIEW OF PROGRESS AND FURTHER DEVELOPMENTS 

SIMPLIFICATION AND COMMON CONTROL PRINCIPLES (ACTION 1-4) 

Action 1: Simplification review of proposed 2007-13 legislation 

When  the  action  plan  was  adopted,  a  limited  window  of  opportunity  remained  for  further 
simplification  of  legislation  for  the  2007-13  planning  period  beyond  the  provisions  already 
negotiated. While simplification has not been as extensive as hoped, some elements intended 
to  reduce  the  numbers  of  beneficiaries  inadvertently  making  erroneous  claims  were 
introduced  in  specific  sectors.  Commission  services  now  have  wider  scope  for  using  lump 
sum payments, reducing the risk of irregularity. Cost reporting models and the definition of 
eligible  costs  have  also  been  simplified  to  reduce  the  risk  of  error.  In  the  Structural  Funds, 
accreditation of national systems together with Commission approval of Member States' audit 
strategies and simpler procedures to interrupt payments should deliver increased assurance. A 
new  regulation  consolidating  and  reinforcing  controls  and  sanctions  in  the  area  of  rural 
development  was  adopted  by  the  Commission  in  December  2006.  In  indirect  centralised 
management in education and culture corrective measures have been reinforced and Member 
States will be obliged to issue an ex ante declaration on national agencies’ control systems. 

Action  2:  Integrate  common  internal  control  principles  in  the  proposal  for  the  revised 
Financial Regulation 

Despite  the  rejection  by  the  legislator  of  an  additional  specific  principle  in  the  Financial 
Regulation  (FR),  Article  28a  provides  that  "the  budget  shall  be  implemented  in  compliance 
with  effective  and  efficient  internal  control…",  including,  "adequate  management  of  risks 
relating to the legality and regularity of the underlying transactions". As such the main aim of 
underpinning fundamental concepts of an internal control framework within the regulation has 
been achieved. 

Action  3:  Establish  and  better  harmonise  the  presentation  of  control  strategies  and 
evidence providing reasonable assurance 

Using  pilot  templates  for  Research  and  Structural  Funds,  services'  Annual  Activity  Reports 
for 2006 should set out control strategies in a progressively harmonised format. This includes 
a clear presentation of sources of assurance and the results of controls, including legality and 
regularity  indicators.  It  will  take  time  to  ensure  complete  consistency  of  approach  but  this 
action  is  expected  to  improve  awareness  of  control  structures  and  sources  of  assurance  and 
will help pinpoint weaknesses and define improvements. 

In  order  to  strengthen  the  link  between  reasonable  assurance  and  payments,  as  from  the 
Synthesis  Report  2006,  the  Commission  will  clearly  set  out  and  communicate  to  the 
budgetary authority reservations to the global assurance, including where relevant by sector or 
Member  state,  together  with  the  corresponding  financial  corrections  or  suspensions  of 
payments. 

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Action  4:  Initiate  inter-institutional  dialogue  on  risks  to  be  tolerated  in  the  underlying 
transactions 

The Action Plan stimulated significant discussion of tolerable risk. In following the European 
Court  of  Auditors'  recommendation  to  explicitly  foresee  political  acceptance  of  risk,  the 
Commission  sought  to  define  in  law  what  had  hitherto  been  implicitly  reflected  in  control 
strategies.  Although  the  legislator  rejected  its  inclusion  in  the  Financial  Regulation,  it 
expressed  support  for  the  Commission  to  continue  exploring  the  concept.  The  Commission 
considers it of fundamental importance to pursue the inter-institutional dialogue on tolerated 
risk  and  will  pursue  this  action  on  the  basis  of  the  necessary  background  information 
stemming from the implementation of Actions 10 and 11. 

MANAGEMENT DECLARATIONS AND AUDIT ASSURANCE (ACTION 5-8) 

Action  5:  Promote  operational  level  management  declarations  and  synthesis  reports  at 
national level 

As regards shared management, the revised Financial Regulation provides in Article 53b that 
"Member  States  shall  produce  an  annual  summary  at  the  appropriate  national  level  of  the 
available  audits  and  declarations".  These  audit  summaries  and  declarations  will  be  received 
for  the  first  time  during  2008.  While  this  is  outside  the  timeframe  of  this  action  plan,  the 
Commission will use the results of its own audits and controls to appraise the quality of the 
annual audit summaries and declarations in order to ensure management and control systems 
are  working  effectively.  Where  the  results  are  positive  this  will  provide  a  building  block  to 
overall  assurance.  Negative  results  may  lead  to  reservations  and  payment  suspension  or 
recovery  where  appropriate.  The  Commission  will  monitor  progress  in  this  area  and  will 
evaluate how best to cooperate with Member States to ensure a continuous feedback of results 
into the annual planning and reporting cycle.  

Action  6:  Examine  the  utility  of  management  declarations  outside  shared  and  indirect 
centralised management 

Action  6a,  involving  examination  of  whether  declarations  would  add  value  in  direct 
centralised management, was not found likely to be effective. Due to the lack of intermediary 
bodies performing a verification function between the Commission and the final beneficiary, 
obtaining  a  declaration  from  a  beneficiary  on  top  of  other  requirements  related  to  financial 
management would not be cost effective. This action has been removed from the plan but the 
main objective is being addressed in Action 7 via certification of methodology. 

Action 7: Promote best practices for increasing cost-benefit of audits at project level 

Audit certificates were envisaged for the Sixth Research Framework Programme to increase 
assurance  on  project  execution.  However,  experience  has  shown  that  errors  which  can  be 
identified by the Commission on the spot are frequently not identified by certifying auditors, 
mainly due to unfamiliarity with eligibility requirements. 

To  ensure  audits  are  carried  out  on  a  consistent  basis  by  all  auditors  working  for  the 
Commission  in  the  Seventh  Framework  Programme,  "agreed  upon  procedures"  have  been 
developed to provide a compulsory set of procedures for all such audits. This approach will 
enable  the  auditor  to  identify  and  report  exceptions,  allowing  the  Commission  to  draw 
conclusions based on its greater understanding of the issues which may arise. 

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In  indirect  centralised  management,  2007-2013  legal  bases  for  the  Lifelong  Learning  and 
Youth  in  Action  programmes  require  Member  States  to  give  preliminary  and  annual 
assurance.  Models  for  the  ex  ante  declaration  have  been  prepared  and  guidelines  issued  to 
national  authorities.  Work  under  the  Action  Plan  for  the  Seventh  Research  Framework 
Programme seeks to address one of the key sources of error in past programmes – the use of 
average  costing  by  beneficiaries.  To  reduce  these  errors,  the  Commission  has  drawn-up 
procedures to analyse cost accounting systems and their underlying costing methodologies in 
advance to pick up systematic errors. This to some extent also fulfils the goal of Action 6a by 
sensitising beneficiaries to the importance of establishing a methodology compliant with the 
contract, and can serve to 'fix the future' by preventing errors. 

Action 8: Facilitate additional assurance from Supreme Audit Institutions 

The  Commission  has  improved  its  cooperation  with  Supreme  Audit  Institutions.  The 
Commission  took  the  lead  by  increasing  its  transparency  with  regard  to  SAIs  and  provided 
each  Member  State  SAI  with  a  report  of  payments  from  the  Community  budget  in  their 
country  in  2005.  On  the  basis  of  feedback,  a  standard  report  has  been  developed  providing 
more detailed information. Reports on 2006 payments will be sent to the SAIs shortly. 

The  Commission  considers  that  establishing  an  ongoing  relationship  with  the  SAIs  is  a 
successful realisation of the action, and an important breakthrough in improving the overall 
control environment in shared management. The role of SAIs in various national initiatives on 
country-level declarations is welcomed for the increased focus it will give to management of 
Community funds in those Member States. 

New sub-action: To build on the momentum created by this action, the Commission 
will pursue contact with the SAIs to determine how their work can be used to provide 
assurance  on  the  execution  of  its  programmes  in  the  Member  States.  It  will  also 
launch  a  case  study  on  the  key  issues  faced  by  SAIs  in  examining  Community 
expenditure. 

SINGLE  AUDIT  APPROACH:  SHARING  RESULTS  AND  PRIORITISING  COST-
BENEFIT (ACTION 9-11) 

Action  9:  Construct  effective  tools  for  sharing  audit  and  control  results  &  promote  the 
single audit approach 

With  the  new  ABAC  accounting  system  in  2005,  the  Commission  can  now  more  easily 
coordinate  management  information  which  has  been  collected  and  stored  in  services'  local 
systems.  2006  saw  the  implementation  of  a  module  in  ABAC  linked  to  legal  entities  which 
allows audit information to be input, searched and followed up. In 2007 this module will be 
supplemented by an automated interface to services' local systems, permitting an overview of 
Commission audit activity covering direct beneficiaries, without further manual input of data. 
A  detailed  database  of  audit  activity  gives  potential  for  improved  planning  and  risk 
management on a Commission-wide basis. 

Sharing  of  audit  data  is  also  foreseen  in  the  other  management  modes.  In  Education  and 
Culture,  an  EC  decision  on  the  responsibilities  of  the  Commission,  Member  States  and 
national agencies based on the single audit approach specifies the type and levels of control. 
A specific guide for national agencies indicates in particular the type and minimum number of 
controls  to  be  performed.  In  shared  management,  the  reporting  of  audit  results  by  Member 

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States  and  their  use  by  the  Commission  has  been  steadily  improved  through  standardised 
formats and assessment procedures, earlier coordination meetings and database tracking tools. 

New  sub-action:  To  oversee  the  initial  stages  of  data-sharing  in  ABAC,  the 
Commission  will,  for  the  Sixth  Framework  Programme,  monitor  the  use  of  data 
sharing and management reporting with a view to identifying key factors for success 
in better integrating the sharing of data in the overall control process. 

Action 10: Conduct an initial estimation and analysis in the costs of controls 

For  shared  management,  a  methodology  for  estimating  the  costs  of  control  has  been  agreed 
and a survey launched for agriculture and structural funds. For agriculture all Member States 
are  involved,  while  for  structural  funds  the  initial  exercise  covers  Wales,  Hungary  and 
Portugal  before  extension  to  the  remaining  Member  States.  For  direct  management,  the 
Commission is determining the costs of control for two pilot DGs (EAC and INFSO). 

New sub-action: To further explore the cost-benefit ratio of control, the Commission 
will examine the effect of programme design and eligibility requirements on costs of 
control to develop a detailed analysis of tolerable risk on a practical basis. 

Action 11: Initiate pilot projects on evaluating benefits of control 

Benefits  of  control  may  be  financial  (recovery  of  erroneous  payments)  and  qualitative  (for 
example the dissuasive effect of the possibility of being controlled and sanctioned encourages 
better checks by the beneficiary on payment claims). However, the valuation of the deterrent 
effect  of  controls  is  problematic  due  to  the  lack  of  a  control  population  to  compare  the 
monetary effect of an added control and the difficulty of cross-sectoral comparisons owing to 
differences in policy environment and control structures. 

As a result, this action is focusing on quantifiable benefits in DGs INFSO and EAC and aims 
to value recoveries in 2005 of errors detected for these DGs’ programmes. This approach is 
still likely to undervalue the direct benefits of control given the multi-annual nature of some 
programmes  and  that  errors  made  in  year  N  may  be  detected  and  recovered  in  subsequent 
years.  To  ensure  the  cost  of  control  is  justified  in  terms  of  the  observed  error  rate,  a  pilot 
study  will  explore  this  matter  further.  Covering  both  centralised  direct  and  shared 
management,  this  will  provide  information  on  recoveries  and  financial  corrections  in  2005 
and how risk can be applied to the definition of control strategies taking account of the multi-
annual nature of programmes. Qualitative benefits will also be considered. 

New sub-action: To determine whether recovery and offsetting systems are working 
effectively, by identifying amounts recovered in 2005 and 2006 and their coherence 
with  errors  identified  during  controls,  the  Commission  will,  in  direct  management, 
develop  a  typology  of  error  and  the  relationship  with  recoveries,  financial 
corrections and adjustments to payments and for structural funds it will examine the 
reliability of national monitoring and reporting systems. 

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SECTOR-SPECIFIC GAPS (ACTION 12-16) 

Action 12: Address the gaps identified by participating services 

Since  the  Gap  Assessment  exercise  in  mid-2005,  DGs  have  had  an  opportunity  to  integrate 
the specific elements in their Annual Management Plans, which will be reported in the 2006 
and  2007  Annual  Activity  Reports.  Some  DGs  were  also  able  to  integrate  key  Gap 
Assessment findings within their 2007-13 legislation. In internal policies, the Research DGs 
have established and are implementing a multi-annual strategy of 6FP ex post audits based on 
a  coordinated  audit  plan  weighted  towards  making  systematic  improvements  in  major 
beneficiaries'  cost  claims  while  offering  sufficient  coverage  across  the  whole  audited 
population. 

New  sub-action:  To  ensure  effective  delivery  of  added  assurance,  the  Commission 
will perform 300 audits for FP6 in 2007, compared with the 45 carried out in 2006. 
In addition, having developed a systematic approach to analysing and sampling the 
FP6 beneficiary population as part of Action 16b, the Commission will proceed with 
the  identification  and  correction  of  errors  in  beneficiaries  receiving  the  most 
significant  proportion  of  the  budget.  This  will  also  provide,  by  the  end  of  2007,  a 
representative picture of the level and nature of irregularities in the research budget 
as a whole.  

Action  13:  Analyse  the  controls  under  Shared  Management  (in  particular  Structural 
Funds) at regional level and the value of existing statements 

A more detailed assessment of the effectiveness of current controls and assurance statements 
by Member States will be provided in the Annual Activity Reports for 2006. DG REGIO and 
DG EMPL are continuing to improve their procedures to determine assurance on payments by 
producing a management and control systems assessment per Member State, detailed down to 
system or programme level. This rates the control components of systems on compliance and 
effectiveness  using  a  similar  scale  to  that  of  the  Court  of  Auditors,  classifying  programmes 
into  3  groups  according  to  the  level  of  assurance  obtained:  reasonable  assurance,  assurance 
with  limitations,  and  limited/no  assurance.  These  DGs  have  also  developed  legality  and 
regularity  indicators  which  will  supplement  the  presentation  of  the  control  strategy  in  the 
2006 AAR.  

Action 14: Provide greater guidance for structural funds on managing the risk of error 

For  Action  14a,  the  Commission  has  asked  Member  States  to  ensure  beneficiaries  of 
Structural Funds are made aware of controls and the risk of cancellation of funding. Further 
guidance  on information Member  States have to send to the Commission on recoveries and 
withdrawals of funding following irregularities has been issued and an amendment has been 
made  to  the  regulatory  reporting  provisions5.  Closure  guidelines  for  2000-06  programmes 
were  issued  by  the  Commission  in  August  2006.  Guidance  has  also  been  issued  illustrating 
good practices in first-level management checks and checks by paying authorities. 

5 

Regulation (EC) No 448/2001, part of the amending Regulation (EC) No 1978/2006 of 22 December 
2006 (OJ L 368, 23.12.2006, p. 89). 

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For Action 14b the Commission is preparing interpretative guidance on a number of subjects, 
including  "financial  engineering",  which  will  be  issued  after  discussion  with  the  Member 
States. 

Action 15: Promote the ‘Contracts of Confidence’ initiative for Structural Funds 

DG  REGIO  has  continued  to  promote  the  Contract  of  Confidence  to  increase  the  level  of 
assurance  for  the  2000-06  programming  period  as  well  as  to  lay  useful  foundations  for  the 
2007-13  period.  Two  Contracts  of  confidence  have  been  formalised  in  the  structural  funds 
(Wales and Austria) and discussions are continuing with four other Member States. 

Action 16: Establish common guidelines per policy family 

Under Action 16a improved guidelines for research and internal policies have been provided 
in  an  updated  audit  manual  for  use  by  the  contracted  auditor  for  the  6th  Framework 
Programme.  The  Commission  also  identified  a  need  to  provide  guidance  in  adapting  audit 
strategies to heterogeneous control environments while retaining core common standards. The 
deadline of this action has been extended to enable best practices from a range of policies to 
be gathered and presented in this area. 

Action 16b has contributed to the 6th Framework Programme audit strategy by prioritising an 
initial  global  overview  and  evaluation  of  the  beneficiary  population.  This  resulted  in  an 
approach, based on international standards, which combines stratification with monetary unit 
sampling (MUS), and incorporates the correction of systematic errors with the detection of the 
global error rate via a statistical sample. 

For Action 16c, DG REGIO is revising the audit manual for the Structural Funds. This will, 
inter alia, take account of the new legislative requirements and incorporate guidance on the 
application of international auditing standards. 

OVERALL CONCLUSIONS AND THE WAY FORWARD 

The  conclusion  is  broadly  positive.  While  there  have  been  some  delays  (see  annex),  the 
Commission considers that it will still be able to meet the objective of having the foundations 
in place by the end of 2007 for properly managing the risk of errors and providing increased 
assurance as foreseen in the Action Plan. The results of actions will be progressively visible 
and demonstrable - initially in terms of a more transparent and clearer control approach. This 
should lead to a reduction in the error rate through improved correction and prevention.  

Experience has shown that a number of actions need to be refined to provide a further impetus 
to increased assurance and the Commission has proposed new sub-actions in these areas. New 
sub-actions are concentrated on direct centralised  management  given the Commission's sole 
responsibility  in  this  area.  The  new  sub-actions  will  be  completed  within  the  original 
timetable for the action plan (end of 2007) and will, together with the ongoing actions, ensure 
that the framework will be in place by that date for the Integrated Internal Control Framework 
to begin to have the planned impact on assurance. 

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Where  the Commission obtains  additional assurance, there  is  the  potential  for  the  European 
Court  of  Auditors  to  rely  on  this  for  its  Declaration  of  Assurance.  The  Commission  will 
therefore  continue  to  liaise  closely  with  the  Court  on  the  implementation  and  impact  of  the 
action plan and is also committed to improving the contradictory procedure. Timing remains a 
challenge in all areas of budget implementation. In the area of shared management, about half 
of the replies from Member states to the Court's "statements of preliminary findings" were not 
available in due time for the contradictory procedure on the 2005 Annual Report6. Potentially 
important  feed-back  from  the  Member  States  on  the  preliminary  findings  of  the  Court 
therefore arrives too late to inform the DAS. 

The Commission will provide a final report on the implementation of the action plan in early 
2008. This report will take a first look at the impact of the different actions on assurance and 
will  draw  conclusions  for  the  future  consolidation  of  the  Integrated  Internal  Control 
Framework. 

6 

Report on Member States replies to the ECA 2005 Annual Report. 

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