Report from the Commission to the Council on the follow-up to 2005 Discharge Decisions (Summary) - Council Recommendations {SEC(2007) 1186}
Date: 2007-09-19
Institutions: European Commission
Subjects: budgetary discharge, financial year, general budget (EU), implementation of the budget

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 19.9.2007 
COM(2007) 537 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 

on the follow-up to 2005 Discharge Decisions 
(Summary) - Council Recommendations 

{SEC(2007) 1186} 

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TABLE OF CONTENTS 

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

I. 

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

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

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

(Commission working document, points 5-6).............................................................. 4 

C) Commission Internal Control (Commission working document, points 7-9)....................... 4 

D) Budgetary management (Commission working document, points 10-12) ........................... 5 

E) Revenue (Commission working document, points 13-21) .................................................... 5 

F) The Common Agricultural Policy (Commission working document, points 22-26) ............ 6 

G) Structural measures (Commission working document, points 27-31).................................. 6 

H) Internal policies, including research (Commission working document, points 32-38) ........ 7 

I) External actions (Commission working document, points 39-46) ......................................... 7 

J) Pre-accession Strategy (Commission working document, points 47-52)............................... 8 

K) Administrative expenditure (Commission working document, points 53-62)...................... 8 

L) Financial instruments and banking activities  

(Commission working document, points 63-65).......................................................... 9 

II. 

III. 

Court of Auditors’ special reports (Commission working document, points 66-84)... 9 

European Development Funds (Commission working document, points 85-87) ........ 9 

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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  27  February  2007  and  the  Resolutions  voted  by  the  European  Parliament  on 
24 April 2007. The present Follow-Up Report deals with the recommendations made by the Council 
in  relation  to  the  2005  Discharges.  A  separate  Follow-up  Report  deals  with  the  recommendations 
made by Parliament in relation to the Discharges given for the 2005 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  the  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 2005 discharge, the Commission has identified a total of 87 recommendations 
made by the Council to the Commission. The Commission considers that for 32 recommendations 
the required action has already been taken. For another 54 recommendations the Commission agrees 
to  take  the  action  recommended  by  the  Council.  Finally,  the  Commission  cannot  accept 
one recommendation and will therefore not be taking the requested action3. 

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See also Article 147 of the Financial Regulation for the general budget. 
2005 General Budget Discharge, 2005 EDF Discharge, 2005 Agencies Discharge. 
See recommendation 62. 

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I. 

COUNCIL RECOMMENDATION ON THE GENERAL BUDGET 

A) Introduction (Commission working document, points 1-4) 

The Commission fully agrees with the Council on the importance of continuing to improve financial 
management  and  of  having  controls  working  correctly  and  effectively.  It  provided  a  mid-term 
scoreboard  on  the  implementation  of  the  Action  Plan  towards  an  Integrated  Internal  Control 
Framework  in  July  2007,  and  a  final  report  on  the  implementation  of  the  Action  Plan  will  be 
provided in early 2008. The final 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. 

In the light of experience, a number of actions under the Action Plan towards an Integrated Internal 
Control  Framework  have  been  refined  to  give  further  impetus  towards  increased  assurance, 
concentrating  on  direct  centralised  management  and  including  a  detailed  examination  of  the  cost-
benefit-risk  balance  for  controls.  The  foundations  will  be  in  place  by  the  end  of  2007  for  the 
Integrated Internal Control Framework to begin to have the planned impact on assurance 

the  Commission's  annual  synthesis  on  management  achievements 

Furthermore, 
identifies 
weaknesses in the design and the operation of control systems and introduces appropriate remedial 
actions and reports on their implementation. The 2006 Synthesis report gave further impetus to the 
development  of  indicators  for  the  legality  and  regularity  of  transactions  to  support  the  assurance 
expressed  in  annual  activity  reports.  Such  indicators  will  become  compulsory  as  from  the  annual 
activity reports for 2007. 

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

document, points 5-6) 

As  regards  the  accounts,  the  Commission  has  corrected,  where  possible,  for  the  errors  that  were 
highlighted  by  the  Court  during  its  2005  audit.  The  Commission  has  also  considered  these  errors 
and  their  causes  while  planning  and  performing  its  closure  of  the  2006  accounts,  so  as  to  try  to 
avoid their recurrence. 

The  Commission  will  provide  the  Council  with  information  on  recoveries,  including  amounts 
recovered by Member States under shared management. This will be based in the first instance on 
extracts  from  the  financial  report  of  the  EAGGF  Guarantee  Section  and  the  annual  report  on 
implementation of the Structural Funds, and the notes to the final accounts 2006.  

For information on the measures taken in the various expenditure areas, please refer to the points 
below. 

C) Commission Internal Control (Commission working document, points 7-9) 

As  recommended  by  the  Council,  the  Commission  continues  its  efforts  to  improve  financial 
management. In its Action Plan towards an Integrated Internal Control Framework and in the action 
plans included in Annual Activity Reports of the Directorates-General for 2006 to address identified 
weaknesses,  the  Commission  has  set  out  a  range  of  measures  which  are  being  taken  to  improve 
control and assurance. 

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The  Commission  is  gradually  implementing  a  better  structured  and  homogeneous  presentation  of 
the internal control systems of the Directorates-General. A concise template to ensure a consistent 
presentation  of  control  structures  and  sources  of  assurance  was  developed  for  the  2006  Annual 
Activity Reports. Over time the format is expected to improve awareness of control structures and 
sources of assurance and will help pinpoint weaknesses and define improvements.  

The  structures  created  by  the  Financial  Reform  since  the  year  2000  have  for  the  most  part  been 
implemented  and  the  Commission-wide  achievement  of  a  very  high  level  of  compliance  with  the 
baseline requirements of the Internal Control Standards marked the beginning of a new phase which 
aims to improve the effectiveness of the Commission's internal control systems. Work has started in 
2006 to revise the Internal Control Standards to put more emphasis on measuring the effectiveness 
of internal control. 

D) Budgetary management (Commission working document, points 10-12) 

The Commission notes that the Council has welcomed the improvement in the management of the 
budget in 2005. It considers that the increase in outstanding commitments in 2005, in particular in 
the  Structural  Funds,  was  not  unexpected.  This  was  mostly  due  to  the  large  increase  in 
commitments for the EU-10 countries (in line with the Copenhagen profile), while payments made 
to  these  programmes  and  projects  were  still  relatively  slow  in  their  start-up  phase.  Payments  for 
EU-15  programmes  increased  again  in  2005.  The  fact  that  the  level  of  decommitments  remains 
limited also indicates that the n+2 rule provides a powerful incentive for Member States to ensure 
that implementation proceeds at a sufficiently high rate. 

Like  the  Council,  the  Commission  attaches  high  importance  to  the  swift  adoption  of  the 
programmes for the 2007-13 period and reports regularly to the Council on this matter. Forecasting 
and  budgeting  are  monitored  regularly  throughout  the  year.  The  budget  forecast  alert  tool 
established in 2006 contributes to the good management of the budget.  

E) Revenue (Commission working document, points 13-21) 

Like the Council, the Commission welcomes the fact that that the Court again in 2005 considered 
the  overall  results  satisfactory  concerning  the  reliability  of  the  accounts  and  the  legality  and 
regularity of underlying transactions for revenue. 

The Council's request for a general analysis of the overall administration, management and control 
costs  for  the  Community  and  Mrmber  States  of  both  the  traditional  and  the  VAT  own  resources 
systems is currently being considered by the Commission, in particular as to which approach will 
most  cost-effectively  provide  the  reliable  and  comparable  data  needed  to  make  a  meaningful 
assessment.  

As  regards  traditional  own  resources,  the  Commission  is  considering  the  feasibility  of  producing 
more  guidance  on  the  current  procedures  related  to  the  use  of  the  B-accounts  system  in  Member 
States and on the underlying conditions to be met by Member States when balancing protection of 
the  Community's  financial  interests  and  trade  facilitation.  The  Commission  is  also  taking  the 
necessary steps to improve the systems for handling mutual assistance cases. 

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The Commission continues discussions on VAT reservations and their impact with Member States 
in the Advisory Committee on Own Resources. As regards the GNI resource, the Commission will 
perform more direct verification of selected national aggregates in the sense indicated by the Court 
during  the  2007-2009  round  of  GNI  verification  missions,  and  will  continue  to  encourage  best 
practices  in  national  accounts  compilation  through  the  GNI  Committee.  The  Commission  will 
present  a  proposal  for  including  allocated  Financial  Intermediation  Services  Indirectly  Measured 
(FISIM)  in  GNI  for  own-resource  purposes  when  it  considers  that  all  Member  States  are  able  to 
implement this adjustment in a uniform manner. This is expected to be the case in 2008. 

F) The Common Agricultural Policy (Commission working document, points 22-26) 

The  Commission  is  continuing  its  efforts  to  monitor  the  full  and  correct  application  of  the 
Integrated Administrative Control System (IACS) in all Member States. In case of deficiencies, the 
Commission will not hesitate to impose financial corrections.  

The Commission has addressed the deficiencies  found in  the  olive oil sector and the clearance of 
accounts procedures are ongoing. The major part of the olive oil production has been integrated into 
the single payment scheme. Aid is thereby no longer paid on the basis of the quantity produced but 
is based on area and controlled within the framework of the IACS. This should significantly reduce 
any risk of error. 

As regards rural development, the Commission has also taken the recommended action to correct 
the  weaknesses  identified.  Concerning  the  temporary  rural  development  instrument  for  some  new 
Member  States,  the  Commission  services  will  present  a  working  document  to  the  Agricultural 
Funds Committee inviting new Member States to wind up the implementation of these programmes 
by 16 October 2007 in order to proceed with the final closure of the programme following the 2007 
clearance of accounts decision in May 2008. 

G) Structural measures (Commission working document, points 27-31) 

The  Commission  is  taking  the  action  recommended  by  the  Council.  For  the  2007-13  Financial 
Framework  period  a  number  of  changes  should  reduce  the  administrative  burden  associated  with 
structural expenditure. Member States will mainly determine eligibility conditions, and for smaller 
programmes with a greater percentage of national funding they will be able to apply national rather 
than EU requirements and procedures in some instances. At the same time, the control framework 
and the Commission's ability to supervise its operation will be strengthened by new elements such 
as  an  ex  ante  compliance  assessment  on  national  systems  to  be  delivered  by  the  Member  State 
before interim payments start and an annual audit opinion delivered by the audit authority.  

The  Commission  endorses  the  principle  of  controls  being  proportionate  to  the  risks  and  costs 
involved. Therefore, as part of the Action Plan towards an Integrated Internal Control Framework 
(COM(2006)9 and COM (2007)86), it is assessing the cost of controls in Structural Funds through a 
survey. The Commission is also asking Member States to provide regular information on the error 
rates they find in their audit work, which are an indicator of the risk. The data obtained will help 
clarify the relationship between the costs and benefits of controls and achieve a better balance. The 
cooperation between the Commission and Member States is continuing to be developed in the areas 
of  reporting,  sharing  of  audit  results  and  harmonisation  of  audit  standards.  This  long-standing 
development has been given further impetus by the Action Plan and the legislation for the 2007-13 
period. 

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The Commission issued guidance on the closure of 2000-06 Structural Fund programmes in 2006 
(C(2006) 3424) and will shortly do so for the closure of Cohesion Fund projects of the same period. 
It also issued documents in 2006 setting out good practice in management verifications and checks 
by the paying authority before certifying expenditure.  

In  2006  the  Commission  issued  a  guidance  note  on  the  information  on  recoveries  and  financial 
corrections  to  be  provided  by  Member  States,  and  in  early  2007  it  asked  all  Member  States  to 
supply  complete  information  on  recoveries,  withdrawals  and  pending  recoveries  for  2006  and 
cumulatively  for  the  whole  period  2000-06.  The  Commission  is  receiving  the  information  and 
intends to summarise it in a report to be presented in autumn 2007.  

H) Internal policies, including research (Commission working document, points 32-38) 

The Commission fully shares the concerns expressed by the Council on the weaknesses detected by 
the Court of Auditors. It continues to improve its control systems in the context of the Action Plan 
towards  an  Integrated  Internal  Control  Framework.  A  multi-annual  approach  to  mitigating  the 
inherent  risk  of  reimbursement  of  overstated  costs  has  been  introduced  in  the  research  area, 
including  a  substantial  increase  in  the  number  of  ex-post  audits  and  reinforcement  of  the  audit 
certificate  system.  Furthermore,  "agreed  upon  procedures"  have  been  developed  to  provide  a 
compulsory set of procedures for the certificates on the Financial Statements and the certificates on 
the  methodology  described  in  the  model  grant  agreement  for  the  Seventh  Research  Framework 
Programme  (FP7).  These  actions  are  expected  to  lead  to  a  reduction  in  the  error  rate  through 
improved prevention, detection and correction. 

Under FP7 steps have also been taken to simplify the rules for reimbursement of costs, including 
the use of lump sums for International Cooperation Partner Countries within grant agreements for 
indirect  actions.  The  requirements  for  time  recording  of  researchers  are  clearly  specified  in  the 
terms  of  reference  for  the  certificates  of  financial  statements  and  on  methodology  annexed  to  the 
Grant  Agreement  and  have  to  be  certified  by  the  auditors.  The  Commission  has  also  in  2007 
published guidance for beneficiaries. 

In relation to National Agencies the decisions establishing the new generation of programmes in the 
fields  of  education,  training  and  youth  provide  for  a  comprehensive  set  of  checks  and  controls 
regarding respect of procedures and internal control mechanisms in order to ensure and verify the 
regularity and legality of transactions as well as the reality and eligibility of activities. 

I) External actions (Commission working document, points 39-46) 

As  recommended  by  the  Council,  the  Commission  continues  to  improve  the  functioning  of  both 
internal  and  external  audits,  management  reporting  and  the  supervisory  and  control  systems.  The 
Commission  will  endeavour  to  further  reinforce  the  current  risk  analysis  and  better  communicate 
the basis for its analysis. It is aware of the risks at project implementing organisation level and has 
taken a number of measures over the last years to mitigate its potential effects. These include the 
use and improvement of standard contract provisions. In early 2006, for instance, the standard grant 
and  fee-based  service  contracts  were  revised.  They  now  include  standard  terms  of  reference  for 
auditors  to  perform  expenditure  verifications  to  be  submitted  by  the  beneficiaries  of  Community 
funds prior to final payments. These new terms of reference have been revised so as to reinforce the 
verification of compliance with the contract terms, including those relating to public procurement 
procedures. EuropeAid's Common Relex Information System (CRIS) allows relevant analyses to be 

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performed,  including  by  type  of  implementing  organisation  or  management  mode.  The  system  is 
being constantly improved and refined, in line with evolving management needs. 

J) Pre-accession Strategy (Commission working document, points 47-52) 

As  recommended  by  the  Council,  the  Commission  will  continue  to  monitor  closely  the  effective 
functioning of the national supervisory  and control  systems  for programme expenditure under the 
pre-accession strategy, in particular within the SAPARD/IPARD paying agencies. Under the Phare 
programme the Commission has taken action to clarify the eligibility of VAT expenditure and has 
received  and  dealt  with  most  of  the  final  declarations  from  the  national  authorities.  The 
Commission  shares  the  Council's  regret  at  the  delays  in  the  Extended  Decentralised  Information 
System (EDIS) accreditation process for Phare and ISPA. However, the Commission had to insist 
on further improvements of the national administrative structures before granting EDIS in order to 
ensure the sound financial management of the funds. 

K) Administrative expenditure (Commission working document, points 53-62) 

The Commission has taken due note of the Council’s recommendations concerning administrative 
expenditure. As regards the NAP (New Payroll System), all reports are available, upon request, to 
every  authorising  officer,  but  it  is  up  to  the  authorising  officers  in  each  institution  to  define  their 
own  set  of  controls.  The  PMO  runs  its  own  controls,  including  some  ex-post  controls,  and  in  the 
light  of  the  experience  of  the  past  years  it  considers  its  current  controls  sufficient  and  does  not 
envisage, at this stage, further strengthening its ex-post controls. As regards the reimbursement of 
mission  costs,  the  Guide  to  missions  –  the  internal  rules  adopted  by  the  Commission  governing 
missions  of  its  staff  –  is  currently  under  review  to  take  due  account  of  the  remarks  of  the  Court. 
Adoption of the new rules is scheduled for the beginning of 2008. 

Under  this  heading  the  Council  has  also  included  recommendations  concerning  the  regulatory 
agencies. The Commission shares the concerns about good governance and better regulation of the 
agencies expressed by both the Council and the European Parliament. It considers that the adoption 
of  the  draft  interinstitutional  agreement  on  the  operating  framework  for  the  European  Regulatory 
Agencies (COM(2005)59) would go a long way towards addressing the issues raised such as impact 
assessment, cost-benefit considerations, evaluation and annual reporting. The Commission therefore 
hopes that Council can make further progress on this important issue in the near future. Whilst fully 
respecting the autonomy of the regulatory agencies, the Commission in the meantime continues to 
provide extensive guidance and support to these agencies. The Service Level Agreements drawn up 
with  many  regulatory  agencies  in  2006  in  different  areas  of  administration  and  training4  are  an 
important example of this. As recommended by the Council, the Commission has for the first time 
with its Preliminary Draft Budget for the financial year 2008 presented an overview document of 
the  agencies.  The  Commission  has  also  committed  itself  to  providing  a  meta-evaluation  of  the 
existing decentralised agencies.  

4 

See also the other examples mentioned in point 56 of the working document. 

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L)  Financial 

instruments  and  banking  activities 

(Commission  working  document, 

points 63-65) 

The Commission is taking the necessary action to implement the Council's recommendations on the 
management, follow-up and closure of programmes relating to financial operations, such as MEDIA 
II and ECIP, and to tackle the backlog relating to coal research programmes. Moreover, a revised 
Tripartite  Agreement  between  the  Court  of  Auditors,  the  European  Investment  Fund  and  the 
Commission was signed on 16 January 2007.  

II. 

COURT  OF  AUDITORS’  SPECIAL  REPORTS 
points 66-84) 

(Commission  working  document, 

The Council has made a number of recommendations to the Commission concerning special reports 
published  by  the  Court  of  Auditors  in  2005  and  2006.  The  Commission’s  replies  to  these 
recommendations can be found in the Commission working document (points 66-84). 

III. 

EUROPEAN 
points 85-87) 

DEVELOPMENT 

FUNDS 

(Commission 

working 

document, 

The  Commission  has  taken  due  note  of  the  Council's  recommendations  concerning  the  European 
Development  Funds.  The  Commission's  main  supervisory  and  control  systems  have  been 
continuously improved in recent years, inter alia on the basis of the recommendations made by the 
Court. Further improvements will be made in line with the Commission's Action Plan "Towards an 
Integrated  Internal  Control  Framework",  which  addresses  the  main  gaps  identified  in  the  control 
framework. This includes formalisation and harmonisation of the presentation of the internal control 
strategies,  the  aim  of  which  is  to  provide  an  overall  view  of  the internal  control  flow  and  related 
accountability  chain  and  to  document  how  associated  risks  are  addressed.  As  regards  the  EDF 
Financial Management Report, the Commission has, in the 2006 report, addressed the issues raised 
by the Council. 

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