Annual Report of the Court of Auditors on the activities funded by the sixth, seventh, eighth and ninth European Development Funds (EDFs) concerning the financial year 2006, together with the Commission’s replies
Date: 2007-09-27
Institutions: European Court of Auditors
Subjects: European Court of Auditors, European Development Fund, activity report, audit, financial control, financial management, financial year

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Official Journal of the European Union

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IV

(Notices)

NOTICES FROM EUROPEAN UNION INSTITUTIONS AND BODIES

COURT OF AUDITORS

In accordance with the provisions of Article 248 (1) and (4) of the EC Treaty and Article 116 of the
Financial Regulation of 27 March 2003 applicable to the ninth European Development Fund,

the Court of Auditors of the European Communities, at its meeting of 27 September 2007, adopted its

Annual Report on the activities funded by the sixth, seventh, eighth and ninth European
Development Funds concerning the financial year 2006

The report, together with the Commission’s replies to the Court’s observations, was transmitted to the
authorities responsible for giving discharge and to the other institutions.

(2007/C 259/01)

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Annual Report on the activities funded by the sixth, seventh, eighth and
ninth European Development Funds (EDFs)

TABLE OF CONTENTS

Introduction

Chapter I — Implementation of the sixth, seventh, eighth and ninth EDFs

Financial implementation

Approval of the tenth EDF

The Commission’s annual report on the financial management of the EDFs

Chapter II — Statement of Assurance by the Court of Auditors on the EDFs

Statement of Assurance by the Court of Auditors on the sixth, seventh, eighth and ninth
European Development Funds (EDFs) for the financial year 2006

Information in support of the Statement of Assurance

Scope and nature of the audit

Reliability of the accounts

Legality and regularity of the underlying transactions

Paragraph

1-5

6-11

6-8

9

10-11

12-55

I-VI

12-55

12-13

14-18

19-55

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

1. The European Development Funds (EDFs) are the result of
international conventions or agreements (1) between the Member
States of the European Union and certain African, Caribbean and
Pacific (ACP) States, and of Council Decisions on the association
of overseas countries and territories (OCT).

2. The Commission has responsibility for and takes charge of
the management of most of the expenditure of the EDFs in asso-
ciation with the ACP States. The EDF’s investment facility has
been fully managed by the European Investment Bank (2) (EIB)
since 1 April 2003. This facility is not covered by the Court’s
Statement of Assurance or the European Parliament’s discharge
procedure (3) (4).

3. The financial allocation for each of the four EDFs being
implemented in 2006, with the exception of the instruments now
under the EIB’s sole management, was mainly assigned to:

(a) programmable aid (5) intended for the implementation of
development projects (roughly half of the total allocations);

(b) programmable aid (5) intended to provide budget support for
the recipient states (almost a quarter of the total allocations);

(1) The Yaoundé I Convention dates back to 1964. The most recent agree-
ment (Cotonou) dates from 23 June 2000 and was revised in Luxem-
bourg on 25 June 2005.

(2) Thus, under the ninth EDF,

EUR 13 800 million, of which the EIB is
EUR 2 200 million.

the initial allocation amounted to
for

responsible

(3) See Articles 96, 103 and 112 of

the Financial Regulation of
27 March 2003 applicable to the ninth EDF (OJ L 83, 1.4.2003, p. 1).
In its Opinion No 12/2002 on the proposal for this Regulation
(OJ C 12, 17.1.2003), the Court stressed that these provisions reduce
the scope of the European Parliament’s powers of discharge.

(4) A tripartite agreement between the EIB, the Commission and the Court
(Article 112 of the Financial Regulation of 27 March 2003 applicable
to the ninth EDF referred to above) sets out rules for the audit of these
operations by the Court.

(5) Programmable aid is defined within the framework of national and
regional indicative programmes (NIPs and RIPs) and of intra-ACP
funded projects and programmes.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(c) non-programmable aid intended for specific fields of coopera-
tion such as humanitarian and emergency assistance, support
for export earnings (Stabex and Sysmin or, now, FLEX) or
financial contributions, such as venture capital (6) and aid for
debt relief (just over a quarter of the total allocations).

4. Once programming is complete, EDF resources are mobilised
in two stages. The Commission, as Chief Authorising Officer,
makes the financing decision (shown in the accounts as financial
commitments) following receipt of a request from an ACP State,
and after a favourable opinion from the EDF Committee (7) (com-
posed of representatives of the Member States). The Commission
and the ACP State then lay down the rules for the implementa-
tion of these decisions by the National Authorising Officer
(NAO) (8) of the country concerned within the framework of a
financing agreement or directly by the Commission. The NAO
concludes contracts (shown in the accounts as individual legal
commitments) and authorises payments, which will be checked
and executed by the Commission in accordance with the proce-
dures for implementing the EDF.

5. Budget support is not subject to this system of management.
The Commission remains the sole authorising officer. Financing
agreements constitute legal commitments and give rise to pay-
ments without any individual legal commitments being entered
into. Once the Commission has checked that the conditions of
the Cotonou Agreement and the financing agreement have been
met, it makes an initial transfer of funds to the budget of the
recipient country. Once transferred, these funds merge with the
budget of the ACP State, where they are used and audited in
accordance with the laws and procedures of the recipient coun-
try. The Commission and the other main international donors
assess both the improvements made to the management of pub-
lic finances in these countries and the results in terms of poverty
reduction. Before making subsequent disbursements, the Com-
mission checks that the conditions laid down in the financing
agreement have been met.

(6) As regards the sixth, seventh and eighth EDFs, these operations con-
tinue to be implemented by the EIB on the Commission’s responsibil-
ity.

(7) The EDF Committee’s assent is necessary for projects or programmes
with a value greater than EUR 8 million or representing more than
25 % of the indicative programme. For projects of less than EUR 8 mil-
lion, ex ante information is given to the EDF committee.

(8) In general, the NAO’s powers are vested in the Finance Minister of the

ACP State.

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CHAPTER I — IMPLEMENTATION OF THE SIXTH, SEVENTH,
EIGHTH AND NINTH EDFS

Financial implementation

6.
In 2006, the sixth, seventh, eighth and ninth EDFs were
implemented simultaneously. Although the EDFs are committed
over a period of five years, there is no time limit for payments.
21 years after the sixth EDF came into force, the Authorising
Officer of the EDF decided to close the Fund on 31 July 2006. At
closure, EUR 7 339 million had been paid, i.e. 99,3 % of the
EUR 7 391 million allocated to projects. The remaining balance
of EUR 52 million was transferred to the ninth EDF.

6.-7.
In line with the Monterrey and Paris agendas the Commission
has been making considerable efforts to scale up aid and increase effec-
tiveness. 2006 was a very successful year for the implementation of the
EDFs with record levels of contracts and payments made, significant
reductions in old and dormant commitments, closure of the sixth EDF
and progress towards the eventual closure of the seventh EDF. The objec-
tive is to commit all ninth EDF resources by the end of 2007 resulting
in EUR 10,5 billion being implemented during 2005-2007, the high-
est level ever in the history of the EDF.

7. Tables 1 and 2 show the cumulative use of EDF resources
and the financial implementation. Charts I and II show the
cumulative resources and decisions by sector of intervention. In
2006, individual commitments amounted to EUR 3 073 million,
after deductions of cancellations, compared with EUR 2 652 mil-
lion in 2005. Net payments (9) amounted to EUR 2 762 million,
in comparison with EUR 2 489 million the year before. The rate
of disbursement, measured as net payments in relation to new
financial commitments, was 102 %, compared with 82 % in the
previous year, indicating a higher disbursement of funds in 2006.
Unspent commitments remained stable at EUR 10 300 million,
or 25 % of total funds committed.

On quality, the Commission in 2006 introduced a 100 % coverage by
the Quality Support Group of all EDF financing proposals at both iden-
tification and appraisal stages. Results oriented monitors monitored over
1 000 EDF projects, finding on average that projects were performing
on track or better. 13 evaluations covering aid to ACP States were com-
pleted and will feed back results into the programming process and the
design of future programmes.

The Commission will continue its efforts to improve even further the
implementation of the EDF and will continue to follow up the recom-
mendations made by the Court in that process.

8.
Payments in the sectors of education, health, water and basic
sanitation amounted to EUR 836 million in 2006, i.e. 29 % of the
total expenditure. The transport, communication and energy sec-
recipients of EDF funds, with
tors are also significant
EUR 663 million (23 %) in 2006. Also, direct non-targeted bud-
get aid and sector policy support programmes are two increas-
ingly significant financial
instruments, with total expenditure
made in 2006 amounting to EUR 638 million (23 %). The Com-
mission has laid down deadlines for the phasing-out of the Sta-
bex instrument, whereby contracting and the subsequent
payments are to be completed by the end of 2008 and 2010
respectively.

(9) Net payments equal total payments minus recoveries.

Table 1 — Cumulative use of EDF resources at 31 December 2006

Situation at end of 2005

Budgetary implementation during the financial year 2006

Situation at end of 2006

(million euro)

.

3
1
1
0
2
0
0
7

.

Global
amount

Implemen-
tation rate (2)

6th EDF

7th EDF

8th EDF

9th EDF

Global
amount

6th EDF

7th EDF

8th EDF

9th EDF

Global
amount

Implemen-
tation rate (2)

E
N

A — RESOURCES (1)

44 455,0

– 76,1

– 126,7

– 265,3

621,7

153,7

7 338,7

10 654,9

11 050,3

15 564,6

44 608,6

B — USE

1. Financial commitments

38 727,3

87,1 %

– 76,1

– 126,7

– 265,3

3 186,7

2 718,7

7 338,7

10 654,9

11 050,3

12 402,0

41 445,9

92,9 %

2. Individual legal commitments

32 965,3

74,2 %

– 38,3

– 6,3

202,5

2 914,8

3 072,6

7 338,7

10 522,7

10 449,6

7 726,9

36 037,9

80,8 %

3. Payments (2)

28 402,7

63,9 %

5,0

159,2

736,8

1 860,9

2 761,9

7 338,7

10 244,1

9 122,0

4 459,9

31 164,7

69,9 %

C — OUTSTANDING PAYMENTS

(B1–B3)

10 324,5

23,2 %

0,0

410,8

1 928,3

7 942,1

10 281,3

23,0 %

D — AVAILABLE BALANCE (A–B1)

5 727,7

12,9 %

0,0

0,0

0,0

3 162,6

3 162,7

7,1 %

Initial allocations to the 6th, 7th, 8th and 9th EDFs, interest, sundry resources and transfers from previous EDFs.

(1)
(2) As a percentage of resources.
Source: Court of Auditors, based on the EDF Reports on financial implementation and Financial statements at 31 December 2006.

1. Financial commitments

2. Individual legal commitments

3. Payments

Table 2 — Financial implementation in the financial years 2002-2006 inclusive

2002

1 768,4

2 142,9

1 852,7

2003

3 395,8

2 742,7

2 179,5

2004

2 375,2

2 746,3

2 197,8

2005

3 035,1

2 652,0

2 489,1

(million euro)

2006

2 718,7

3 072,6

2 761,9

Source: Court of Auditors, based on the EDF Reports on financial implementation and Financial statements at 31 December 2006.

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o
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e
a
n
U
n
o
n

i

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2
5
9
/
7

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

9. The Commission has anticipated the risk referred to by the Court.
For example, where budget support programmes for countries are due to
expire in 2008, they have been extended using funds available from the
ninth EDF.

Approval of the 10th EDF

9. The amount of Community aid to the ACP States within the
ACP-EC Partnership agreement has been set for the period 2008
to 2013 at EUR 21 966 million. This 10th EDF represents a 62 %
increase compared with the financial allocations of the ninth EDF.
As the Commission’s Annual Report on the Financial Manage-
ment of the sixth-ninth EDFs in 2006 (10) indicates, possible
delays to the ratification of the tenth EDF and to the adoption of
the applicable financial regulation beyond the deadline of 1 Janu-
ary 2008 entail a major risk of late approval of new operations in
ACP States, which could affect the continuity of EDF-funded
activities (11).

The Commission’s annual report on the financial management of the
EDFs

10. The Financial Regulation applicable to the ninth EDF (12)
requires the Commission to report each year on the financial
management of the EDFs. The Court carried out a review of this
report to assess whether it fairly describes the achievement of
objectives, the financial situation and the events that had a sig-
nificant influence on the year’s activities. This review included the
verification of the accuracy of the financial data presented and the
follow-up of observations made previously by the Court and rec-
ommendations made by the discharge authority.

11. The report on the financial management presents an accu-
rate description of the achievement of the objectives for the finan-
cial year, the financial situation and the events that had a
significant influence on the activities carried out in 2006. The dis-
closed Stabex information, however, is unreliable mainly due to
the complex implementation system of the measure. The Euro-
peAid Co-operation Office (hereafter called ‘EuropeAid’) is aware
of this and plans an audit of the Stabex funds in 2007.

(10) COM(2007) 240 final of 27.4.2007, p. 3.
(11) According to Article 1, paragraphs 3 and 4, of the Internal Agreement
on the financing of Community aid under the multiannual financial
framework for the period 2008 to 2013 (OJ L 247, 9.9.2006), bal-
ances from the ninth EDF or from previous EDFs or funds decom-
mitted from projects under the ninth EDF or from previous EDFs can
no longer be committed after 31 December 2007.

(12) Articles 96 and 102.

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CHAPTER II — STATEMENT OF ASSURANCE BY THE COURT OF AUDITORS ON THE EDFS

Statement of Assurance by the Court of Auditors on the sixth, seventh, eighth and ninth European Development Funds (EDFs) for the financial
year 2006

I. The European Court of Auditors (the Court) has examined the accounts of the sixth, seventh, eighth and ninth EDFs and the
underlying transactions for the financial year ending 31 December 2006. These accounts comprise the financial statements, the
reports on financial implementation, and the financial statements and information supplied by the European Investment Bank
(EIB) (13). Pursuant to the financial regulations the Court is required to provide 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 in respect
of the part of the EDF resources for whose financial management the Commission is responsible (14). The Court carried out the
audit in accordance with its auditing policies and standards. These are based on generally accepted international audit standards
that have been adapted to the context of the EDFs. The Court thus obtained a reasonable basis for the opinions expressed below.

Reliability of the accounts

II. The Court is of the opinion that the reports on financial implementation for the financial year 2006 and the financial state-
ments at 31 December 2006 reliably reflect the revenue and expenditure relating to the sixth, seventh, eighth and ninth EDFs for
the financial year and their financial situation at the end of the year.

Without qualifying the above opinion, the Court draws attention to:

(a)

the fact that the validity of the assumptions used for the estimate of the provision for invoices to be received has not been
demonstrated by the Commission;

(b)

the overstatement of the amount of guarantees disclosed in the notes to the financial statements.

(13) Pursuant to the provisions of Articles 96(1), 100, 101 and 125(2) of the Financial Regulation applicable to the ninth EDF; in practice, this refers,
firstly, to the balance sheets and associated statements prepared by the Accounting Officer and, secondly, to the management accounts comprising
the tables prepared by the principal Authorising Officer in consultation with the accountant. These financial statements are presented for each of
the four EDFs and in a comprehensive, consolidated form. The financial statements and information supplied by the EIB are not covered by this
Statement (see footnote 14).

(14) Pursuant to Article 103(3) of the abovementioned Financial Regulation; taken together with Article 1 of the same Regulation, this means that the

Statement does not extend to the part of the ninth EDF resources that is managed by the EIB and for which it is responsible.

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Legality and regularity of the underlying transactions

In view of the results of its audit, and except for the matter expressed in paragraph IV, the Court is of the opinion that the
III.
transactions underlying the revenue, allocations, commitments and payments for the financial year are, taken as a whole, legal
and regular.

IV. The Court’s audit revealed a material incidence of errors affecting underlying transactions authorised by Delegations.

V. With regard to budget aid, and without further qualifying the above audit opinion, the Court’s audit revealed that Commis-
sion’s disbursement decisions do not demonstrate in a sufficiently formal and structured manner that there is compliance with
the Cotonou Agreement.

VI. Despite the progress made by the Commission as regards its supervisory and control systems, the Court’s audit revealed
that some systems should be improved and an overall control strategy developed to ensure a more efficient and effective imple-
mentation of the supervisory and control activities. The Court notes that many of the issues raised in its report are being addressed
by the Commission and welcomes the positive response given by the Commission to its recommendations.

27 September 2007

Hubert WEBER
President

European Court of Auditors
12, rue Alcide De Gasperi, L-1615 Luxembourg

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THE COMMISSION’S REPLIES

Information in support of the Statement of Assurance

Scope and nature of the audit

12. The aim of the work on the reliability of the accounts of the
EDFs is to obtain sufficient evidence to conclude on the extent to
which all revenue, expenditure, assets and liabilities have been
properly registered and that the annual accounts faithfully reflect
the financial positions at the end of the year. The observations
regarding the reliability of the accounts, set out in paragraph II of
the Statement of Assurance, are based on an audit of the consoli-
dated financial statements (15) and the consolidated report on the
financial implementation of the sixth, seventh, eighth and ninth
EDFs (16). The audit comprised an appropriate range of audit pro-
cedures designed to examine, on a test basis, evidence relating to
the amounts and disclosures. It included an assessment of the
accounting principles used, significant estimates made by man-
agement and the overall presentation of
the consolidated
accounts.

13. The observations regarding the legality and regularity of the
underlying transactions, set out in paragraphs III to V of the State-
ment of Assurance, are based on:

(a) an evaluation of the supervisory and control systems at Euro-
peAid’s central services and in five Delegations (Cameroon,
Gabon, Jamaica, Mozambique and Sierra Leone) covering
eight countries;

(b) an examination in each Delegation visited of a statistically
selected sample of transactions covering all domains except
budget support. A total of 78 payments and 18 individual
legal commitments were audited. This process included
on-the-spot examinations of 21 projects related to 57 trans-
actions;

(c) an examination of the budget support paid to two of the

countries visited (Mozambique and Sierra Leone);

(d) an examination of 12 payments and two individual legal
commitments authorised by EuropeAid’s central services;

(e) an examination of 40 transactions already checked ex post by

EuropeAid’s central services;

(15) See Article 100 of the Financial Regulation of 27 March 2003 appli-
cable to the ninth EDF: the financial statements shall comprise the
balance sheet, the statement of economic outturn, the statement of
cash flow and the table of items payable to the EDF.

(16) See Article 101 of the Financial Regulation of 27 March 2003 appli-
cable to the ninth EDF: the reports on financial implementation shall
comprise tables describing the appropriations, the commitments and
the payments.

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(f) an examination of the Annual Activity Report and the decla-
ration by the Director-General of EuropeAid and the proce-
dure for preparing them.

Reliability of the accounts

14.
For the second year, the Commission had to prepare the
financial statements of the EDF by applying accruals accounting
principles.

15. The use for the EDF of the accounting system already used
by the Commission to account for budgetary expenditure was
postponed from the start of 2007 until the start of 2008 to allow
EuropeAid to make its accounting system compatible with ABAC,
the Commission’s general accounting system. The delay also takes
into account technical difficulties as well as organisational diffi-
culties linked to the deployment of a new system in all the ACP
Delegations. The accounting system currently in use does not
have all the features necessary for efficient and effective reporting
of economic information on an accruals basis. Consequently,
annual accrual adjustments to the accounting data must be pro-
cessed manually, thereby weakening the effectiveness of account-
impact of variations in
ing controls. Moreover, the financial
currency exchange rates cannot be identified separately by the
accounting system nor can it be extracted manually (17).

15. The limitations of the accounting system (OLAS) should be over-
come with the introduction of ABAC FED as from 2008.

The accrual adjustments to the cash-based accounting data are done
manually using aggregate figures extracted from the current accounting
system and therefore its encoding respects the same controls as the cash-
based information.

The new ABAC system will allow for identification of the financial
impact of variations in currency exchange rates.

The number of contracts in local currency is not considered to be mate-
rial in relation to the total contracts signed. Therefore, the Commission
does not consider these potential exchange differences to be material in
relation to the accounts as a whole.

16.
In the Activity Report for 2005, the Director-General for
the Budget made a reservation for the unavailability of the new
accounting system, as this fact reduces the ease with which con-
trols can be made and could thus lead to an imperfect presenta-
tion of the EDF accounts. Although the new accounting system is
still not implemented and the accounts still have to be drawn up
by applying manual corrections, the Director-General for the
Budget withdrew the reservation in the Activity Report for 2006.

16. The reservation, which was first made in the 2004 Annual Activ-
ity Report, was maintained in 2005 due to doubts surrounding the abil-
ity of the local IT system (OLAS) to produce a first set of fully accrual
compliant financial statements. Furthermore, additional data quality
control mechanisms were put in place during the year end closure period,
and the Court of Auditors gave the 2005 financial statements a positive
Declaration of Assurance (DAS).

17. The financial statements contain a provision for the costs
incurred in the reporting period but for which no invoices have
been received at the year end. This provision is statistically esti-
mated on the basis of a number of assumptions and amounts to
EUR 1 924 million which corresponds to 92 % of total liabilities.
The validity of the assumptions used for its estimate has not been
demonstrated by the Commission.

17. The statistical approach used to form this provision is based on the
assumption that the charges generated by all ongoing contracts follow a
linear trend throughout successive financial years. The validity of the
assumptions used by the Commission is borne out by the constant over-
all percentage of contract completion (83 %) over a number of years.
Moreover, it will be reviewed in the medium term. Lastly, it has been
refined and improved on the basis of recommendations made by an inter-
national audit firm.

(17) Its disclosure is required by IPSAS 4 — The Effects of Changes in For-

eign Exchange Rates.

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THE COMMISSION’S REPLIES

18.
Encoding mistakes (18) affect the accuracy of some data
used for the preparation of the annual accounts, notably with
respect to guarantees. The amount of guarantees disclosed in
note 1.12 to the financial statements totals EUR 723 million as at
the end of 2006. However, the Court’s audit revealed both that
some existing bank guarantees had not been recorded and that
some recorded guarantees had already expired or been released.
The estimated net effect of these errors is an overstatement of
5,8 %. The Court notes that the Commission is making a consid-
erable effort to improve the recording of guarantees.

18. During 2006 the Commission made major efforts to enhance the
quality of data recorded in the accounting system. During the annual
closure-of-accounts exercise, additional checks were carried out for the
purpose of drawing up the annual accounts. The impact on the annual
accounts is therefore very limited and considered not to be material.

Legality and regularity of the underlying transactions

Substantive testing of transactions

Commitments

19. The Cotonou Agreement (19) requires that financing agree-
ments between the Commission and the ACP State or States con-
cerned are drawn up within 60 days of the Commission’s decision.
The Court’s audit revealed that a significant number of financing
agreements were not signed by the recipient country within this
time limit.

19. The Commission and the recipient countries have not breached the
60 day rule in the Cotonou Agreement as this rule concerns the
drawing-up and not the signing of the financing agreements. The dead-
line for signing financing agreements is 31 December in year N+1
(Article 54(2) in the Financial Regulation applicable to the 9th EDF).
As a matter of diligent practice, the Commission does in virtually all
cases not only draw up but also sign financing agreements within
60 days of the Commission decision.

Some errors regarding individual legal commitments were
20.
found concerning adherence to tendering rules relating to pub-
licity and documentation by a UN organisation and the legally
prescribed bank guarantees in support of contracts (four errors
affecting four out of the 78 transactions checked).

20. Three cases concern the renewal of guarantees covering contracts
nearing completion, where the residual risk was zero.

As regards the other case, relations between the Commission and the
United Nations are governed by a framework agreement (FAFA) which
contains specific provisions on procedures.

Project Payments

21. The Court’s audit of payments authorised by EuropeAid’s
central services did not reveal errors.

(18) E.g. contract type, contract dates and payments that are wrongly

recorded as advances, information concerning guarantees.

(19) Article 17, paragraph 2 of Annex 4.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

22. The Court’s audit of payments authorised by Delegations
revealed a material incidence of errors (12 errors affecting 10 out
of the 78 transactions checked) affecting the amount of the
underlying transactions audited which mainly concern:

— the eligibility of the expenditure, such as payments made out-
side the permitted period, payment of VAT and the use of
inappropriate procurement procedures (three errors affect-
ing three out of the 78 transactions checked),

— payments of improper sums, mainly as a result of calculation
errors, but in some cases for quantities declared that did not
correspond to reality (six errors affecting six out of the
78 transactions checked),

— costs not supported by all the documents required (three
errors affecting three out of the 78 transactions checked).

22. Most of the errors detected by the Court concern payments made
by the Commission under contractual and regulatory provisions, on the
basis of either an audit report or a statement of account drawn up by the
project supervisor, and in compliance with the general regulations. Fur-
thermore, the legality and regularity of the expenditure on the projects
and contracts concerned and analysed are certified by audit reports.

One transaction was described by the Court as an error because an audit
report was missing for clearing an advance. However, strictly speaking
this was not a condition for clearance of the advance. The residual errors
are mistakes in calculations concerning small amounts.

23. Most of the errors are due to inadequate controls carried
out by supervisors or auditors (see paragraphs 32 and 36). The
remainder indicates weaknesses in some checks performed by the
Delegations before the payments were authorised (see para-
graph 34). Some errors, made on advance payments, are likely to
be corrected on a subsequent or final payment. In spite of the
shortcomings already noted, planned audits might have detected
and corrected some other errors. The residual errors remain sig-
nificant, notwithstanding these possible future corrections.

23. Most of the cases mentioned concern payments made on the basis
of audit reports and statements of account drawn up by the project super-
visor, which can be corrected later when final payments are made.

The Commission notes that the level of residual error is not materially
significant.

24. The Commission strives to implement development aid in an effec-
tive manner, while respecting formalities and taking account of the situ-
ation on the ground.

24. The Court’s audit also revealed other recurring errors that
may have an impact on the amount of the underlying transac-
tions, mainly concerning compliance with provisions governing
external audits and supporting documents (six errors affecting six
out of the 78 transactions checked). Errors which do not have an
impact on the amount of the underlying transactions have also
been identified, such as the premature application of contractual
modifications and the lack of visibility given to the EDF’s finan-
cial support (12 errors affecting 12 out of the 78 transactions
checked).

Budget aid

25. The Cotonou Agreement states that budgetary assistance
shall only be granted where public expenditure management is
sufficiently transparent, accountable and effective (20). The Com-
mission interprets this condition dynamically (21). In its view, the
weaknesses affecting public finance management at the time of

(20) Article 61(2)(a).
(21) See paragraphs 28 and 29 of Special Report No 2/2005 concerning

EDF budget aid to ACP countries (OJ C 249, 7.10.2005).

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THE COMMISSION’S REPLIES

the financing decision do not preclude the launch of a budget aid
programme, provided that the will for reform exists and the
reforms are deemed to be satisfactory.

26. The Court’s audit in Sierra Leone revealed that the Commis-
sion is not able to demonstrate that it has complied with the
above provisions of the Cotonou Agreement, particularly in view
of its ‘dynamic interpretation’. There is a tendency for the Com-
mission to rely upon indicators which seek to predict future
progress when making disbursement decisions. The accuracy of
those predictions is questionable. Moreover,
the indicators
designed to measure progress in public finance management
(PFM) do not always permit clear evidence of progress to emerge;
some of the information used to track progress against the com-
mon action plan was unreasonably optimistic; and the data relied
upon was not scrutinised with sufficient rigour, particularly in
connection with the failure to produce public accounts. At the
time of the Court’s audit (22) the most recently published central
government accounts related to the financial year 2001. Trans-
parency and accountability cannot be demonstrated without the
timely production of annual accounts as they make a vital con-
tribution to public expenditure management. Compliance with
the Cotonou Agreement is not, therefore, assured.

26. The production of government accounts is one among several fea-
tures of a robust PFM system. A decision on disbursement of the fixed
tranche is adopted in the framework of comprehensive monitoring, con-
sisting of an appraisal of performance (i.e. checking against the general
conditions of the Financing Agreement assessed on the basis of reports
from the government and other public bodies) as well as various diag-
nostic exercises of the overall PFM system (1). A progress report is sub-
mitted to donors annually by the government to inform them of progress
made in the implementation of PFM reforms. The Commission makes
use of any other information allowing it to judge the latest relevant devel-
opments on PFM reforms before taking a disbursement decision.

The decision to disburse the fixed tranche was based on i) information
on the production of government’s accounts that appeared realistic at that
time, ii) an assessment of progress in the rest of the reform programme.

The dialogue and the follow up by MDBS (Multi Donor Budget Sup-
port) donors on the issue of production of government accounts has given
some results. By June 2007 the backlog with final government accounts
has finally been cleared.

Taking into account the achievement in strengthening the Sierra Leone
PFM system and the comprehensive analysis carried out by the Delega-
tion, the Commission is of the view that it has scrutinised with sufficient
rigour the data available and has acted in full respect of the relevant pro-
visions of the Cotonou Agreement.

27. The Court’s audit in Mozambique provided evidence that
the Delegation’s monitoring of the implementation of public
finance management reforms is of a good standard. The financ-
ing agreement makes reasonably explicit the coherence between
the public finance management weaknesses presented, the mea-
sures implemented or planned and the conditions governing the
disbursment of the EDF financial support. However, it does not
sufficiently demonstrate in a formalised and structured manner
that the recipient country has a suitable long term reform pro-
gramme to address all significant public finance management
weaknesses. The performance indicators used do not allow the
effectiveness of public finance management system reforms to be
comprehensively assessed. Moreover, insufficient attention was

27. The PFM indicators used by development partners including the
EC in the context of the PRBS are essentially meant to allow for the
monitoring of the direction and magnitude of change in PFM reform and
are therefore mostly process indicators.

The Commission considers that the Financing Agreement demonstrated
in a sufficiently detailed manner the reform programme to address PFM
weaknesses, but the Commission recognizes that, with the widespread use
of the PEFA assessment tool, the analysis of PFM will become more for-
malised and better structured.

(22) November 2006.

(1) PEFA Assessment, Public Expenditure Reviews, Country Financial Account-

ability Assessments, etc.

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THE COMMISSION’S REPLIES

given to anti-corruption measures. Relations and dialogue
between donors, including the Commission, and the Supreme
Audit Institution have improved recently. Contact with the Par-
liament, although desirable, had not developed to the same
extent.

More recently, as regards paying attention to issues related to corrup-
tion, the Performance Assessment Framework (PAF) utilised by all
19 participating donors includes 3 indicators on corruption. In addi-
tion, as issues related to corruption have to be seen in a much wider con-
text and are not only related to budget support but relevant to all
development aid, the EC is, for example, also within its development pro-
gram dealing with Justice looking in more detail at corruption.

Activity Report by the Director-General of EuropeAid

28. The activity report by the Director-General of EuropeAid
presents the policy achievements, the management performance
of the services and the main results of the controls. It also reflects
the Commission’s follow-up of recommendations made by the
Court of Auditors, the Internal Audit Service (IAS) and the Inter-
nal Audit Capability (IAC) of EuropeAid.

29. The Director-General of EuropeAid declared that he had
obtained reasonable assurance that the control procedures put in
place gave the necessary guarantees concerning the legality and
regularity of the underlying transactions. However, the Court’s
audit reveals that the incidence of errors should be reduced by
improving the supervisory and control systems.

29. The supervisory and control system in place enabled the Director-
General to give reasonable assurance on the legality and regularity of the
transactions carried out by EuropeAid in 2006.

The Commission fully agrees that there is room for improvement.

Supervisory and control systems

Overall control strategy

30. Numerous control activities are carried out by many actors
to ensure that transactions are legal and regular. Beneficiaries,
supervisors, ACP States, Delegations and EuropeAid’s central ser-
vices carry out controls on transactions before they are autho-
rised. Subsequently, there is monitoring and verification by the
Delegations, EuropeAid’s central services and the Internal Audit
Capability (IAC). EuropeAid has yet to develop an overall control
strategy, as stressed by the Court on several occasions (23), to
ensure efficient and effective implementation of these various
control activities. It is EuropeAid’s intention to formulate this
control strategy in 2007.

30. The Commission Services are fully aware of the need to have and
apply a control strategy that is cost effective. Indeed, the control strategy
applied integrates audits, evaluations, assessments, monitoring and
supervisory activities.

In line with the Court’s Opinion No 2/2004 and following the prin-
ciples set out therein, a gap assessment was carried out in July 2005,
which was followed by an ambitious ‘Action Plan towards an Integrated
Internal Control Framework’, adopted by the Commission in January
2006.

(23) See Opinion No 2/2004 of the Court of Auditors of the European
Communities on the ‘single audit’ model (and a proposal for a Com-
munity internal control framework) (OJ C 107, 30.4.2004) and the
Annual Report on the activities funded by the sixth, seventh, eighth,
and ninth EDFs concerning the financial year 2005 (OJ C 263,
31.10.2006, p. 224, paragraph 40).

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THE COMMISSION’S REPLIES

Beneficiaries

31.
Small entities which manage programme estimates (24) and
beneficiaries of grant agreements have simple control systems and
do not always have an appropriate accounting system to record
project expenditure.

31. The practical guide for programme estimates requires organisa-
tions managing them to have an appropriate accounting system to record
project expenditure and segregation of duties between the accountant and
the authorising officer. Regular training is given in order to reinforce
management capacity.

Supervisors

32.
For important works, supply or service contracts, an exter-
nal supervisor is designated to direct and/or monitor the execu-
tion of the contract. The Court’s audit has shown that the quality
of the controls carried out by supervisors varies considerably (see
paragraph 23).

32. The system of supervision written into works contracts is an inte-
gral part of the control system and has been defined in the general regu-
lations (Decision 3/90). The Commission has considerably improved the
system, in particular by encouraging a situation in which the works are
designed and monitored by the same body. The statements of account
drawn up by supervisors are checked by the Delegations. Moreover, these
statements do not become final until final acceptance of the works and
up until then can be corrected.

ACP States

33. The Commission continued its efforts to increase the capac-
ity of the National Authorising Officer (NAO) administrations by
providing technical assistance, equipment and training in order to
enable effective control of EDF expenditure by NAO administra-
tions. The results are variable, mainly due to a lack of involvement
by the ACP States. This means that many Delegations can place
only limited reliance on the controls performed by the NAO
administrations, resulting in a heavier workload.

Delegations

33. Training courses are held regularly in ACP countries in order to
increase the capacity of administrations. 21 courses on EDF financial
and contractual procedures were run in 2006.

34. The authorisation of each individual payment follows a pro-
cedure involving the completion of control check-lists and
approval by five individuals. Part of the errors identified by the
Court should have been detected and corrected at this stage (see
paragraph 23) which indicates weaknesses in the quality of some
checks made. This is aggravated by an insufficient presence of
Delegation staff in the field to monitor the work of supervisors.

34. As the Court points out, the Commission has set up financial cir-
cuits and introduced the use of standard check-lists for each transaction.
This contributes to the harmonisation and quality of controls carried out
by Delegations when payment transactions are validated.

Devolution of aid management should enable Delegations to have a
greater presence on the ground.

(24) Public or semi-public agencies or departments of the State or States
concerned or the legal person responsible for executing the operation.

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THE COMMISSION’S REPLIES

35. Audits of expenditure, mostly entrusted to private audit
firms, are one of the key elements of the Commission’s supervi-
sory and control systems. They are in general performed at the
end of the implementation period of a commitment in order to
clear expenditure and close projects. They are not intended to
assess systems and do not contribute to the prevention of sys-
temic errors. Furthermore, the number of audits provided for by
the Delegations in the initial annual audit plan (AAP) for 2006
was 649 (25). The number of audits actually commissioned by the
Delegations was significantly lower than the number planned (26),
partly due to the Delegations’ limited capacity to organise and fol-
low up audits.

35.
External audits are one of the components of EuropeAid internal
control system as part of a set of checks on the legality and regularity of
operations.

When necessary, audits are launched at an early stage of project imple-
mentation, so as to provide information on the functioning of the man-
agement and control system of the contractual partners.

Amongst the measures taken, the new terms of reference and related
guidance should have some positive effects on timely implementation of
the Annual Audit Plan.

36. The audits initiated by the Delegations are not subject to
standardised terms of reference which clearly set out audit objec-
tives and materiality considerations. As a consequence, the qual-
ity of the external audits is variable, and the forms of opinion and
supplementary information provided in the audit reports vary
considerably. This reduces the contribution that this potentially
rich source of assurance can make to the overall control frame-
work.

36. The elements mentioned by the Court are already part of the stan-
dard audit techniques and methodologies used by the audit firms carry-
ing out audits of external aid operations.

EuropeAid has adopted standardised terms of reference which clearly
define objectives and materiality criteria. The forms of opinion will thus
be better harmonised, so that the contribution of this control tool can be
improved even further.

Monitoring by the central services of EuropeAid

37. The monitoring of the implementation of the EDFs by
EuropeAid’s central services comprises a wide range of activities
including the analysis of risks, the review of management reports,
the examination of a sample of external audit reports and the
analysis of management information available from the account-
ing system.

(25) The figures relate to the annual audit plan of ACP countries and

include audits of both EDF and general budget expenditure.

(26) The lack of centrally-managed data on the execution of Delegation-
mandated audits makes the exact extent of this phenomenon difficult
to quantify, although a review of 49 EAMRs received from Delega-
tions revealed that only six Delegations reported having implemented
their Annual Audit Plan in full. At least six Delegations had not been
able to carry out any audits in their Annual Audit Plan for 2006 and
many Delegations reported low implementation rates.

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THE COMMISSION’S REPLIES

38.
EuropeAid has embedded risk management into the Annual
Management Plan (AMP) process in order to identify risks at a
stage where preventive action can be taken. A risk register has
been established that includes an action plan to mitigate identi-
fied risks. The register is monitored and updated regularly. How-
ever, the risk management exercise at Delegation level is often
carried out in a formal way which limits its contribution to Euro-
peAid’s risk analysis. It is a self-assessment based on pre-defined
risks which is not carried out in a participative manner nor fol-
lowed up by the adoption of an action plan.

38. Delegations carry out an annual risk self-assessment through a
harmonised and dedicated methodology which allows them to identify
major risks and corresponding mitigating actions in relation to the objec-
tives set in their Annual Management Plan (AMP) as well as a consoli-
dation of the results at central level. Each geographic Directorate receives
the results of the exercise.

The instructions on the preparation of the AMP 2007 of EuropeAid
expressely indicate that the results of the latest Risk Assessment exercise
performed in Delegations (attached to the instructions) shall be taken
into account.

Delegations will be encouraged to carry on the risk management exercise
in a fully participative manner.

39. The risk of ineligible project expenditure is considered sig-
nificant. The action defined to address this risk concentrates on
activities designed to detect the occurrence of ineligible expendi-
ture, such as external audits. The action does not mention activi-
ties which might reduce or eliminate ineligible expenditure in the
first place. Nevertheless, the Court notes that this action plan pro-
vides for the formalisation of EuropeAid overall control strategy.

39. The annual risk self-assessment is a high-level risk assement which
complements other and more detailed risk analyses, carried out for
instance in the context of the establishment of the AAP. It focuses on
residual risk taking account of the control and other mitigating mecan-
isms already in place.

Actions are mainly focused on issues bearing an impact on the overall
management of external aid, including delegations. EuropeAid is com-
mitted to formalise the overall control strategy before the end of 2007.

40. The main tool for monitoring the Delegations is the Exter-
nal Assistance Management Reports (EAMRs), six-monthly man-
agement reports prepared by the Delegations. They are a periodic
information source which enables the devolved Delegations to
send EuropeAid’s central services the most important items of
information on internal organisation, project implementation and
external audits. Despite the improvement of the EAMR templates
in 2006, the Court’s audit has revealed that Delegations’ report-
ing practices are inconsistent providing limited information on
external audit results and the follow-up given.

40. The monitoring of the implementation of delegations’ devolved
management comprises a wide range of activities and tools, including the
EAMR, in which Delegations report back to Headquarters on the imple-
mentation of the AAP. Delegations are also requested to underline key
elements concerning the legality and regularity of the operations notably
when they concern issues which go beyond the single project and bear a
general interest for headquarters. The EAMR however is not the tool for
performing a complete analysis of all the findings in all the audit reports
received during the reporting period.

41. As already mentioned by the Court in its previous two
Annual Reports, there is no centralised management information
relating to the coverage and results of the audits initiated by the
Delegations. This means that the level of assurance that can be
derived from these audits is much reduced compared with what
could be obtained if a robust management information system
were in place. Although a computerised tool, CRIS Audit, was
developed to monitor audits and analyse their findings, it is still

41.
EuropeAid has developed appropriate tools to conduct audits while
several mechanisms contribute to their quality control as well as to the
consolidation and use of the systemic audit findings.

The planning and follow-up of audit results are both ensured by the
authorising departments concerned at Headquarters or in Delegations.

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THE COMMISSION’S REPLIES

not delivering the expected results because it is not fully devel-
oped and the necessary data are not entered into the system. It is
planned that CRIS Audit will be modified, but it is currently not a
priority.

EuropeAid intends to further improve the operation of CRIS-Audit,
building on the experience gathered, as a complementary tool to the cur-
rent system.

42. A first review of a sample of audit reports was started in
2006, but the sample is not representative and the review was
carried out a long time after the reports were prepared. The qual-
ity control of audits initiated by the Delegations is not yet
adequate. Therefore, the conclusions contained in the eventual
feedback report might lack relevance and are unlikely to result in
the identification of matters of wider significance.

Verification by the central services of EuropeAid

43. Verifications by EuropeAid’s central services include mis-
sions to verify the functioning of the Delegations’ internal con-
trol systems, ex post controls and external audits initiated by
EuropeAid’s central services.

44.
In 2006, EuropeAid’s central services carried out two mis-
sions to Delegations consisting of an examination of the set-up
and functioning of the supervisory and control systems. The mis-
sions were well designed and provided practical recommenda-
tions for improvements to control systems. EuropeAid is
currently developing a standardised methodology for these mis-
sions. Although the Court recommended an increase in the num-
ber of missions in its Annual Report concerning the financial year
2005 (27), fewer were carried out than in 2005 (28), and consid-
erably fewer than initially planned (29).

EuropeAid has reviewed some aspects of its transactional ex
45.
post control system. The control coverage was reduced and the
scope of the checks slightly extended. Aspects related to legal
commitments as well as detailed supporting documentation for
work programme expenditure, however, remain outside the scope
of the exercise. The checks relating to 2006 were carried out in a
timely manner and recorded using a newly-introduced system,
representing a significant improvement compared with the 2005
exercise. As mentioned in the Annual Report concerning the
financial year 2005 (27), the transactional ex post control can make
only a limited contribution to the overall assurance on systems
and procedures, and the legality and regularity of the underlying
transactions. The Court’s review of a sample of transactions

(27) OJ C 263, 31.10.2006
(28) 10 missions were carried out in 2005.
(29) See the Commission’s reply to paragraph 42(c) of the Court’s Annual
Report on the activities funded by the sixth, seventh, eighth and ninth
EDFs (OJ C 263, 31.10.2006).

42. After a pilot project in 2006, the quality control system for audits
will be improved in 2007 by adopting a more systemic approach.

44. The Commission has made sure that Delegations operate smoothly
and are capable of managing projects on a devolved basis. 2006/2007
should be regarded as a transitional period during which the missions
carried out — the quality of which was highlighted by the Court — were
carefully targeted. A new overall framework will be defined now that
devolved management is fully operational.

Setting up a transactional ex-post control system, and defining its
45.
characteristics, are both based on an appreciation of residual risk and of
the interaction with the other components of the control system. Ex post
transactional controls provide an additional layer of assurance for the
appreciation of the elements which are subject to such control.

This covers payments, recoveries and clearance of pre-financing transac-
tions carried out by the Commission. Legal commitments however are
not neglected, as all these transactions take place within the legal con-
text of the contract signed by both parties. The study of each transaction
entails a systematic checking of the applicable contractual conditions.

The documentation requested for each type of transaction selected is
clearly set out in the ex post transactional control manual.

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THE COMMISSION’S REPLIES

checked ex post also revealed that the controls had not, in some
cases, been appropriately documented, and some errors had not
been detected.

46. Audits initiated by EuropeAid’s central services are sub-
jected to a rigorous quality control procedure and the results of
the reports are examined and collated with a view to making
methodological improvements and identifying issues which may
be of a significance that extends beyond the audited project. These
audits reveal an incidence of error consistent with the findings of
the Court. In the absence of documentation on the risk analysis
carried out to select the projects to be audited, EuropeAid is, how-
ever, unable to demonstrate that it has selected for audit all suit-
able subjects.

46. The establishment of the Annual Audit Plan is accompanied by a
note, per Directorate, describing the criteria applied for the selection of
audit subjects as well as the results of the analysis.

Even if the Commission endeavours to better document the risk analysis,
results of external audits, notably risk-based, reveal that this control tool
is effective in detecting errors and corroborates the validity of risk criteria
used in preparing the Annual Audit Plan.

47. The current terms of reference governing external audits
initiated by EuropeAid’s central services do not incorporate mate-
riality considerations or provide guidance concerning sampling.
This can lead to similar errors being treated differently and to an
expectation gap between the preparers and the users of audit
results. A significant number of the audits finalised in 2006 were
affected by a limitation of scope. New standardised terms of ref-
erence for these audits have been adopted recently.

47. Audit firms contracted by EuropeAid apply international audit
standards. The new terms of reference clearly define the materiality cri-
teria.

The scope limitations as identified by the Court were cases of projects
which had been subject to a risk analysis and are often part of a previous
Annual Audit Plan. One of the possible consequences of a risk assessed
programme is that the results may indicate a scope limitation. In addi-
tion, the role of task management was often assumed by Headquarters
waiting for the full implementation of the audit function at Delegation’s
level.

Internal audit

48. The principal objective of EuropeAid’s internal audit capa-
bility (IAC) is to assess and evaluate the internal control system.
The IAC effectively performs its function. In 2006, the IAC com-
pleted audits of EuropeAid’s risk management system, and of
goods and services procurement. Additionally, a follow-up of
control system audits in three Delegations (30) was performed.
The conclusions of the IAC are generally consistent with the
Court’s findings.

(30) Madagascar, the Dominican Republic and Kenya.

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THE COMMISSION’S REPLIES

49. The Commission’s Internal Audit Service (IAS) performed a
validation of the self assessment of EuropeAid’s Internal Audit
Capabilities. The overall conclusion was positive although there
were a number of recommendations relating to staff skills and
training, quality assurance, documentation of planning and audit
work, and the role of the IAC as supporter of an effective ethics
programme.

50. A follow-up by the IAS of the progress made by EuropeAid
in implementing recommendations that
resulted from an
in-depth audit carried out in 2003 concluded that most of the
recommendations had been implemented and that the remainder
were in progress.

51. The IAS also carried out an audit on the implementation of
the financial and administrative framework agreement (FAFA)
with the United Nations by EuropeAid and DG ECHO. Payments
made in 2006 to United Nations (UN) organisations represent
4,8 % of total expenditure. The overall conclusion of the audit is
that the control mechanisms still need to be effectively and fur-
ther implemented at both project and UN organisation levels, but
acknowledges that progress has been made and most of the issues
concerned are being addressed. An institutional review of UN
bodies, which was initiated by EuropeAid and designed to assess
whether the policies and procedures in place adequately equipped
these bodies to act as custodians of EDF resources, concluded that
a globally satisfactory evaluation of the internal control systems
could be provided in three out of 10 cases. For the other organi-
sations, some limited aspects had to be studied later since not all
the relevant data was available at the time the evaluation was
undertaken. The Commission is currently working to agree terms
of reference with the UN for verification work.

Conclusions and recommendations

52. The Court’s audit revealed a material incidence of errors
affecting the amounts of the underlying transactions authorised
by Delegations which had not been detected by the supervisory
and control systems of the ACP States, the Delegations and Euro-
peAid’s central services. The residual errors remain significant,
notwithstanding possible future corrections. This indicates the
need to pursue efforts to improve the design and/or implemen-
tation of some of the systems. Table 3 gives an overview of the
Court’s assessment of EuropeAid’s supervisory and control sys-
tems.

51. Draft terms of reference (the ‘Common Guidelines’) were drawn up
by EuropeAid following the third Annual Meeting of the UN-EC Work-
ing Group on the FAFA (cf. the Operational Conclusions of this meet-
ing, April 2006). These were first submitted to the UN in September
2006. Negotiation is ongoing with the UN on four issues deriving from
the proposed guidelines.

52. The Commission considers that the type of error detected concerns
mainly payments made on the basis of audit reports or statements of
account drawn up by supervisors in accordance with contractual and
regulatory obligations. The Commission also notes that the level of
residual error is not materially significant.

As the Court indicates in Table 3, the Commission has this year
improved reporting by Delegations, ex post control, follow-up to audits
and recovery order procedures.

The Commission intends to continue these improvements, in particular
pursuing its efforts towards more harmonised presentation of the control
strategy.

.

3
1
1
0
2
0
0
7

.

Table 3 — Assessment of supervisory and control systems

Key internal control

Monitoring missions

External audits

System concerned

Procedures
and manuals

Risk analysis
and
management

Management
reporting

Controls
performed
before
transactions
are
authorised

Quality

Quantity

Ex-post
controls

Quality

Quantity/
implementation
of the audit
plan

Follow-up of
individual
audit
findings/
Effective
recovery
procedures

Overall
monitoring
by central
services of
audits
commissioned
by
Delegations

Internal audit

Overall
assessment

Central services
EuropeAid

Delegations

Legend:

Satisfactory

Partially satisfactory

Unsatisfactory

N/A

Not applicable: does not apply or not assessed

N/A

N/A

N/A

N/A

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
U
n
o
n

i

C
2
5
9
/
2
3

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

53.
EuropeAid has started to remedy the shortcomings men-
tioned by the Court in its Annual Report concerning the financial
year 2005. Some aspects of the transactional ex post control sys-
tem have been reviewed and the support to operational and
financial staff at the Delegations and in the central services has
improved. EuropeAid has developed new terms of reference for
external audits but the central monitoring of external audits ini-
tiated by the Delegations should be improved. Furthermore, the
number of monitoring missions is still limited and EuropeAid’s
risk analysis does not sufficiently involve the Delegations nor
adequately address inherent and control risks relating to the legal-
ity and regularity of operations.

54. The Court welcomes the efforts made by EuropeAid to
develop a control strategy to ensure the efficient and effective
implementation of the numerous supervisory and control activi-
ties of the various actors involved. The following recommenda-
tions should be considered in this context:

54. The Commission services are fully aware of the need to have and
apply a control strategy that is cost effective. Indeed, the control strategy
applied integrates audits, evaluations, assessments, monitoring and
supervisory activities.

(a)

the control strategy should be established and made opera-
tional by the end of 2007. As already indicated by the
Court (31), it should establish clear and consistent objectives,
ensure coordination and set the type and intensity of check-
ing. This should necessarily entail a balancing act between
the costs of the various controls and the accompanying ben-
efits, whilst taking account of the tolerable risk of errors in
the underlying transactions. The control strategy should
include a well-structured and documented risk analysis that
formally involves the Delegations in a fully participative
manner;

(a) The Commission shares the Court’s view. It has set up an Action
Plan ‘Towards an Integrated Internal Control Framework’ which
aims to perfect a common, coordinated approach and tools for all
Commission services.

(b)

the management of projects financed by work programmes
should be better supported. This should involve greater pres-
ence of Delegation staff in the field supporting accounting
systems and training. Carrying out more audits at an early
stage of the implementation of projects would also help to
monitor and, where necessary, improve the quality of the
control systems implemented by beneficiaries;

(b) The Commission will continue to improve the quality of projects
managed in the form of programme estimates. To that end, it has
produced a new practical guide and specific training courses are held
regularly in the ACP countries. The harmonisation of accounting
aspects will be examined together with the Delegations.

(c)

checks performed by the Delegations before authorising pay-
ments should better scrutinise the payment requests and
intensify the focus on the reality, eligibility and accuracy of
the expenditure. The quality of the work performed by super-
visors should be better monitored;

(c) Controls exercised by the Delegations follow the provisions of the
Financial Regulation relating to the validation of expenditure by the
responsible authorising officer, based on supporting documents
attesting the creditor’s entitlement on the basis of a statement of
supplies actually delivered or work actually carried out or other
documents.

(31) See Opinion No 2/2004.

31.10.2007

EN

Official Journal of the European Union

C 259/25

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The Commission will pursue its efforts to tighten up the quality
controls carried out by Delegations and National Authorising
Officers, while taking into account the costs and benefits of addi-
tional checks.

(d) The new terms of reference have been adopted and further enhance

the elements of the audit work quoted by the Court.

(e) The central monitoring of the external audits will be further
improved during 2007. An information needs assessment is cur-
rently being performed by EuropeAid in order to identify the main
priorities on the development of the information system. However,
the immediate priority must remain the migration to ABAC-FED.

(d)

(e)

the quality of the controls performed by external auditors
should be enhanced by ensuring that the new terms of ref-
erence include a clear definition of the purpose of the audit,
the materiality threshold to be applied, the sampling, the
nature of the audit procedures to be performed, guidance on
how errors should be treated and how conclusions are to be
reported upon. These standard terms of reference should also
be used for all external audits initiated by the Delegations;

the central monitoring of the external audits organised by the
Delegations should be improved so that the results can be
effectively communicated to all relevant levels of manage-
ment. This should be enhanced by the availability, by the end
of 2007, of a management system that provides information
on the audit process and facilitates access to relevant audit
results;

(f)

verification of the Delegations by EuropeAid’s central ser-
vices should be enhanced by increasing the number of mis-
sions.

(f) A new overall framework for missions to Delegations will be defined

now that devolved management is fully operational.

55.

55. Regarding budget support, the Court previously recom-
mended that the Commission should demonstrate in a more for-
malised and structured manner, setting out the reasons leading to
its conclusion that the direction being taken by a beneficiary
country is satisfactory, that there is compliance with Article 61(2)
of the Cotonou Agreement, account being taken of the public
finance management weaknesses revealed by the initial assess-
ment (32). In view of the Commission’s vigorous application of
the ‘dynamic interpretation’ in Sierra Leone, compliance with the
Cotonou Agreement is not assured. Therefore, the Court reiter-
ates its previous observation, and recommends the following:

(a)

compliance with the Cotonou Agreement should be bench-
marked against baseline requirements, such as the availabil-
ity of timely published and audited accounts. A clear, formal
presentation of the conclusions reached would require the
parameters of the ‘dynamic interpretation’ to be made
explicit, thus enabling the appropriateness of disbursement
decisions to be assessed;

(a) Understanding this to be a restatement of a previous recommenda-
tion (Special Report No 2/2005, paragraph 85), the Commission
repeats its general agreement and flags the expected positive impact
of the revised guidelines for General Budget Support. Noting that
the short term risk that may be implied by its dynamic interpreta-
tion of Article 61(2) must always be viewed in relation to the ulti-
mate objectives to be achieved, the Commission wishes to highlight
the specific circumstances of fragile States.

(32) Special Report No 2/2005, paragraph 85.

C 259/26

EN

Official Journal of the European Union

31.10.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b)

(c)

in order to set out its conclusions in a structured manner, the
Commission should ensure that the data used as a basis for
disbursement decisions rely more on measurements of events
that have already taken place than on predictions of future
occurrences;

the indicators used should permit clear evidence of progress
in public finance management to emerge where appropriate.
This could be achieved by including indicators which can be
measured over time, and compared from one period to the
next, as opposed to indicators which rely on the performance
of a one-off event.

(b) The Commission agrees.

(c) The Commission agrees but underlines that some reforms can be
designed and implemented relatively quickly but others will require
several years.

Table 4 — Follow-up of key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

1.

2.

3.

4.

5.

6.

In its action plan towards an Integrated Internal Control
Framework, the Commission should develop its overall
control strategy.

(Annual Report concerning the financial year 2005, para-
graph 40)

The financial control exercised by Delegations needs to be
strengthened to prevent and detect errors. Controls of
expenditure should focus more on the reality of goods
delivered and works performed. This requires an intensi-
fied supervision of projects by carrying out more visits and
controls on-the-spot throughout the duration of projects.

(Annual Report concerning the financial year 2005, para-
graph 41)

The effectiveness of the management reporting by Delega-
tions formalised by the External Assistance Management
Reports (EAMRs) could be improved as feedback with sup-
port and instructions to Delegations is not always on time.

(Annual Report concerning the financial year 2005, para-
graph 31)

The Commission has yet to achieve its stated aim to
develop an overall control strategy to ensure an efficient
and effective implementation of these various control
activities. It is EuropeAid’s intention to formulate this con-
trol strategy in 2007.

A control strategy should be established and made opera-
tional by the end of 2007.

See the Commission’s reply to point 30.

No specific actions were taken by EuropeAid. The number
of errors revealed following the Court’s audit of individual
payments corroborates the observation that the financial
control exercised by the Delegations needs to be strength-
ened.

Checks performed by Delegations before authorising
payments should better scrutinise the payment requests
and intensify the focus on the reality, eligibility and accu-
racy of the expenditure. The quality of work performed
by supervisors should be better monitored.

On-the-spot controls are carried out wherever possible, but
they cannot be systematic, given the number of projects and the
limited resources available. For that reason some of the con-
trols are carried out externally. The Commission tries to con-
duct regular checks on the work of supervisors and feels that
the control systems put in place operate satisfactorily.

The central services of EuropeAid improved their response
to EAMRs by providing more detailed and timely feedback.

Satisfactory action has been undertaken.

The number of missions to Delegations consisting of an
examination of the setup and functioning of the supervi-
sory and control systems is limited.

The missions are well designed and provide practical rec-
ommendations for improvements to control systems.
However, although more missions were planned for 2006,
less were carried out than in 2005.

The verification of Delegations by the central services of
EuropeAid should be enhanced by increasing the num-
ber of missions.

(Annual Report concerning the financial year 2005, para-
graphs 32 and 42)

As the transactional ex-post controls are restricted in scope,
they can only make a limited contribution to the overall
assurance on systems and procedures and the legality and
regularity of the underlying transactions. Moreover, they
are carried out with much delay.

(Annual report 2005, paragraphs 33 and 42)

EuropeAid catched up the backlog and reviewed some
aspects of the approach. The control coverage was reduced
and the scope of the checks slightly extended. The scope of
the transactional ex-post controls still excludes however
aspects related to legal commitments as well as detailed
supporting documentation of expenditure of work pro-
grammes.

EuropeAid should consider extending the scope of trans-
actional ex-post controls to aspects related to legal com-
mitments as well as detailed supporting documentation
of expenditure of work programmes.

The Commission has made sure that Delegations operate
smoothly and are capable of managing projects on a devolved
basis. 2006/2007 should be regarded as a transitional period
during which the missions carried out — the quality of which
was highlighted by the Court — were carefully targeted. A
new overall framework will be defined now that devolved man-
agement is fully operational.

The caracteristics of the transactional ex-post controls are
based on an appreciation of residual risk and of the interac-
tion with the other components of the control system. Trans-
layer of
actional ex post controls provide an additional
assurance for the appreciation of the elements which are sub-
ject to such control (see also the Commission’s reply to
point 45).

the implementation and
The central monitoring of
follow-up of the audits initiated by the Delegations and the
central services of EuropeAid needs to be improved.

No modifications were made to the computerised tool,
CRIS audit. There is still no centralised management infor-
mation relating to the coverage and results of the audit ini-
tiated by the Delegations.

(Annual Report concerning the financial year 2005, para-
graph 37)

The central monitoring of external audits organised by
Delegations should be improved so that the results can
be effectively communicated to all relevant levels of
management. This should be enhanced by the availabil-
ity, by the end of 2007, of a management system that
provides information on the audit process and facilitates
access to relevant audit results.

The current system for the planning and centralised monitor-
ing of external audits provides the information necessary for
EuropeAid’s risk analysis and audit strategy. EuropeAid
intends to further improve the operation of CRIS-Audit, build-
ing on the experience gathered, as a tool complementary to the
current system. Meanwhile, the Commission has made the
Annual Audit Plan 2007 reporting format more detailed.

.

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C 259/28

EN

Official Journal of the European Union

31.10.2007

   Charts illustrating the consolidated sixth, seventh, eighth and ninth EDFs 
as at 31 December 2006   

Chart I: Cumulative resources

 Total =  44 608,5  million euro  (1)

Contributions by the Member States

Special contribution for Congo, Stabex; transfers from EDFs prior to the 6th EDF and Capitalised income
(in million euro)

Chart II: Cumulative decisions

 Total =  41 445,9  million euro  (1)

Transport

Non-targeted budget support, Structural Adjustment

Government and Civil society, Peace building, Elections

Food security, Food aid, Humanitarian aid Emergency aid, 
Reconstruction relief

Water Supply and Sanitation

Health

Debt relief

Education

Agriculture, Fishery, General environment protection

Multisector aid, urban and rural development

Trade, Tourism, Business services

Energy, Industry, Minerals, Telecommunications

Stabex

Other

EDF 6
 7 338,7  million euro

EDF 7
 10 654,9  million euro

EDF 8
 11 050,3  million euro

EDF 9
 12 402  million euro

Source: Court of Auditors, on the basis of the data in the accounting system.
(1)  The  difference  between  the  cumulative  resources  (44  608,5  million  euro)  and  the  cumulative  decisions  (41  445,9  million  euro)  equals  the  available  balance  to  be  allocated 

(3 162,6 million euro).