The Court's statement of assurance provided to the European Parliament and the Council
Date: 2007-09-27
Institutions: European Court of Auditors
Subjects: European Commission, European Court of Auditors, European Parliament, agricultural expenditure, audit, auditing, budgetary control, financial year

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Official Journal of the European Union

15.11.2007

THE COURT'S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIA-
MENT AND THE COUNCIL

(2007/C 274/02)

I.

Pursuant to the provisions of Article 248 of the Treaty the Court has audited:

(a) the ‘Final annual accounts of the European Communities’ (1) which comprise the ‘Consolidated
financial statements’ (2) and the ‘Consolidated reports on implementation of the budget’ (3) for
the financial year ended 31 December 2006; and

(b) the legality and regularity of the underlying transactions within the legal framework of the Euro-

pean Communities.

Management's responsibility

In accordance with Articles 268 to 280 of the Treaty and the Financial Regulation, manage-
II.
ment (4) is responsible for the preparation and fair presentation of the ‘Final annual accounts of the
European Communities’ and the legality and regularity of the underlying transactions:

(a) The management's responsibility concerning the ‘Final annual accounts of the European Commu-
nities’ includes designing, implementing and maintaining internal control relevant to the prepara-
tion and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error, selecting and applying appropriate accounting policies, on the
basis of the accounting rules adopted by the Commission's accounting officer (5), and making
accounting estimates that are reasonable in the circumstances. According to Article 129 of the
Financial Regulation, the Commission approves the ‘Final annual accounts of the European
Communities’ after the Commission's accounting officer has consolidated them on the basis of
the information presented by the other institutions (6) and bodies (7) and established a note,
inter alia, that he has a reasonable
accompanying the final consolidated accounts, declaring,
assurance that these accounts present a true and fair view of the financial position of the Euro-
pean Communities in all material aspects.

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

pean Communities financial year 2006.

(2) The ‘Consolidated financial statements’ comprise the balance sheet, the economic outturn account (including
segment reporting), the cash flow table, the statement of changes in net assets and a summary of significant
accounting policies and other explanatory notes.

(3) The ‘Consolidated reports on implementation of the budget’ comprise the consolidated reports on implementa-

tion of the budget and a summary of budgetary principles and other explanatory notes.

(4) At the level of the European Institutions and bodies management includes the Members of the Institutions, Direc-
tors of the Agencies, Authorising Officers by delegation and sub-delegation, Accounting Officers and the leading
staff of financial, audit or control units. At the level of Member and Beneficiary States, management includes
Authorising Officers, Accounting Officers and the leading staff of paying authorities, certifying bodies and imple-
menting agencies.

(5) The accounting rules adopted by the Commission's accounting officer are derived from International Public Sector
Accounting Standards (IPSAS) issued by the International Federation of Accountants or, in their absence, Interna-
tional Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board. In accordance with the Financial Regulation, the ‘Consolidated financial statements’
for the financial year 2006 are prepared for the second time on the basis of these accounting rules adopted by the
Commission's accounting officer, which adapt accruals based accounting principles to the specific environment of
the Communities, while the ‘Consolidated reports on implementation of the budget’ continue to be primarily
based on movements of cash.

(6) Before the adoption of the final annual accounts by the institutions, the different accounting officers sign them off,
thereby certifying that they have a reasonable assurance that the accounts present a true and fair view of the finan-
cial situation of the institution (Article 61 of the Financial Regulation).

(7) The final annual accounts are drawn up by the respective directors and sent to the Commission's accounting
officer together with the opinion of the management board concerned. In addition, the respective accounting offi-
cers sign them off, thereby certifying that they have a reasonable assurance that the accounts present a true and fair
view of the financial situation of the bodies (Article 61 of the Financial Regulation).

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(b) The way in which management exercises its responsibility for legality and regularity of underlying
transactions depends on the method of implementation of the budget. In the case of direct
centralised management, implementation tasks are performed by the Commission's departments.
Under shared management, implementation tasks are delegated to Member States, under decen-
tralised management to third countries and under indirect centralised management to other
bodies. In the case of joint management, implementation tasks are shared between the Commis-
sion and international organisations (Article 53 to 57 of the Financial Regulation). Implementa-
tion tasks have to comply with the principle of sound financial management, requiring designing,
implementing and maintaining effective and efficient internal control including adequate supervi-
sion and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceed-
ings to recover funds wrongly paid or used. Regardless of the method of implementation applied,
the Commission bears the ultimate responsibility for the legality and regularity of the transac-
tions underlying the accounts of the European Communities (Article 274 of the Treaty).

Auditor's responsibility

III.
The Court's responsibility is to provide, on the basis of its audit, the European Parliament and
the Council with a statement of assurance as to the reliability of the accounts and the legality and
regularity of the underlying transactions. Except as described in paragraph IV, the Court conducted
its audit in accordance with the IFAC and INTOSAI International Auditing Standards and Codes of
Ethics, in so far as these are applicable in the European Community context. These standards require
that the Court plans and performs the audit to obtain reasonable assurance whether the ‘Final annual
accounts of the European Communities’ are free from material misstatement and the underlying
transactions, taken as a whole, are legal and regular.

In the case of revenue the scope of the Court's audit work was limited. Firstly, VAT and GNI
IV.
own resources are based on macroeconomic statistics for which the underlying data cannot be
audited directly by the Court, and secondly, the audits of traditional own resources cannot cover
imports that have not been subject to custom supervision.

V.
In the context described under paragraph III, an audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in the final consolidated accounts and the legality
and the regularity of the underlying transactions. The procedures selected depend on the auditor's
judgement, including the assessment of the risks of material misstatement of the final consolidated
accounts and of material non-compliance of the underlying transactions with the requirements of the
legal framework of the European Communities, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the preparation and fair presentation
of the final consolidated accounts, and supervisory and control systems implemented to ensure
legality and regularity of underlying transactions, in order to design audit procedures that are appro-
priate in the circumstances. An audit in this context also includes evaluating the appropriateness of
accounting policies used and reasonableness of accounting estimates made, as well as evaluating the
overall presentation of the final consolidated accounts and the annual activity reports.

The Court considers that the audit evidence obtained is sufficient and appropriate to provide a

VI.
basis for its statement of assurance.

Opinion on the reliability of the accounts

VII.
In the Court's opinion, except for the effects of the matters described in paragraph VIII, the
‘Final annual accounts of the European Communities’ present fairly, in all material respects, the finan-
cial position of the Communities as of 31 December 2006, and the results of their operations and
cash flows for the year then ended, in accordance with the provisions of the Financial Regulation
and the accounting rules adopted by the Commission's accounting officer.

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VIII.
The Court's audit has identified errors in amounts registered in the accounting system as
invoices/cost statements and pre-financing which have the effect of overstating the accounts payable
by some 201 million euro and the total amount of long and short term pre-financing by some 656
million euro.

IX. Without calling into question the opinion expressed in paragraph VII, the Court notes that,
due in part to the complex system of financial management and despite improvements made, weak-
nesses in the accounting systems of certain institutions and Directorates-General of the Commission
still put at risk the quality of financial information (in particular for cut-off and employee benefits).
This led to a number of corrections after the presentation of the provisional accounts.

Opinion on the legality and regularity of the underlying transactions

X.
In the Court's opinion, revenue, commitments and payments for Administrative expenditure,
Pre-accession strategy, with the exception of the Sapard Programme, and External actions, for those
payments managed and controlled directly by Commission delegations, are free from material error.
In these areas the supervisory and control systems are implemented in a manner which provides for
an adequate risk management. Moreover, for common agriculture policy (CAP) expenditure the
Court's audit shows that, where properly applied, the integrated administration and control system
(IACS), in particular in respect of the Single Payment System, is an effective system to limit the risk
of irregular expenditure.

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

XII.
In the Court's opinion, in the other areas of expenditure payments are still materially affected
by errors, although to different levels, and the Commission and the Member and other beneficiary
states need to make further efforts to implement adequate supervisory and control systems, so as to
improve the handling of the attendant risks. These areas are listed below, namely: common agri-
cultural policy, structural measures, internal policies and external actions.

(a) In CAP expenditure, the Court found a marked reduction in the estimated overall level of error
in underlying transactions. However, it still remains just above the materiality threshold. Clear-
ance systems and post payment checks for CAP subsidies not covered by IACS provide limited
assurance as to compliance with Community legislation. Furthermore, claims for EU aid are not
usually checked on the spot by the independent bodies in charge of the certification of the
accounts of paying agencies.

(b) In Structural measures, the Court found that control systems in the Member States are generally
ineffective or moderately effective, and that the Commission maintains only a moderately effec-
tive supervision to mitigate the risk that the control systems in the Member States fail to prevent
overstated or ineligible expenditure. Therefore, the reimbursement of expenditure to structural
policies projects is subject to material error.

(c) In Internal policies the Court's audit revealed that the supervisory and control systems do not
sufficiently mitigate the inherent risk of the reimbursement of overstated costs, resulting in a
material level of error in payments to beneficiaries.

(d) In External actions, despite the improvements of the Commission's supervisory and control
systems, a material level of error was detected at the level of implementing organisations, due to
continued weaknesses in the systems designed to ensure the legality and regularity of transactions
at this level.

XIII.
The Court emphasises that its audits in the area of CAP expenditure, structural measures and
internal policies show that complicated or unclear eligibility criteria or complex legal requirements
have a considerable impact on the legality and regularity of underlying transactions. For example,
because of the often complex eligibility conditions, the agri-environmental measures in Rural Devel-
opment are prone to a significantly higher incidence of error than the non-rural development part of
CAP expenditure.

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XIV.
The Court notes the improvements introduced by the Commission as regards its internal
control framework and the positive impact they have on the assessment of the operation of supervi-
sory and control systems and of the impact of relevant reservations on the assurance provided by the
Commission's Directors-General declarations. However, the Court continues to find weaknesses in
those assessments, namely as regards their impact on the assurance concerning the legality and regu-
larity of underlying transactions.

27 September 2007

Hubert WEBER

President

European Court of Auditors

12, rue Alcide De Gasperi, L-1615 Luxembourg