Annual Report of the Court of Auditors on the implementation of the budget concerning the financial year 2006, together with the institutions’ replies
Date: 2007-09-27
Institutions: European Court of Auditors
Subjects: EU control, European Court of Auditors, activity report, banking, financial instrument, financial year, implementation of the budget, multiannual financial framework

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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 Articles 129 and 143 of
Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable
to the general budget of the European Communities, as amended by Council Regulation (EC, Euratom)
No 1995/2006 of 13 December 2006,

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

Annual Report on the implementation of the budget concerning the financial year 2006.

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

(2007/C 273/01)

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TABLE OF CONTENTS

General introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 1 — The Statement of Assurance and supporting information . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

5

7

Chapter 2 — Commission internal control framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27

Chapter 3 — Budgetary Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51

Chapter 4 — Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

Chapter 5 — The common agricultural policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77

Chapter 6 — Structural policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Chapter 7 — Internal policies, including research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Chapter 8 — External actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Chapter 9 — Pre-accession strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Chapter 10 — Administrative expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Chapter 11 — Financial instruments and banking activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Annex I

— Financial information on the general budget

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I

Annex II

— Reports and opinions adopted by the Court of Auditors since 2002 . . . . . . . . . . . . . . . . . . . XVII

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GENERAL INTRODUCTION

0.1. This document, covering the 2006 financial year, com-
prises the Court’s 30th annual report on the implementation of
the general budget of the European Union. The annual report in
relation to the European Development Funds is presented in a
separate volume.

0.6. The most apparent area of improvement is agriculture
where the Court found a marked reduction on the estimated over-
all
level of error in underlying transactions, although it still
remains just above the materiality threshold. This reflects the fact
that the integrated administrative and control system continues to
be effective (where properly applied) and is also the effect of the
introduction of the single payment scheme.

0.2. The structure of the annual report on the implementation
of the general budget is as follows: Chapter 1 — the Statement of
Assurance; Chapter 2 — the Commission’s internal control sys-
tem; Chapter 3 — key observations on budgetary management;
Chapters 4 to 10 — revenue and activities financed from differ-
ent parts of the budget, reflecting the headings of the financial
perspective; and Chapter 11 — financial
instruments and
banking activities. The replies of the Commission — or other
EU Institutions where appropriate — are presented with the
report.

0.7. Despite the advances noted, the Court’s audit of other
areas of CAP expenditure, structural mesures and internal
policies show that complicated rules or unclear eligibilty crite-
ria or complex legal requirements have a considerable impact
on the legality and regularity of the underlying transactions.
In these areas, which cover a significant part of the budget,
checks on expenditure claims, which are mainly based on the
information supplied by the beneficiary are, in many cases,
insufficient in number and coverage and often of inadequate
quality.

0.3. The chapters covering revenue and the major areas of
expenditure have the following main elements:

— detailed analyses of the results of the audit work carried out
in the context of the Statement of Assurance in the form of
specific assessments;

— results of follow-up reviews of progress made on implement-
the Court and the Budgetary

ing recommendations of
Authorities arising from previous audits;

— a list of the special reports published by the Court since the

last annual report.

0.4. The specific assessments are based on an evaluation of the
operation of the principal supervisory and control systems gov-
erning revenue and each expenditure area and the results of the
Court’s testing of underlying transactions. The Court’s overall
appraisal of all these elements forms the basis for the Statement
of Assurance set out in Chapter 1, which now includes a table
summarising the Court’s assessment of the functioning of super-
visory and control systems, and the error range for each budget-
ary area. In addition, the Annexes to Chapters 4 to 9 set out the
elements used for monitoring and evaluating the financial man-
agement of the EU budget.

0.5. As the Court has repeatedly stated, the key to adequate
management of the EU budget is through sufficient, appropriate
internal control systems operated by the Commission and Mem-
ber States. Over the past few years the Court has recognised in its
annual reports the efforts of the Commission in promoting and
applying improved control and management procedures. The
2006 annual report continues this trend by identifying areas of
improvement — some significant — as well as setting out the
large areas of expenditure where the situation continues to remain
unsatisfactory.

0.8. 2006 saw the adoption of a substantially revised financial
regulation. In addition, strengthened sectoral regulations partly
related to the 2007 to 2013 period were approved. These ele-
ments aim to simplify systems and procedures while strengthen-
ing controls. They have thus the potential to achieve better
implementation of the budget in the coming years. The Court
provided input to these processes in the form of opinions and will
closely monitor their application. In addition, the Court also
assessed the implementation of the Commission’s action plan to
an integrated control framework adopted in early 2006 and
found that its impact is only likely to be evident in the medium
to long term.

0.9. As set out in Chapter 1, the Court found continuing
progress in the Commission’s important and complex task —
started in 2005 — of introducing accruals-based accounting.
However, certain weaknesses persist, notably at the level of the
recording and processing of information concerning prefinanc-
ing and open invoices.

0.10.
Significant recent developments are the new requirement
for Member States to provide annual summaries of the available
audits and declarations, the voluntary initiatives by some of
them to issue national declarations and the decisions by some
national audit bodies to issue audit reports on the management
of EU funds. The national declarations are used essentially for
accountability to national parliaments. They may prove of rel-
evance to the Commission within its overall responsibilities for
managing the budget notably through its supervisory role. In its
opinion No 6/2007 of July 2007, the Court considers that all
if properly implemented, could stimulate
these elements,
improved management and control of EU funds in Member
States. The opinion also sets out the conditions by which
such elements could give added value and be used by the Court
international auditing
— following the requirements of
standards.

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CHAPTER 1

The Statement of Assurance and supporting information

TABLE OF CONTENTS

Paragraph

The Court’s Statement of assurance provided to the European Parliament and the Council

I-XIV

Opinion on the reliability of the accounts

Opinion on the legality and regularity of the underlying transactions

Information in support of the Statement of Assurance

Introduction

Reliability of the accounts

General background

Audit scope and approach

Strengthening the transition to accruals based accounts

Consolidated financial statements as at 31 December 2006

Consolidated reports on implementation of the budget

Legality and regularity of underlying transactions

The Court’s approach

Audit results 2006

VII-IX

X-XIV

1.1-1.42

1.1-1.5

1.6-1.37

1.6-1.8

1.9

1.10-1.21

1.22-1.36

1.37

1.38-1.42

1.38-1.39

1.40-1.42

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THE COURT’S STATEMENT OF ASSURANCE PROVIDED TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

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 European Communities.

Management’s responsibility

II.
In accordance with Articles 268 to 280 of the Treaty and the Financial Regulation, management (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 Communities’ includes designing,
implementing and maintaining internal control relevant to the preparation 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, accompanying
the final consolidated accounts, declaring, inter alia, that he has a reasonable assurance that these accounts present a true
and fair view of the financial position of the European Communities in all material aspects.

(1) The ‘Final annual accounts of the European Communities’ make up volume I of the annual accounts of the European 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 implementation 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, Directors 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
implementing 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, International Accounting Standards (IAS)/International Financial Report-
ing Standards (IFRS) issued by the International Accounting Standards Board. In accordance with the Financial Regulation, the ‘Consolidated finan-
cial 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 financial situation of the institution (Article 61 of the Financial Regu-
lation).

(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 officers sign them off, thereby certifying that they have a reasonable assur-
ance 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 per-
formed by the Commission’s departments. Under shared management, implementation tasks are delegated to Member States,
under decentralised management to third countries and under indirect centralised management to other bodies. In the case
of joint management, implementation tasks are shared between the Commission and international organisations (Article 53
to 57 of the Financial Regulation). Implementation tasks have to comply with the principle of sound financial management,
requiring designing, implementing and maintaining effective and efficient internal control including adequate supervision
and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings 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 transactions 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 own resources are based on
IV.
macroeconomic statistics for which the underlying data cannot be audited directly by the Court, and secondly, the audits of tra-
ditional 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 frame-
work of the European Communities, whether due to fraud or error. In making those risk assessments, the auditor considers inter-
nal 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
appropriate 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.

VI. The Court considers that the audit evidence obtained is sufficient and appropriate to provide a 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 financial 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 Regu-
lation 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 sys-
tem of financial management and despite improvements made, weaknesses 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 Commis-
sion 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 dif-
ferent 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 agricultural 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. Clearance 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 effective supervision to mitigate the risk that the control
systems in the Member States fail to prevent overstated or ineligible expenditure. Therefore, the reimbursement of expen-
diture 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 inher-
ent 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.

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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 Development are prone to a significantly higher incidence of error than the non-rural development part of CAP expendi-
ture.

XIV. The Court notes the improvements introduced by the Commission as regards its internal control framework and the posi-
tive impact they have on the assessment of the operation of supervisory and control systems and of the impact of relevant res-
ervations 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 regularity of under-
lying transactions.

27 September 2007.
Hubert WEBER
President

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

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INFORMATION IN SUPPORT OF THE STATEMENT OF
ASSURANCE

Introduction

1.1.
Pursuant to Article 248 of the EC Treaty, the Court of
Auditors provides the European Parliament and the Council with
a Statement of Assurance concerning the reliability of the
accounts and the legality and regularity of the underlying trans-
actions (‘the DAS’). The Treaty also authorises the Court to
supplement this statement with specific assessments of each
major area of Community activity.

1.2. The aim of the work on the reliability of the accounts of the
European Communities is to obtain sufficient evidence to con-
clude on the extent to which revenue, expenditure, assets and
liabilities have been properly registered and that the annual
accounts present fairly, in all material respects, the financial posi-
tion as of 31 December 2006, and the results of their operations
and cash flows for the year then ended (see paragraphs 1.6
to 1.37).

1.3. The aim of the work on the legality and regularity of the
underlying transactions is to gather sufficient evidence, of a direct
or indirect nature, to give an opinion on whether they are in
accordance with the applicable regulations or contractual provi-
sions, and have been correctly calculated (see paragraphs 1.38
to 1.42 of this chapter for horizontal issues and chapters 2 and 4
to 10 for details).

1.4. Once again, the Court paid particular attention to the
efforts made by the Commission to strengthen its internal con-
trol system and to the follow-up given to the action plans adopted
within the context of the Roadmap towards an integrated inter-
nal control framework or annexed to the annual activity reports
and their Synthesis for the financial year 2006 and before (see
chapter 2).

1.5.
In addition, in the absence of indicators presented by the
Commission over a series of years (8), the Court provides certain
indicators to monitor progress in improving internal controls
both overall, and for each income and expenditure area (see
annexes to this chapter and to chapters 2 and 4 to 10).

(8) See paragraphs 1.51 and 1.52 of the Annual Report concerning the
financial year 2004 and chapter 2 of the present Annual Report.

1.5.
In addition to assessments of compliance with internal control
standards, for the first time in 2006 the Commission encouraged the
Annual Activity Reports for 2006 to include a section on ‘key indica-
tors supporting reasonable assurance’ (Section 2.4), and for the Struc-
tural Funds they contain, as well as assessments of Member States’
systems, information on the inputs, outputs, results and impact of Com-
mission actions to obtain assurance on legality and regularity of trans-
actions.

Three quarters of the Directorates–General presented legality and regu-
larity indicators in 2006, including all major spending departments.

From the 2007 annual activity reports onwards, the use of indicators
will be mandatory.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Reliability of the accounts

General background

1.6. The Court’s observations concern the final annual accounts
for the financial year 2006, drawn up by the Commission’s
Accounting Officer and approved by the Commission in compli-
ance with Article 129 of the Financial Regulation of 25 June 2002
and sent to the Court by 31 July 2007. The accounts comprise the
‘consolidated financial statements’ — covering, in particular, the
balance sheet setting out the assets and liabilities at the end of the
year — and the ‘consolidated reports on the implementation of
the budget’ — covering the revenue and expenditure for the year.

1.7. The 2006 annual accounts are the second set of accounts
prepared under the accruals based accounting rules which were
introduced by the European Communities in 2005 on the basis
of provisions of
the Financial Regulation (in particular
Articles 123 to 138) (9). In comparison to the 2005 annual
accounts, the following major changes occurred:

— the accounts of 24 agencies were consolidated, as compared

with 16 in 2005;

— more detailed information is given on the different forms of

recovery of Commission expenditure;

— the Accounting Officer of each institution and body consoli-
dated in the final consolidated accounts signed off its indi-
vidual accounts and the Accounting Officer of
the
Commission stated that he had obtained reasonable assur-
ance that the consolidated accounts present a true and fair
view of the financial position of the European Communities
in all material aspects.

1.8. The Commission’s Accounting Officer, at the request of the
Court, provided the latter with a representation letter confirming
that subject to certain limitations the final accounts are complete
and reliable (see paragraphs 1.30 and 2.23 to 2.25).

(9) Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on
the Financial Regulation applicable to the general budget of the Euro-
pean Communities (OJ L 248, 16.9.2002, p. 1), last amended by Regu-
lation (EC, Euratom) No 1995/2006, (OJ L 390, 30.12.2006, p. 1).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.9. The Commission published on 21 June 2007 a Progress Report
as at 31 March 2007 on the modernisation of the accounting system
(COM(2007) 343 final) reporting, inter alia, that the project was
implemented largely in accordance with the project plan 2006-2007
and updating and extending the IT systems improvement plan to 2008.
Progress was made in improving the control environment and quality of
accounting data in all Directorates-General. Significant progress was
reported in developing the ABAC IT system, and two Institutions and
six Agencies also migrated to the ABAC system during the year. The
migration of the European Development Funds (EDF) accounts to
ABAC has been prepared and the Commission services are working to
‘go live’ in 2008.

Audit scope and approach

1.9. The Court continued its audit of the modernisation of the
Communities accounting system (10). In the third phase of the
audit (11), the Court concentrated on the following elements:

— assessment of whether measures taken within the Commis-
sion, to remedy weaknesses in the new financial reporting
framework and accounting systems of certain Directorates-
General (12), contribute to providing reasonable assurance
that the accounts are true and fair (see paragraphs 1.13
to 1.21);

— verification of the reliability of the 2006 accounts, concen-
trating on elements captured for the first time in the 2005
accounts and for which qualifications were presented (13)
(pre-financing and related guarantees, invoices/cost state-
ments and cut-off) (see paragraphs 1.22 to 1.37).

Strengthening the transition to accruals based accounts

General achievements

1.10. The Commission’s Accounting Officer introduced a series
of measures in order to consolidate the transition to accruals
based accounts, including checks on a monthly basis in order to
detect inconsistencies in the recording of pre-financings.

1.10. These measures will be continually improved as part of ongoing
projects aimed at improving the quality of accounting information.

1.11. These measures have contributed to a strengthening of
the financial reporting framework and accounting systems. How-
ever, certain weaknesses still exist which put at risk the quality of
accounting data (see paragraphs 1.13 to 1.21). Table 1.1 contains
a follow-up of the Court’s qualifications concerning the reliability
of the accounts which were expressed in the Statement of Assur-
ance for the 2005 financial year, as well as the other points raised
by the Court, which were settled or which still need to be
addressed in the context of the measures taken by the Commis-
sion to consolidate the transition to accruals based accounts.

1.11. The Commission continues to improve its accounting framework
and systems. It considers that the remaining risks are adequately
addressed and have no material impact on the reliability of the 2006
accounts.

See replies to paragraphs 1.15 to 1.21, and also to paragraphs 1.28,
1.31, 1.33 and 1.37.

(10) See communication from the Commission — Modernisation of the
Accounting System of the European Communities (COM(2002) 755
final of 17.12.2002).

(11) The Court’s preliminary findings of the first phase of its audit were
presented in the Annual Report concerning the financial year 2004
(see paragraphs 1.21 to 1.45) and for the second phase in the Annual
Report concerning the financial year 2005 (see paragraphs 1.5
to 1.58). Results of subsequent stages will be included in future
Annual Reports.

(12) See paragraphs VI, VII and VIII of the Court’s Statement of Assurance

concerning the financial year 2005.

(13) See paragraphs VI, VII a) and b) of the Court’s Statement of Assur-

ance concerning the financial year 2005.

Table 1.1 — Follow-up of the reservations expressed in the Court’s Statement of Assurance concerning the financial year 2005 as to the reliability of the accounts and
certain other observations made in the Annual Report concerning the financial year 2005

Reservations in the 2005 Statement of Assurance

Replies in the 2005 Annual report

Developments

Commission’s reply

In the context of a complex exercise, the existing financial
reporting framework has not been consistently applied,
in
particular for cut-off, and,

For the 2006 closure, concerning cut-off, more in-depth
testing and controls will be made in the light of the experience
of
the first year of application of accruals accounting.
Furthermore, the Commission will strengthen its control over
the application of the cut-off methodology.

to strengthen the cut-off procedures,

In order
the Commission’s
Accounting Officer’s services provided the Directorates-General with
reports and with a procedure for ex-post cut-off testing. However, not all
Directorates-General carried out
several
deficiencies concerning the cut-off procedures were again noted which had
a negative impact on the provisional accounts. However, after corrections
made, the final accounts were not affected.

testing. Furthermore,

this

See reply to paragraph 1.18.

accounting systems in certain Directorates-General of the
Commission were not able to ensure the quality of financial
information.

The validation of local systems is a rather new activity. As the
situation is constantly evolving, the accounting services’
validation team needs to keep track of this evolution and has
also introduced since June 2006 a procedure for changes in
local systems. The accounting services are committed to
making a follow-up concerning the issues and matters for
further consideration mentioned in the 2005 validation
reports.

suspended. The Court’s audit confirmed that

For several local systems the Accounting Officer’s validation has been
conditional or
the
Commission’s Accounting Officer’s decisions were well founded: the issues
and matters outstanding were important. The Court considers that in the
light of these continuing problems, the Director-General for Budget should
have made a specific reservation on these issues.

See reply to paragraph 1.17.

In view of the progress made, a reserva-
tion in the 2006 annual activity report
was not necessary.

Errors have been identified in amounts registered in the
accounting system as pre-financing and invoices/cost state-
ments in both the opening and closing balance sheets leading
to an overstatement of the net assets in the opening balance
sheet by some 132 million euro and in the closing balance sheet
by some 314 million euro.

The Commission will examine the transactions containing
errors.

Errors identified for pre-financings and invoices/cost statements are still at
a material level in terms of frequency and financial impact as regards the
balance sheet items concerned. However, it is not material overall.

See replies to paragraphs 1.28 and 1.31.

The audit confirmed the general reservation of the Director-
General of Education and Culture covering the lack of assurance
as regards the correctness of its share of the total amounts
included in both the consolidated opening and closing balance
sheets.

Inconsistent treatment of accrual accounting requirements in
the local accounting system had led to differences in the open-
ing and closing balances. Modifications to the local system are
underway and will ensure correct treatment of transactions in
the future. Corrections of past errors are ongoing and should
be completed by the end of 2006.

The Court’s audit found that measures taken improved the quality of the
accounting data. However, certain weaknesses still exist (in particular inad-
equate documentation).

See replies to paragraphs 1.19 to 1.21.

Certain other observations made in the context of the 2005
Annual Report

Replies in the 2005 Annual report

Evolution of the situation

The Commission’s Accounting Officer did not fully comply
with accounting rules Nos 1, 2 and 12 with regard to the scope
of consolidation, the new structure and presentation of the bal-
ance sheet and the revised treatment of the Communities’ pen-
sion liabilities. As the comprehension of these issues evolved
since the adoption of the accounting rules, the necessary amend-
ments should be introduced.

The different character of the liabilities to be covered by the
amounts to be called from Member states should be disclosed
further, in particular the short-term and long-term nature of
those amounts.

The accounting rules Nos 1, 2 and 12 will be adapted.

The modifications to these accounting rules have been adopted by the
Commission’s Accounting Officer in October 2006.

The different character is disclosed in a note to the balance
sheet.

The Court still considers that the different character of the liabilities to be
covered by the amounts to be called from Member States should be dis-
closed further, in particular the years when they fall due.

See reply to paragraph 1.33.

Although the explanatory notes to the consolidated accounts
contain more information about possible corrections, they do
not identify the amount of expenditure which may be subject
to verification and clearance of accounts procedures.

The corrections to be decided in future conformity decisions
(EAGGF Guarantee) is disclosed as a contingent asset in the
Commission’s accounts.

Compared to 2005, the explanatory notes to the annual accounts contain
supplementary information about the fact that some transactions are likely
to be corrected later. However, as for the past, the amounts (and areas) of
expenditure which may be subject to verification and clearance of accounts
procedures is not disclosed.

See reply to paragraph 1.34.

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C 273/16

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Modification of the Accounting rules

1.12. Taking into consideration the results of the Court’s audit
of the 2005 accounts, the Commission’s Accounting Officer, after
having consulted the Advisory Committee on Accounting Rules,
amended Accounting Rules Nos 1, 2 and 12 with regard to the
scope of consolidation, the structure and presentation of the bal-
ance sheet and the treatment of the Communities’ pension liabili-
ties (14). The 2006 accounts were prepared applying these
accounting rules.

Validation of local subsidiary accounting systems

1.13. At present, 19 Directorates-General use their own
IT-systems for financial management purposes and for the cre-
ation of transactions which are sent to the central accounting sys-
tem (ABAC) via an interface.

1.14.
For the financial year 2006, the Commission’s Account-
ing Officer’s services carried out a follow up of the previous year
findings (15). In addition nine further services (16) were subject to
in-depth reviews as part of a cyclical approach aiming at full cov-
erage of Commission’s services on a medium term.

1.15. The Commission’s Accounting Officer was not able to pro-
vide validation to the local systems of the EuropeAid Co-operation
Office (17), Directorate-General for Education and Culture (18) and

1.15. The lead time for new applications and for rectifying problems
in local systems can be considerable, especially where changes in IT sys-
tems are involved. Furthermore, staff have to be trained in their use in
order to ensure that the intended benefits are forthcoming.

Significant progress was made in 2006 in relation to the three services
mentioned by the Court. In the case of the Europe Aid Cooperation
Office, substantial work was carried out on the local IT System, CRIS,
and by the year end, most of the developments had been put into pro-
duction and were working satisfactorily.

With regard to the Directorate-General for Education and Culture, efforts
in 2006 were concentrated on putting in place appropriate intermediary
solutions pending the replacement of the Directorate-General’s local IT
system.

The new ABAC Delegation module was launched at the beginning of
2007.

All three services’ systems will be examined by the Commission’s
Accounting Officer in 2007 and he will decide at the year end whether
the improvements are sufficient to warrant their validation.

While the number of matters for follow up and further consideration has
not decreased in absolute terms, the number of Directorates-General cov-
ered by these remarks has almost doubled (from 13 Directorates Gen-
eral and Services in 2005 to 22 in 2006). This implies a substantial
decrease in the average number of matters outstanding per Directorate-
General. This figure should continue to decrease in 2007, as a result of
further progress made by all the Directorates-General/Services concerned.

(14) See paragraphs 1.24, 1.25 and 1.49 of the Annual Report concern-

ing the financial year 2005.

(15) The Accounting Officer did not validate three local subsidiary
accounting systems and highlighted a number of other issues for con-
sideration. For further details see paragraphs 1.20 and 1.21 of the
Annual Report concerning the financial year 2005.

(16) Directorates-General Personnel and Administration, Competition,
Information Society and Media, Joint Research Centre, Internal Mar-
ket and Services, Taxation and Customs Union, Energy and Transport.
As well as the Office Infrastructure and Logistics — Brussels and the
Office Infrastructure and Logistics — Luxembourg.

(17) EuropeAid Co-operation Office’s revamped local system CRIS went
into production on 22 January 2007 and further verifications will
take place before the system can be validated.

(18) Directorate-General for Education and Culture’s new system Symme-
try was delayed until 2008 and a new version of the existing system
APPFIN was put in production in October 2006. Despite the fact that
the quality of data improved from November 2006 on, certain weak-
nesses still exist (in particular weak documentation). Further valida-
tion procedures will take place in 2007.

15.11.2007

EN

Official Journal of the European Union

C 273/17

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

the Directorate-General for External Relations (19) regarding the
financial year 2006. Furthermore, the number and importance of
issues and matters for further consideration remains much the
same as
the financial
the final validation report of
for
year 2005 (20).

1.16. Three (21) of the nine services that were subject to in-depth
reviews by the services of the Commission’s Accounting Officer
presented significant risks as regards their cut-off procedures. This
matter led to the conditional validation of the local systems in the
final validation report for the financial year 2006. However, after
checking the cut-off procedures and finalising the validation
reports for the three Directorates-General (Information Society
and Media, Energy and Transport and the Joint Research Centre),
the Accounting Officer issued clean validations with one non-
accounting reservation for the Joint Research Centre.

1.17. The Court’s audit confirmed that
the Commission’s
Accounting Officer’s decisions were well founded: the issues and
matters outstanding were important. The Court considers that in
the light of these continuing problems, the Director-General for
Budget should have made a specific reservation on these issues.

1.17. A general reservation was included in the 2005 Annual Activ-
ity Report at a time when the Commission had not yet completed its first
set of provisional accounts based on accrual accounting principles. It also
took account of the considerable challenges faced by the Commission ser-
vices in applying new accounting rules and the difficulties encountered in
the validation process of local systems.

The first definitive results from the new system were tested and docu-
mented when the Commission’s accounting officer prepared the 2005
annual accounts. Since then further significant progress has been made
in clarifying the application of the new accounting rules for establishing
the annual accounts and also improving the local systems.

In view of the progress made, a reservation in the 2006 Annual Activ-
ity Report was not necessary.

Strengthening of cut-off procedures

1.18. Given that 2005 was the first year of a cut-off exercise, no
benchmark methods are available to check the adequacy of meth-
ods. In view of this difficulty, the Commission’s Accounting Offic-
er’s services have provided to the Directorates-General a procedure
for ex-post testing of cut-off data and a first report combining data
from budgetary sources and from general accounting. This aimed,
in particular, at ensuring the consistency of the cut-off methods
and procedures. However, some Directorates-General did not

1.18. The Commission made a significant effort during 2006 to
improve the estimation of cut-off amounts as detailed in paragraph 1.32.
However, for transactions still in progress for which the lifecycle may be
up to 7 years, in the absence of information from the beneficiaries of EC
funds on work-in-progress and the lack of coercive legal means to obtain
it, some services found it very difficult to proceed with testing cut-off
methodologies.

(19) ABAC Delegation IT system for imprest accounts managed by
Directorate-General for External Relations went into production on
8 January 2007 (except for the module dealing with Assets which was
not completed yet). Additional validation procedures will take place
in 2007.

(20) Notably some general issues regarding the clearing of pre-financings,
timeliness of transactions’ posting, use of ABAC Contracts, treatment
of pre-financing in some domains, data consistency between local
systems and ABAC, widespread lack of knowledge/understanding
about accrual accounting principles across the services.

(21) Directorates-General Information Society and Media, Energy and

Transport and the Joint Research Centre.

C 273/18

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

carry out ex-post testing of cut-off methodologies (22). This had a
negative impact on the reliability of the accounting data included
in the provisional accounts. However, after corrections made, the
final accounts were not affected (see paragraph 1.32).

Measures concerning Directorate-General Education and Culture

1.19. The Court’s 2005 audit confirmed the general reservation
of the Director-General for Education and Culture regarding the
completeness and correctness of the accounts of that Directorate-
General. Given the incidence of omissions and double or wrong
postings, it was not possible to quantify the over — or understate-
ment in its share of the assets and liabilities (23).

1.19.
In 2006, the Directorate-General for Education and Culture
substantially improved the quality of its financial information. The
expenditure of this Directorate-General and the Education, Audiovisual
and Culture Executive Agency amounts in total to some 1,5 % of the EC
budget.

1.20. With a view to remedying weaknesses identified concern-
ing the 2005 accounts, the Commission’s Accounting Officer’s
services enhanced their supervision as regards Directorate-
General for Education and Culture and the newly created Educa-
tion, Audiovisual and Culture Executive Agency. Furthermore, a
task force, including an accounting group, were created in order
to perform a detailed review of all invoices/cost claims open in
2006 and to ensure the correctness of the transactions initiated
in the operational units. In addition, an external consultant has
been contracted with a view to provide assistance for the identi-
fication of errors disclosed in the 2005 final accounts and the
closing of the 2006 accounts.

1.20. The Directorate-General for Education and Culture and the
Education, Audiovisual and Culture Executive Agency have taken action
in several areas, including:

— the local system has been improved to prevent the booking of the

same invoice more than once in ABAC,

— in 2006 a task force performed a detailed review of all historical
invoices in order to identify and correct any duplicate entries,

— the cut-off methodology has been refined,

— the risk associated with the partial absence of reconciliation between
the local and central systems was mitigated by the use of data from
the central accounting system as a basis for cut-off calculations and
for reporting pre-financing and outstanding commitments (RAL).

1.21. These measures led to an improvement of the quality of
the accounting data. However, an audit (24) revealed that various
financial data were not adequately allocated between the
Directorate-General for Education and Culture and the Executive
Agency. Furthermore, checks performed and corrections made
should be better documented, in the context of the 2006 closing
of the accounts.

1.21. As this is not an issue that affects the true and fair view of the
Commission’s accounts, the Accounting Services advised the Directorate-
General for Education and Culture and the Education, Audiovisual and
Culture Executive Agency not to focus this year on splitting the transac-
tions but to concentrate their efforts on improving the quality of their
global accounting data.

As a result of the measures undertaken, the overall framework (proce-
dures, IT systems and accounting controls) designed and implemented by
the Directorate-General for Education and Culture and its executive
agency provides reasonable assurance on the completeness, accuracy and
reliability of the accounting data for the 2006 accounting exercise.

(22) EuropeAid Co-operation Office, Directorate-General for Enlargement,
Directorate-General for Research, Directorate-General for Energy and
Transport, Directorate-General for Education and Culture and also the
Education, Audiovisual and Culture Executive Agency did not carry
out ex-post testing of its cut-off methodologies.

(23) See paragraph VIII in the Court’s Statement of Assurance concerning

the financial year 2005.

(24) The audit of the Directorate-General for Education and Culture and
the Executive Agency was conducted by the Commission’s Internal
Audit Service under the supervision of the Court.

15.11.2007

EN

Official Journal of the European Union

C 273/19

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Consolidated financial statements as at 31 December 2006

General remarks

1.22. During 2006, the Commission services made significant
efforts to ensure the completeness and accuracy of the registra-
tion of new pre-financing payments as well as of new open
invoices/cost statements, and the cut-off.

1.23. The Court’s audit of intangible and tangible fixed assets,
stocks, financial and other liabilities, provisions for risks and
charges and reserves did not discover any significant misstate-
ments. However, the Court identified a number of errors else-
where, which are presented below.

1.24. The Court’s audit led it to conclude that the year-end pro-
cedures should be strengthened in some of the consolidated enti-
ties (e.g. European Parliament, Committee of the Regions) and the
Commission in order to avoid necessary corrections after the pre-
sentation of the provisional accounts.

1.24. While the issues concerned by this remark do not affect the true
and fair view of the consolidated accounts, the Commission will none-
theless endeavour to continue improving its year-end accounting proce-
dures.

1.25.
Furthermore, the Court has noted differences in the treat-
ment of some issues between the consolidated entities and
between the Commission’s Directorates-General (e.g. accrued
charges for leave not taken which are accounted for by some
Agencies and Institutions but not by the Commission and the
European Parliament; multi-annual contracts other than operat-
ing leases which are presented for the first time under contingent
liabilities by the Council but not by the other consolidated enti-
ties; no systematic separation of the value for land and buildings
and no contingent liability for the possible need to regrade
upwards a significant number of staff appointed at a lower grade
than the one of the competition they passed pending the outcome
of an ongoing case in front of the European Court of First
Instance).

1.25. The issues mentioned by the Court do not affect the true and fair
view of the consolidated accounts. The Commission will however inves-
tigate the issues of untaken leave and multi-annual contracts. The
remaining differences noted by the Court represent the fact that the dif-
ferent consolidated entities have different materiality levels to consider
when making accounting decisions. Furthermore the limited cases where
it is not possible to split land and buildings values (in certain Commis-
sion delegations and a few other consolidated bodies) is clearly a case of
lack of information at the level of the individual entity rather than an
inconsistent accounting treatment between consolidated entities.

The Court of First Instance rejected on 11 July 2007 the request made
in case T-58/05 regarding recruitment of officials after 1 May 2004.
This means that currently — subject to the outcome of a possible appeal
to the Court of Justice — there are no budgetary implications. Because
of the remoteness of the risk no contingent liability was considered nec-
essary.

C 273/20

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Consolidated balance sheet as at 31 December 2006

Risk capital operations

1.26.
In the consolidated financial statements of the European
Communities, risk capital operations (211 million euro as at
31 December 2006) are classified in the balance sheet under the
heading ‘Investments’ (investments available for sale). These are
held at historic costs less any provisions for impairment, as their
fair value cannot currently be reliably measured. While such a
valuation method is acceptable in the circumstances, it is not
applied consistently. The Court found some cases where provi-
sional estimates for impairments available to the manager of the
operations (European Investment Bank), for a total amount of
21 million euro, had not been communicated to the Commission
(see paragraphs 11.10 and 11.11).

1.26. Reporting and accounting standards have evolved significantly
over the period of the MEDA mandates (which cover these risk capital
operations). The European Investment Bank (EIB) and the Commission
have been following developments and are currently reviewing the situ-
ation together, looking for the most cost-effective solution and also tak-
ing into account information available according to the contracts signed
with final beneficiaries many years ago (hence not including current
reporting standards).

New reporting requirements will also be agreed as regards the content of
the annual executive reports, enabling the Commission to monitor more
thoroughly the application of the relevant legal base and mandate.

Pre-financing

1.27. The audit of a representative sample of 150 pre-financings
from the population of pre-financings registered in the account-
ing system identified a material level of error in terms of fre-
quency and financial impact as regards this item of the balance
sheet. However, it is not material overall. The most common
types of errors are:

— Pre-financing entries were recorded for the wrong amount.

— Pre-financing amounts were recorded although they were

cleared before the year-end.

Furthermore, additional audit work on the identification
revealed problems of

1.28.
and validation of pre-financings
completeness/accuracy for the closing balance sheet:

1.28.

— Instructions on the accounting treatment of unpaid final
invoices and the related clearing of pre-financing should be
reviewed in order to guarantee a harmonised approach
amongst Commission services.

— These instructions have been carefully reviewed during July 2007.
For the limited number of invoices concerned, the conclusion is that
the accounting treatment used by all Commission services for the
2006 closure is the most suitable available. The same treatment
will apply for the next closure at the end of 2007.

15.11.2007

EN

Official Journal of the European Union

C 273/21

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— Recovery orders are not systematically issued when clearing
of pre-financing reveals that money should be recovered
from the beneficiary. This results in pre-financing being over-
stated and the receivables being understated by an amount
that cannot be precisely quantified.

— Pre-financing amounts are not intended to be recovered but to be
used by beneficiaries in accomplishing their contracts. Recoveries
occur in rare cases where beneficiaries fail in their obligations or
where there are marginal differences between the amounts paid and
the final eligible costs.

— Insufficient impairment tests were carried out to adjust the
value of pre-financing to their recoverable amount, resulting
in a possible overstatement of pre-financing and a corre-
sponding understatement of expenses on write-down of pre-
financing (25).

— Impairment tests were not considered as a priority as most of the
Directorates-General concerned deal with public entities, because of
the existence of bank guarantees and because of the rather low rate
of recovery orders issued in the past. Further attention will be given
to this question in the future to confirm the assumption.

1.29. There is a clear link between these tables and the paying agen-
cies’ debtors’ ledger, and the Commission’s new guidelines applicable
from 2007 require the certification bodies to reconcile the debtor’s ledger
with the tables and to provide explanations to any discrepancies found.

The tables form part of the paying agencies’ annual accounts and, as
such, are certified by the certification bodies. Moreover, the Commission
devoted a considerable amount of work into gaining reasonable assur-
ance.

A detailed follow-up will be carried out by the Commission in the course
of 2007 with a view to ensuring that the debts are properly reported in
the tables of Annex III.

See replies to paragraphs 5.61 and 5.62.

1.30. The future of this provisional pension scheme is currently being
reconsidered. In view of the uncertainty regarding its future, and of the
absence of an actuarial valuation, no meaningful provision can be made
in the accounts.

Receivables

1.29.
For European Agricultural Guidance and Guarantee Fund
expenditure, the Commission has introduced a new recovery pro-
cedure (26) which includes tables for the presentation of the debt-
ors’ accounts. The Court’s work in relation to these debtors’
accounts questions the completeness of these tables (27) (see para-
graphs 5.61 and 5.62).

Employee benefits

For Members of the European Parliament from countries
1.30.
whose national authorities do not provide a pension scheme, the
Bureau of the European Parliament adopted a provisional pension
scheme pending the establishment of a definitive Community
pension scheme for all Members (28). However, the liability in
respect of these pension rights is not recognised in the consoli-
dated balance sheet. In the absence of an actuarial evaluation for
these pension rights, the financial impact on the (provision for)
‘Employee benefits’ and on the economic outturn account cannot
be quantified.

(25) EuropeAid Co-operation Office, Directorate-General for the Informa-
tion Society and Media, Directorate-General for Energy and Trans-
port, Directorate-General for Education and Culture.

(26) Council Regulation (EC) No 1290/2005 (OJ L 209, 11.8.2005, p. 1)
and Commission Regulation (EC) No 885/2006 (OJ L 171,
23.6.2006, p. 90).

(27) Limitations of the opinions of the certificates and major findings in
the reports of the certifying bodies, limited work done by some of
them and insufficient information in some of their reports.

(28) Enlarged Bureau decision of 4 November 1981; Bureau decision of 24
and 25 May 1982, as amended on 13 September 1995
(PE 113.116/BUR./rev. XVII/02-2004/Ann.III).

C 273/22

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Accounts payable

1.31. The audit of a representative sample of 150 invoices/cost
statements from the population of accounts payable registered in
the accounting system identified a material level of error in terms
of frequency and financial impact as regards this balance sheet
item. However, it is not material overall. Most of the errors con-
cern invoices or cost statements recorded for the wrong amounts.

Cut-off procedure

1.31. The level of errors found by the Court was limited.

1.32. Weaknesses concerning cut-off procedures (see para-
graph 1.18) led to deficiencies in the provisional accounts which
have been corrected in the final accounts,

In 2006, the Commission improved the estimation of its cut-

1.32.
off amounts by taking the following actions:

— a new cut-off report was developed,

— cut-off techniques were further refined,

— a new procedure and checklist were provided to the services,

— an overview document on cut-off methodology by Directorates-
General was drafted and workshops by families of Directorates-
General organised,

— the Directorate-General for Budget performed on the spot controls

in selected Directorates-General,

— several Internal Audit Capability Services played a role in assessing

the cut-off exercise.

1.33. The current split of amounts to be called from Member States
between long-term and short-term amounts is sufficient, especially when
combined with the long-term/short-term split of assets and liabilities
given on the balance sheet.

Amounts to be called from Member States

1.33. Total assets increased from 58,7 billion euro in 2005
to 67 billion euro, with total liabilities increasing from 120,9 bil-
lion euro to 131,8 billion euro. The difference will be financed
from budgetary amounts already voted or has to be covered in
future budgets. As already indicated previously (29), the different
character of the liabilities to be covered by the amounts to be
called from Member States should be disclosed further, in particu-
lar the years when they fall due.

(29) See paragraph 1.49 of the Annual Report concerning the financial

year 2005.

15.11.2007

EN

Official Journal of the European Union

C 273/23

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.34. The Financial Regulation, and the sector regulations regarding
agriculture and the structural funds, give the Commission the right to
make checks on all expenditure for many years after it was incurred. The
accounts should not imply that, because of this right, all the expenditure
concerned remains to be accepted. Where the amounts of potential recov-
eries are quantifiable, they are disclosed in notes 5.3 and 5.4 to the con-
solidated accounts.

1.35. The ABAC accounting system is being adapted to increase the
quantity of information recorded regarding recoveries. These improve-
ments are planned to be effective for the 2008 accounts.

1.36. The Commission accepts that the reconciliation procedure needs
to be improved. Action will be taken in order to address the deficiencies
identified. Furthermore, the Commission will consider including a full
reconciliation in the annual accounts.

1.37. The difference of 5 million euro concerns a prior year adjust-
ment in the budgetary accounts of a consolidated entity.

Off-balance sheet items and notes to the accounts

1.34. Compared to 2005, the explanatory notes to the annual
accounts contain supplementary information about the fact that
some transactions are likely to be corrected at a later date by the
Commission’s departments or the Member States. However, as for
the past, the notes still do not identify, for each calendar year, the
amounts (and areas) of expenditure which are accepted by the
Commission and the amounts (and areas) of expenditure which
may be subject
to further verification and clearance of
accounts (30).

Consolidated economic outturn account (including segment reporting)

1.35.
Following a specific request of the Court, in particular the
explanatory notes concerning the 2006 economic outturn
account (31) contain more information regarding the amounts
recovered in response to illegal or irregular operations, in particu-
lar at the level of final beneficiaries/recipients, where more than
90 % of the errors are identified. However, further measures are
necessary in order to ensure completeness and reliability of the
accounting data and information presented in the explanatory
notes (see paragraphs 2.23 to 2.25).

1.36. A detailed reconciliation between budgetary outturn and
economic outturn is indispensable for obtaining reasonable assur-
ance concerning the reliability of the accounts. However, the rec-
onciliation made available to the Court in July 2007 still presents
unexplained minor differences. Furthermore, the intelligibility of
the accounts would be improved if a table presenting such a rec-
onciliation was included in the annual accounts.

Consolidated reports on implementation of the budget

1.37. The amount of ‘Outstanding’ recovery orders in the bud-
getary tables for the financial year 2005 (6 175 million euro) (32)
does not agree with the corresponding amount of ‘Entitlements
established’ and carried forward from the previous year in the
2006 annual accounts (6 180 million euro) (33). As this repre-
sents an infringement of the principle of continuity, this should
have been clarified before the establishment of the accounts.

(30) See paragraphs 1.10 and 1.11 of the Annual Report concerning the
financial year 2002, paragraph 1.11 of the Annual Report concern-
ing the financial year 2003, paragraphs 1.12 and 1.13 of the Annual
Report concerning the financial year 2004 and paragraph 1.57 of the
Annual Report for the financial year 2005.

(31) Further information can also be found under contingent assets (frauds
and irregularities and forecasts of revenue) and in the explanatory
notes to the consolidated reports on implementation of the budget.
(32) See reports on the implementation of the budget, table 2 ‘Consoli-
dated summary of the implementation of budget revenue 2005’.
(33) See reports on the implementation of the budget, table 2 ‘Consoli-
dated summary of the implementation of budget revenue 2006’.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Legality and regularity of underlying transactions

The Court’s approach

1.38.
Faced with a rapidly changing audit environment and
based on the experience gained over twelve years, it was neces-
sary to further develop and adapt the methodology underlying
the DAS. The core element of the revised DAS approach is an
assurance model which is based on two principal sources of evi-
dence:

1.38-1.39. The Court’s annual statement of assurance and other audit
work and the recommendations are an invaluable source of information
for the Commission and it endeavours to diligently follow up the recom-
mendations made.

(a) An examination of the operation of the supervisory and con-
trol systems applied in the collection and disbursement of
European funds by Community Institutions, Member States
and Third Countries; aiming to provide representative infor-
mation on the implementation and functioning of key con-
trols in respect of their ability to prevent or detect and correct
errors.

With the encouragement of the discharge authority and the Court, the
Commission continues to take part in an extensive informal and most
useful dialogue with the Court on the impact of errors found in the
annual audits.

It has already taken measures to improve quality control through the
action plan towards an integrated internal control framework, which pro-
poses actions to fill identified gaps in supervisory and control systems,
and to strengthen the systems further.

(b) Checks based on representative samples of transactions relat-
ing to revenue and relating to expenditure, down to the level
of the final beneficiary, aiming to provide direct evidence on
the legality and regularity of payments.

This requires the full cooperation of all Member States, given their shared
management responsibilities for three quarters of the Union’s budget.

Under the assurance model a judgement is made on the level of
confidence that can be derived from the operation of supervisory
and control systems as well as from direct testing of transactions
in order to arrive at a high level of assurance considered neces-
sary concerning the legality and regularity of transactions.

The Commission’s reporting system and modernised accounting system
provide considerable details each year on management of the Commu-
nity resources and explain the reasons for the assurances each Director
General makes each year, their reservations or other observations, and the
actions being undertaken as a result of audit and control work.

The Court’s audit concerns the legality and regularity of the transactions
recorded in a given year. The Directors-General provide assurance on the
operation of the multiannual control systems during that year. The Com-
mission does not underestimate the system weaknesses that can lead to
spending failing to meet the required conditions, but it builds up its
assurance over time and takes into account the remedial measures being
taken to correct such weaknesses and the capacity of the multi-annual
system to correct errors some time after the disbursement of funds.

1.39. These principal sources can be complemented by two
other sources:

(a) An analysis of the Annual Activity Reports and the declara-
tions of the Commission’s Directors-General and their syn-
thesis stating whether the Commission has reasonable
assurance that the systems in place ensure the legality/regu-
larity of the underlying transactions.

(b) An examination of the work of other auditors, defined as
those that are independent of the Community’s management
and control process (e.g. Supreme Audit Institutions in the
Member States or Third Countries) (34).

(34) More detailed information can be found on the Court’s internet site

www.eca.europa.eu.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Audit results 2006

1.40. As in previous years, the conclusions of the various spe-
cific assessments show that in those areas where the supervisory
and control systems, taken as a whole, are properly and correctly
applied the Court’s substantive testing revealed that the risk of
material errors in the legality and regularity of the underlying
transactions was limited (see paragraphs 4.28, 5.65 regarding
IACS, 8.31 concerning delegations, 9.23 except for Sapard
and 10.6). For these areas, the Court estimates that the errors have
a financial impact of less than 2 % of the respective population by
value (see Table 1.2). Furthermore, the Court’s assessment of the
declarations by Directors-General and authorising officers by del-
egation confirmed that no, or only minor reservations had to be
presented (see paragraphs 2.11 to 2.12).

1.40. The Commission considers that progress has been made in the
application of the supervisory and control systems in 2006, but acknowl-
edges that further actions need to be taken. The implementation of the
action plan towards an integrated internal control framework and the
positive impact that it is likely to have in future years on the assurance
gained from the systems are further signals of the Commission’s willing-
ness to improve even further.

Table 1.2 — Specific assessments concerning legality and regularity of underlying transactions

Specific assessments of the 2006 Annual Report

Functioning of
supervisory and control
systems

Error range

Own resources (1)

Common agricultural
policy

Structural operations

Internal policies

External actions

IACS

non-IACS

Overall for CAP

IACS

non-IACS

Headquarters and Delegations

Implementing organisations

Pre-accession strategy

Phare/ISPA

SAPARD

Administrative expenditure (2)

The above table summarises the overall assessment of supervisory and control systems, as outlined in the relevant chapters, and gives the broad
results of the Court’s substantive testing. The table highlights the key elements but cannot present all of the relevant detail for which it is nec-
essary to refer to the body of the report, within the context of the methodology underlying the Court’s audit approach (see paragraphs 1.38
and 1.39).

Legend

Functioning of supervisory and control systems

Error range

Satisfactory

Partially satisfactory (3)

Unsatisfactory

Less than 2 % (below materiality threshold)

Between 2 % and 5 %

Greater than 5 %

(1) See scope limitations in paragraphs 4.3, 4.4 and 4.7.
(2) For ‘Functioning of supervisory and control systems’, paragraphs 10.6 and 10.25 draw attention to some weaknesses
(3) Systems are classified as ‘partially satisfactory’ where some control arrangements have been judged to work adequately whilst others have
not. Consequently, taken as a whole, they might not succeed in restricting errors in the underlying transactions to an acceptable level.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.41. Community-funded expenditure in these budget areas is subject
to a series of control processes, some of which take place before the cer-
tification of expenditure to the Commission and some afterwards. For
example, in internal policies, the inherent risk of the reimbursement of
overstated costs has been mitigated by a substantial increase in the num-
ber of ex-post audits, while for external aid implementing organisations
the Commission ensures that controls on payment claims by the benefi-
ciaries are effected at key stages of project implementation, thus allowing
errors on advance payments to be detected and remedied. The findings
presented by the Court show the situation at a particular point in the
execution of these control processes. A large proportion of the errors are
likely to be corrected through the operation of the multi-annual correc-
tive system.

As regards agriculture, the Commission notes that the level of error over-
all has decreased markedly and is close to the materiality level. For the
non-rural development part of EAGGF Guarantee expenditure, which
accounts for more than 85 % of total expenditure, the level of error is
below the materiality level.

Concerning the other policy areas, the Commission will take the poten-
tial risks into account in its audits. Annual activity reports generally set
out clearly the Directorates-General assessments of the effectiveness of
management and control system in the Member States and the correc-
tive measures underway to bring about the required improvements.
Directors General enter reservations where there appear to be significant
deficiencies posing a material risk to the Community budget that could
not be adequately managed through the normal corrective mechanisms
of the control system.

See also replies to paragraphs 2.8 to 2.17, 2.36, 5.65, 6.38 to 6.40,
7.30, 7.31, 8.31, 8.32 and 9.23.

1.42. While sometimes the achievement of policy goals requires
detailed regulation, the Commission is sensitive to the need to simplify
rules as far as the achievement of the policy goals permits. Where legal
requirements remain complex, the Commission provides guidance to sim-
plify and clarify their application. Avoidance of errors also depends in
large measure on the guidance Member States’ authorities provide to
implementing bodies and beneficiaries, on the effectiveness of controls,
and on beneficiaries’ awareness that non-compliance can lead to loss of
the grant. The Commission in encouraging Member States to step up
their activities in these areas as part of the Action Plan towards an Inte-
grated Internal Control Framework.

Agri-environmental measures, that concern a small part of CAP expen-
diture, are prone to weaknesses (see reply to paragraph 5.72). The defi-
ciencies may be adequately managed through the corrective measures of
the control systems. Furthermore, legislative changes for the coming
period were introduced.

The Commission considers that their control is rather complex, but the
objective of these measures to integrate environmental concerns in agri-
culture and their added value is widely recognized.

1.41.
In areas where the Court’s audit indicated that supervisory
and control systems are at best only partially satisfactory, the
Court’s substantive testing continues to identify material levels of
error (see paragraphs 5.65 to 5.78 for non-IACS, 6.37 to 6.39,
7.30 and 7.31, 8.31 and 8.32 concerning implementing organi-
sations and 9.23 for Sapard). The Court estimates that for these
areas the errors have a financial impact of more than 2 % of the
population by value (see Table 1.2). Furthermore, the Court’s
assessment of the declarations by Directors-General confirmed
that major reservations were either presented or, in the Court’s
view, should have been presented for the areas in question (see
paragraphs 2.11 to 2.12 and 2.13 to 2.17).

1.42. The specific assessments for expenditure under the com-
mon agricultural policy, structural policies and internal policies,
show that complicated or unclear eligibility criteria or complex
legal requirements can have a considerable impact on the legality
and regularity of transactions (see paragraphs 5.44 for Rural
Development Expenditure, 6.29 for Structural Operations
and 7.11 for Internal Policies). For example, the Court’s systems’
audit indicates that Rural Development measures are prone to a
high incidence of errors because of the often complex eligibility
conditions (35). On the other hand, the design and implementa-
tion of the single payment scheme limits the risk of irregular pay-
ments. Nevertheless,
rate of agricultural
the overall error
expenditure as a whole is still above materiality.

(35) The Court’s substantive testing reveals that the error rate calculated on
the basis of a sub-sample, covering only the non-rural development
part of agricultural expenditure, is below materiality.

15.11.2007

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Official Journal of the European Union

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CHAPTER 2

Commission internal control framework

TABLE OF CONTENTS

Introduction and audit scope

The Commission’s Management Representations

The Commission’s Synthesis Report

Annual activity reports and declarations by Directors-General

Process of preparation

Declarations by Directors-General

Legality and regularity indicators

Action Plans

General assessment

Correction of errors

Information available in the Commission on correction of errors

Control Standards

Compliance with baseline requirements

Effectiveness

Overall conclusion and recommendations

Paragraph

2.1-2.2

2.3-2.18

2.3-2.6

2.7-2.18

2.7

2.8-2.17

2.18

2.19-2.30

2.19-2.22

2.23-2.25

2.26-2.30

2.31-2.34

2.32

2.33-2.34

2.35-2.37

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION AND AUDIT SCOPE

2.1. This chapter reports on the Commission’s efforts in 2006
to improve the effectiveness of supervisory and control systems
in its Directorates-General in order to ensure the legality and
regularity of transactions resulting from the EU budget. In par-
ticular, it analyses:

2.1. Actions taken in 2006 included the launch of the action plan
towards an integrated internal control framework, where the first progress
report in March 2007 set out progress made. Improvements were made
in the guidelines for the Annual Activity Reports including the presen-
tation of services’ control strategies and their results and — non-
mandatory for 2006 — of legality and regularity indicators.

— the extent to which the management representations con-
tained in the annual activity reports and declarations by the
Directors-General, and in the Commission’s synthesis, are
confirmed by the Court’s audit findings (paragraphs 2.3
to 2.18),

The broad spectrum of actions being taken to improve the supervisory
and control systems responds to recommendations of the Court and the
Commission’s own internal auditors and those made by the Parliament
and the Council during the annual discharge procedure.

— information on recoveries and financial corrections (para-

graphs 2.23 to 2.30).

2.2. The chapter also comments on the Commission’s action
plan towards an integrated control framework (paragraphs 2.19
to 2.22) and reviews the functioning of the Commission’s super-
visory and control systems (paragraphs 2.31 to 2.34).

THE COMMISSION’S MANAGEMENT REPRESENTATIONS

The Commission’s Synthesis Report

2.3.
In addition to the report on policy achievements (1), the
Commission adopted the 2006 Synthesis Report (2) on its man-
agement achievements considering that ‘the internal control sys-
tems in place, with the limitations described in the annual activity
reports, provide reasonable assurance as to the legality and regu-
larity of operations for which the Commission takes overall
responsibility pursuant to Article 274 of the EC Treaty. However,
it acknowledges that further efforts are needed to resolve a num-
ber of weaknesses, in particular those highlighted in the reserva-
tions of the delegated authorising officers.’

(1) COM(2007) 67 of 28.2.2007.
(2) COM(2007) 274 of 30.5.2007.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.4. The Commission’s assessment of certain cross-cutting
issues is in line with the analysis of the Court, concerning the con-
clusions on the direct centralised management in the area of
research (see paragraph 2.12), the need for simplification (see
paragraph 1.42), continued efforts in the development of legality
and regularity indicators (see paragraph 2.18) and further
improvements of the quality of annual activity reports (see para-
graphs 2.7 and 2.9). However, for certain parts of the common
agricultural policy, structural measures, and also certain parts of
external actions the Court’s audit reveals significant weaknesses in
the supervisory and control systems which go beyond those set
out by the Directors-General as reservations in their declarations
accompanying the annual activity reports (see paragraphs 2.13
to 2.17). Furthermore, the Commission’s analysis of the remain-
ing problems concerning the reliability of the accounts, in par-
ticular at the level of local subsidiary systems, was not complete
(see paragraphs 1.13 to 1.17).

2.5. The Commission states in its Synthesis Report that ‘in some
cases’ the difference between the Court’s assessment of the assur-
ance to be drawn from internal control systems and the assurance
given by the responsible Directors-General derives primarily from
diverging interpretations on the typology and impact of errors
and/or on the evaluation of systems deficiencies. In the Court’s
view, the divergence reflects mainly the fact that the Commis-
sion’s assessment of management achievements does not
adequately take into consideration the impact of ongoing control
weaknesses, although they are mostly recognised in the different
action plans and annual activity reports (see paragraphs 2.11
and 2.19 to 2.22).

2.4. Directors General enter reservations in their declarations where
the information they have built up from their own and the Member
States’ audit work on the functioning of systems indicate significant defi-
ciencies posing a material risk to the Community budget that could not
be adequately managed through the normal corrective mechanisms of the
control system. In addition to these cases Directors General might choose
a reservation when a high reputational risk for the Community institu-
tions exists. The Directors General mentioned by the Court therefore did
not issue reservations when they considered that the risk was adequately
managed and they explained the reasons of their assessment in their
Annual Activity Reports.

Agri-environmental measures, which concern a small part of CAP
expenditure, are prone to weaknesses (see paragraph 5.72). The deficien-
cies may be adequately managed through the corrective measures of the
control systems. Furthermore, legislative changes for the coming period
were introduced.

See also the replies to paragraphs 1.15, 1.17, 1.42, 2.13 and 2.18.

2.5. The Commission indicated in the Synthesis Report that the assess-
ment of the assurance to be drawn from the internal control framework
also takes account of its multi-annual character, which enables correc-
tions to be made some time after the disbursement of funds, and of the
corrective measures to remedy the identified control weaknesses.

The Directors General concerned are discussing their differences of per-
ception with the Court, and will explain the reasons in their annual activ-
ity reports for 2007 onwards.

The Synthesis Report also indicated that Directors General take due con-
sideration of the results of audits of the Court as a major source for their
assurance.

2.6.
For example, as already stated in the Annual Report con-
cerning the financial year 2005 (3), the Court’s audits show that,
in a number of areas, the existing supervisory and control systems
do not ensure the prevention or timely identification and correc-
tion of errors (see paragraphs 5.76, 6.39, 7.30, 8.31 (4) and 9.23).

2.6.
In the area of agricultural expenditure the results of the controls
at the level of the final beneficiaries, as communicated by the Member
States to the Commission and published in the relevant annual activity
report provide an indication of the extent of irregular payments for agri-
cultural expenditure. To further improve the assurance which can be

(3) See the Annual Report concerning the financial year 2005, para-

graph 1.64.

(4) In external actions, errors found were mostly at the level of the project

implementing organisations.

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

that its services apply a multi-annual system under which errors
in one year may be detected and corrected in subsequent years.
Independently of these arguments, the Commission does not have
at its disposal adequate and reliable information concerning cor-
rections made at
final beneficiaries (see para-
graphs 2.23 to 2.30).

the level of

gained from this information, as from 2007, the Commission has
implemented the Court’s recommendation that the certification bodies
should do more work to verify and validate the inspection statistics and
post-payment checks.

In the structural actions area, the Commission broadly shares the Court’s
view that improvements are necessary in national systems. However,
there is evidence that between 20 and 35 % of systems are satisfactory,
around 60 % are in need of improvements to correct material deficien-
cies in key controls, and around 10 % are seriously deficient (see reply to
paragraph 6.35). In the latter cases, payments are suspended or finan-
cial corrections are imposed where Member States do not themselves
make the required corrections.

The Commission maintains that a large proportion of the errors found
are likely to be corrected through the multi-annual corrective mechanisms
in the system. The guidelines for the 2007 annual activity reports will
require more detailed information on recoveries. In particular the Com-
mission has taken steps to obtain better information regarding correc-
tions made by Member States. See the replies to paragraphs 5.76, 6.39,
7.30, 8.31 and 9.23.

Annual activity reports and declarations by Directors-General

Process of preparation

2.7. The guidance (5) for the 2006 annual activity reports, as
well as the peer review exercise (6), indicate the continued efforts
made by the central services of the Commission in order to clarify
the link between the effectiveness of internal control systems and
the basis on which the declarations are built (7), and provide gen-
eral information on how to present key indicators on legality and
regularity (8).

(5) Note from the Commission’s central services (SEC GEN, DG BUDG
and DG ADMIN) to Directors-General and Heads of Service — Stand-
ing instructions for the preparation of the annual activity reports for
year 2006, SEC(2006) 1789 of 19.12.2006.

(6) This is a process, organised by families of Directorates-General under
the coordination of the central services, to improve consistency and
coherence between reservations included in the declarations.

(7) In particular, under part 2 ‘Management and internal control systems’,
an ‘Internal Control Template’ (ICT) should be used for the description
of the inherent nature and characteristics of the management, risk and
control environment. The elaboration of the ICT is foreseen by action
3 of the action plan towards an integrated internal control framework.
(8) In the framework of the 2005 Synthesis Report multiannual objective
no 4 (COM(2006) 277 of 7.6.2006), specific common templates of
legality and regularity indicators should be further developed by the
families of Directorates-General. By the end of 2006, only the ‘Cohe-
sion for Growth and Employment’ family had finalised its overview on
objectives and indicators.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Declarations by Directors-General

2.8.
In their declarations attached to the annual activity reports,
the Directors-General have to state whether the resources assigned
to the activities have been used in accordance with principles of
sound financial management and internal controls implemented
in their departments provide reasonable assurance that the under-
lying transactions are legal and regular. In the event of material
internal control weaknesses or irregularities, they have to qualify
the declarations issuing reservations (9) and to draw up remedial
action plans.

2.8. The combination of these two principles (reasonable assurance on
sound financial management and legality and regularity) leads to a cer-
tain ‘balance’ of risks and controls being considered as acceptable by
management, even though ‘full assurance’ and ‘full legality/regularity’
cannot be reached.

2.9. The Court’s analysis of the annual activity reports and dec-
larations of the Directors-General for the financial year 2006
reveals that the materiality criteria, as well as the definition of the
reservations and their impact on the assurance were, in gen-
eral (10), clear. The Court’s audit also reveals that the annual activ-
ity reports generally present an improved assessment of the
strengths and weaknesses of supervisory and control systems (11).

2.9. The Commission expects further improvements for 2007, thanks
notably to the generalisation of the use of the Internal Control Template
in the annual activity reports which establishes a clearer link between
control systems and assurance. The Commission will also pursue its
efforts to improving materiality criteria and strengthening the basis of the
assurance where needed.

2.10. All the Directors-General stated that they had obtained
reasonable assurance that the resources allocated to them had
been used for the specified purposes, and that the internal con-
trols which they had introduced ensured the legality and regular-
ity of the underlying transactions.

2.11. The Court notes that 15 of the 40 declarations contain
one or more reservations. The total number of reservations fell
from 2005 (31) to 2006 (20) (12). The majority refers to weak-
nesses already identified in previous years (13) and concerns
mainly the legality and regularity of the underlying transactions.
The most important reservations in the context of the DAS are
shown in Table 2.1.

(9) The Directors-General are required to provide an overall summary on
the combined impact of reservations on the declarations as a whole
and to reach a clear conclusion as to whether, in the light of those res-
ervations, the assurance to be provided in the declarations can be
maintained.

(10) As regards the materiality criteria and/or reservations (definition
and/or impact) in the context of the DAS, there is still a scope for
improvement for the following DGs: EAC, ECFIN, ENV, EPSO/EAS,
ESTAT and FISH.

(11) Despite the fact that the Directorates-General did not use the Internal
Control Template in a harmonised manner (see paragraph 2.7).
(12) The detailed analysis of the Court reveals that 2006 reservations
include 6 new and 14 carry-over reservations. However, for example,
the number of Member States/regions covered in the reservation con-
cerning the European Social Fund (ESF) increased from 1 to 8.
(13) See Annual Reports concerning the financial year 2003 and 2004,
financial year 2005,

paragraphs 1.67, and concerning the
paragraph 2.17.

Table 2.1 — Evolution of the evidence given by Commission Directorates-General’s annual activity reports for the Court’s Statement of Assurance

Sector

Most important reservations of Directors-General
(included in the declarations)

2004

2005

2006

Impact of these most impor-
tant reservations on the
Director-General’s assurance in
the Court’s view (1)

2004

2005

2006

Other significant weaknesses revealed by the Court’s
audit and/or the Commission
(not included in the declarations)

2004

2005

2006

×

×

×

×

×

×

A

A

A

/

— Limited scope of the Commission’s monitor-
ing action and backlog of incomplete checks
as regards Regulation (EEC) No 4045/89

B

B

B

— Management and control systems in the Member
(para-

concerning rural development

States
graph 5.66)

— Risks connected with the closure of the
1994-1999 programming period and/or sig-
nificant weaknesses in the implementation of
Regulation (EC) No 2064/97

— Management and control systems in the Member
States (2000/2006) (3) (paragraph 6.38)

B

B

B

Own Resources — ‘Hilton’ beef

Common
Agricultural
Policy

— IACS in Greece

Structural
measures

— EAGGF-Guidance: management and control
systems in the Member States (2000/2006)

— ESF: management and control systems in the Mem-

ber States (2000/2006)

×

×

×

×

— IFOP: management and control systems in the

Member States (2000/2006)

— ERDF: management

and

control

systems

(2000/2006)

×
Italy

×
Greece

— INTERREG: management and control

systems

(2000/2006)

×

×

×

×
United Kingdom

×
Spain, Scotland
(United
Kingdom),
Sweden,
Slovakia,
Slovenia, Latvia,
Calabria and
Lazio (Italy)

×
United Kingdom
and Spain

×
England and
Scotland (United
Kingdom)

×
All programmes
(except IIIB
North West
Europe and
Azores, Canaries
and Madeira)

— Cohesion Funds: management and control sys-

tems (2000/2006)

×
Greece

×
Spain
















Evidence given by the annual activity
report for the Court’s audit
conclusions (2)

2004

2005

2006

A

A

A

C

B (4)
C (5)

B (4)
C (5)

C

C

C
















C
2
7
3
/
3
2

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

.

1
5
1
1
2
0
0
7

.

Sector

Most important reservations of Directors-General
(included in the declarations)

2004

2005

2006

Internal policies,
including
research

— Insufficient assurance/weaknesses on management

through National Agencies

— (On-the-spot audits for internal policies con-
tracts) — absence of sufficient evidence to determine
the residual level of persisting errors with the regard
to the accuracy of cost claims

— Error frequency (eligibility) in the cost claims for

research contracts

×

×

×

×

×

×
6th Framework
Programme

×
5th Framework
Programme

×
5th Framework
Programme

— Weaknesses in the European Fund for Refugee’s man-

agement and control systems

×
United Kingdom
and
Luxembourg

×
United Kingdom

×
Italy

External actions — Non respect of contract procurement proce-

×

dures by a Humanitarian Organisation

— Legal status and liability of contractual partner
in the framework of the implementation of EU
contribution to UNMIK Pillar IV in Kosovo

×

Pre-accession
strategy

— ISPA: management and control systems

×
Romania

— PHARE: Risks inherent in the decentralised sys-
tems, omissions in the audit of systems and
transactions

×
Romania and
Bulgaria

Administrative
expenditure

— Implementation of internal control standards in

×

×

the EU’s delegations


















Impact of these most impor-
tant reservations on the
Director-General’s assurance in
the Court’s view (1)

2004

2005

2006

Other significant weaknesses revealed by the Court’s
audit and/or the Commission
(not included in the declarations)

2004

2005

2006

Evidence given by the annual activity
report for the Court’s audit
conclusions (2)

2004

2005

2006

— Preliminary testing within the framework of
indirect centralised management (Article 35
MERF) (2)

— Error frequency for public health area

×

×

B

B

B

— Error frequency for 6th Framework Pro-

×

gramme of research (2)

— Supervisory and control systems for the legality
and regularity of underlying transactions at the
level of implementing organisations need to be
further improved to be fully operational (para-
graph 8.32)

×

×

A

A

A

/

B

A

A

A

A

A

— Weaknesses in the supervisory and control systems
in the EU’s delegations (3) (paragraph 10.15)

×


















B

B

B

C

B

B

B

A

A

A

A

A

Key:
(1)

Impact of these most important reservations on the Director-General’s declaration in the Court’s view:
A: reasonable assurance that the internal control systems ensure the legality and regularity of the underlying transactions with no or insignificant qualifications.
B: reasonable assurance with qualifications that the internal control systems ensure the legality and regularity of the underlying transactions (errors < 2 % or system weaknesses whose financial impact < 10 % of the budget concerned).
C: no assurance (errors > 2 % or system weaknesses whose financial impact > 10 % of the budget concerned).

(2) Evidence given by the annual activity report for the Court’s audit conclusions:

A: sufficient evidence for the Court’s DAS conclusions (clear and unambiguous).
B: sufficient evidence for the Court’s DAS conclusions after corrections (with immaterial inaccuracies or missing information of minor importance).
C: insufficient evidence for the Court’s DAS conclusions (with material inaccuracies or missing information of major importance, for example: negligence of the problems of shared management, cover of the previous financial year, lack of quantification, unusable information).

(3) Although included in the annual activity reports.
(4) For CAP expenditure, where IACS is properly applied.
(5) For CAP expenditure, which is not subject to IACS or where IACS is not properly applied.
Source:

Court of Auditors.

.

1
5
1
1
2
0
0
7

.

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
7
3
/
3
3

C 273/34

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.12.
For own resources, internal policies (including research),
pre-accession strategy (14) and administrative expenditure (see
Table 2.1 and paragraphs 4.28, 7.30, 9.23, 10.15, 10.16
and 10.25) the annual activity reports are generally in line with
the conclusions of the relevant DAS specific assessments.

2.13. On the other hand, in significant parts of the EU budget,
the Directors-General give a more positive account of the legality
and regularity of EU spending than is consistent with the Court’s
audit.

2.14. As regards the common agricultural policy, the assurance
provided by the declaration of the Director-General for Agricul-
ture and Rural Development (see Table 2.1), in some significant
respects,
is not compatible with the Court’s findings. The
Directorate-General for Agriculture and Rural Development is
using an assurance model in support of the declaration. The ele-
ments of this model are specified in the annual activity report (15).
The Court’s audit findings show weaknesses which impact on
each of these elements and which limit the assurance it can draw
from the declaration. In particular, taking assurance from ele-
ments not related to 2006 expenditure (16), using forecasts of
future corrections (contingent assets) in respect of the current
year and including the impact of financial corrections falling to
Member States rather than to the irregularly paid beneficiaries (see
paragraphs 5.63-5.64).

2.13. The Court’s audit concerns the legality and regularity of the
transactions recorded in a given year. The Directors-General provide
assurance on the operation of the multiannual control systems during
that year. The Commission does not underestimate the system weaknesses
that can lead to spending failing to meet the required conditions, but it
builds up its assurance over time and takes into account the remedial
measures being taken to correct such weaknesses and the capacity of the
multi-annual system to correct errors some time after the disbursement
of funds.

See also replies to paragraphs 2.5 and 2.6.

2.14. The Commission notes that the total level of error has decreased
markedly and that, for the non-rural development part of EAGGF Guar-
antee expenditure, which accounts for more than 85 % of total expen-
diture, it is below the materiality level. As regards Rural Development,
the agri-environmental measures are prone to a high incidence of mate-
rial error.

The assurance gained by the Director-General for Agriculture and Rural
Development is based on a comprehensive system for the management
and control of agricultural expenditure which ensures that irregular pay-
ments to final beneficiaries are prevented or detected and recovered. This
system relies on four complementary levels, each of which works satis-
factorily. In particular, as regards the conformity procedure, its multi-
annual nature does not affect the assurance which can be derived from
this procedure for the financial year 2006. While it is true that the
financial consequences are only determined at the end of the procedures,
the preliminary findings of the audits carried out in 2006 are already
known. Furthermore, since the Commission’s audits cover the Member
States’ management and control systems, they do not only provide infor-
mation on the expenditure audited, but indirectly also on future expen-
diture covered by the systems in question.

(14) Except for SAPARD.
(15) For example, for EAGGF guarantee: 1. compulsory administrative
structure at the level of the Member States, 2. detailed systems for
controls and dissuasive sanctions, 3. ex-post controls, 4. clearance of
accounts procedures.

(16) For example, clearance of accounts procedures (see paragraphs 5.56-
5.64) and ex-post scrutinies of payments (see paragraphs 5.48-5.53).

Furthermore, the purpose of recording the contingent assets in the Com-
mission’s accounts is to disclose the potential receivables, based on the
results of its audits, and has not been intended to provide any assurance
as to the legality and regularity of the underlying transactions.

15.11.2007

EN

Official Journal of the European Union

C 273/35

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.15.
In structural policies, the declarations of the Directors-
General of Regional Policies and of Employment, Social Affairs
and Equal Opportunities understate the significant weaknesses of
management and control systems in the Member States (see para-
graph 6.38) and material level of errors at project level (see para-
graph 6.39) singled out by the Court’s audits (see Table 2.1).

2.15. The annual activity reports of the responsible Directors General
set out the basis for their assessment of the effectiveness of management
and control system in the Member States and the corrective measures
underway to bring about the required improvements and indicate the lev-
els of risk for Community funds. The assessments are based on extensive
audit work and are broadly in line with those of the Court. They indi-
cate, as set out in the reply to paragraph 2.6, that some 10 % of control
systems are seriously deficient, and therefore present a high risk. In these
cases, payments to Member States may be suspended and financial cor-
rections imposed where the Member State does not itself make the
required corrections. The Commission maintains that a large proportion
of the errors found are likely to be corrected through the multi-annual
corrective mechanisms in the system.

2.16. The Court also questions whether the overall assessment
of the Director-General for Regional Policy in respect of the Euro-
pean Regional Development Fund (ERDF) and the Cohesion Fund
is compatible with the qualifications which he makes on the func-
tioning of management and control systems in 10 and 9 Member
States
respectively (17). The same situation exists
the
Directorate-General for Employment, Social Affairs and Equal
Opportunities (18). Furthermore, the Court notes that the annual
activity report of the latter states that an ‘audit opinion’ was not
formulated on 17,5 % of the expenditure concerning the pro-
gramming period 2000-2006 for the European Social Fund (ESF);
the Director-General based his assurance on management repre-
sentations.

for

2.16. While the management and audit services of the Directorate
General for Regional Policy gave qualified opinions on systems in a num-
ber of Member States on account of material deficiencies affecting key
elements of their systems, it was concluded, on the basis of the corrective
measures being taken and having regard to the multi-annual operation
of the control arrangements, that the deficiencies were not so significant
as to warrant a formal reservation on the Director General’s declaration.
As regards the European Social Fund, the Commission considers that the
overall assessment by the Director-General of Directorate General for
Employment, Social Affairs and equal Opportunities on systems is com-
patible with the reservations on programmes in 7 Member States. Man-
agement representations are there to close the gap on non-audited
operations because it is simply not possible to have 100 % audit cover-
age every year.

(17) For ERDF, the analysis of the annual activity report of Directorate-
General for Regional Policy reveals that ‘the opinion was qualified in
relation to material deficiencies affecting key elements of the system’
for Czech Republic, Greece, Ireland, Latvia, Lithuania, Luxembourg,
Netherlands, Slovakia and Spain. Moreover for Slovenia it was quali-
fied because of a scope limitation. As regards the Cohesion Fund, ‘the
opinion was qualified in relation to material deficiencies affecting key
elements of the system’ in Czech Republic, Hungary, Ireland, Latvia,
Lithuania, Poland, Portugal, Slovakia and Spain. Furthermore, con-
cerning the closure of programming period 1994 to 1999 no precise
information is given on the level of irregularities identified and the
financial correction procedures launched.

(18) For the European Social Fund (ESF), the analysis of the annual activ-
ity report of Directorate-General for Employment, Social Affairs and
Equal Opportunities reveals that, in the DG’s view, national/regional
systems covering 73,39 % of 2006 payments provided reasonable
assurance with limitations.

C 273/36

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.17. The material incidence of error and the weaknesses in the
supervisory and control systems designed to ensure the legality
and regularity of the transactions at the level of project imple-
menting organisations in the area of external actions (see para-
graphs 8.31 and 8.32) found by the Court are not sufficiently
reflected in the annual activity report and declaration of Europe
Aid Co-operation Office (see Table 2.1).

2.17. The Commission internal control system seeks a balance between
the costs and benefits of checks, and is shaped to take into account the
multiannual character of external aid expenditure, ensuring that con-
trols on payment claims by the beneficiaries are effected at key stages of
project implementation, thus allowing errors on advance payments to be
detected and remedied.

Measures were taken in 2006 to further strengthen the control systems,
including distribution of an improved practical guide for contractual pro-
cedures, the guide for programme estimates, more detailed reporting
guidelines for Delegations and more rigorous ex post controls.

2.18. While it was not yet mandatory for Directors General to pro-
vide legality and regularity indicators in their Annual Activity reports for
2006 according to the general types recommended in the standing
instructions (D(2006) 12058), the 2006 Synthesis report announces
continued efforts to develop these legality and regularity indicators while
ensuring a coherent approach by policy family of services. From the
2007 annual activity reports onwards, the use of indicators will be man-
datory.

Legality and regularity indicators

2.18. Three quarters (19) of the Directorates-General present
legality and regularity indicators in their 2006 annual activity
reports. The Court notes that not all of these indicators comply
with the general types (of result and/or impact indicators) indi-
cated in the guidelines prepared by the Commission’s central ser-
vices. The Court considers that additional efforts are still necessary
at the level of the Directorates-General in order to measure the
effectiveness of the supervisory and control systems as well as the
legality and regularity of the underlying transactions (see para-
graphs 2.31 to 2.34).

ACTION PLANS

General assessment

2.19. On 7 March 2007,
the Commission presented a
report (20) on the state of play of the action plan (21) towards an
integrated internal control
framework, whose conclusion is
broadly positive. It stated that it has made concrete progress on
the implementation of the action plan, but that the remaining
challenges should be addressed. Although there have been some
delays, the Commission considers that by the end of 2007 it will
‘have the foundations in place’ for properly managing the risk of
errors and providing increased assurance that transactions are
legal and regular.

2.20.
In the detailed analysis accompanying its progress report
(see Table 2.2), the Commission assessed that, out of the 35 sub-
actions, 10 were completed, 5 were almost completed, 13 were
in progress, 4 were not yet started and 3 were withdrawn. It also
introduced 6 new sub-actions to be implemented by the end of
2007.

(19) The only exceptions are represented by DGs BEPA, BUDG, DIGIT,
EPSO/EAS, ESTAT, MARKT, OIL, PMO and SG, which exclude all
major spending services.
(20) COM(2007) 86 of 7.3.2007.
(21) COM(2006) 9 of 17.1.2006.

Table 2.2 — Overview of the implementation of the Commission’s action plan towards an integrated internal control framework

Reference

Domain/(sub-)actions/deadline set in the action plan

Assessment of the completion by
the Commission

Court’s assessment of the stage of
implementation as at 31.12.2006

Court’s preliminary assessment of
the impact achieved as at
31.12.2006

.

1
5
1
1
2
0
0
7

.

Simplification and common control principles

1

2

3a

3b

3c

3d

3e

3N

4

5

Keep under consideration simplification of the rules for the 2007 to 2013 period concerning in
particular the eligibility of expenditure in the structural funds and in the research programmes
(31.12.2006).

Almost completed

Almost implemented

Further action needed (1)

Propose internal control as budgetary principle in the revised Financial Regulation on the basis
of the results of the inter-institutional consultation (1.6.2006).

Withdrawn

Not implemented

Objective not entirely achieved
(follow-up required)

Establish Internal Control Templates which outline the range of control components which
would be expected in a given control environment (31.5.2006).

Completed

Implemented

Demonstrate how Directorates-General will gain assurance on the internal control structures for
shared management and internal policies, taking the developed templates and control strategies
at Commission-level into account (30.9.2006).

Completed

Implemented

Organise peer review to enhance coherence and consistency of control strategies per family
(31.3.2007).

In progress

In progress of implementation

Demonstrate how Directorates-General will gain assurance on the internal control structures for
external policy, administrative expenditure, pre-accession aid, EDF and own resources, taking the
developed templates and control strategies at Commission-level into account (31.12.2007).

In progress

In progress of implementation

Organise peer review to enhance coherence and consistency of control strategies per family
(31.12.2007).

Not yet started

Impact not yet realised
(follow-up required)

Impact not yet realised
(follow-up required)

—

—

As from Synthesis Report 2006, the Commission will clearly set out and communicate to the
budgetary authority reservations to the global assurance, including where relevant by sector or
Member State, together with the corresponding financial corrections or suspensions of payments
(31.12.2007).

Launch inter-institutional initiative on the basic principles to be considered regarding the risks to
be tolerated in the underlying transactions and the definition of common benchmarks for the
management of this risk (31.3.2006).

New measure introduced on 7.3.2007

Withdrawn

Not implemented

Objective not entirely achieved
(follow-up required)

Promote the use of management declarations at operational level in the negotiations on the 2007-
2013 legislation for indirect centralised management and the establishment of national coordi-
nating bodies able to provide an overview of the assurance available for example by a synthesis
of operational declarations per policy area (30.6.2006).

Completed

Implemented

Impact not yet realised
(follow-up required)

Management declarations and audit assurance

6a

Develop guidelines on making management declarations more effective in research and other
internal policies (30.9.2006).

Withdrawn

Not implemented

Objective not entirely achieved
(follow-up required)

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
7
3
/
3
7

Reference

Domain/(sub-)actions/deadline set in the action plan

Assessment of the completion by
the Commission

Court’s assessment of the stage of
implementation as at 31.12.2006

Court’s preliminary assessment of
the impact achieved as at
31.12.2006

6b

7a

7b

7c

8

8N

Extend guidelines on making management declarations more effective for external policies
(31.12.2007).

Not yet started

Establish criteria for certification audits in research and internal policies, focusing on the use of
‘agreed-upon procedures’ (31.12.2006).

Completed

Implemented

Impact not yet realised
(follow-up required)

Examine criteria, where these are not already in place, for certification audits in shared
management 2007 to 2013, considering also the use of ‘agreed-upon procedures’ (31.3.2007).

In progress

In progress of implementation

—

Extend criteria for certification audits, focusing on the use of ‘agreed-upon procedures’, to other
management modes, where appropriate (31.12.2007).

Not yet started

Analysis of potential additional assurance from SAIs on existing practice related to EU funds
(31.12.2006).

Completed

See Action 8N

To build on the momentum created by this action, the Commission will pursue contact with the
SAIs with a view to determining how their work can be used to provide assurance on the execution
of its programmes in the Member States. It will also launch a case study on the key issues faced
by SAIs in examining Community expenditure (31.12.2007).

New measure introduced on 7.3.2007

Single audit approach: sharing of results and prioritising cost-benefit

9a.1

Assess potential actions necessary for enhancing the sharing of audit and control results and
recording of their follow-up in the area of internal policies, including research (31.12.2006).

Completed

Implemented

Impact not yet realised
(follow-up required)

9a.1N

To oversee the initial stages of data-sharing in ABAC, the Commission will, for the Sixth Frame-
work Programme, monitor the use of data sharing and management reporting with a view to
identifying key factors for success in better integrating the sharing of data in the overall control
process (31.12.2007).

New measure introduced on 7.3.2007

9a.2

9a.3

9b

9c

Assess potential actions necessary for enhancing the sharing of audit and control results and
recording of their follow-up in the area of structural funds 2007 to 2013 (31.5.2007).

Almost completed

In progress of implementation

Assess potential actions necessary for enhancing the sharing of audit and control results and
recording of their follow-up in the area of other policies (31.12.2007).

In progress

In progress of implementation

For expenditure under direct management, implement a tool linked to ABAC for a Commission-
wide exchange of information on control and audit missions on all legal entities (31.12.2007).

In progress

In progress of implementation

—

—

—

Award tender for a Commission-wide contractual framework to assist Directorates-General on
implementation of control work and tracking control performance
methodological
(30.4.2007).

issues,

Almost completed

Almost implemented

Impact not yet realised
(follow-up required)

C
2
7
3
/
3
8

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

.

1
5
1
1
2
0
0
7

.

Reference

Domain/(sub-)actions/deadline set in the action plan

Assessment of the completion by
the Commission

Court’s assessment of the stage of
implementation as at 31.12.2006

10a.1

10a.2

Assess costs of controls in shared management: define a common methodology (31.5.2006).

Completed

Implemented

Assess costs of controls in shared management: launch initiative for data to be provided by
Member States (30.9.2006).

Completed

In progress of implementation

10a.3

Assess costs of controls in shared management: provision of data by Member States (28.2.2007).

In progress

In progress of implementation

10a.4

Assess costs of controls in shared management: analysis of received information (30.9.2007).

Not yet started

Court’s preliminary assessment of
the impact achieved as at
31.12.2006

Impact not yet realised
(follow-up required)

—

—

—

10b

10N

11

11N

Make a first estimation on the costs of control incurred in direct management expenditure
(30.6.2007).

In progress

In progress of implementation

To further explore the cost-benefit ratio of control, the Commission will examine the effect of
programme design and eligibility requirements on costs of control to develop a detailed analysis
of tolerable risk on a practical basis (31.12.2007).

New measure introduced on 7.3.2007

Run a pilot-exercise for evaluating benefits in the context of control of internal policies
(30.6.2007).

In progress

In progress of implementation

—

To determine whether recovery and offsetting systems are working effectively, by identifying
amounts recovered in 2005 and 2006 and their coherence with errors identified during controls
the Commission will, in direct management, develop a typology of error and the relationship with
recoveries, financial corrections and adjustments to payments and for shared management it will
examine the reliability of national monitoring and reporting systems (31.12.2007).

Sector specific gaps

New measure introduced on 7.3.2007

12

Put in place steps to close these gaps via the annual management plans, with follow-up reporting
on progress in the annual activity reports (15.6.2007).

Almost completed

Almost implemented

Impact not yet realised
(follow-up required)

12N

To ensure effective delivery of added assurance, the Commission will perform 300 audits for FP6
in 2007, compared with the 45 carried out in 2006. In addition, having developed a systematic
approach to analysing and sampling the FP6 beneficiary population as part of action 16b, the
Commission will proceed with the identification and correction of errors in beneficiaries receiv-
ing the most significant proportion of the budget. This will also provide, by the end of 2007, a
representative picture of the level and nature of irregularities in the research budget as a whole
(31.12.2007).

New measure introduced on 7.3.2007

13.1

Finalise, as requested by Ecofin, the analysis for structural funds on the present controls at sector
and regional level and the value of existing statements and declarations, taking the article 13
annual reports due by June 2006 and the results of Commission audits into account (31.3.2007).

Almost completed

Almost implemented

Impact not yet realised
(follow-up required)

.

1
5
1
1
2
0
0
7

.

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
7
3
/
3
9

Reference

Domain/(sub-)actions/deadline set in the action plan

Assessment of the completion by
the Commission

Court’s assessment of the stage of
implementation as at 31.12.2006

Court’s preliminary assessment of
the impact achieved as at
31.12.2006

13.2

Update, in the context of the annual activity reports, how Directorates-General gain assurance
from the internal control structures for structural funds and agriculture for the 2007 to 2013
period (31.12.2007).

Completed

In progress of implementation

—

Disseminate good practices for primary level checks to manage the risk of error in underlying
transactions and recommend Member States to step up their information activities directed at
beneficiaries, including information on controls and risk of cancellation of funds (30.6.2006).

Completed

Implemented

Impact not yet realised
(follow-up required)

14a

14b

15

16a

16b

Provide in the context of the structural funds and indirect centralised management 2007 to 2013
guidelines for beneficiaries and/or intermediate levels on controls and responsibilities in the
control chain (31.12.2007).

In progress

In progress of implementation

Conclude for structural funds ‘contracts of confidence’ with 8 Member States, if sufficient
volunteers, as a sound basis to prepare for implementation of the new legislation and to improve
assurance on expenditure under the existing legislation (31.12.2007).

In progress

In progress of implementation

Establish guidelines, based on existing experience, on accreditation, training and monitoring of
external auditors in the domain of research and other internal policies (30.6.2007).

In progress

In progress of implementation

Develop common approaches to using risk and representative sampling in research and other
internal policies, and external policies (31.12.2007).

In progress

In progress of implementation

16c

Coordinate audit standards, error rate reporting, etc. for structural funds (31.12.2007).

In progress

In progress of implementation

(1) The implementation/interpretation of the legal framework still should bear in mind the objective of simplification.
Source: Court of Auditors.

—

—

—

—

—

C
2
7
3
/
4
0

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

.

1
5
1
1
2
0
0
7

.

15.11.2007

EN

Official Journal of the European Union

C 273/41

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.21. As stated in its annual report 2005 (22), the Court will
evaluate the results of the action plan when it is possible to assess
its impact. The Court however notes that the Commission’s time-
table for its action plan (see paragraph 2.19) appears to be opti-
mistic and points out that most of the actions concerned are
likely to have a real impact on the functioning of the supervisory
and control systems of the Commission only in the medium/long
term.

2.21. The Commission itself pointed out in the progress report on the
Commission Action Plan towards an Integrated Internal Control Frame-
work (1) that the new sub-actions will be completed within the original
timetable for the action plan (end of 2007) and will, together with the
ongoing actions, ensure that the framework will be in place by that date
for the Integrated Internal Control Framework to begin to have the
planned impact on assurance.

2.22. Table 2.2 provides an overview of the Court’s preliminary
assessment on the implementation of the measures included in
the action plan towards an integrated internal control framework.
At the end of 2006, this analysis indicates that 4 actions were not
yet started, 16 were still in progress (of implementation), 15 (23)
required follow-up (the objective was not entirely achieved or the
impact was not yet realised) and 6 were newly introduced actions.
The Court considers that some of these actions are a follow-up of
(or linked to) previous actions established by the Synthesis Report
for 2005 and/or before (see paragraph 2.29) (24).

2.22. The implementation of the action plan is largely respecting the
timetable set by the Commission, which extends over the years 2006
and 2007. The Commission will provide a final report on the imple-
mentation of the action plan in spring 2008. The impact will be seen
over a longer period. The Commission will monitor this impact on assur-
ance and the 2008 report will take a first look at the impact of the dif-
ferent actions and will draw conclusions for the future consolidation of
the integrated internal control framework (see COM(2007) 86).

(22) See the Annual Report concerning the financial year 2005, para-

graphs 2.3 and 2.24.

(23) 11 of them have been almost or fully implemented.
(24) In particular, multi-annual objectives presented in annex 1 of the
2005 Synthesis Report (COM(2006) 277 of 7.6.2006), which also
include actions of previous synthesis reports still in progress. E.g.
objectives no 1 ‘achieving an effective internal control system and
ownership of internal control concepts and processes at all levels in
each Directorate-General and service’, 2 ‘promoting the Commission’s
accountability through annual activity reports and their synthesis sol-
idly based on assurances from managers’, 3 ‘establishing effective and
comprehensive risk management …’, 4 ‘making objectives and indi-
cators a policy and management tool …’, 5 ‘ensuring a smooth imple-
mentation of accepted internal audit recommendations’, 8 ‘ensuring
strong follow-up of action plans related to the expressed reservations,
notably for the progress to be made in 2006’, 9 ‘enhancing account-
ability by establishing a comprehensive integrated internal control
framework …’, 10 ‘improving efficiency and strengthening account-
ability by ensuring proportionality and a sound balance between
ex-ante and ex-post controls and by further harmonisation and better
focusing of ex-post controls’ and 12 ‘making financial management
more efficient by applying simplification measures’. See also the
Annual Report concerning the financial year 2002, paragraph 1 104,
and concerning the financial year 2003, paragraph 1.76.

(1) See COM(2006) 9 final of 17.1.2006.

C 273/42

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THE COMMISSION’S REPLIES

Correction of errors

2.23. The primary objective of supervisory and control systems
is to prevent or to detect and correct errors in transactions from
the EU budget. As in previous years, the Court’s audit has found
evidence of material error in substantial areas of EU spending and
that most errors occur at the level of final beneficiaries; correc-
tion of errors in spending from the EU budget would therefore
require primarily action at this level (25).

2.23. Where the supervisory and control systems have been assessed as
ineffective and where the weaknesses identified constitute a risk for the EC
budget, the Commission applies the mechanisms laid down for the exer-
cise of its supervisory role to recover the respective amounts from the
Member State responsible. Member States thus have an incentive to
ensure adequate controls in order to avoid possible financial corrections.

2.24. There is however insufficient evidence concerning correc-
tions made. The information on recoveries and financial correc-
tions presented in the 2006 annual activity reports and different
sections of the 2006 final consolidated annual accounts does not
contain sufficient explanations in order to disclose the risk of
overlapping of the different elements. Furthermore, it does not
make it possible to distinguish between the recoveries of
final
at
illegal/irregular
beneficiaries/recipients and the corrections borne by Member
States for systems weaknesses.

expenditure

level of

the

the

Errors in the Structural Funds identified by the Court also occur at the
level of implementing bodies, not the individual claimants, for example
in the determination of co-financing rates. Flat rate financial corrections
borne by Member States are in these cases an indication of the extent of
the effectiveness of the Commission’s supervisory control to safeguard the
Community budget.

2.24. Whereas the information on recoveries and financial corrections
in the agricultural sector is generally adequate, it needs to be improved
in other sectors. Action 11N of the action plan is aimed inter alia at
determining ‘whether recovery and offsetting systems are working effec-
tively’, by identifying amounts recovered in 2005 and 2006 and their
coherence with errors identified during controls and for shared manage-
ment it will examine the reliability of national monitoring and report-
ing systems.

The Commission will endeavour to analyse the various systems used in
recovering amounts in order to provide better information about such
recoveries in the annual accounts.

(25) Therefore, recoveries such as flat rate or lump sum corrections sup-
ported by the Member States for weaknesses in the supervisory and
control systems or spontaneous reimbursements by the final
beneficiaries/recipients are not directly relevant for indicating effec-
tiveness of supervisory and control systems at the level of final
beneficiaries/recipients.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.25. Moreover, the information given is incomplete because it
does not show the full extent of corrections made on EC expen-
diture nor to which extent the amounts relate to expenditure
made in 2006 (see paragraphs 5.61 and 5.62). In particular, this
is the case for the area of structural actions, despite the fact that
specific mechanisms are in place, both at the level of the Com-
mission and the Member States, to ensure the return of ineligible
grants (e.g. by exchanging ineligible against eligible expenditure
and by offsetting of recoveries with expenditure or by reduction
of future cost claims).

2.25. The decisions on financial corrections in agriculture taken in
2006 are listed in the Directorate General for Agriculture and Rural
Development annual activity report with, for each decision, the total of
the sums excluded from Community financing.

The Commission accepts that it needs to furnish more complete evidence
of financial corrections and recoveries regarding structural actions, and
has therefore taken steps to improve the quality of the information avail-
able within the Commission and to obtain the information from Mem-
ber States which despite regulatory requirements has not been consistently
supplied.

Information available in the Commission on correction of errors

2.26.
In view of the need to ensure the availability, complete-
ness and reliability of the information on correction of errors, the
Commission launched in 2006 a number of initiatives.

2.27.
In addition to an action taken for EAGGF Guarantee (see
paragraphs 5.52 and 5.61), the Commission modified Regulation
(EC) No 448/2001 in December 2006 (26) and issued a guidance
note on information that is required regarding the corrections
made and amounts to be recovered by Member States in the area
of structural actions.

2.27.
In January 2007 the Commission also wrote to all Member
States requesting information for 2006 and cumulatively for the whole
2000-2006 period on recoveries and withdrawals and the situation of
pending recoveries at the end of 2006.

2.28.
In March 2007, a ‘new measure (11N)’ was introduced in
the action plan towards an integrated internal control framework
(see paragraph 2.20 and Table 2.2). On this basis, the Commis-
sion aims at determining whether recovery and offsetting systems
are working effectively, by identifying amounts recovered in
2005 and 2006 and their coherence with errors identified during
controls. In this context, it will, in the case of expenditure under
direct management, develop a typology of errors and seek to
identify the relationship with recoveries, financial corrections and
adjustments to payments. For expenditure under shared manage-
ment, it will examine the reliability of national monitoring sys-
tems.

(26) Regulation (EC) No 1978/2006 (OJ L 368, 23.12.2006, p. 89).

C 273/44

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.29. However, this action 11N is in reality a follow-up of (or
otherwise linked to) previous Commission horizontal action
plans (27) (see paragraph 2.22) which the Commission had con-
sidered as having been completed.

2.29. Action 11N is wider than the previous actions cited by the
Court, as it makes the link with the findings of controls.

In a number of previous annual reports (28), the Court has
2.30.
drawn the attention of the Commission to the deficiencies in
obtaining reliable information on the correction of errors. Due to
the complexity of the issues, there is no indication that these defi-
ciencies have yet been solved or are likely to be solved in the short
term.

2.30. As indicated in reply to paragraph 2.6, the Commission will
make sure that future annual activity reports include more information
about corrections that were envisaged, launched or imposed during the
given year. The Commission pays particular attention to developing pre-
ventive measures, based on an analysis of the reasons which lead to the
imposition of corrections. These may be general measures such as defin-
ing the legislative framework or more specific, such as individual finan-
cial checks.

(27) (a) Action 96 ‘More effective management of recovery of unduly paid

funds’ (COM(2000) 200 of 1.3.2000) of the White Paper;
(b) Action No 5.3.2A ‘The recovery of amounts due (…) is to be
addressed in the annual management plan (…) accompanied by
appropriate performance indicators (…)’ and B ‘Directorate-General
for Budget will lead the monitoring process on clearance of the back-
log of recoveries (…) that would provide for management purposes
regular and reliable statistics/indicators (…) and that would allow a
Commission wide overview of overall performance and effectiveness’
of the synthesis 2002 (COM(2003) 391 of 9.7.2003); and
(c) followed-up
2004
(COM(2005) 256 of 15.6.2006) and No 4 of synthesis 2005
(COM(2006) 277 of 7.6.2006) ‘Making objectives and indicators a
policy and management tool (…)’.

objectives No

synthesis

by

of

5

(28) See e.g. the financial reservation on Sundry debtors in the Court’s
Statement of Assurance concerning the financial years 2004, 2003,
2002 and paragraph 6.41 of the Annual Report concerning the finan-
cial year 2005.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

CONTROL STANDARDS

2.31. The Court examined the application of the internal con-
trol standards (29) by a number (30) of the Commission’s services,
with the view to assessing not only the degree of implementation
of the minimum requirements (baselines), but also to evaluate the
effectiveness of the systems ensuring the legality and regularity of
the underlying transactions (31).

Compliance with baseline requirements

2.32. The overview on the state of internal control in the Com-
mission’s services in 2006, presented by the Directorate-General
for the Budget, shows that, for the 2006 financial year, the
Directorates-General comply on average with 95 % of the base-
line requirements. Given that the baseline requirements remained
essentially unchanged (32), the Court notes that compliance with
the internal control standards is stable, compared with 2005. The
Court’s assessment of the implementation of internal control
standards (generally consistent with the Commission’s analysis) is
presented in Table 2.3.

2.32.
Even if the average of 95 % seems to be stable and unchanged
in 2006 Directorates-General were faced with new requirements in the
area of ICS 11 (in particular preparation of IT Security Plans based upon
a risk analysis of IT systems) and ICS 15 (two new requirements in the
area of business continuity planning).

(29) Standards no 11 ‘Risk analysis and management’, 12 ‘Adequate man-
agement information’, 14 ‘Reporting improprieties’, 17 ‘Supervision’,
18 ‘Recording exceptions’, 20 ‘Recording and correction of internal
control weaknesses’, 21 ‘Audit reports’ and 22 ‘Internal audit capa-
bility’.

(30) DGs AGRI, AIDCO, BUDG, ECFIN, ECHO, ELARG, EMPL, FISH,
INFSO, PMO, OIB, OIL, OPOCE, REGIO, RELEX, RTD and TREN.
(31) The immediate direct impact of the internal control standards varies,
depending on the management mode for the budget implementation.
For example, for agriculture and structural funds, where day-to-day
management is carried out by national or regional authorities, the
Commission’s internal controls extend to supervision of management
and control systems in Member States.

(32) The number of baseline requirements increased from 75 to 79. For 9
of the baseline requirements selected for 2006, minor modifications
were made in comparison with 2005.

Table 2.3 — The Court’s analysis of the implementation of internal control standards (with a direct link to the legality and regularity of underlying transactions)
for the main Directorates-General (situation as at 31 December 2006)

Compliance

Standard no 11
‘Risk analysis
and management’

Standard no 12
‘Adequate management
information’

Standard no 14
‘Reporting improprieties’

Standard no 17
‘Supervision’

Standard no 18
‘Recording exceptions’

Standard no 20
‘Recording and correction
of internal control
weaknesses’

Standard no 21
‘Audit reports’

Standard no 22
‘Internal audit capability’

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

A

A

B

A

A

A

A

A

B

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

B

A

A

B

A

B

A

A

B

A

A

B

A

A

A

A

A

B

A

A

A

A

B

B

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

B

B

A

B

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

B

A

A

A

A

B

B

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

B

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

A

Directorates-General or services

Agriculture and Rural
Development

Budget

Economic and Financial Affairs

Enlargement

Energy and Transport

Employment, Social Affairs and
Equal Opportunities

External relations

EuropeAid

Fisheries and Maritime Affairs

Humanitarian Aid

Information Society and Media

Office for Administration and
Payment of Individual Entitle-
ments

Office Infrastructure and
Logistics Brussels

Office Infrastructure and
Logistics Luxembourg

Publications Office

Regional Policy

Research

Execution of pay-
ment appropria-
tions in 2006
(million euro)

53 465

1 086

283

2 063

1 161

9 478

523

3 572

725

607

1 268

2 611

332

70

154

19 766

3 325

Assessment:
Compliance
A: Compliance with baseline requirements.
B: Partial compliance with baseline requirements.
Source: Court of Auditors.

C
2
7
3
/
4
6

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

.

1
5
1
1
2
0
0
7

.

15.11.2007

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Effectiveness

2.33. Despite the high level of compliance with the baseline
requirements, supervisory and control systems at the level of the
Commission do not sufficiently mitigate the risk of error, in par-
ticular, in certain areas of agriculture, structural policies, internal
policies, external actions and pre-accession aid (see para-
graphs 5.77, 6.38, 7.30, 8.32, 9.23 and Table 2.4). This analysis
is in line with one of the conclusions (33) of the 2006 annual
report of the Commission’s Internal Audit Service (IAS) (34).

2.33. This is to be expected as the Internal Control Standards mainly
concern operations within the Commission, whereas the bulk of the errors
occur in expenditure managed by the Member States or by implement-
ing organisations.

As regards the area of agriculture replies are given in paragraphs 5.63,
5.64 and 5.77.

As regards pre-accession aid, see reply to paragraph 9.23.

Table 2.4 — Assessment of effectiveness of supervisory and control systems (1)

Policy area

Overall assessment

Own Resources (2)

Agriculture

— Commission level

IACS

non-IACS

— Member State level

IACS

non-IACS

Structural policies

— Commission level

— Member State level

Internal policies including research

External actions

— Commission Headquarters and Delegation

Pre-accession aid

— Commission level

Phare/Turkey and ISPA

SAPARD

— National level

Administrative expenditure (3)

The above table summarises the overall assessment of supervisory and control systems, as outlined in the relevant chapters. It highlights the
key elements but cannot present all of the relevant detail for which it is necessary to refer to the body of the report, within the context of the
methodology underlying the Court’s audit approach (see paragraphs 1.38 and 1.39).

Legend

Satisfactory

Partially satisfactory

Unsatisfactory

(1) Distinction between Commission and other levels is provided when information is relevant.
(2) See scope limitations in paragraphs 4.3, 4.4 and 4.7.
(3) The assessment is limited to the ‘Functioning of supervisory and control systems’ of the Commission.
Source: Court of Auditors.

(33) The IAS audit work found clear improvements in the internal con-
trol systems in many areas. However, there are also still major weak-
nesses and further efforts are needed. Areas for improvement include
e.g. ex-post controls and contract management.

(34) COM(2007) 280 of 30.5.2007.

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THE COMMISSION’S REPLIES

2.34. The quality review performed by the Commission’s Inter-
nal Audit Service (IAS) on the Internal Audit Capabilities (IACs)
of Directorates-General concluded that the majority of IACs (35)
partly or generally complied with (professional) standards but
efforts to improve the internal audit work should continue (36).
The Court takes note of the findings included in this review and
welcomes the relevant proposals for improvement, in particular
the one recommending that, on the one hand, IACs should pro-
vide an overall assessment on the internal control systems of
Directorates-General at the end of the 3 year period ending 2009
and, on the other hand, the same would also apply to the IAS at
the Commission level (37).

2.34. The role of the Internal Audit Capability (IAC) is not to pro-
vide an annual opinion on the Annual Activity Reports (AAR) of the
Directors General, but to give advice regarding the AAR process and in
accordance with the nature and scope of its work during the year in ques-
tion, the IAC should express an opinion on the state of control as a con-
tribution to the preparation of the AAR (see SEC(2003) 0059).

The Commission has no current plans to change its control structure as
regards the role of the Internal Audit Capabilities.

The issue could be re-examined in the future when the Commission will
have gained more experience with the present architecture of internal con-
trol, also taking into account the resources required.

OVERALL CONCLUSION AND RECOMMENDATIONS

2.35.
In the financial year 2006, the Court finds further
improvements in the Commission’s supervisory and control sys-
tems, in particular, the improvement of the process of prepara-
tion of
declarations
(paragraph 2.7) and the assessment of the functioning of super-
visory and control systems and of the impact of the relevant res-
ervations on the assurance given in the Directors-General
declarations (paragraphs 2.9 and 2.12).

activity

reports

annual

and

the

2.36. The Court’s audits however identified continuing weak-
nesses in the assessments provided by the annual activity reports
and declarations of some Directors-General (paragraphs 2.13
to 2.18) and the functioning of the supervisory and control sys-
tems (paragraphs 2.33 and 2.34).

2.36. Annual activity reports generally set out clearly their assessment
of the effectiveness of management and control system in the Member
States and the corrective measures underway to bring about the required
improvements. The Director Generals’ assessments differ from the
Court’s, for example with regard to the need for reservations on the assur-
ance expressed, largely because of the multi-annual perspective of the
control systems put into place in each policy area.

(35) The requirements underlying the IAC are foreseen by the internal con-

trol standard No 22.

(36) Increasing professionalism and coordination of audit planning pro-

cess.

(37) See also the Annual Report concerning the financial year 2004,

paragraph 1.76.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.37. The Court recommends that the Commission continues
its efforts to reinforce the supervisory and control systems of its
Directorates-General focusing on the following areas:

2.37.

(a)

ensuring that annual activity reports and declarations present
a consistent and rigorous assessment of supervisory and con-
trol systems, including appropriate legality and regularity
indicators which is compatible with the reservations (para-
graphs 2.13 to 2.18);

(a) The Commission committed itself in the 2006 Synthesis Report to
monitoring the implementation of remedial actions launched by the
delegated authorising officers to resolve underlying control weak-
nesses.

(b) completing an appropriate follow-up of the relevant mea-
sures of the action plan towards an integrated internal con-
trol framework in view to ensure a real
impact on the
supervisory and control systems, in particular the elaboration
of adequate and reliable information on correction of errors
at the level of final beneficiaries (paragraphs 2.19 to 2.30);

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

(c)

improving the effectiveness of the supervisory and control
systems with a view to sufficiently mitigate the risk of error
(paragraphs 2.33 and 2.34).

(c) The Commission agrees with the recommendation and aims to
ensure that the control resources are used cost effectively and that the
cost of control is justified in terms of the observed error rate, the dis-
suasive effects, and other qualitative benefits.

The Commission will continue its efforts to enhance the supervisory
and control systems with a particular view to further mitigate the
risk of errors in the programmes implemented by Member States in
shared management. The Commission’s action plan towards an
integrated internal control framework is intended to optimise the
cooperation with the Member States and the effectiveness of the
overall control framework. The new elements introduced in the regu-
latory framework for the 2007-2013 period will also increase
effectiveness.

15.11.2007

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Official Journal of the European Union

C 273/51

CHAPTER 3

Budgetary Management

TABLE OF CONTENTS

Introduction

Observations

Amending budgets have the effect of reversing increase in payments budget

Outstanding budgetary commitments show a further increase

Cohesion Fund spending below estimates

Year n + 2 rule resulted in a low level of decommitment

Paragraph

3.1-3.2

3.3-3.15

3.3-3.6

3.7-3.11

3.12

3.13-3.14

Commission report on budgetary and financial management improved, but provides
an inconsistent level of information

3.15

Conclusions and recommendations

3.16-3.21

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INTRODUCTION

3.1. This chapter analyses issues arising from the implementa-
tion of the EU general budget in 2006, the last year of the 2000
to 2006 financial perspective. In particular, it covers the high rate
of budgetary implementation, the amending budgets, the increas-
ing level of outstanding budgetary commitments and the effect of
lower than forecast spending in the Cohesion Fund.

For more detailed information on the structure and opera-
3.2.
tion of the budget — particularly the meaning of, and relation-
ship between, payments and commitments — see Annex I of this
Annual Report.

OBSERVATIONS

Amending budgets have the effect of reversing increase in payments
budget

3.3. Total appropriations in 2006 for commitments (122,8 bil-
lion euro) and payments (111,2 billion euro) were respectively
4,1 % and 1,6 % higher than in 2005. Overall, the appropriations
for commitments and payments remained below the financial
perspective ceilings by 0,7 billion euro and 7,9 billion euro
respectively.

3.4. The six amending budgets voted during the year resulted in
an overall 0,6 billion euro decrease in appropriations for com-
mitments and a 4,6 billion euro decrease in appropriations for
payments. The latter is mostly a reaction to lower than expected
payments in agriculture (0,9 billion euro) and structural opera-
tions (3,3 billion euro). Reducing appropriations for payments in
this way reflects good budgetary management as it reduces the
budgetary surplus (1) by the same amount
(allowing own
resources to be returned to Member States).

3.4. The Commission is taking steps to reduce underimplementation
to a minimum through active budget management. The Budget Forecast
Alert system helps detect potential problems at an early stage. Unfore-
seeable events are dealt with by amending budgets, as recommended by
the Court. As a result of this approach, the rate of implementation of
final payments has steadily risen to close to 100 %.

3.5. The budgetary outturn for 2006 is given in Diagrams III
and IV of Annex I, and shows the following:

3.5.

— utilisation rates for both commitments and payments — at
99 % and 96 % respectively — were identical to 2005;

(1) The budgetary surplus shows the extent to which the budget has not
been used. It is not a reserve and it cannot be accumulated and used in
future years to finance expenditure. The unused revenue that the sur-
plus represents is offset against the own resources to be collected for
the following year.

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THE COMMISSION’S REPLIES

— But for this, and lower than expected payments in EU-10, the ini-
tially available payment appropriations would have been fully used,
according to Commission estimates.

— for structural operations the 3,3 billion euro reduction in
payment appropriations (which exceeded the budgetary
increase in this area for the year) resulted in a final utilisation
rate of 99 %. This would have been 90 % without the amend-
ing budget. This reduction was mainly due to the holding
back of payment claims in Spain and payments to the United
Kingdom as a result of weaknesses in their management and
control system-;

— 2,7 billion euro of unused payment appropriations were not
cancelled but carried over from 2006 to 2007, the same level
as was carried over from 2005 to 2006;

— the budgetary surplus for the year was 1,9 billion euro, less

than in 2005 (2,4 billion euro).

3.6. Detailed information on budgetary implementation for
2006 can be obtained from the Commission document ‘Report
on budgetary and financial management — Financial year
2006’ (2) (see paragraph 3.15).

Outstanding budgetary commitments show a further increase

3.7. Outstanding budgetary commitments — unused commit-
ments carried forward to be used in future years, mainly on mul-
tiannual programmes — increased by 12,6 billion euro (10,6 %)
to 131,6 billion euro (see Table 3.1). Around 90 % of the increase
(and 71 % of the total) related to structural operations, 23 % of
which (2,9 billion euro) related to the Cohesion Fund (see para-
graph 3.12).

3.7. As the Court notes at paragraph 3.10, a build-up of outstand-
ing commitments over a given Financial Perspective period is a natural
consequence of differentiated expenditure, whereby commitments are
made within the period but payments can continue beyond the end of the
period.

3.8. 2006 was the last year of the 2000 to 2006 programming
period: by the end of the year all commitments for that period
had been made. The outstanding budgetary commitments at the
end of 2006 therefore represent the full extent of the remaining
payments to be made over the next few years (3). They corre-
spond to 28 % of the total amounts of the related financial per-
spective headings for the whole period.

(2) http://ec.europa.eu/budget/library/publications/fin_manag_account/

rep_budg_fin_manag_2006_en.pdf.

(3) At the same time as payments related to the start of the 2007 to 2013

period.

Table 3.1 — Change in balance of outstanding commitments 2006

By type

Non-
Differenti-
ated appro-
priations

Differenti-
ated appro-
priations

Total

Agriculture

Structural
operations

Internal
policies

External
actions

Admini-
stration

Reserves

Pre-accession
strategy

Compen-
sation

Round-
ing

Commitments brought forward

Balance brought forward

1 254

117 826

119 080

1 863

81 704

14 597

12 387

Payments

Decommitments

Cancellations

Commitments made in 2006

– 1 006

– 43 576

– 44 582

– 1 797

– 31 567

– 4 804

– 3 561

– 56

– 163

– 1 674

– 1 730

– 163

– 18

– 42

– 707

– 5

– 430

– 23

– 311

– 21

820

– 703

– 13

– 70

Commitments made

56 465

64 595

121 060

49 865

44 579

10 195

5 867

6 675

Payments

Cancellations

Rounding

Commitments outstanding at end
2006

Source: 2006 annual accounts.

– 55 334

– 6 660

– 61 994

– 48 001

– 832

– 4 210

– 1 626

– 5 997

– 15

– 1

– 15

– 1

– 7

– 2

1

– 2

1

1 144

130 511

131 655

1 870

93 171

15 318

12 734

– 4

– 1

707

7 710

– 2 150

– 250

– 4

2 678

– 126

– 1

128

– 128

1 074

– 1 074

0

7 857

0

– 1

– 1

2

– 1

1

– 2

– 2

C
2
7
3
/
5
4

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

.

1
5
1
1
2
0
0
7

.

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THE COMMISSION’S REPLIES

3.9. At the end of 2006 the balance of outstanding budgetary
commitments represented 2,6 years’ worth of payments and
2,0 years’ worth of commitments at the 2006 rates. These mea-
sures are respectively 30 % and 38 % more than at the corre-
sponding point in the previous cycle (i.e. 1999, which was the last
year of the 1994 to 1999 period), indicating a higher relative level
of outstanding budgetary commitments.

3.10. Outstanding budgetary commitments arise as a natural
consequence of differentiated expenditure, where expenditure
programmes take a number of years to complete and commit-
ments are made sometimes years before the corresponding pay-
ments. In the event of underspending — such as happened to a
significant extent between 1999 and 2003 (4) and is currently the
case for structural operations spending in the enlargement coun-
tries (see paragraph 3.12) — the unused payment appropriations
are cancelled, but unused commitments made are carried forward
for a certain period before being decommitted (see para-
graph 3.13). Since 1994, commitments have exceeded payments
by an average of 21 % (see Graph 3.1). The effect is a greater than
expected build up of outstanding commitments, with the situa-
tion being rolled forward each year.

3.9-3.10. The Commission also uses the ratio of outstanding com-
mitments to average annual commitments, which is less influenced by
advance payments and one-off events. This ratio has been around 2 years
of commitments (2,1 in 2006), which is normal given the n + 2 rule.

The year 1999 was four years after enlargement of the Union from 12
to 15 Member States, whereas 2006 was two years after the accession
of ten new Member States. Secondly, the changeover in the commitments
and payments system (commitments made automatically every year in
2000-2006 instead of depending on progress in execution as in 1994-
1999, and payments as reimbursements instead of advances) has also
tended to increase outstanding commitments relative to the previous
period. The build-up of commitments over the period is normal in these
circumstances.

Graph 3.1 — Differentiated appropriations 1994 to 2006

(4) See paragraph 2.12 of the Annual Report concerning the financial year 2003.

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3.11. The slight fall in 2006 payments compared to 2005 was not
related to the end of programme period. Available evidence on execution
trends of the programmes of the 2000-2006 programme period does
not suggest any underlying significant deceleration.

3.11. As mentioned in paragraph 3.7, structural operations —
the Structural Funds and the Cohesion Fund — represent the
majority share of the outstanding commitments. For the Struc-
tural Funds the 2000-2006 programmes outstanding commit-
ments were 76,9 billion euro, representing 2,6 years of payments
at the 2006 spending rate (see Graph 3.2). This represents a pro
rata fall from 3,6 years of payments at the end of 2005. Benefi-
ciaries of the funds have until the end of 2008 to make pay-
ments (5). However, experience shows that spending naturally
tails off towards closure. This indicates that expenditure risks
being decommitted under the year n + 2 rule (see paragraph 3.13).
Indeed, spending in 2006 was slightly less than for 2005 despite
the increased budget (6).

Graph 3.2 — Structural Funds 2000-2006 programming period

(5) The Commission can make payments to Member States up to the clo-
sure of the operational programmes, the claims for which have to be
made to the Commission by March 2010. However, these are to be
based on payments made by final beneficiaries up to the end of 2008.
In more general terms ‘The cumulative backlog of payments from
years 2000 to 2006 is 29,6 billion euro’. Source: Commission Analy-
sis of the budgetary implementation of the Structural Funds in 2006,
May 2007, page 15.

(6)

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Cohesion Fund spending below estimates

3.12. The spending rate for the Cohesion Fund was less than
expected in the new Member States, linked to their difficulties in
absorbing expenditure. An amending budget reduced payment
appropriations by 0,5 billion euro and outstanding budgetary
commitments
increased from 12,5 billion euro in 2005
to 15,4 billion euro at the end of 2006 (see Graph 3.3). This rep-
resents 5,1 years of payments at the 2006 spending rate. The cor-
responding spending is therefore likely to reach far into the 2007
to 2013 period, when the Member States will have new pro-
grammes to establish and the additional related expenditure to
absorb.

3.12. The Commission refers to its comments at paragraph 3.9 on the
ratio between the level of outstanding commitments and the average
annual commitments. For the Cohesion Fund this ratio was 3,9 at the
end of 2006.

The profile for Cohesion Fund spending in EU-10 was based on the deci-
sions of the Copenhagen European Council in 2002. Cohesion Fund
spending in EU-10 has been constrained not only by start-up absorp-
tion difficulties, but also by the relatively long lead times for implement-
ing infrastructure projects. However, the level of this spending in EU-10
is forecast to increase in the next few years. Most projects have a final
date of implementation of end 2010, with the bulk of closures expected
for 2011 and 2012. In the 2007-2013 period Cohesion Fund projects
will have shorter implementation times as the n + 2/n + 3 rule will be
applied to them (see also the Court’s observation at paragraph 3.14).

Graph 3.3 — Cohesion Fund

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Year n + 2 rule resulted in a low level of decommitment

3.13. Outstanding commitments for the Structural Funds (but
not the Cohesion Fund) are subject to the year n + 2 rule, which
requires commitments to be cancelled if no corresponding pay-
ments have been made by the end of the second year following
the year the commitment was made. Member States are warned
of the risk of cancellation, so helping them focus attention where
implementation is falling behind. The total amount decommitted
under the year n + 2 rule in 2006 was 217 million euro (286 mil-
lion euro in 2005). De-commitments remain small in compari-
son with average annual commitments (around 0,7 %).

3.13. The objective of the n + 2 rule is to boost implementation. A
low rate of cancellation indicates that the rule is working as intended.

The rule has proved effective in improving financial management of the
funds and minimising losses (amounts de-committed) by comparison
with the previous system of de-commitment only at closure.

3.14. The Court notes that the new 2007 to 2013 program-
ming period is subject to a change, by which some Member
States (7) will be granted one extra year (n + 3) to make claims on
the related commitments. At the same time, the Cohesion Fund
will be subject to the n + 2/n + 3 rule. The first change will poten-
tially result in a further increase in outstanding budgetary com-
mitments, but this effect is likely to be mitigated by the effect of
the second change.

Commission report on budgetary and financial management
improved, but provides an inconsistent level of information

3.15. The Commission’s report on budgetary and financial
management provides improved information on detailed budget
implementation, outstanding budgetary commitments — includ-
ing indicators — and reasons for lower than forecast spending.
However, in contrast to 2005, no information is given on the
cumulative implementation of the larger multiannual Community
programmes, and no distinction is made between EU-15 and
EU-10 expenditure. Furthermore, the report does not always
present a consistent level of analysis. For example, more detailed
explanation is given for lower than forecast spending in agricul-
ture than for the other areas. The lower than forecast spending on
structural operations which triggered the amending budget is not
analysed in detail (8).

3.15. The Commission takes note of the comments. The timing of the
report which is required by the Financial Regulation (end March) makes
it difficult to provide more analysis of structural operations expenditure,
which is why this information is presented in the separate report on the
Structural Funds published in May.

The report contains an implementation overview chapter of each Finan-
cial Perspective heading as well as a separate chapter ‘Analysis by policy
area of main cases of under-implementation’ intended to provide a com-
prehensive picture of budgetary adjustments and the implementation out-
turn. This is usually done by quoting the reasons given to the Budgetary
Authority.

(7) The year n + 3 rule applies to spending on the 2007 to 2013 period
in 2007 to 2010 for the Member States acceding in 2004 and 2007,
as well as Portugal and Greece (Article 93 of Council Regulation (EC)
No 1083/2006).

(8) Additional information is however provided on the Structural Funds
in the annual report on the budgetary execution of the Structural
Funds.

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CONCLUSIONS AND RECOMMENDATIONS

3.16. The 2006 budget increased compared to 2005 and the
spending rates remain at a high level. Nevertheless, for structural
operations initial payments appropriations turned out to be sig-
nificantly higher than required and the final budget had to be
reduced by 3,3 billion euro by an amending budget, effectively
cancelling the increase received.

3.16. The final budget had to be reduced due to a reduction in pay-
ments to Spain and the United Kingdom as a result of weaknesses in
their management and control systems and to lower than expected spend-
ing in the EU-10.

3.17. Outstanding budgetary commitments on differentiated
expenditure increased by 10,7 % to 130,5 billion euro. At
2,6 years’ worth of payments this is 30 % more than at the com-
parable point in the previous period (1999). The change from the
year n + 2 rule to the year n + 3 rule for certain Member States
for the new programming period risks further increasing the level
of outstanding budgetary commitments, although this effect is
likely to be mitigated by the application of the n + 2/n + 3 rule to
the Cohesion Fund.

3.17. The ratio of outstanding commitments to average annual com-
mitments is around 2, which is normal given the n + 2 rule.

The situation in 1999 is not readily comparable with that of 2006,
given the change in the regulatory framework and enlargement (see para-
graph 3.9).

3.18. As highlighted in 2005 (9), the already high rate of spend-
ing in the Structural Funds (which represents the major propor-
tion of differentiated expenditure
and the outstanding
commitments) needs to be further increased in 2007 and 2008
to ensure that the deadline for beneficiaries in Member States to
make payments (end of 2008) is met for the 2000 to 2006 pro-
grammes. This will be difficult as spending tends to reduce at the
end of the programming period. The risk that subsequent closure
of the current programmes will be delayed and impact on the
start and implementation of the 2007 to 2013 programmes —
as was the case for the start of the current programming
period (10) — should be addressed by the Commission and the
Member States.

3.18. The deadline for expenditure (end 2008) is to be distinguished
from the closing date for the submission of final payment claims by the
Member States (March 2010). Payment of the balances due will be
made for most programmes in 2010/2011. To prepare for the closure,
the Commission issued closure guidelines in 2006 and is organising clo-
sure seminars for Member States. If the closing date for expenditure is
not met, the unspent funds will be decommitted by the Commission at
closure. Available evidence on execution trends of the 2000-2006 pro-
grammes does not suggest any significant underlying deceleration. The
Commission is working closely with Member States to facilitate a
smooth start-up of the 2007-2013 programmes

(9) See paragraphs 3.10 and 3.16 of the Annual Report concerning the

financial year 2005.

(10) As indicated by the Commission in COM(2002) 528 final, p. 4 —
‘The administrative and financial constraints connected with the
completion of the 1994 to 1999 programmes contributed largely to
the delays in starting up programmes for the 2000 to 2006 period’.

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THE COMMISSION’S REPLIES

3.19.
Specific attention is required for the Cohesion Fund where
underspending has caused a large increase in outstanding budget-
ary commitments. The situation is likely to be exacerbated by the
start of the new programming period.

3.19. The Commission is monitoring the Cohesion Fund situation
carefully. The lower than expected spending rate of Cohesion Fund in
EU-10 is partly due to the relatively long lead times for infrastructure
projects and partly to start-up problems (see paragraph 3.12). The
application of the n + 2/n + 3 rule in 2007-2013 will work against
the accumulation of outstanding commitments.

3.20. As previously recommended (11), when proposing future
payment budgets the Commission needs to take better account of
the absorption capacities of Member States and the expenditure
profile within the programming period. In this context, the Com-
mission should also pay due attention to the risks to sound finan-
cial management.

3.20. The Commission’s budget planning, anchored in the principle of
sound financial management, takes account to the extent possible of the
absorption capacities of Member States, paying particular attention to
previous years’ budgetary execution, forecasts, and the level of programme
implementation. Unforeseeable events are dealt with by amending bud-
gets. The rate of implementation of final payments has steadily risen to
close to 100 %.

3.21. The Report on budgetary and financial management pre-
pared by DG Budget provides an improved but inconsistent infor-
mation level of detail. The Court recommends that consistent
level of analysis on lower than forecast spending is provided for
all principal budgetary areas.

3.21. The Commission takes note of these comments (see also reply to
paragraph 3.15).

(11) See paragraph 3.21 of the Annual Report concerning the financial

year 2005.

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CHAPTER 4

Revenue

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the statement of assurance

Audit scope

Traditional own resources

VAT and GNI own resources

Paragraph

4.1-4.2

4.3-4.32

4.3-4.8

4.3-4.5

4.6-4.7

Temporary budget compensation and cash-flow facility for new Member States

4.8

Legality and regularity of underlying transactions

Traditional own resources

VAT and GNI own resources

Temporary budget compensation and cash-flow facility for new Member States

Supervisory and control systems

Traditional own resources

VAT own resource

GNI own resource

Conclusions and recommendations

Follow up of previous observations

Special reports issued since the last annual report

4.9-4.15

4.9-4.13

4.14

4.15

4.16-4.27

4.16-4.18

4.19-4.20

4.21-4.27

4.28-4.32

4.33

4.34

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INTRODUCTION

4.1. The revenue in the budget of the European Union consists
of own resources and other revenue. As shown in Table 4.1,
Graph 4.1 and Graph 4.2 own resources are by far the main
source of financing for budgetary expenditure (94,4 %).

Table 4.1 — Revenue for the financial years 2005 and 2006

Type of revenue and corresponding budget heading

Actual revenue
in 2005

Development of the 2006 budget

Initial budget

Final budget

Actual revenue
in 2006

% change
(2005 to 2006)

(a)

(b)

(c)

(d)

e = [(d) – (a)]/(a)

(million euro)

1

Traditional own resources (net of 25 % collection costs)

14 063,1

14 225,1

14 888,9

15 028,3

— Agricultural duties (Chapter 10)

— Sugar and isoglucose levies (Chapter 11)

— Customs duties (Chapter 12)

2 VAT resource

— VAT resource from the current financial year

(Chapter 13)

1 350,8

695,1

12 017,2

16 018,0

763,5

556,2

12 905,4

15 884,3

863,4

150,6

13 874,9

17 186,1

1 291,8

151,6

13 584,9

17 206,2

15 618,9

15 884,3

17 200,3

17 219,8

6,9

– 4,4

– 78,2

13,0

7,4

10,2

— Balances from previous years (Chapter 31)

399,1

0,0

– 14,2

– 13,6

– 103,4

3 GNI resource

70 860,6

80 562,5

70 451,4

70 132,1

— GNI resource from the current financial year

(Chapter 14)

— Balances from previous years (Chapter 32)

4

Balances and adjustments

— UK correction (Chapter 15)

— Final calculation of UK correction (Chapter 35)

— Intermediate calculation of UK correction

(Chapter 36)

5 Other revenue

— Surplus from previous financial year

(Chapter 30)

68 811,6

80 562,5

68 921,2

68 602,1

2 049,0

– 130,6

– 120,3

– 10,3

0,0

0,0

0,0

0,0

0,0

0,0

1 530,2

0,0

0,0

0,0

0,0

1 530,0

– 15,3

– 6,0

– 4,0

– 5,3

6 279,6

1 297,7

4 852,0

6 071,7

– 1,0

– 0,3

– 25,3

– 88,3

– 95,0

– 61,2

NA

– 3,3

— Miscellaneous revenues (Titles 4 to 9)

3 016,9

1 297,7

2 349,2

3 568,9

Grand Total

107 090,7

111 969,6

107 378,4

108 423,0

18,3

1,2

Source: Budgets and amending budgets for 2006; Annual Accounts of the European Communities, 2006.

3 262,7

0,0

2 502,8

2 502,8

– 23,3

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Graph 4.1 — Breakdown of actual revenue in 2006

Source: Annual Accounts of the European Communities, 2006.

Graph 4.2 — Evolution of sources of actual revenue 1991 to 2006

(1) Contains surplus from previous financial year and miscellaneous revenue.

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4.2. There are three categories of own resources: traditional
own resources (1) (customs duties, agricultural duties and sugar
levies) (14,0 %), own resources calculated on the basis of value
added tax (VAT) collected by Member States (15,8 %) and own
resources based on the Member States’ gross national income
(GNI) (2) (64,6 %).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

Traditional own resources

4.3. The main risks to the receipt of traditional own resources
are evasion of duty by the taxpayer, whether by misrepresenta-
tion or simply by smuggling; miscalculation or failure to estab-
lish duty because of undetected errors or weaknesses in customs
authorities’ systems; and errors or omissions in Member States’
accounting for the duty established. The Court’s audit of the
transactions underlying the accounts cannot cover undeclared
imports or those that have escaped customs surveillance.

4.4. The Court audited a sample of underlying transactions
made up of Member States’ declarations to the Commission and
carried out an evaluation of supervisory and control systems,
both in the Commission and in Member States.

4.5. This included a review of the organisation of customs
supervision and of the national systems for accounting for tradi-
tional own resources in six Member States (3) and evaluation of
the supervisory role of the joint committees (ACOR (4), Customs
Code Committee (5)).

(1) Traditional own resources are collected by Member States on behalf of

the European Union, retaining 25 % to cover collection costs.

(2) The VAT and GNI own resources are contributions resulting from the
application of uniform rates to Member States’ harmonised VAT
assessment bases or to the Member States’ GNI, calculated according
to Community rules.

(3) Belgium, France, Italy, Hungary, Slovakia, United Kingdom; in addi-
tion the traditional own resources accounting system of Finland was
reviewed.

(4) Advisory Committee on Own Resources, referred to in Article 20 of
Council Regulation (EC, Euratom) No 1150/2000 (OJ L 130,
31.5.2000, p. 1), as amended by Regulation (EC, Euratom)
No 2028/2004 (OJ L 352, 27.11.2004, p. 1). The Committee consists
of representatives of the Member States and of the Commission, and
provides the liaison between the Commission and the Member States
on own resources matters. It examines questions concerning the
implementation of the own resources system, as well as the estimates
of own resources.

(5) Articles 247 to 249 of Council Regulation (EEC) No 2913/92

(OJ L 302, 19.10.1992, p. 1).

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VAT and GNI own resources

4.6. The main risks for these two resources lie at the level of the
compilation of data used for the National accounts, the use of
estimates where statistical data are not available, and the com-
plexity of the legislative framework.

4.7. The VAT and GNI own resources reflect macroeconomic
statistics, for which the underlying data cannot be audited directly.
For this reason, the VAT/GNI audit took as its starting point the
receipt by the Commission of the macroeconomic aggregates pre-
pared by the Member States (either as forecasts or as final figures)
and assessed the Commission’s systems for handling the data until
they are ultimately included in the final accounts. The audit thus
covered the establishment of the annual budget and its imple-
mentation in respect of the contributions by Member States. The
audit also covered the Commission supervisory and control sys-
tems which are intended to provide assurance that EU revenue is
correctly established and collected, as well as the supervisory role
of the ACOR (6) and GNI (7) Committees.

Temporary budget compensation and cash-flow facility
for new Member States

4.8.
In addition the Court’s audit covered the implementation of
those arrangements intended to compensate new Member States
for budgetary imbalances (8) in accordance with Articles 29
and 30 of the Act concerning the conditions of accession of
EU-10 Member States (9). These arrangements had the form of a

(6) See footnote 4.
(7) The GNI Committee is referred to in Article 4 of Council Regulation
(EC, Euratom) No 1287/2003 (OJ L 181, 19.7.2003, p. 1). The Com-
mittee consists of representatives of the Commission and Member
States. Each year, the Committee examines the GNI data forwarded by
the Member States and issues an opinion on the appropriateness of
these data for own resource purposes with respect to reliability, com-
parability and exhaustiveness. The Committee is consulted by the
Commission with regard to the latter’s proposals for improving GNI
calculations, and it also deals with questions relating to the GNI com-
pilation practices, revision of GNI data and the problem of exhaustive-
ness of GNI.

(8) The European Council of Fontainebleau of 25 and 26 June 1984 rec-
ognised that ‘any Member State sustaining a budgetary burden which
is excessive in relation to its relative prosperity may benefit from a cor-
rection at the appropriate time’. It also pointed out that the ‘expendi-
ture policy is ultimately the essential means of resolving the question
of budgetary imbalances’.

(9) Act concerning the conditions of accession of the Czech Republic, the
Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the
Republic of Lithuania, the Republic of Hungary, the Republic of Malta,
the Republic of Poland, the Republic of Slovenia and the Slovak
Republic and the adjustments to the Treaties on which the European
Union is founded(OJ L 236, 23.9.2003, p. 33).

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temporary budget compensation for the Czech Republic, Cyprus,
Malta and Slovenia, as well as a cash flow facility for all 10 acced-
ing States, totalling 3 386 million euro at 1999 prices and to be
paid over the years 2004 to 2006 as an item of expenditure under
the general budget of the European Communities.

Legality and regularity of underlying transactions

Traditional own resources

4.9. Traditional own resources are collected by the Member
States who enter them in the accounting system kept by the
national Treasury (‘the A accounts’) and thereby make the
resources available to the Communities. Where duties or levies
remain unpaid and no security has been provided, or they are
covered by securities but have been challenged, it is possible for
Member States to suspend making these resources available by
entering them in a separate account (‘the B account’ (10)).

4.10. The Court found that overall the underlying transactions
audited were legal and regular. However some errors and weak-
nesses were found.

4.11. As in previous years the Court’s audit and the Commis-
sion’s inspection visits detected recurrent bookkeeping problems
affecting B accounts. Late or inaccurate entries, omissions and
erroneous cancellations were found in a number of Member
States (11). In two of these (12), unchallenged customs debts cov-
ered by securities had systematically been recorded in the B
accounts, even though the parts covered by the security should
have been made available. Furthermore the payment of a balance
of 22,7 million euro by Germany is still under discussion with the
Commission (13).

4.11. The Commission has taken action to resolve these issues. Bel-
gium is amending its national procedures to exclude guaranteed amounts
as a result of a European Court of Justice judgment in an infringement
brought by the Commission (1); and the Commission is pursuing the
incorrect treatment of guaranteed amounts in the UK as a result of the
Commission’s own inspection findings. Germany has provided further
information to the Commission during a recent inspection which satis-
factorily explains nearly all of the accounting corrections Germany had
made in its B account. The Commission expects that the remaining
points will be closed shortly.

(10) Council Regulation (EC, Euratom) No 2028/2004 of 16 Novem-
ber 2004 amending Regulation (EC, Euratom) No 1150/2000 imple-
menting Decision 94/728/EC, Euratom on the system of
the
Communities’ own resources.

(11) Belgium, France, Italy, Hungary, Slovakia, Finland and United King-

dom.

(12) Belgium and United Kingdom.
(13) See Annex 4.1 — Follow-up of recent Court’s observations.

(1) Judgment dated 5 October 2006 in case C-377/03

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.12. The Commission will pass on the Court’s findings to the Mem-
ber States concerned.

4.13. The Commission will raise the Court’s consideration in the
appropriate forum in order to clarify the question.

On the basis of a request made to the Member States the provisional
partial amount of securities forfeited for import licenses within tariff quo-
tas is 1,05 million euro for the budget year 2005-2006. This figure is
still subject to review by the Member States. The Court will be informed
as soon as an up-dated figure is available.

4.12. Member States must also forward to the Commission
annually estimates of the totals for entitlements that are unlikely
to be recovered (14). In four of the Member States visited (15) there
are no written instructions for producing these estimates, which
might affect their quality, as well as the consistency of the meth-
ods followed year on year.

4.13. At present, the securities lodged with a view to imports or
exports of agricultural products under the Tariff Quota System
managed by an import or export licence and subsequently for-
feited become a resource of the Member State concerned. The
Court considers that such a security should (16) form part of the
Communities’ own resources and the amounts involved should
be made available to the Commission. The Commission is invited
to clarify this issue. Furthermore, the Court has asked, on several
occasions since December 2006, to be informed on the amounts
involved; the Commission has not been able to provide reliable
data (17).

VAT and GNI own resources

4.14. The Court’s audit found the calculation of Member States’
contributions and their settlement by Member States to be legal
and regular. However the Court draws attention to the comments
made in paragraphs 4.24 to 4.26.

Temporary budget compensation and cash-flow facility
for new Member States

4.15.
In respect of the compensations referred to in para-
graph 4.8, the audit did not reveal any errors in the calculation
and payment of the amounts concerned.

Supervisory and control systems

Traditional own resources

4.16. The Court has reviewed the inspections carried out by the
Commission (18) and has taken the results into account. As in pre-
vious years, the Commission’s methodology was found to be
soundly-based and the documentation to be good. The inspec-
tions confirmed that the own resources collection systems were
generally satisfactory, but certain weaknesses in respect of transit
procedure and management of B accounts were identified.

(14) Article 6(4)(b) of Regulation (EC, Euratom) No 2028/2004.
(15) Belgium, Slovakia, Finland and United Kingdom.
(16) On the basis of Article 2(1)(a) of the current own resources Decision

2000/597/EC, Euratom (OJ L 253, 7.10.2000, p. 42).

(17) According to Article 31 of Regulation (EEC) No 2220/85 as amended
(OJ L 205, 3.8.1985, p. 5), ‘Member States shall keep available for the
Commission, for each year, the total number and sum of the securi-
ties forfeited’.

(18) Article 18 of Regulation (EC, Euratom) No 1150/2000, as amended

by Regulation (EC, Euratom) No 2028/2004.

C 273/68

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.17. On-the-spot audits by the Court confirmed that overall
the audited supervisory and control systems for customs and for
traditional own resources accounting were functioning satisfac-
torily in the six Member States (19) that were visited. Nevertheless
some weaknesses were found.

4.18. Community regulations do not usually prescribe any par-
ticular methods, and they do not set the level of customs control
to be exercised. Nevertheless, Member States must implement
checks that provide adequate protection for the Communities’
financial interests (20). However, the audits detected some weak-
nesses in the area of checks carried out by Member States. In one
Member State (21), for example, the frequency with which the IT
system triggered physical checks on imported goods was very low
compared to other Member States (22), of the order of 1 in 7 000
(0,014 %). In another Member State (23), ex post checks on traders
applying simplified procedures (24) were carried out with inter-
vals of more than three years, even though the period of limita-
tion for traditional own resources that have been evaded is three
years.

VAT own resource

4.19. The Commission maintained the satisfactory frequency
and quality of its on-the-spot inspections during 2006.

4.20. Reservations are a device for the Commission to keep
doubtful elements in the VAT statements submitted by Member
States open for correction after the statutory time-limit of four
years. The number of reservations is still significant and one case
goes back as far as 1989 (see Table 4.2). 82 % of all active reser-
vations as at the end of 2006 have been issued since 2002 with
an average age of a reservation being 3,4 years. The changes to
EU-25 VAT base following the work on reservations performed
in 2006 resulted in a negative adjustment to the aggregate VAT
resource of around 14 million euro.

4.18. Member States use different balances of pre-release and later
audit-based checks in their framework of customs controls. Therefore
comparisons of the frequency with which individual components of that
framework are applied do not show the full picture. The requirement for
a common risk management framework for customs control (2), although
primarily aimed at enhancing security and safety, is expected to have a
positive effect on the protection of the community’s financial interests.
The Commission will take up the Court’s findings with the Member
States concerned.

4.20. The Commission hopes to lift the two oldest reservations, from
1989 and 1993, in the near future. A further three reservations date
from 1995. Most reservations are lifted following the next control mis-
sion after the one in which they were created.

(19) Belgium, France, Italy, Hungary, Slovakia, United Kingdom.
(20) Article 2(1) of Council Regulation (EC, Euratom) No 2988/95 of
18 December 1995 on the protection of the European Communities’
financial interests (OJ L 312, 23.12.1995, p. 1) and Articles 17 and 18
of Regulation (EC, Euratom) No 2028/2004.

(21) United Kingdom.
(22) The Court’s audit revealed rates of physical checks in other Member

States of at least 0,3 %.

(23) France.
(24) Provided for by Article 76 of Regulation (EEC) No 2913/92 —
because formalities and procedures are reduced, these procedures are
high-risk.

(2) Regulation (EC) No 648/2005 of the European Parliament and of the Coun-
cil of 13 April 2005 amending Council Regulation (EEC) No 2913/92
establishing the Community Customs Code (OJ L 117, 4.5.2005, p. 13), in
particular its implementing provisions.

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Official Journal of the European Union

C 273/69

Table 4.2 — VAT reservations as at 31 December 2006

Member States

Number of reservations
outstanding at
31.12.2005

Reservations set in 2006

Reservations lifted in
2006

Number of reservations
outstanding at
31.12.2006

Oldest year to which
reservations apply

6

1

17

10

13

6

7

11

1

1

8

5

0

7

11

7

111

Belgium

Denmark

Germany

Ireland

Greece

Spain

France

Italy

Luxembourg

Netherlands

Austria

Portugal

Slovakia

Finland

Sweden

United Kingdom

Total

GNI own resource

2

1

6

4

4

0

0

3

0

1

0

8

3

2

1

2

0

1

6

2

1

1

4

1

0

1

0

3

0

3

1

5

8

1

17

12

16

5

3

13

1

1

8

10

3

6

11

4

1989

1991

1999

1998

1997

1999

1993

1995

1997

2002

1995

1996

2004

1995

1998

1995

37

29

119

4.21. At the beginning of 2006, there were 63 open specific
GNI reservations (25) relating to the period 1995 to 2001. Dur-
ing the year, 20 reservations were lifted, leaving a balance of 43
open reservations as at the year end (See table 4.3). In 2006 gen-
eral reservations were issued in respect of the years 2002, 2003
and 2004 of all EU-15 Member States pending the analysis of the
updated inventories (26). The Commission expects to replace the
general reservations by specific reservations in 2007 or 2008
depending on progress made in analysis of inventories, which is
due to start in 2007. The changes to GNP/GNI of EU-15 Member
States (Greece excluded) following the work on specific reserva-
tions for the period 1995 to 2001 resulted in a negative adjust-
ment to the aggregate GNI resource of around 500 million euro
over the whole period. This has been taken into account in Mem-
ber States VAT/GNI balances payments in 2004, 2005 and 2006.

(25) Reservations in respect of GNI resource relate to sources and meth-
ods used by Member States for the compilation of national accounts
aggregates and make it possible to adjust GNI aggregates after the
four year time limit set in Community legislation. A general reserva-
tion covers the totality of a Member State’s data, whereas a specific
reservation covers discrete sources and methods.

(26) No reservations for EU-10 Member States have been set so far as their
GNI data in respect of 2004 will remain open for own resource pur-
poses until September 2008.

C 273/70

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Official Journal of the European Union

15.11.2007

Table 4.3 — GNI specific reservations as at 31 December 2006

Member States

Number of reservations
outstanding at 31.12.2005

Reservations set
in 2006

Reservations lifted
in 2006

Number of reservations
outstanding at 31.12.2006

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

3

2

3

0

0

0

5

0

0

2

1

4

0

0

0

0

3

0

4

7

5

3

4

8

0

0

0

3

0

6

20

43

Belgium

Denmark

Germany

Ireland

Greece

Spain

France

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

3

5

3

4

7

5

8

4

8

2

1

4

3

0

6

Total

63

4.22. Before 22 September of each year, Member States have to
provide the Commission (Eurostat) with figures for aggregate GNI
and its components (the GNI questionnaire) covering the preced-
ing year and any revisions made to the figures for previous years.
Together with these figures, Member States have to transmit a
report on the quality of GNI data (the GNI quality report) supply-
ing the information necessary to show how the aggregates are
reached, and in particular describing any significant changes in
the procedures and basic statistics used and explaining the revi-
sions made to earlier GNI data supplied (27).

4.23. On the basis of the GNI data received, the GNI Commit-
tee (28) gives an opinion on the appropriateness of Member States’
GNI data for own resources purposes (29). The GNI data supplied
by the Member States can give rise to adjustments to the GNI bal-
ances established for previous years.

4.24. On 22 September 2006 Greece transmitted to the Com-
mission the GNI questionnaire covering financial years from
1995 to 2005. The revised Greek GNP/GNI (30) data included in
the questionnaire showed increases of between 13 % and 26 %.
As there is no legal obligation to do so, neither the Commission
nor the GNI Committee had received any advance notice of such
increases.

(27) Article 2(2) and (3) of Regulation (EC, Euratom) No 1287/2003.
(28) See footnote 7.
(29) Article 5 of Regulation (EC, Euratom) No 1287/2003.
(30) GNP was used up until 2001. GNI has been used since 2002.

15.11.2007

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

4.25.
Following the specific reservations set by the Commission
for the years 1995 to 2001, Greece adopted year 2000 as the new
benchmark year for its revised GNI figures, the previous bench-
mark year being 1988. The usual practice is that National Statis-
tical Institutes perform major revisions to national accounts data
in about five-year intervals reflecting improvements in source
data and methodology, and these include an update of bench-
mark estimates.

4.26. At its meeting on 25 and 26 October 2006, faced with
such a major revision, and due to insufficient information on the
revised figures in the Greek 2006 quality report, the GNI Com-
mittee considered that the unrevised Greek GNP/GNI data should
be used for own resources purposes until the Commission had
checked the new data on the basis of the updated GNI inven-
tory (31). Any understatement of GNI for a particular Member
State — while not affecting the overall GNI own resource — has
the effect of increasing the contributions from the other Member
States, until the problem is identified and corrected. Furthermore,
an understatement might have the additional effect of an unwar-
ranted cap (32) being placed on the VAT base, causing further
overpayments from the other Member States. This situation will
not be rectified until the Greek GNI figures are adopted by the
GNI Committee and the Commission then must calculate the bal-
ances and adjustments to balances based on these figures.

4.27. Member States were supposed to submit their updated or
new GNI inventories to the Commission by 31 December 2006.
Following initial analysis, on-the-spot control missions would be
undertaken by the Commission starting in 2007. Six Member
States (33) had not transmitted their complete, new or updated
GNI inventories by the end of June 2007.

(31) This is a document which Member States have to provide to the Com-
mission describing the procedures and basic statistics used to calcu-
late GNI and its components according to ESA 95.

(32) According to Article 2(1)(c) of Decision 2000/597/EC, Euratom the
VAT bases to be taken into account for calculating the Member States
VAT contributions shall not exceed 50 % of GNI/GNP for each Mem-
ber State.

(33) Spain, France, Italy, Cyprus, Luxembourg and United Kingdom.

4.27. The Commission continuously reminded Member States of the
need to meet the deadline throughout 2006 and issued a further
reminder just after 31 December 2006, as well as on the occasions of
the meetings with Member States’ Directors of National Accounts on
31 January and of the GNI Committee on 26 April 2007. At this GNI
Committee meeting, the delegates from Member States which have not
yet sent their GNI inventories indicated that these inventories were to be
sent by the end of June 2007 at the latest. Further actions by the Com-
mission are being considered.

Given the amount of work required for the analysis of the inventories and
the GNI control missions to 25 Member States, these missions will be
conducted over a three-year period 2007-2009.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Conclusions and recommendations

4.28. With due consideration to its scope (see paragraphs 4.3,
4.4 and 4.7), the Court’s audit as regards own resources revealed
that overall the underlying transactions audited were free from
material error and that the overall functioning of the supervisory
and control systems audited was satisfactory, except for the low
rates of checks described in paragraph 4.18 and the problems
mentioned in paragraph 4.11 as affecting the B accounts.

4.28. The Commission will pursue the findings the Court did not con-
sider satisfactory with the Member States concerned.

4.29. The Court recommends that the Commission verifies that
the level of customs checks carried out by Member States
adequately protects the Communities’ financial interests (see para-
graph 4.18).

4.29. The Commission makes regular inspections of the adequacy of
Member States’ frameworks of customs control to provide assurance to
the budgetary authority that they comply with Community legislative
requirements and protect the Communities’ financial interest.

4.30. The Court considers that forfeited securities described in
paragraph 4.13 should be made available to the Commission and
invites the Commission to clarify this issue.

4.30. The Commission will raise the Court’s consideration in the
appropriate forum in order to clarify the question.

4.31.
Since the Commission has no effective means of ensuring
that Member States provide adequate and timely information
which would permit it to lift outstanding reservations about the
calculation of VAT own resources, it should examine what other
steps are open to it to bring pressure to bear on those Member
States concerned in long-outstanding reservations to resolve the
matter (see paragraph 4.20).

4.31. Although the Commission already presses individual Member
States to provide the necessary information without delay, it has now
begun collective discussions with the Member States, in the Advisory
Committee on Own Resources, concerning possible mechanisms to
achieve this objective. The Commission welcomes the Court’s continued
insistence on this matter.

4.32.
In respect of the Commission’s controls of the GNI data
and the underlying systems, the Court recommends that the
Commission:

4.32.

(a)

sets rules on communication of GNI revisions, so that the
Commission and the GNI Committee are forewarned of
major revisions (see paragraph 4.24);

(a) Proper communication and close coordination of the national
accounts revision policies of Member States are of major importance
and have been discussed with Member States on many occasions (3).
The Commission has taken several actions on this question and will
continue to work closely with Member States to achieve better com-
munication and coordination.

(3) For example the Committee on Monetary, Financial and Balance of Payments
Statistics has proposed guidelines for better communication of major revisions
of national accounts. These guidelines include advance notice of revisions indi-
cating, where possible, their potential impact as well as a proper documenta-
tion of the reasons and impact on major aggregates and the timetable for
further revisions. The proposed guidelines also cover coordination and com-
munication on major revisions due to changes in concepts, definitions or clas-
sifications in the European Union. These guidelines were further discussed by
the Statistical Programme Committee on 24 May 2007.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(b)

implements a co-ordinated policy for national accounts data
revisions, including the requirement for a regular bench-
marking (see paragraph 4.25);

(c)

ensures that the conclusions from control of the Greek inven-
tory are available early enough, so as to allow the inclusion
of corrected data in accounts for the financial year 2007 (see
paragraph 4.26).

(b) The Commission again discussed national accounts revisions with
the GNI Committee on 26 April 2007. Most Member States sup-
ported the principle of better communication and coordination of all
major revisions,
including common regular benchmarking, e.g.
every five years. Many Member States pointed to major practical
difficulties relating to differences in statistical systems, and in data
sources and surveys as well as their periodicity in the various coun-
tries. The Commission will continue discussions on these issues with
Member States.

(c) The Commission finalised its desk examination of the updated
Greek GNI inventory sent to Eurostat in February 2007 and car-
ried out a GNI control mission to Greece on 20-26 June 2007.
Further to this control mission, Eurostat will pursue discussions
with the Greek statistical authorities. The Commission expects to
reach conclusions on the appropriate levels of the Greek GNI fig-
ures in time for the official GNI notification of 22 September 2007,
which is used in the 2007 budgetary procedures.

FOLLOW UP OF PREVIOUS OBSERVATIONS

4.33. The results of the Court’s follow-up of previous observa-
tions in recent annual reports can be found in Annex 4.1.

SPECIAL REPORTS ISSUED SINCE THE LAST ANNUAL
REPORT

Special Report No 11/2006 on the Community transit

4.34.
system (OJ C 44, 27.2.2007, p. 1).

ANNEX 4.1

Follow-up of recent Court’s observations

Court’s observations

Situation in 2006

Further action needed

Commission reply

Traditional own resources: Agricultural tariff quotas

Paragraph 3.16 of the Annual Report concerning the financial year
2003 identified that certain quotas allow large numbers of importers,
all linked to a main operator, to introduce their own requests for a
licence to ensure a maximum quota allocation.

The Court’s audit revealed that in 2006 several
importers, all linked to a main operator, were
able to submit their own licence requests.

This distorts competition and puts a heavy bur-
den on the managing services in both the Com-
mission and the Member State.

Even though the Commission has taken action
to improve the procedural framework through
Commission Regulation (EC) No 1301/2006 (to
come into effect from 1 January 2007), this does
not fully address the problem. The Court consid-
ers that the Commission should implement addi-
tional measures that preclude several importers
all linked to a main operator from lodging more
than one application in respect of the same
period.

Commission Regulation (EC) No 1301/2006 laying down common rules for
the administration of import tariff quotas for agricultural products has rein-
forced and harmonised the provisions concerning applications for licences, inter
alia, aiming at preventing applications lodged by operators not involved in
external trade in the sector concerned. According to Article 5 of the Regula-
tion, an operator must furnish proof of such involvement in trade with third
countries in the sector concerned. These provisions also apply to subsidiaries in
so far as they fulfil the abovementioned requirements.

In parallel, Commission services have been pursuing an action to streamline
and harmonise the provisions laid down in the regulations opening import tar-
iff quotas in the different market organisations. The effects will be assessed in
the forthcoming months. If necessary, further measures will be considered in
this context.

Potential duties under discussion between the Commission and Germany

In paragraph 3.23 of the Annual Report concerning the financial year
2004, the Court noted that in 2003 Germany removed entries total-
ling 40,1 million euro from its B account, without providing a full
explanation of this reduction.

In 2005, the Court indicated that 22,7 million euro of potential duties
remain under discussion between the Commission and Germany.

VAT own resource: financial impact of outstanding reservations

In paragraph 4.14 of the Annual Report concerning the financial year
2005 the Court noted that the financial impact of outstanding reser-
vations was not quantified and further recommended that the Com-
mission should attempt to estimate, where possible, the impact of
these reservations.

GNI own resource: quality reports

The balance of 22,7 million euro was still under
discussion in 2006.

Germany should provide the evidence required
so that the Commission can conclude the case.

The Commission has obtained further explanations and demonstrations from
Germany which satisfactorily resolves nearly all of the corrections made. The
remainder are undergoing further scrutiny.

None.

As the financial impact of the reservations is sel-
dom easy to estimate, during the 2006 audit the
Court recommended that a note explaining the
reservations mechanism be included in the
financial statements, so as to make the reader
aware of the uncertainty relating to the VAT
resource figure. This
recommendation was
accepted by the Commission and a relevant note
has been included in the 2006 Annual Accounts.

With a view to reducing the number of reservations with apparently minor
financial impact, the Commission will remind Member States that they may
seek authorisation either not to take certain transactions into account or to use
approximations where precise calculation would be likely to involve unjustified
administrative burdens relative to the effect on the VAT base.

C
2
7
3
/
7
4

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o
n

i

In paragraph 4.17 of the Annual Report concerning the financial year
2005 the Court noted that in the 2005 quality reports Member States
were still not reporting on the results of their investigations of the qual-
ity of GNI and its components.

The analysis of quality reports submitted in
2006 showed that, following the discussion at
the GNI Committee of 3 July 2006, with
2 exceptions, Member States addressed this
point.

The Commission should ensure that all Member
States with no exceptions provide the informa-
tion requested.

The Commission will continue its efforts to ensure that all Member States meet
the requirements of this provision of the GNI quality reports.

.

1
5
1
1
2
0
0
7

.

Court’s observations

Situation in 2006

Further action needed

Commission reply

GNI own resource: direct verification

In paragraph 3.35 of its Annual Report concerning the financial year
2004, as well as in paragraph 4.16 of its Annual Report concerning the
financial year 2005, the Court pointed out that there is still insufficient
verification by the Commission of the GNI data (1).

The Commission should perform more direct
verification in the context of checking the GNI
inventories and questionnaires in 2007.

The issue was discussed by the GNI Committee
in July 2006 and the Commission concluded
that it would reflect on identifying domains that
could lend themselves to more direct verification
of the underlying national accounts which form
the basis for the figures forwarded in GNI ques-
tionnaires (2). However, no such approach was
implemented in 2006 and the Commission’s
reply to paragraph 4.16 stated that it would only
resume control missions to Member States after
the new inventories are available and analysed in
2008.

After a complete round of missions based on the inventories of 2001, Mem-
ber States were asked to provide, by the end of 2006, new inventories taking
into account the recent major revisions of their national accounts. Most inven-
tories were transmitted in December 2006. Some will arrive in 2007. There-
fore, no missions on these inventories could be carried out in 2006.

The Commission will resume, in 2007, its control missions to Member States
following analysis of the new inventories and will perform direct verification in
the sense indicated by the Court on selected domains, taking into account
resource constraints both in the Commission and in Member States. The Com-
mission will continue, as in the past, to keep the Court informed of its activi-
ties in this area.

GNI own resource: financial impact of outstanding reservations

In paragraph 91 of the Special Report No 17/2000, the Court pointed
out that it is essential for the Commission to quantify the impact of its
reservations on GNP.

None.

As the financial impact of the reservations is sel-
dom easy to estimate, during the 2006 audit the
Court recommended that a note explaining the
reservations mechanism be included in the
financial statements, so as to make the reader
aware of the uncertainty relating to the GNI
resource figure. This
recommendation was
accepted by the Commission and a relevant note
has been included in the 2006 Annual Accounts.

(1) Article 5 of Regulation (EC, Euratom) No 1287/2003 requires that the Commission verifies the sources and methods used by Member States to calculate GNI, notably in respect of the comparability, reliability and exhaustiveness.
(2) A GNI questionnaire is provided by each Member State and contains figures for aggregate GNI and its components.

.

1
5
1
1
2
0
0
7

.

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C
2
7
3
/
7
5

15.11.2007

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Official Journal of the European Union

C 273/77

CHAPTER 5

The common agricultural policy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

The Integrated Administration and Control System (IACS)

The situation in Greece

The Single Payment Scheme (SPS)

The Single Area Payments Scheme (SAPS)

Rural development

Guarantee expenditure

Transitional Rural Development Instrument (TRDI)

Ex post scrutiny of payments to traders and processors

Export refunds

The Commission’s clearance of accounts

Conclusions and recommendations

Follow-up of previous observations

Recoveries of irregular payments

Olive oil

Special Reports

Paragraph

5.1-5.5

5.6-5.78

5.6-5.41

5.11-5.14

5.15-5.38

5.39-5.41

5.42-5.47

5.42-5.45

5.46-5.47

5.48-5.53

5.54-5.55

5.56-5.64

5.65-5.78

5.79-5.84

5.79-5.81

5.82-5.84

5.85

C 273/78

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

5.1. This chapter deals with the Court’s audit of Agriculture and
Rural Development under the Guarantee Fund expenditure which
totalled 49 799 million euro in 2006 (2005: 48 466 million
euro (1)) (for details see Graph 5.1). Under the Treaty, the Euro-
pean Commission has overall responsibility for implementing the
EU budget. Virtually all agricultural expenditure is carried out
under shared management. This means that payments to final
beneficiaries (farmers, private companies, traders, associations or
public entities) are made by Paying Agencies approved by the
Member States. Less than 1 % of expenditure is managed directly
by the Commission.

Graph 5.1 — Breakdown of EAGGF-Guarantee expenditure by sector — financial year 2006

(1) SPS and SAPS.
Source: The Commission’s Annual accounts for 2006 — Volume II.

(1) Net payments.

15.11.2007

EN

Official Journal of the European Union

C 273/79

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.2. The expenditure declared by the Member States is subject
to several control systems:

(a) check of the correctness of the farmer’s claims under the Inte-
grated Administration and Control System (IACS) (2);

(b)

sector-specific controls, e.g. for olive oil and rural develop-
ment;

(c) physical checks on subsidised exports of agricultural

goods (3);

(d) post-payment scrutiny of commercial documents on the pre-
mises of traders and processors of agricultural goods (4);

(e)

the clearance procedure, which covers all of the expenditure
declared as far as the completeness and accuracy of the
annual accounts are concerned (the financial decision) and,
on a multi-annual basis, the legality and regularity of the
expenditure (conformity decisions).

5.3.
In order to obtain assurance as to the legality and regular-
ity of the transactions underlying the Community’s accounts, the
Court audited these supervisory and control systems and tested a
random sample of payments drawn from the expenditure of 30
paying agencies (which were collectively responsible for 68 % of
CAP expenditure) (see Table 5.1).

(2) Council Regulations (EEC) No 3508/92 (OJ L 355, 5.12.1992, p. 1)
and (EC) No 1782/2003 (OJ L 270, 21.10.2003, p. 1) covering ani-
mal premiums and area aid.

(3) Council Regulation (EEC) No 386/90 (OJ L 42, 16.2.1990, p. 6).
(4) Council Regulation (EEC) No 4045/89 (OJ L 388, 30.12.1989, p. 18)
covering payments above a specified threshold of export refunds, pro-
cessing and transformation subsidies, cotton, olive oil, tobacco and
some rural development measures.

C 273/80

EN

Official Journal of the European Union

15.11.2007

No

Member State

Paying agency

Amounts declared in
million euro (1)

% of total

Modified
certificates (2)

Disjoined accounts (3)

Table 5.1 — Paying agencies by expenditure declared in 2006

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

France

Italy

Greece

United Kingdom

Poland

Spain

Ireland

France

Germany

Denmark

France

Spain

Germany

Hungary

Portugal

Finland

United Kingdom

Spain

Germany

Italy

Italy

Spain

Belgium

Germany

Germany

Lithuania

Germany

Belgium

Germany

Spain

Austria

France

Spain

France

Sweden

Spain

Italy

PAs covered by DAS 2006

Germany

Czech Republic

Germany

Netherlands

France

Germany

Germany

Italy

Netherlands

Germany

United Kingdom

Spain

United Kingdom

Belgium

Slovakia

Germany

ONIC

AGEA

OPEKEPE

RPA

ARiMR

Andalucía

DAF

OFIVAL

Bayern, Landwirtschaft

DFFE

CNASEA

Castilla — La Mancha

Niedersachsen

MVH

INGA

MMM

SERAD

Aragón

Nordrhein-Westfalen LWK

AVEPA

AGREA

Cataluña

BIRB

Schleswig-Holstein

Hamburg-Jonas

NMA

Thüringen

Région Wallonne

Rheinland-Pfalz

Galicia

AMA

ONIEP

Castilla — Léon

ONIOL

SJV

Extremadura

Region Lombardie

Baden-Württemberg

SAIF

Mecklenburg-Vorpommern

PZ

VINIFHLOR

Brandenburg

Sachsen-Anhalt

FINPIEMONTE

Dienst Regelingen

Sachsen

DARD

FEGA

NAW

ALV

APA

Hessen

4 263,0

3 307,3

3 083,2

2 925,2

1 964,8

1 806,0

1 723,3

1 646,2

1 260,4

1 163,3

1 025,3

912,9

905,8

890,2

879,8

824,4

679,5

560,2

527,7

498,4

426,8

396,8

393,5

371,3

313,5

308,0

293,8

272,7

215,1

175,4

8,5

6,6

6,2

5,8

3,9

3,6

3,4

3,3

2,5

2,3

2,0

1,8

1,8

1,8

1,8

1,6

1,4

1,1

1,1

1,0

0,9

0,8

0,8

0,7

0,6

0,6

0,6

0,5

0,4

0,4

1 234,6

1 077,2

966,4

930,7

918,3

686,9

543,4

514,5

497,5

447,8

447,4

446,6

443,7

411,2

381,5

365,3

355,3

350,3

333,8

333,5

277,2

266,1

249,7

2,5

2,2

1,9

1,9

1,8

1,4

1,1

1,0

1,0

0,9

0,9

0,9

0,9

0,8

0,8

0,7

0,7

0,7

0,7

0,7

0,6

0,5

0,5

Subtotal

34 013,8

68,0

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

×

× (4)

×

×

15.11.2007

EN

Official Journal of the European Union

C 273/81

No

Member State

Paying agency

Amounts declared in
million euro (1)

% of total

Modified
certificates (2)

Disjoined accounts (3)

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

Netherlands

Italy

France

Germany

Poland

Spain

Slovenia

France

Spain

Latvia

Spain

Italy

France

France

Spain

Italy

Spain

Spain

Estonia

France

Netherlands

France

Portugal

Spain

Netherlands

France

Cyprus

Luxembourg

Spain

Spain

Netherlands

Austria

Spain

Germany

United Kingdom

Germany

Italy

Malta

France

Germany

United Kingdom

Germany

Germany

Spain

Ireland

×

×

×

×

×

×

×

×

×

×

×

HPA

ARTEA

AUP

BLE

ARR

Valencia

AAMRD

FIRS

Navarra

RSS

Murcia

ARBEA

ONIGC

ONIVINS

Canarias

SAISA

Asturias

País Vasco

PRIA

ODEADOM

PT

ONIFLHOR

IFADAP

Madrid

PVE

ONILAIT

CAPO

Min. Agric.

La Rioja

Cantabria

DLG

ZA Salzburg

Baleares

Saarland

FC

Bayern, Umwelt

ENR

MRAE

OFIMER

Hamburg

CCW

Nordrhein-Westfalen LfEJ

Bremen

FROM

DCMNR

233,5

232,8

208,1

178,0

175,3

174,6

159,1

153,9

137,1

136,6

125,5

124,3

113,6

108,6

99,0

91,4

85,2

75,9

75,3

74,8

72,4

68,6

68,4

58,4

54,3

52,1

48,5

46,9

45,9

44,2

44,0

37,6

34,4

23,1

18,5

16,6

15,6

9,3

8,9

7,2

5,3

5,1

3,6

2,4

0,6

0,5

0,5

0,4

0,4

0,4

0,3

0,3

0,3

0,3

0,3

0,3

0,2

0,2

0,2

0,2

0,2

0,2

0,2

0,2

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,1

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

Subtotal

Total

16 033,4

50 047,2

32,0

100,0

(1) Conformity corrections declared and amounting to – 64,8 million euro (Spain), – 152,1 million euro (Italy) and – 0,3 (Netherlands) are not included because they cannot be allocated to individual pay-

ing agencies.

(2) This includes a qualified opinion, scope limitation or an emphasis of matter.
(3) Accounts disjoined from the financial decisions where further work or information was requested from the certifying bodies.
(4) Only accounts concerning expenditure in the field of rural development measures disjoined.
Source:

Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2006.

C 273/82

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.4.
In addition the Court has examined the systems put in
place to implement the Single Payment Scheme (see para-
graph 5.15) under which some 14 200 million euro was paid to
beneficiaries in 2006 (5). It did not carry out any systems audit on
the Single Area Payment Scheme (SAPS) (see paragraph 5.40) as
it was too early to see improvements in the Member States pre-
viously audited. Nevertheless, the Court included these Member
States in its direct testing of transactions.

5.5. Given concerns about the legality and regularity of pay-
ments in connection with schemes not directly covered by the
IACS, the Court has carried out specific audits of olive oil pro-
duction aid (including the reliability of the GIS)
(see para-
graph 5.82) and dried grapes (see paragraph 5.12).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

The Integrated Administration and Control System (IACS)

5.6. The IACS is the key management and control tool for the
Single Payment Scheme (SPS) (see paragraph 5.15), the Single
Area Payment Scheme (SAPS) (see paragraph 5.39) and all area
aid and animal premium schemes. It covers almost 70 % of the
Guarantee Fund budget.

IACS consists, in each Member State, of a database of hold-
5.7.
ings and applications, systems for identifying agricultural parcels
and registering animals, as well as a register of entitlements in
those Member States implementing the SPS. The system provides
for several eligibility controls: an administrative check of all
the same
claims, cross-checks with databases
land/animals from being claimed twice and a minimum rate of
5 % for on-farm inspections.

to prevent

(5) Regulation (EC) No 1782/2003.

15.11.2007

EN

Official Journal of the European Union

C 273/83

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.8. The IACS inspection results reported to the Commission by
paying agencies address the legality and regularity of payments to
farmers but the Court considers that they should be verified and
validated by an independent body. Errors that have occurred in
the calculation of entitlements are not included in the IACS
inspection results although they affect the legality and regularity
of the payments made. However, the errors found as a result of
inspections by the paying agencies are corrected before payment.

5.8.
In order to further improve the assurance that can be gained from
the IACS inspection results with regard to the effectiveness of the control
systems, the Commission has implemented the Court’s recommendations
that the certification bodies should do more work to verify and validate
the inspection statistics and post-payment checks. From financial year
2007 onwards, the certification bodies will be required by the Commis-
sion’s guidelines to analyse and report on the results of on-the-spot con-
trols and the control statistics.

5.9-5.10. The Commission would like to emphasise this positive trend
towards lower error rates in applications and over-declarations of areas
and animals and considers this to be a very positive impact of the recent
CAP reforms.

5.9. According to these statistics (see Table 5.2 and Graph 5.2),
for all Member States together, 28,9 % (40 % in previous year) of
the area applications checked in 2005 and giving rise to payment
in the financial year 2006 contained errors. These errors repre-
sent 1,4 % of the area verified by the paying agencies. For EU-15
this latter percentage decreased from 2,0 % in 2004 to 1,2 % in
2005. The decrease in the error rate is linked to the introduction
of the SPS in 10 Member States of EU-15 (6), where the error rate
has dropped to 0,7 %; in the other five the error rate is still 1,8 %
and is the same in the new Member States.

5.10.
In the 10 Member States that decoupled all or part of ani-
mal premiums the number of animals still subject to checking has
gone down by between 35 % and 67 % depending on the aid
scheme and the error rate has noticeably decreased. For the larg-
est scheme, the suckler cow premium (see Table 5.3 and
Graph 5.3), Member States found 0,7 % of animals claimed to be
missing or ineligible (1,56 % in 2004); for the special beef pre-
mium it was 1,23 % (2,53 % in 2004) and for the sheep and goat
premiums it has fallen to 3,6 % from 6,3 % in 2004.

(6) Austria, Belgium, Denmark, Germany, Ireland, Italy, Luxembourg, Por-

tugal, Sweden and the United Kingdom.

Table 5.2 — Area Aid, forage areas and other crops — Applications checked on-the-spot in 2005 (payment year 2006)

Applications submitted

Applications checked

Applications with anomalies

Random selected inspections

Random selected inspections with
anomalies

Member States

Number

Area (ha)

Average
size
(ha)

Number

%

Area (ha)

%

Average
size
(ha)

Number

%

Area (ha)

%

Number

%

Area (ha)

%

Number

%

Area (ha)

%

Belgium
Denmark
Germany
Ireland
Italy
Luxembourg
Austria
Portugal
Sweden
United Kingdom

Total 2005 EU 10 (1)
Total 2004 EU 10

Greece
Spain
France
Netherlands
Finland
Malta
Slovenia

Total 2005 EU 7 (1)
Total 2005 EU 17
Total 2004 EU 15
Total 2003 EU 15 (2)
Total 2002 EU 15

Czech Republic
Estonia
Cyprus
Latvia
Lithuania
Hungary
Poland
Slovakia

Total 2005 EU-8
Total 2004 EU-10 (3)
Total 2005 EU-25
Total 2004 EU-25

43 430
69 474
386 237
129 187
662 539
2 006
132 244
138 883
84 454
198 078
1 846 532
1 576 525
318 768
451 929
391 787
52 358
65 219
3 961
61 169
1 345 191
3 191 723
2 829 381
2 840 153
2 894 917
20 251
19 136
41 470
78 781
225 402
205 293
1 484 624
13 531
2 088 488
2 077 233
5 280 211
4 906 614

1 057 350,81
2 733 746,86
16 825 485,63
4 830 161,00
8 412 971,00
122 846,14
2 348 035,15
2 445 810,32
3 171 490,67
15 300 055,19
57 247 952,77
50 678 823,20
4 111 168,74
16 441 131,63
25 481 183,83
828 546,15
2 102 180,12
4 417,15
388 952,48
49 357 580,10
106 605 532,87
98 852 502,22
98 843 983,00
97 955 796,00
3 490 297,79
846 403,60
164 780,51
1 498 451,19
2 568 705,71
5 048 877,59
14 253 733,11
1 825 195,37
29 696 444,87
29 371 245,00

136 301 978
128 223 747

24
39
44
37
13
61
18
18
38
77
31
32
13
36
65
16
32
1
6
37
33
35
35
34
172
44
4
19
11
25
10
135
14
14
26
26

2 930
4 150
21 968
7 695
38 760
130
8 131
7 864
5 247
10 357
107 232
102 780
38 503
42 912
22 425
6 522
4 151
372
5 149
120 034
227 266
221 028
230 170
248 572
1 455
1 353
3 138
6 124
12 337
14 536
93 323
1 575
133 841
124 668
361 107
345 696

6,7
6,0
5,7
6,0
5,9
6,5
6,1
5,7
6,2
5,2
5,8
6,5
12,1
9,5
5,7
12,5
6,4
9,4
8,4
8,9
7,1
7,8
8,1
8,6
7,2
7,1
7,6
7,8
5,5
7,1
6,3
11,6
6,4
6,0
6,8
7,0

119 400,66
173 452,08
1 223 309,75
349 026,00
949 459,22
8 056,70
187 720,67
558 980,18
201 003,62
1 675 942,00
5 446 350,87
4 389 417,33
1 239 442,18
1 873 231,00
1 791 403,51
137 551,00
140 872,40
1 061,77
46 779,93
5 230 341,79
10 676 692,66
9 382 645,37
11 309 077,00
11 656 029,00
172 348,94
176 583,74
49 274,20
382 704,18
278 460,87
304 023,96
1 162 866,47
484 524,83

3 010 787
3 834 258,00

13 687 480
13 216 903

11,3
6,3
7,3
7,2
11,3
6,6
8,0
22,9
6,3
11,0
9,5
8,7
30,1
11,4
7,0
16,6
6,7
24,0
12,0
10,6
10,0
9,5
11,4
11,9
4,9
20,9
29,9
25,5
10,8
6,0
8,2
26,5
10,1
13,1
10,0
10,3

41
42
56
45
24
62
23
71
38
162
51
43
32
44
80
21
34
3
9
44
47
42
49
47
118
131
16
62
23
21
12
308
22
31
38
38

609
1 273
10 088
1 863
4 087
123
1 681
2 699
2 472
5 675
30 570
49 863
12 003
17 002
10 467
2 598
2 329
301
747
45 447
76 017
93 480
97 729
94 717
750
927
2 812
3 233
4 622
3 983
11 236
790
28 353
40 351
104 370
133 831

20,8
30,7
45,9
24,2
10,5
94,6
20,7
34,3
47,1
54,8
28,5
48,5
31,2
39,6
46,7
39,8
56,1
80,9
14,5
37,9
33,4
42,3
42,5
38,1
51,5
68,5
89,6
52,8
37,5
27,4
12,0
50,2
21,2
32,4
28,9
38,7

541,54
1 217,04
7 021,09
2 227,00
9 176,00
138,15
1 303,90
6 972,42
2 832,65
9 258,00
40 687,79
102 017,33
29 577,44
44 205,00
12 305,08
3 150,89
1 630,23
217,86
314,56
91 401,06
132 088,85
187 358,00
199 740,00
198 079,00
2 491,00
5 685,48
7 380,83
11 084,54
7 927,10
6 159,56
4 271,06
9 796,42

54 796
67 945,00

186 885
255 302,00

0,5
0,7
0,6
0,6
1,0
1,7
0,7
1,2
1,4
0,6
0,7
2,3
2,4
2,4
0,7
2,3
1,2
20,5
0,7
1,7
1,2
2,0
1,8
1,7
1,4
3,2
15,0
2,9
2,8
2,0
0,4
2,0
1,8
1,8
1,4
1,9

687
889
4 949
1 422
9 631
27
2 558
5 257
1 871
2 157
29 448
20 114
7 318
8 788
5 152
841
1 022
55
946
24 122
53 570
33 644
58 241
58 313
285
227
300
911
3 044
3 537
17 486
334
26 124
25 945
79 694
59 589

14 490,60
23,4
30 148,98
21,4
232 854,01
22,5
54 115,09
18,5
116 336,77
24,8
1 838,72
20,8
67 513,45
31,5
335 304,79
66,8
77 435,86
35,7
20,8
181 028,19
27,5 1 111 066,46
806 796,95
19,6
78 555,17
19,0
339 989,80
20,5
376 748,88
23,0
13 881,92
12,9
29 836,58
24,6
77,57
14,8
18,4
5 095,79
20,1
844 185,71
23,6 1 955 252,17
15,2 1 386 255,27
25,3 1 928 924,38
23,5 2 361 830,00
33 305,74
19,6
5 824,79
16,8
2 917,62
9,6
12 425,20
14,9
35 505,47
24,7
102 525,46
24,3
125 238,06
18,7
45 787,05
21,2
363 529,39
19,5
20,8
385 051,43
22,1 2 318 782
17,2 1 771 306,70

12,1
17,4
19,0
15,5
12,3
22,8
36,0
60,0
38,5
10,8
20,4
18,4
6,3
18,1
21,0
10,1
21,2
7,3
10,9
16,1
18,3
14,8
17,1
20,3
19,3
3,3
5,9
3,2
12,8
33,7
10,8
9,4
12,1
10,0
16,9
13,4

107
291
2 386
400
1 074
25
450
849
833
1 366
7 781
8 320
1 425
3 189
518
340
513
35
146
6 166
13 947
11 268
20 766
26 408
141
152
273
471
1 236
1 346
1 817
67
5 503
9 064
19 450
20 332

15,6
32,7
48,2
28,1
11,2
92,6
17,6
16,1
44,5
63,3
26,4
41,4
19,5
36,3
10,1
40,4
50,2
63,6
15,4
25,6
26,0
33,5
35,7
45,3
49,5
67,0
91,0
51,7
40,6
38,1
10,4
20,1
21,1
34,9
24,4
34,1

75,39
230,86
1 980,38
514,48
1 761,90
30,23
332,11
4 355,35
687,06
1 474,95
11 442,71
9 209,88
2 080,74
4 297,20
603,88
501,79
171,33
14,79
49,56
7 719,29
19 162,00
19 893,13
29 445,65
41 312,03
470,3
337,3
521,5
539,5
1 426,3
2 157,2
668,9
343,0
6 464,00
9 764,10

25 626
29 657,23

0,5
0,8
0,9
1,0
1,5
1,6
0,5
1,3
0,9
0,8
1,0
1,1
2,6
1,3
0,2
3,6
0,6
19,1
1,0
0,9
1,0
1,4
1,5
1,7
1,4
5,8
17,9
4,3
4,0
2,1
0,5
0,7
1,8
2,5
1,1
1,7

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(1) The Commission has reajusted these data in 2005.
(2) The Commission has reajusted these data in 2006.
(3) The Commission has reajusted these data in 2007.
NB 1: Remote sensing involves the use of satellite or aerial photography to check IACS applications.
NB 2: Test performed in year N are relevant to payments made in year N+1.
IACS statistics submitted by Member States to DG AGRI.
Sources:
Annual Activity Report 2006 — DG AGRI.

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15.11.2007

EN

Official Journal of the European Union

C 273/85

Graph 5.2 — Area aid — Results of field inspections: percentage of aplications
inspected which were overstated

Source:

IACS statistics submitted by Member States to DG AGRI and annual activity report 2006 DG AGRI.

Table 5.3 — IACS inspections for suckler cow premium — Results of on-the-spot checks in 2005 (payment year 2006)

Member States

Total number of animals

Inspected animals partially
rejected

Inspected animals rejected

Animals inspected
(random selection)

Claimed

Inspected

%

Number

% of total
claimed

Number

% of total
claimed

Number

% of total
inspected

% of total
claimed

Partially
rejected

% partially
rejected

Rejected

% rejected

Belgique

Greece

Spain

France

Netherlands

Austria

Portugal

Finland

Malta

Slovenia

397 513

210 982

1 775 937

4 232 508

72 344

550 638

422 430

46 311

0

35 506

92 332

302 457

445 155

12 047

56 238

86 825

7 072

0

88 781

13 009

EU-10

7 797 444

1 050 641

8,9

43,8

17,0

10,5

16,7

10,2

20,6

36,0

0,0

14,7

13,5

126

557

471

665

17

336

442

36

0

662

3 312

0,4

0,6

0,2

0,1

0,1

0,6

0,5

0,5

0,0

5,1

0,3

317

688

1 825

1 565

358

517

1 201

97

0

692

7 260

0,9

0,7

0,6

0,4

3,0

0,9

1,4

1,4

0,0

5,3

0,7

5 071

4 080

45 712

73 247

2 310

8 462

11 003

1 454

0

2 337

153 676

14,3

4,4

15,1

16,5

19,2

15,0

12,7

20,6

0,0

18,0

14,6

1,3

1,9

2,6

1,7

3,2

1,5

2,6

3,1

0,0

2,6

2,0

35

27

70

84

3

32

83

6

0

121

461

0,7

0,7

0,2

0,1

0,1

0,4

0,8

0,4

0,0

5,2

0,3

36

29

90

280

43

35

83

6

0

121

723

0,7

0,7

0,2

0,4

1,9

0,4

0,8

0,4

0,0

5,2

0,5

Sources:

IACS statistics submitted by Member States to DG AGRI.
Annual Activity Report — DG AGRI.

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15.11.2007

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Official Journal of the European Union

C 273/87

Graph 5.3 — IACS inspections for suckler cow premium: percentage of controled animals with errors

Source:

IACS statistics submitted by Member States and Annual Activity Report 2006 DG AGRI.

C 273/88

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

The situation in Greece

5.11.
For the fifth consecutive year the Director General’s dec-
laration contains a reservation concerning insufficient implemen-
tation of the IACS in Greece. For 2006 the Court has confirmed
continuing failure to implement key controls, namely: claims
handling, inspection procedures, animal database integrity and
the Land Parcel Identification System. Some 850 million euro per
year is paid to farmers under these unsatisfactory control condi-
tions. For the period 1996-2005 the Commission has imposed
corrections totalling 479 million euro, equivalent to some 6 % of
the expenditure declared. Corrections have also been made for
dried grapes.

5.11. As regards financial year 2006 (claim year 2005), audits con-
firm the persistence of important deficiencies in the functioning of the key
elements of the IACS in Greece such as the claims procedure, the quality
of on-the-spot-controls, the quality of animal data bases and in particu-
lar the Land Parcel Identification System.

In order to protect the financial interests of the Community, the Com-
mission continues with an intensive audit programme and as long as
necessary will impose financial corrections on Greece.

Moreover, the Commission closely monitors and supervises the Greek
action plan that has been drawn up by the Greek authorities on the
explicit request of and in close cooperation with the Commission in order
to remedy the above deficiencies. The action plan contains strict dead-
lines for the implementation of the different actions which should pro-
duce their first results as of financial year 2007 (claim year 2006).

5.12. The dried grapes aid scheme requires growers to produce
a minimum quantity of dried grapes per hectare (i.e. they have to
achieve a minimum yield). Nearly all the aid (about 115 million
euro p.a.) is paid in Greece.

5.13. The Court’s DAS audits in recent years as well as a spe-
cific audit in 2006 have established that since 1999 the Greek
national authorities have incorrectly applied reductions in the
minimum yield requirements for both sultanas and currants cov-
ering the great majority of the dried grapes area. Only in 2002/03,
a year in which severe weather affected much of Greece, were
these based on insurance agency assessments of the damage and
were in accordance with the rules. In other years most of the
reductions were decided by the national authorities, for reasons
not linked to natural disasters (7). This has resulted in payments
being made to growers who did not meet the minimum yield
requirements (in particular for sultanas — some 50 % of total
production) and who were not affected by a natural disaster.

5.13. The Commission conducted several missions on the dried grapes
scheme in recent years in Greece and is aware of the developments
described. For the most recent years the Greek authorities granted gen-
eralised derogations in the form of uniform reductions of mandatory pro-
duction quantities for the whole of Greece, justifying them by referring to
national disasters and, to a lesser degree, to other reasons.

The Commission considers that this is not in compliance with Commu-
nity legislation and as a result of its on-the-spot missions conformity
procedures are underway.

(7) Reasons for refunds given in Ministerial decisions: ‘poor soil condi-
tions’, ‘the altitude of the parcels’, ‘the cultivation mode and mode for
drying’, ‘the plant health status of the vineyards’, ‘the age of the vine-
yards leading to easy affection by viruses and soil fatigue’, ‘replanta-
tion were not done with the appropriate plants for the soil and weather
conditions of the region’, ‘sultanas grown on plants affected by viruses
due to the utilisation of non-certified plants during replantation’.

15.11.2007

EN

Official Journal of the European Union

C 273/89

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.14. The conformity procedures are on-going in respect of the remain-
ing years and, given its integration into the single payment scheme from
2008, the Commission intends to propose financial corrections in two
‘packages’ — one for the years not yet corrected (i.e. 2003 to 2005)
and, as necessary, a second for the remaining period which will take espe-
cially into account that the derogations from the minimum yield require-
ment have apparently not been granted in conformity with Community
law in the most recent years.

5.16. Under the SPS rules Member States have a significant discre-
tional margin to set up the system according to their specific needs and
intentions. This goes for the basic choice of the model, whereby the
regional model was conceived as an option to derogate from the histori-
cal model, and for the establishment of specific rules regarding the imple-
mentation of the model chosen.

failures

in key controls

5.14. The Commission has made flat-rate financial corrections
for
the period 1997-2002
(40 million euro). Corrections have not yet been proposed for
subsequent years and the Commission has not established the
extent of ineligible payments, which for sultanas, may be signifi-
cant.

for

The Single Payment Scheme (SPS)

What is it and how does it work?

5.15. Under the SPS farmers are not paid on the basis of what
they produce or the number of animals they keep (8). Instead the
following steps have to be taken to receive the aid in full:

(a) application for entitlements for the first year (and in the same
year application for payment (single application) accompa-
nied by the declaration of eligible hectares);

(b) once the entitlements are established, single application
(every year) declaring all hectares and notably the SPS eligible
hectares;

(c)

the farmer must keep his land in good agricultural and envi-
ronmental condition (GAEC) and meet a number of specific
environmental requirements (Cross Compliance).

5.16.
In order to qualify under the SPS farmers must first obtain
‘entitlements’ (9). National authorities opt for one of the models
provided for under EU legislation (see Table 5.4) and calculate the
number and value of each farmer’s entitlements. Under the his-
torical model each farmer is granted entitlements based on the
average amount of aid received and area farmed during the refer-
ence period 2000-2002. Under the regional model all entitle-
ments of a region have the same flat-rate value and the farmer is
allocated an entitlement for every eligible hectare declared in the
first year of application. The hybrid model combines the histori-
cal element with a flat rate amount and, if it is dynamic, the his-
it becomes a
torical component decreases each year until
predominantly flat rate-system.

(8) The following aid schemes are included in the SPS: arable crops, beef
and veal, sheepmeat and goatmeat, milk and milk products, grain
legumes, dried fodder, rice, seeds, potato starch, cotton, olive oil,
tobacco, hops and sugar beet.

(9) Every entitlement, together with one hectare of land declared by the
farmer and kept in good agricultural and environmental condition
(GAEC), gives raise to an SPS payment.

Table 5.4 — SPS models adopted by Member State audited

Member State

Model applied

Denmark

Germany

Luxembourg

Sweden

United Kingdom

UK — England

UK — Scotland

UK — Wales

UK — N. Ireland

Hybrid dynamic

Hybrid dynamic

Hybrid static

Hybrid static

Hybrid dynamic

Historic

Historic

Hybrid static

Beneficiaries of EU-direct payments claim
year 2004 (1)

SPS Applications submitted 2005 (2)

2005 in % of 2004 (rounded)

Number

52 420

330 640

1 970

59 440

70 031

19 596

16 821

24 962

Area
(1 000 ha)

2 329,00

14 050,00

122,00

2 763,00

7 425,00

4 358,00

1 301,00

1 017,00

Number (3)

69 474

386 237

2 006

84 454

116 500

21 669

18 364

41 545

Area
(1 000 ha) (4)

2 734,00

16 825,00

123,00

3 171,00

8 248,00

4 606,00

1 439,00

1 007,00

Total

575 880

33 365,00

740 249

38 153,00

Number
(%)

132,53

116,81

101,83

142,08

166,00

111,00

109,00

166,00

129,00

Area
(%)

117,00

119,00

101,00

115,00

111,00

106,00

111,00

99,00

114,00

Source:
(1) Figures for Denmark, Luxemburg, Germany and Sweden are figures submitted by the Member States under Commission Regulation (EC) No 296/96. The sector is currently analysing the United Kingdom figures in order to sort them by paying

agency. Provisionally the figures for England, Scottland, Wales and Northern Ireland are taken from the IACS control statistics provided for in article 76 of Regulation (EC) No 796/2004.

(2) Figures taken from the statistics transmitted under article 76 of Regulation (EC) No 796/2004.
(3) A certain increase of the number of SPS claims compared to the number of beneficiaries of direct aid payments under the previous aid schemes is explained by the fact that certain categories of SPS beneficiaries (e. g. fruit-, vegetable- and

warepatatoes producers, horskeepers) had exercised an agricultural activity before introduction of SPS but did not receive any EU direct aid.

(4) A certain increase of the area covered SPS claims compared to the area declared under the previous direct aid schemes is explained by the fact that the areas used for agricultural production outside previous aid schemes are declared now under

SPS and by the fact that under SPS the farmer is obliged to declare all the land at his disposal.

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15.11.2007

EN

Official Journal of the European Union

C 273/91

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.17. Member States are to establish a national reserve (10) from
which they allocate entitlements to new farmers, those in special
situations or those affected by restructuring or development pro-
grammes.

The audit objectives

5.18. The Court has audited the systems for establishing entitle-
ments in the 10 Member States (11) which introduced the SPS in
2005 (payments in 2006, budgetary ceiling 15 088 million
euro (12), 27 % of total agricultural expenditure) (13).

The objectives of the audit were to assess whether:

(a)

the national provisions adopted by the Member States com-
ply with EU legislation and whether the entitlements have
been correctly calculated;

(b)

the Member States have set up adequate administrative pro-
cedures and a reliable internal control for the correct, com-
plete and accurate establishment and management of
payment entitlements;

(c)

the Members States have implemented a reliable manage-
ment and control system for processing SPS claims (14).

Calculating and allocating entitlements

5.19. Correct calculation and allocation of entitlements is a pre-
requisite for correct SPS payments. Incorrectly established entitle-
ments will result in an over or under-payment in the first year and
all subsequent years if not detected.

(10) See article 42 of Regulation (EC) No 1782/2003.
(11) The calculation and allocation of entitlements was audited in: Aus-
tria, Belgium (Flanders), Denmark, Germany (Bavaria), Ireland, Italy
(AGEA), Luxembourg, Portugal, Sweden, United Kingdom (England,
Scotland and Northern Ireland).

(12) See Annex V of Commission Regulation (EC) No 118/2005 (OJ L 24,

27.1.2005, p. 15).

(13) The Court has not audited Cross Compliance — the farmer’s respect
of the various standards covering environmental, public, plant and
animal health, etc.

(14) This aspect was audited in Austria, Belgium (Wallonia), Denmark,
Germany (Brandenburg), Ireland, Italy and the United Kingdom
(Wales).

C 273/92

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Non compliance with the rules

The ten months rule

5.20. Community legislation requires that land declared for SPS
must be at the claimants’ disposal for a minimum period of
10 months each year. Contrary to this, in the United Kingdom
entitlements were allocated under SPS and aid was paid to land-
lords, not engaged in farming, who let out their land for most of
the year and who do not therefore meet the requirement. In
Northern Ireland, for example, more than 176 000 entitlements
(worth 13,8 million euro) were allocated to such landlords (15).

5.20. The general concept of de-coupling should be taken into account.

Article 33 of Regulation (EC) No 1782/2003 establishes that only
farmers as defined in Article 2 a of that regulation may have access to
the Single Payment Scheme.

Indeed this model

Under the regional model, adopted as a derogation to the historical
model at the request of several Member States, it is allowed to pay on
the basis of the whole agricultural area declared the first year of appli-
cation; this extension concerned mainly grassland and fruits and veg-
etables.
implies that new beneficiaries, which
beforehand did not receive direct support, became eligible, if inter alia the
area is at their disposal, if the GAEC is applied and if they exert on it an
agricultural activity pursuant to the definition of Article 2 of Regulation
(EC) No 1782/2003. This can include landlords but only if they are
engaged in agricultural activity.

Indeed the claimant needs to have the land declared for a minimum of
10 months at his disposal. If in the cases the Court describes, land is less
than 10 months at the landlord’s disposal, it is not eligible. The Com-
mission will take action through conformity procedures.

5.21. The United Kingdom authorities consider that, depend-
ing on the terms of the letting agreement, landlords may qualify
for SPS and/or rural development aid for land let to and farmed
by the lessee. According to EU law however, only the farmer, i.e.
the person disposing of the land and exercising an agricultural
activity on the land is entitled to SPS payments and rural devel-
opment aid.

5.21. The Commission shares the Court’s interpretation of the relevant
EU law.

One eligibility condition is to exercise an agricultural activity.

The Member States have to identify who is considered as active farmers
(having the right for entitlements). If the landlord bears the economic risk
of the farming activity, it is not excluded to consider him ‘exercising an
agricultural activity’.

(15) The value of entitlements allocated to landlords will substantially

increase over time (see paragraph 5.28).

15.11.2007

EN

Official Journal of the European Union

C 273/93

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Consolidation of entitlements

5.23. The practice described by the Court has already been identified
by the Commission and is being followed up through conformity proce-
dures.

5.24. This issue will be followed up through conformity procedures.

EU legislation provides for the establishment of reference
5.22.
amounts for farmers in areas subject to restructuring and/or
development programmes relating to public intervention in order
to avoid the abandonment of land and/or to compensate for spe-
cific disadvantages for farmers in those areas. Where a farmer has
lost land in this way and is no longer able to activate all of his
entitlements, they may be consolidated,
i.e. exchanged for a
smaller number with a higher value.

Some Member States/countries (Austria, Ireland, Wales
5.23.
and Scotland) did not comply with EU legislation. They extended
this provision to all cases (16) where a farmer in 2005 had fewer
hectares than entitlements. Consolidation was granted in order to
have the farmer’s reference amount concentrated on a number of
entitlements equal to the number of hectares held, and conse-
quently to allow the farmer to activate all his entitlements. Wales
and Scotland applied this irregular type of consolidation only in
the first year of SPS whereas it continues in Austria and Ireland.
In 2005, more than 200 000 hectars were consolidated in this
way. The impact is estimated at 60 million euro per year (17).

5.24.
In Northern Ireland and England, which apply the hybrid
model, a consolidation effect arose when contrary to Community
provisions (18) farmers were allowed to restrict allocation of
entitlements to part of the eligible area declared in their 2005
claim. This enabled farmers to have their historical reference
amount spread over fewer hectares, i.e. they were allocated fewer
entitlements with higher values, and allowed landlords to claim
entitlements in their own name for land let to farmers.

(16) Especially cases where rental agreements were not renewed.
(17) The Court estimated the financial impact using the average value of

entitlements in the Member States concerned.

(18) Article 59(4) of Regulation (EC) No 1782/2003 provides that under
the regional model the number of entitlements per farmer shall be
equal to the number of hectares he declares […] the first year of appli-
cation of the single payment scheme.

C 273/94

EN

Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

New beneficiaries

5.25.
EU legislation (19) gives access to the SPS to a farmer,
defined as a natural or legal person, whose holding is located
within the Community and who exercises an agricultural activity
— the production, rearing of animals or growing of agricultural
products or maintaining the land in good agricultural and envi-
ronmental condition (GAEC).

5.26. Although claimants may qualify for the SPS merely by
maintaining their land in GAEC, the admission conditions were
not applied uniformly throughout the Community. For example,
Luxembourg restricted the allocation of entitlements to applicants
who actually operate an agricultural holding with all the machin-
ery and equipment necessary for independent management. All
other Member States applying the regional or hybrid model
accepted claims from landowners who undertook to keep their
land, or have it kept, in GAEC, even if they did not have any agri-
cultural machinery or equipment.

5.26. Applying the principle of subsidiarity, the concrete implemen-
tation of GAEC is Member States’ competence. Hence, no uniform imple-
mentation exists across the EU. Luxembourg has chosen stricter rules
that it deemed suitable but those are not compulsory for the other Mem-
ber States. The Commission does not oppose such a solution.

5.27. Table 5.4 shows that the number of direct aid beneficia-
ries has increased significantly. Especially under the regional
model, where all grassland and land used for fruit and vegetables
became eligible, the SPS has led to a substantial increase in the
number of hectares in respect of which direct aid is paid and
beneficiaries. The Court has also noted among them railway com-
panies (England), horse riding/breeding clubs (Germany and
Sweden) and golf/leisure clubs and city councils (Denmark
and England).

5.27. The criteria for allocating entitlements had to be met by the ben-
eficiary. To activate subsequently an entitlement he must have eligible
agricultural land at his disposal and exert thereon an agricultural activ-
ity. If a natural or legal person meets all eligibility conditions for the land
at its disposal and declared, it is eligible. Golf courses as such are not eli-
gible. Similarly, it is clear that e.g. the area used to play golf or for other
leisure activities is excluded, and that only areas used for agricultural
activity are eligible. The Commission is following up the cases identified
by the Court.

Side-effects of the SPS

5.28.
Entitlements allocated to landlords, not engaged in farm-
ing, are, under the hybrid model, solely based on the flat-rate
regional element of SPS. Under the dynamic version of the model,
whilst the value of such entitlements starts low, by the end of the
dynamic phase these entitlements will have a much higher value:
all entitlements will end up with the same value. There will be a
significant redistribution effect on EU direct aid away from those
actually farming and towards landowners, who will see the value
of their entitlements multiplied by four in Denmark and Germany
and tenfold in England. In England, the flat-rate element of entitle-
ments was worth 28,20 euro per hectar in 2005, whereas all
entitlements will have a face value of some 280 euro per hectar
in 2012 (20).

5.28.
See also the Commission’s reply to paragraph 5.20 as to the
concept of the regional model and its importance for conservation pur-
poses.

First of all, the choice of the model is up to the Member State. The model
described here entails also a redistribution effect since, with a view to a
flat rate payment for all eligible agricultural area, 1. the coverage is
extended to those area that previously did not receive aid, 2. some of the
individual historical rights (varying among beneficiaries and per hect-
are) are added and equally distributed on the (extended) area.

(19) See Article 33(1) and Article 2(a) and (c) of Regulation (EC)

No 1782/2003.

(20) For severely disadvantaged areas land the figures are 25,59 euro and
some 230 euro; for moorland they are 3,36 euro and some 30 euro.

A legal or natural person who met the eligibility condition was entitled
to receive the single payment.

15.11.2007

EN

Official Journal of the European Union

C 273/95

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Redistribution effect

5.29. Member States may apply the so-called windfall profit
clause (21) whereby a farmer who had sold or leased for six years
or more all or part of his holding after the reference period has
the number of entitlements due to him on the basis of his aid dur-
ing the reference period (22) reduced by up to 90 %. These deduc-
tions are credited to the national reserve. Only Belgium, Denmark,
Italy, Luxembourg and Sweden chose to apply this clause (23). In
the other Member States, farmers are allowed to keep all of their
windfall entitlements. Windfall profits have not only increased
the contribution rate borne by all farmers to the national reserve
but also led to unequal treatment of farmers in the EU.

5.29. Member States have indeed the choice to revert under certain
conditions entitlements to the national reserve. Four Member States
made use of this option, while others did not.

Where this option has been selected, certain conditions need to be applied
(see Article 42(9) of Regulation (EC) No 1782/2003 and Article 10
of Regulation (EC) No 795/2004). The windfall profit clause is
optional for Member States. Windfall profit situations have often been
substantially reduced by private contract clauses, because it is impossible
for the sellers to activate an entitlement without land.

5.30. The Court has found that the allocations made under the
new farmer and investment schemes created substantial abnor-
mal profits which fall within and outside the scope of the wind-
fall profit clause.

5.31.
EU legislation (24) allows Member States to allocate refer-
ence amounts from the national reserve to new farmers (25) who
started their agricultural activity after the reference period. In
Scotland several new farmers were given entitlements where the
applicant did not meet the criteria of the new farmer scheme (26).
In one case farmer A took over a holding in May 2004 for which
the the former farmer B had been allocated 602 entitlements
worth 287 000 euro in 2005. Farmer A successfully applied

5.31. As it is described, farmer A did not qualify as a new farmer and
therefore the allocation from the national reserve needs to be verified.

The described practice is being followed up through conformity proce-
dures.

(21) Article 42(9) of Council Regulation (EC) No 1782/2003 and
Article 10 of Commission Regulation (EC) No 795/2004 (OJ L 141,
30.4.2004, p. 1).

(22) The windfall profit clause only applies to transfers prior to
15 May 2004. Transfers after that date and transfers free of charge fall
outside its scope.

(23) Spain and France applied this clause in 2006.
(24) Article 42(3) of Regulation (EC) No 1782/2003.
(25) See the farmer definition in paragraph 5.26.
(26) See article 2(k) of Regulation (EC) No 795/2004 which provides that
a new farmer may not have exercised any agricultural activity in his
own name and at his own risk or must not have had the control of a
legal person exercising an agricultural activity in the five years pre-
ceding the start of the new agricultural activity.

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under the new farmer scheme of the national reserve and received
his entitlements worth 111 000 euro for wich he was fully paid
in 2005. Farmer B declared 410 (27) of his 602 entitlements with
410 hectares of rough grazing land rented more than 300 kilo-
meters away in the Scottish Highlands (28) and on which he kept
85 sheep. For this new agricultural activity he was paid
182 000 euro in 2005. Farmers A and B were both legal entities
that had jointly operated the holding in question until March
2004.

5.32. A simple transfer of a holding between family members
during or after the reference period was sufficient to increase the
number and values of entitlements allocated for the holding. In
Ireland a farmer who stopped farming in 2002 leased his holding
to his son. The father was allocated entitlements worth
38 000 euro on the basis of premia paid in 2000 and 2001. His
son was approved as a new farmer and allocated entitlements
worth 87 000 euro on the basis of premiums paid in 2002. In
2005 the father transferred his land and his entitlements free of
charge to his son who ended up owning entitlements worth
125 000 euro. If the transfer had not occurred the holding would
have been allocated entitlements worth 67 800 euro.

5.32.
If a transfer occurred within the reference period the same piece
of land will generate two entitlements. The situation results from the
incompleteness of the reference period (2000-2002) for father and son,
during which both could constitute rights for entitlements on the same
area.

The described practice is being followed up through conformity proce-
dures.

Increased entitlements due to investments

5.33.
Entitlements from the national reserve may be allocated
to farmers who made investments in production capacity or pur-
chased land. In Scotland, the allocation for investment was dis-
proportionate to the investment made. For example, one farmer
had invested in 1 802 hectares of land located in a severely dis-
advantaged area, but the investment allocation was calculated on
the basis of the much higher regional average value for the other
land. He received entitlements worth 417 966 euro. In Northern
Ireland, a farmer was allocated entitlements worth 109 000 euro.
After the reference period he transfered more than 600 cattle to
the holding of a family member who was allocated 140 000 euro
for the same animals under the investment scheme.

5.33. Member States have a margin of appreciation when implement-
ing the investment clause for the allocation of entitlements. However, the
allocation of payment entitlement has to be based on objective criteria
and should ensure equal treatment among farmers.

The described practice is being followed up through conformity proce-
dures.

(27) 192 entitlements worth 115 000 euro have been transferred under
the provisions of article 17 of Regulation (EC) No 795/2004 to farmer
A’s daughter and two other farmers in respect of land sold to them in
2003. These entitlements were transferred without applying the
windfall profit clause.

(28) The lessor of the land was a sheep keeper who owned more than
11 700 hectares of rough grazing land for which he was allocated
comparatively low value entitlements of 20 euro each. In total he had
leased more than 3 000 hectares to farmers in similar situations as
farmer B.

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THE COMMISSION’S REPLIES

5.34. By mid 2003, the features of the reform, including the
existence of a scheme providing for allocations for investors, had
In the United Kingdom a 10 %
become public knowledge.
increase in income was considered sufficient evidence of an
investment. Paradoxically by increasing the number of cattle
slaughtered during 2002 (i.e. destocking) farmers could meet this
investment criterion. Consequently there was a general run on
cattle premiums. For example, in Northern Ireland the number of
animals claimed under the beef special premium and the slaugh-
ter premium schemes was more than 20 % higher in 2004 than
the average for 2000-2002. As a consequence more than 82 %
(10,5 million euro) of the allocations from the national reserve
were made to investors. The same phenomenon was observed in
Scotland and England (85 % (34,4 million euro) and 78 %
(94 million euro) respectively). This run on premiums and the
non-application of the windfall profit clause explain why the con-
tribution rate to the national reserve was in excess of 3 %.

5.34. Member States have a margin of appreciation how to imple-
ment the investment clause. However, the described interpretation of
‘investment’ is not covered by the corresponding Community legislation.

Indeed, the EU legislation refers to increasing production capacity and
purchasing land, an increase in income, in some cases (as described) may
not necessarely reflect an increase of the production capacity.

See also the Commission’s reply to paragraph 5.29 on the non-
application of the windfall profit clause.

The case is followed up through conformity procedures.

The activation of entitlements and payments

Reasonable overall quality of the management and control system

In 2005 the management and control systems applied by
5.35.
the Member States for processing farmers’ claims were affected by
three major changes: the introduction of a compulsory Geo-
graphical Information System (GIS), a new system for the identi-
fication and registration of payment entitlements, and the
introduction of obligatory Cross Compliance checks. The Court’s
audit covered the first two elements. For detailed observations
and the overall evaluation, see Annex 5.2.

5.36.
In Scotland the system for identification and registration
of payment entitlements is incomplete since it does not correctly
record transfers of entitlements or monitor minimum activation
obligations (29). In several Member States the payment calculation
was incorrect in cases where the area established after control was
not enough to activate all entitlements declared by the farmer.

(29) A standard entitlement must be activated at least once every three
years and National Reserve entitlements must be activated every year
for the first five years.

5.36. The Commission will follow up these alleged shortcomings
through conformity procedures.

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Long delays in establishing entitlements and making payments

5.37.
In all Member States visited (except Portugal and Belgium)
definitive entitlements were allocated wholly or partly after the
legal deadline of 31 December 2005 (more than 8,3 billion euro
in value terms). Some Member States were consequently unable
to pay all farmers by the 30 June 2006 deadline. This was a par-
ticular problem in England.

5.37. Generally, the late establishment did not lead to a delay in SPS
payments to the farmers. In case of non-respect the rules as set out in
Regulation (EC) No 883/2006, in particular its Article 9, will be
applied. Reductions due to late payments in 2006 will be applied only
in England.

5.38. The Court itself accepts that the design and implementation of
the Single Payment Scheme limits the risk of irregular payments (see
paragraph 5.66).

Overpayments

5.38. The Court’s audit at
final beneficiary level revealed
13 cases out of 54 (24 %) randomly selected payments tested
where an incorrect area and/or ineligible areas had been taken
into account for the calculation of the number of entitlements.
The differences in area ranged from 0,35 % to 6,92 % but the
total financial impact is limited. Nevertheless it should be noted
that even very small errors can have a significant impact on future
payments under the dynamic model (see paragraph 5.28).

The Single Area Payments Scheme (SAPS)

5.39. The main difference between SAPS and SPS is that under
the former ‘entitlements’ are not established. A uniform amount
is paid for each hectare of eligible land. In due course the eight
Member States that apply SAPS (30) will be required to adopt SPS.

5.40.
For 2006 the SAPS coverage was completed by visiting
the remaining three New Member States that apply the scheme
(Estonia, Cyprus and Latvia) (31) and three Member States for a
second time (Lithuania, Hungary and Poland). In total 24 pay-
ments were tested at final beneficiary level.

(30) Cyprus, Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland,

Slovakia.

(31) The other five Member States were audited the previous year. See the
Annual Report concerning the financial year 2005, paragraphs 5.12
to 5.20.

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the reduction coefficient

5.41.
In Estonia the four beneficiaries audited had been paid for
a larger area than was measured on the spot (average 4,6 %) and
the Estonian authorities were unable to substantiate the figure for
the calculation of
they applied
(3,51 %) (32). In Cyprus, there are continuing weaknesses in the
land registry system (it dates from 1926 and the changes to the
natural borders of fields that have taken place since then are not
reflected in it) which explains the two relatively large differences
in area found (7,26 % and 18,7 %). In Hungary the reduction
coefficient was wrongly calculated, leading to a systematic over-
payment of 1,62 %.

5.41. As regards Estonia, the Commission has carried out an audit of
the IACS in 2005 which did not reveal major deficiencies.

The Court’s findings are in line with the rate of error reported by Estonia
to the Commission.

As regards Cyprus, the Commission shares the concerns of the Court. The
deficiencies are being followed up through the conformity procedure.
After the audit in 2005, an additional audit of the IACS in Cyprus is
scheduled for the second half of 2007. Moreover, having regard to the
nature of the deficiencies, the Commission requested the Cypriot authori-
ties to take immediate action in order to remedy these deficiencies.

As regards Hungary, the Commission will examine the Court’s findings
in the light of the reply from Hungary and, if necessary, follow them up
through conformity procedures.

Rural development

Guarantee expenditure

5.42.
EAGGF-Guarantee expenditure for rural development
amounted to 5 623 million euro in 2006 (33). This covers spend-
ing on a large number of measures such as agri-environmental
schemes, compensatory amounts for farming in less-favoured
areas, investments in farms, and infrastructure in rural areas.

5.43. The Court’s audit covered the administrative and control
procedures and the audit of 25 payments at final beneficiary level
in eight Member States.

5.44. The Court’s audit found a high incidence of errors, by
both nature and amount for the agri-environmental schemes.
Payments under these schemes are dependent on respecting
(often complex) conditions, such as observance of good farming
practices. The Court found in seven out of eight cases audited that
farmers had not met their commitments or that some conditions
had not been effectively checked by the authorities.

5.44. The Commission considers that the high incidence of errors in
agri-environmental measures found by the Court is not representative for
the total of rural development expenditure.

As regards agri-environmental measures, the Commission considers that
their control is rather complex, but the objective of these measures to inte-
grate environmental concerns in agriculture and their added value is
widely recognised.

With regard to the seven out of eight cases mentioned by the Court, the
non-respect of the agri-environmental commitments was in many cases
either partial or it had a limited impact.

(32) If the total aid payable exceeds the national SAPS envelope the aid

must be reduced proportionally.

(33) A further 3 810 million euro was spent on rural development under

the EAGGF-Guidance Fund (see chapter 6).

The Commission has established a comprehensive programme to audit
the national management and control systems for agri-environmental
measures.

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5.45. The Commission will follow up these cases through conformity
procedures.

5.47. The Commission has identified similar weaknesses in the course
of its audits in Hungary. The impact of the detected weaknesses has been
analyzed during the conformity procedure, and in cases where a risk for
the Fund has been established, financial corrections are being applied.

5.45. The Court could not express an opinion in two cases
because there was insufficient evidence to support the payment to
the beneficiaries. It was not possible in one case to verify the real-
ity of the investment and in the other to establish the link between
the expenditure declared (interest rate subsidy on loans) and the
financial benefit for the farmers.

Transitional Rural Development Instrument (TRDI)

5.46.
Support for rural development in the EU-10 for the
period 2004-2006 is made available under the ‘transitional rural
development instrument’, against which an amount of 2 116 mil-
lion euro was paid in 2006. The Court carried out system audits
in two Member States: Latvia and Hungary. No problems were
found in Latvia.

5.47.
In Hungary for the financially most important measure,
agri-environment (72,6 million euro), the audit found shortcom-
ings in the control and management system. For example: on-the-
spot checks were not performed throughout the year in 2005, but
after the main harvest, (as a consequence many conditions were
not verified at all); parcels could not always be reliably and indi-
vidually identified; the condition of maximum livestocking den-
sity was not checked as part of IACS cross-checks (with animal
databases).

Ex post scrutiny of payments to traders and processors

5.48. Member States are required to carry out annual pro-
grammes of post-payment checks of commercial documentation
for export refunds, processing and transformation subsidies and
some rural development expenditure. Member States must satisfy
themselves that transactions have taken place and been executed
correctly, and must take steps to recover sums lost as a result of
irregularity or negligence. These checks are carried out under
Regulation (EEC) No 4045/89.

5.49. The Commission plays a supervisory and coordination
role by ensuring that Member States’ risk analysis and control
programmes are appropriate. This includes an analysis of the rel-
evant reports and other documents provided by Member States
and may entail visits to Member States in order to check the
implementation of the regulations.

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Official Journal of the European Union

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THE COMMISSION’S REPLIES

5.50.
In 2006, the Commission carried out specific missions to
eight Member States. 35 conformity audits (34) included a review
of at least one post-payment check as part of the work carried
out. The Commission also introduced at the end of December
2006 for certain measures, new, harmonised methods for exam-
ining aspects of the regulation in the context of conformity
audits (35). This should be extended to all measures involved in
order to ensure standardisation of approach and coverage. In
2006, no audits covering aspects of the regulation were carried
out by the unit responsible for rural development conformity
audits although it represents 16 % of potential
irregularities
reported by Member States. In the other areas, both horizontal
and conformity audits were carried out.

5.51. Despite the fact that the Regulation (EC) No 40/2006
introduced the obligation to report on expenditure actually
checked, not all Member States were in a position to provide this
information in 2006. The position in respect of checks on sec-
ondary purchasers of milk, public storage and multi-annual rural
development projects and what constitutes a finished check is still
differently interpreted and applied in the Member States.

5.50.
In 2006 the rural development unit mainly carried out audits
of measures not covered by the regulation such as agri-environment.
However, the horizontally responsible unit examined 21 rural develop-
ment controls representing 19 % of all the controls reviewed by the unit.
Rural development represents 8 % of expenditure under the regulation.

5.51. The Comission is aware of these differences in the control prac-
tice of the Member States but these differences are not in violation of
their obligations under the regulation.

5.52.
In its Annual Report concerning the financial year 2005
the Court criticised the Commission for not being in a position
to measure the success of checks in terms of detecting and recov-
ering irregular payments. At the end of November 2006 the
Commission sought information from Member States on recov-
ery but with limited success — six Member States have responded
to date. The Commission therefore still does not know how many
of the potential irregularities initially reported under Regulation
(EEC) No 4045/89 resulted in recovery or why they did not.

5.52. The success of Regulation (EEC) No 4045/89 depends on and
is measured by the number and value of potential irregularities found by
the ex-post controllers. The Commission has provided the Court with
exact data in this respect.

The Commission expects to know by the end of the year for all the Mem-
ber States concerned how many irregular payments have been recovered.

The follow-up given to the irregularities detected is systematically
reviewed during the Commission’s missions to the Member States. For
the cases forming part of the sample of controls selected in 2006 the
actions taken and justifications given were found generally to be accept-
able.

Moreover, under the Commission’s new guidelines, certification bodies
are required from financial year 2007 onwards to verify that paying
agencies follow-up properly all potential irregularities revealed in the
course of application of Regulation (EEC) No 4045/89.

(34) To: Austria, Denmark, France, Germany, Ireland, Italy, the Nether-

lands and the United Kingdom.

(35) See paragraph 5.38(b) of the Annual Report concerning the financial

year 2005.

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5.53. Backlogs in the completion of post-payment checks for
2004/2005 and earlier persist in Germany (Niedersachsen), Italy
(Ministero Politiche Agricole) and Spain (Andalucia) at the time of
submission of annual reports by Member States as per 1 Janu-
ary 2007.

5.53. The backlog of Ministerio Politiche Agricole and of Niedersa-
chsen is limited in financial importance. Moreover, it is regularly reduced.
The Commission is closely monitoring the progress made.

The Commission’s mission to Spain from 11 to 15 June 2007 showed
that the 2004/2005 and earlier backlog in Andalucia has been fully
resolved.

Export refunds

5.54.
Export refunds paid to exporters of EU agricultural prod-
ucts cover the difference between EU internal and world market
prices, and allow surplus production to be disposed of on world
markets. In 2006 refunds amounted to 2 493 million euro. Mem-
ber States are required to physically check 5 % of exports to
ensure that they are correctly described and entitled to the export
refund claimed. They also have to carry out checks at the point of
exit from the EU where this is different from the place at which
the goods were presented for a physical check (substitution
checks) (36). The Commission monitors the quality and number of
these checks.

5.55. Member States are obliged to provide the Commission
with data regarding expenditure and information on the EAGGF-
Guarantee Section for the purpose of the clearance of accounts as
well for monitoring and forecasting (37). An analysis carried out
by the Court on this data for 2004/05 shows that the informa-
tion provided in respect of physical and substitution checks is not
reliable. It was further noted that Greece has not submitted any
data in this respect. In relation to the Netherlands, it was found
that the definition of ‘physical checks’ applied by one paying
agency included documentary checks, leading to a significant
overstatement of the number of checks recorded.

(36) Regulation (EEC) No 386/90.
(37) Commission Regulation (EC) No 2390/1999 (OJ L 295, 16.11.1999,

p. 1).

5.54. The Commission’s monitoring of the checks includes on-the-spot
audit and systematic collation and review of annual statistics supplied by
Member States, which show a low level of irregularity.

5.55. Regulation (EC) No 2390/1999 concerns accounting data
whose primary purpose is to provide details of individual transactions
underlying Member State expenditure, but also captures other informa-
tion known about a transaction at the time of entry in the accounts. The
Commission is aware that, for this reason, the information is sometimes
incomplete. Nonetheless, the data is useful for analytical and audit pur-
poses but it is not used for monitoring physical control levels.

Of much greater importance for this purpose are the detailed statistics
which the Commission receives annually, which are checked systemati-
cally in-office and during on-the-spot audits and which are considered
to be a very reliable monitoring tool.

The question of missing cells in the payment data was already raised with
Greece by letter of 19 October 2005 and Greece did include this infor-
mation in the 2005/2006 data.

Regarding the Netherlands, the Commission awaits the Member State’s
reply.

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Official Journal of the European Union

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The Commission’s clearance of accounts

5.56. Management of expenditure on agriculture is, in the main,
shared between Member States and the Commission. Aid is paid
by the Member States, who are then reimbursed by the Commis-
sion. These reimbursements are considered as advances until the
Commission ‘clears’ the accounts. The current two-stage clearance
system used for this purpose includes an annual financial deci-
sion and multi-annual conformity decisions taken by the Com-
mission.

Financial clearance

5.57.
In the financial decisions for 2006 (38) the Commission
‘cleared’ the accounts of 91 of the 98 paying agencies (see
Table 5.1). The decisions are based on certificates of independent
auditors (certifying bodies), which are limited to completeness,
accuracy and the veracity of the paying agencies accounts. Checks
on the legality and regularity of underlying payments (‘conformity
issues’) are not explicitly stated in the Regulations and the Com-
mission does not require the certifying bodies to perform them.
Hence their certificates cannot be relied upon to provide such
assurance.

5.57. According to the relevant legislation, the certificate drawn up by
the certification body states whether it has gained reasonable assurance
that the accounts transmitted to the Commission are true, complete and
accurate. The certificate is based, inter alia, on an examination of pro-
cedures covering the paying agency’s administrative structure as regards
the question whether the structure is capable of ensuring that compli-
ance with Community rules is checked before payments are made. The
certificate forms part of the comprehensive system for the management
and control of CAP expenditure and as such contributes to the assurance
on the legality and regularity of the underlying transactions. Moreover,
from financial year 2007 onwards, the certification bodies are also
expected to provide an opinion on the effectiveness of internal control sys-
tems, i.e. whether the control system put in place by the paying agency
provides reasonable assurance as to the legality and regularity of under-
lying transactions.

5.58. Certifying bodies had to audit the single payment scheme
for the first time in 2006. The Commission did not specify the
scope and depth of the work for this task. The Italian certifying
bodies, for example, excluded verification of entitlements from
their work and mentioned this in their certificates. The Commis-
sion accepted this without comment.

5.58. Certification bodies are requested to satisfy themselves that the
paying agency’s procedures for the verification of entitlements operate
effectively. In contrast, they are not required to directly verify the accu-
racy of each beneficiary’s entitlements in the sense of checking the legal-
ity and regularity of the underlying payment for each beneficiary in the
sample. In 2006, all the certification bodies complied with this require-
ment by auditing the paying agencies’ procedures for the verification of
the SPS entitlements.

The scope and the depth of the work on the Single Payment Scheme has
been specified in the Commission’s new guideline on the model report
which is applicable from financial year 2007 onwards.

(38) The Commission made a separate decision for rural development
expenditure in the new Member States. This is to better reflect the
financial management in this field.

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5.59. The Commission mainly places reliance on a desk review
of the certifying bodies’ certificates and reports. The Court found
that the short time available and the number of languages
involved limit
the Commission’s
review (39). For 7 of the 30 certificates and reports reviewed by
the Court (40), the information available did not allow the Court
to draw a conclusion as to the existence, or not, of material errors
in the paying agencies’ accounts.

the scope and depth of

5.59. The Commission carries out the audit work necessary to gain
reasonable assurance whether (based on the information presented) the
paying agencies’ accounts are true, complete and accurate, i.e. that they
are free from material misstatement. Disjunctions arise when it is unable
to conclude positively. This is a distinct and separate mechanism from
conformity exercises, which aim to exclude expenditure from Commu-
nity financing which has not been incurred in accordance with Commu-
nity rules.

5.60. The Court visited seven certifying bodies to review their
work (41). The main weaknesses found related to the scope and
depth of the detailed testing, the work of delegated bodies, includ-
ing on the spot controls and the check of completeness of debt-
ors’ accounts. These weaknesses should be resolved in order to
provide a greater level of assurance which can be gained from the
work of the certification bodies. In 2006 the Commission services
made visits to the certifying bodies of four other paying agen-
cies (42). Its overall conclusion was limited to the statement that
‘the audit methodology of the certifying body appears to provide
sufficient assurance for the clearance decision’.

5.61. The Commission has introduced a new recovery proce-
dure (43) which includes tables for the presentation of the debt-
ors’ accounts but final guidelines on the completion of these
tables were only provided in November 2006. The Court’s work
in relation to the reliability of the debtors’ accounts questions the
completeness of these tables: limitations of the opinions in the
certificates and major findings in the reports, limited work done
by some of the certifying bodies and insufficient information in
some of their reports. Furthermore, the Commission’s reconcili-
ation of these tables resulted in some changes to tables that had
already been certified as correct.

(39) Reports and certificates have to be transmitted to the Commission by

10 February and the decision is to be taken by 30 April.

(40) 30 paying agencies were included in the DAS population. For a fur-
ther 15 paying agencies, where the certificate had been modified, the
grounds for this were examined.

(41) DAF-Ireland, AGEA and AGREA-Italy, BIRB-Belgium, FAGA-Spain,

ONIC-France and OPEKEPE-Greece.

(42) ARBEA-Italy,

IFADAP-Portugal, Ministère

de

l’Agriculture-

Luxembourg and MVH-Hungary.

(43) Council Regulation (EC) No1290/2005 (OJ L 209, 11.8.2005, p. 1)
and Commission Regulation (EC) No 885/2006 (OJ L 171,
23.6.2006, p. 90).

The Commission was able to satisfy itself that there was not a material
error in the total expenditure of the accounts it cleared. This includes the
7 accounts referred to by the Court.

5.60. As to the scope and depth of the certification bodies’ work, the
applicable legislation requires these bodies to examine the paying agen-
cy’s administrative structure only as regards the question whether that
structure is capable of ensuring that compliance with Community rules
is checked before payments are made. This is sufficient for the purpose of
the financial clearance and should not be considered as a weakness.

The Commission’s audit missions carried out in 2006 confirm (via an
assessment of the methodology used and the testing performed) that the
certification bodies’ reports and certificates are fundamentally reliable,
although there is scope for improvement in some areas. The issues cited
are all given due prominence in the Commission’s new guideline on the
model report. The certification bodies will be expected to cover these issues
in greater depth and present their findings more clearly.

5.61. The tables (1) referred to by the Court are designed to provide the
Commission with the necessary information for applying the new clear-
ance mechanism for irregularity cases provided for in Articles 32 and 33
of Council Regulation (EC) No 1290/2005. There is a clear link
between these tables and the paying agencies’ debtors’ ledger, and the
Commission’s new guideline on the model report for the certification bod-
ies applicable from 2007 requires the latter to reconcile the debtor’s led-
ger with the tables and to provide explanations to any discrepancies
found.

The tables form part of the paying agencies’ annual accounts and, as
such, are certified by the certification bodies. Moreover, the Commission
devoted a considerable amount of work into gaining reasonable assur-
ance that reported debt was fairly categorised and stated. The balances
at 15 October 2006 were assessed and the closing balances of the old
table 105 were reconciled with the opening balances of the new tables of
Annex III as of mid-October 2005. Where the reconciliation could not
be carried out successfully and the amounts were significant, thus, no rea-
sonable assurance could be gained, such as in the case of AGEA in Italy,
the accounts were disjoined.

A detailed follow-up will be carried out by the Commission in the course
of 2007 with a view to ensuring that the debts are properly reported in
the tables of Annex III.

(1) See Annex III to Commission Regulation (EC) No 885/2006.

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5.62. The decision on the amounts of outstanding irregularities,
which are charged in equal parts to the Community and the
Member States (‘50:50 rule’) (44) was included for the first time in
the financial clearance decisions for 2006 and an amount of some
EUR 130 million each was charged to the Community and the
Member States (45). An additional amount of 147 million euro
was charged 100 % to the Community for irregularities that the
Member States considered to be irrecoverable (46). The new pro-
cedure provides that significant amounts are charged to the Com-
munity on the basis of Member States’ information. This implies
that a detailed follow-up must now be carried out by the Com-
mission to ensure that the debts should properly be charged to
the Community.

5.62. The results referred to by the Court are the consequence of the
new clearance mechanism for irregularity cases introduced by Article 32
of Regulation (EC) No 1290/2005.

According to Article 49 of Regulation (EC) No 1290/2005, the new
50/50-rule was applied in 2007 to all outstanding cases for which full
recovery had not taken place by 16 October 2006. Some of these cases
date back to the 1980s. This explains the relatively high amount cleared.
It is expected that in subsequent years, when only the cases which in that
year reach the maturity of 4 or 8 years are concerned, the amounts to be
cleared will be significantly lower.

The sums charged to either side are certified by the certification bodies,
which means that they have been reviewed in detail by these bodies.
Moreover, the Member States’ correct application of this new clearance
mechanism is being followed-up by the Commission in the framework of
its audits on the paying agencies.

Conformity clearance

5.63. Conformity decisions have the objective of excluding
expenditure from Community financing where the Commission
has found non-compliance with Community rules. Conformity
clearance is also used by the Director General for Agriculture to
support his declaration of assurance on the legality and regularity
of EAGGF expenditure. Analysis of the system revealed the fol-
lowing weaknesses:

5.63.

(a)

conformity decisions did not relate to payments made to
final beneficiaries in the year in which the decisions were
taken — they usually related to several years of expenditure
and were taken several years in arrears. By the end of 2006
clearance was not complete for any year later than 1998;

(a) At the end of 2006, only 12 audits carried out in the years 2002
and before, allowing financial corrections for the period prior
to 2001, have not yet been closed. This means that the conformity
work on expenditure from the years 2000 and before has largely
been completed.

The multi-annual nature of the conformity procedures referred to by
the Court does not affect the assurance which can be derived from
these procedures for the financial year 2006. While it is true that
the financial consequences are only determined at the end of the pro-
cedures, the preliminary findings of the audits carried out in
2006 are already known. Moreover, since the Commission’s audits
cover the Member States’ management and control systems, they do
not only provide information on the expenditure audited, but indi-
rectly also on future expenditure covered by the systems in question.

(44) Article 32(5) of Regulation (EC) No 1290/2005.
(45) Additional amounts might be charged to the Community when the

remaining accounts have been cleared.

(46) Article 32(6) of Regulation (EC) No 1290/2005.

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for 2006. These

(b) DG AGRI’s Annual Activity Report 2006 referred, in the
chapter on assurance, to the contingent assets recorded in its
amounted to 1 472 mil-
accounts
lion euro (47) and are intended to predict the impact of future
financial corrections. This accounting treatment improves
the information available to the user of the accounts, but
cannot provide the Court or the Commission with assurance
as to the legality and regularity of the underlying transac-
tions;

(b) As stated in DG AGRI’s Annual Activity Report 2006, it can be
concluded from the results of the audits carried out in 2006 that
the overall situation with respect to deficiencies in the national con-
trol systems is comparable to the situation in previous years and
that, therefore, it is entirely justified to estimate the amount of
financial corrections necessary to cover the risk for the 2006 expen-
diture on the basis of the average historical net correction rate for
the period 1996-2001.

(c)

the cost of financial corrections is borne by the Member
States, usually by the general taxpayer, rather than by the
beneficiaries of the aid irregularly paid;

(d)

there was a lack of evidence that the number of audits car-
ried out by the Commission covered in a sufficient manner
the risks identified in the Commission’s risk analysis. The
testing at the level of the beneficiary is determined by the
time available rather than on the basis of a laid down instruc-
tion to the auditor. The audits carried out do not systemati-
cally include a verification of the existence and accuracy of
the information in the declarations at the final beneficiary
level;

The purpose of recording the contingent assets in the Commission’s
accounts is to disclose the (potential) receivables, based on the results
of its audits, and has not been intended to provide any assurance as
to the legality and regularity of the underlying transactions.

(c) Where undue payments are or can be identified as a result of the
conformity procedures, Member States are required to follow them
up by recovery actions against the final beneficiaries. However, even
where this is not possible, for example because the correction is
based on deficiencies in the national control system and cannot be
linked to any individual irregular payment, financial corrections are
an important means to improve the Member States’ management
and control systems and, thus, to prevent or detect and recover
irregular payments to final beneficiaries.

(d)

In 2006, in total 354 audits including 184 with on-the-spot
checks and 170 without such checks were carried out. The Com-
mission considers that these audits cover in an appropriate manner
the risks identified in the Commission’s risk analysis.

The Commission carries out compliance audits to evaluate the qual-
ity of the national management and control systems. Where appro-
priate, these audits may include tests of individual files at the level
of the final beneficiaries, including on the spot checks. This approach
is consistent with international audit standards as well as with the
Commission’s audit manual.

(47) In Table 9 of the balance sheet.

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(e)

the method used for calculating the expenditure to be
excluded is in most cases a ‘flat rate’ where a percentage of
total aid paid is recovered. Given that this method is based
on the seriousness of the control system’s weakness and not
on the value of irregularities found, no valid link can be made
between the amounts recovered by conformity decisions and
the real amounts of irregular payments.

(e) The objective of the conformity clearance is to exclude expenditure
from Community financing which has not been effected in compli-
ance with Community rules. The Commission considers that this
objective is achieved also in cases where financial corrections are
applied on a flat rate basis because the amount of irregular pay-
ments to beneficiaries cannot be quantified. Flat-rate corrections are
applied when the actual amount of irregular payments to benefi-
ciaries cannot be determined by exact calculation or extrapolation.
This principle has been regularly confirmed by the Court of Justice.
Therefore, the Commission considers this method of flat rate cor-
rections as fully appropriate

5.64. The Court carried out an audit of three financial correc-
tions included in the three conformity decisions taken in 2006
which concerned the period 1999-2005 covering 25 % of the
amount of the corrections made (48). The following observations
are made:

5.64.

(a) given the limited resources available the Commission’s con-
formity audits are selected on the basis of a risk analysis. Due
to the two-year limit there is thus a risk that expenditure is
not checked in time in order to allow a correction to be
made (49). The Court found that corrections for irregular pay-
ments with an estimated maximum amount of 100 mil-
lion euro could not be made as they were discovered after the
time limit;

(a) The conformity audits to be carried out are determined on the basis
of a central risk analysis. For the purpose of the conformity process,
this selection is in line with international auditing standards. DG
AGRI devotes more than 10 % of its total staff to this task.

If deficiencies are discovered in the framework of conformity audits
which represent a financial risk to the EAGGF, any financial cor-
rections are limited to the expenditure effected 24 months prior to
the transmission of the Article 11 letter notifying the Member State
of the Commission’s findings. This so-called 24 month rule was
adopted by the Council to ensure legal certainty for the Member
States. It is inherent in the application of this rule that certain
expenditure cannot be subject to financial corrections although it
may be affected by deficiencies.

In the cases audited by the Court, the Commission has reacted on
time to the information received.

(48) Commission Decision 2006/334/EC (OJ L 124, 11.5.2006, p. 21),
Commission Decision 2006/554/EC (OJ L 218, 9.8.2006, p. 12) and
Commission Decision 2006/932/EC (OJ L 355, 15.12.2006, p. 96).
(49) Corrections may be made for a maximum of two years prior to the
audit findings being communicated, Article 7(4) of Council Regula-
tion (EC) No 1258/1999 (OJ L 160, 26.6.1999, p. 103).

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(b)

the time needed by the Commission, for these complex cases,
from the initial audit to the clearance decision, for the cor-
rections examined, was between four and seven years which
delayed the ‘finalisation’ of the clearance procedures for the
financial years in question.

(b) The time needed for completing the conformity procedures depends
on a number of factors. Such factors include, for example, the com-
plexity of the case, requiring additional work or even additional
missions, the respect of deadlines by the Member States and the
follow-up of the recommendations of the Conciliation Body. Fur-
thermore, the full respect of the Member State’s right of defence is a
fundamental principle of the conformity clearance procedure.

The Court’s statement (‘(…) which delayed the “finalisation” of the
clearance procedures for the financial years in question.’) does not
take into account the difference between the financial clearance of a
given financial year and the conformity clearance. There is no con-
formity clearance per financial year.

Conclusions and recommendations

5.65. Agriculture and Rural Development expenditure under
the Guarantee Fund is affected by errors which, although decreas-
ing, remain material. IACS, where properly applied, is an effec-
tive control system for limiting the risk of error or irregular
expenditure. However, this is not the case in Greece.

5.65. The Commission notes that the total level of error for all expen-
diture under the EAGGF Guarantee established by the Court has
decreased markedly and is close to the materiality level. For the non-rural
development part of EAGGF Guarantee expenditure, which accounts for
more than 85 % of total expenditure, it is below this materiality level.
Errors in rural development concentrate on agri-environmental measures.

IACS is an effective control system to limit the risk of irregular expen-
diture.

The situation in Greece is addressed through ongoing audits and clear-
ance of accounts procedures to protect the financial interest of the Union
and through the monitoring and supervision of the implementation of
the Greek action plan.

5.66. The design and implementation of the SPS limits the risk
of irregular payments to farmers. Nevertheless some Member
States have failed to correctly apply certain key elements of the
SPS: Austria, Ireland and the United Kingdom extended consoli-
dation of entitlements beyond the provisions of the regulation
(see paragraphs 5.22 to 5.24).

5.66. The Commission is aware of these practices and shares the view
of the Court. Any possible risk to the Fund will be taken into account
through the conformity procedures.

5.67. The United Kingdom did not comply with Community
legislation when allocating entitlements and paying SPS and rural
development aid to landlords for land let to and farmed by the
lessee farmers (see paragraphs 5.20 and 5.21).

5.67. The Member States have to identify who is considered as active
farmers (having the right for entitlements). If the landlord bears the eco-
nomic risk of the farming activity, it is not excluded to consider him ‘exer-
cising an agricultural activity’.

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THE COMMISSION’S REPLIES

5.68.
Even if the overall national ceilings were not breached,
one quarter of the payments tested at final beneficiary level
revealed overpayments although the total financial impact is lim-
ited (see paragraph 5.38).

5.69. Among the new beneficiaries, the Court noted railway
companies, horse riding/breeding clubs, golf/leisure clubs and city
councils in the United Kingdom, Germany, Sweden and Denmark
(see paragraphs 5.25 to 5.27). Allocation of entitlements to land-
owners that never exercised any agricultural activity and who
only keep land in GAEC has led to substantial redistributional
effects of EU aid away from farmers to landlords, particularly in
the dynamic hybrid model (see paragraph 5.28). The United King-
dom authorities set inappropriate criteria for allocations of
entitlements for investments from the national reserve (see para-
graphs 5.33 and 5.34).

5.69. Regional models do, indeed, open up support to those who may
not have received it in the past. This was a clear and conscious choice of
the Member States concerned to redistribute support in the new circum-
stances of decoupling. The new beneficiaries are those who farmed
actively in the relevant reference period (i.e. in the first year of applica-
tion). They may or may not have been the owners of the land, but this is
irrelevant to the question of who received the premia rights.

5.70. The SPS regulations gave Member States discretion to
choose how to allocate entitlements from the national reserve and
whether or not to eliminate windfall profits (see paragraphs 5.29
to 5.34). The same issues have been dealt with very differently in,
and even within, the Member States, consequently there can be no
equal treatment of beneficiaries under the scheme.

5.70. Member States have indeed the choice to revert under certain
conditions entitlements to the national reserve. Where this option has
been selected, certain conditions need to be applied.

Similarly, the responsibility for the implementation of the SPS lies with
the Member States.

5.71. The Commission should take these consequences into
account when performing the ‘Health Check’ (50) due in March
2008.

5.71. The ‘Health Check’ will scrutinise the functioning of the support
schemes introduced with the CAP-reform 2003.

5.72.
In rural development, the agri-environmental measures
are prone to a high incidence of errors, because farmers do not
meet the (often complex) eligibility conditions. The Commission
should give due consideration to the pertinence of eligibility con-
ditions for such measures.

5.72. The Commission considers that the high incidence of errors in
agri-environmental measures found by the Court is not representative for
the total of rural development expenditure.

As regards agri-environmental measures, the Commission considers that
their control is rather complex, but the objective of these measures to inte-
grate environmental concerns in agriculture and their added value is
widely recognised.

Concerning the programming period 2007-2013 the newly introduced
legislation (2) requires the Member States to ensure ex-ante that all the
rural development measures and the related commitments and eligibility
conditions they intend to implement are properly verifiable and control-
lable.

(50) Declaration No 3 on the review of the financial framework annexed

to be Interinstitutional Agreement of 17 May 2006.

(2) Article 48 of Commission Regulation (EC) No 1974/2006.

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5.73. The nature of post-payment checks (51) and remaining
weaknesses in their application limit the assurance that can be
gained as to the legality and regularity of payments made in pre-
vious years.

5.73. The Commission considers that the system of post-payment
checks works adequately. Its own audits confirm that assurance can be
gained from these checks.

Although there might not be a direct link between the expenditure
incurred in 2006 and that controlled by the post-payment checks, these
checks contribute to the overall assurance regarding the legality and regu-
larity of the underlying transactions in 2006 since the system as such is
functioning properly. In fact they are an extra level of controls in addi-
tion to the pre-payment checks and must therefore be regarded in the
context of the overall system for the management and control of agri-
cultural expenditure (see also the Commission’s reply to paragraph 5.77).

Improvements are required in respect of the shortcom-
5.74.
ings detected by the Court and the Commission’s clearance unit
before the system of physical and substitution checks on export
refund consignments can be considered as operating satisfacto-
rily.

5.74. The physical and substitution checks under Regulation (EEC)
No 386/90 form part of the whole chain of controls, which also include
ex-ante administrative checks of refund payment claims, ex-post controls
under Regulation (EEC) No 4045/89 and the Commission’s own
audits. The Commission considers this system as operating satisfacto-
rily. As a proportion of expenditure, the irregularities reported by the
Member States for both physical and other controls in export refunds
have been decreasing in recent years and are now at a low level. Never-
theless, in response to the Court’s main concerns identified in the Special
Report No 4/2007 legislative changes are under consideration.

5.75. The Commission’s financial clearance decisions concern
the reliability of the accounts. The certificates issued by the Cer-
tifying bodies do not cover legality and regularity. Claims for EU
aid are not usually checked by them on the spot. In order to
improve the assurance that can be gained from this element of
clearance, the Commission services should make frequent audit
visits to a sufficient number of certifying bodies and ensure that
conditions for its desk review of certifying bodies’ certificates and
reports provide for adequate scope and depth.

5.75. The Commission visits certification bodies (and paying agen-
cies) on the basis of a risk analysis, which takes the magnitude of the
issues confronting both bodies into account. This practice will be contin-
ued for the financial year 2007.

The scope and depth of the Commission’s review of certification bodies’
certificates is considered to be adequate. The Commission carries out the
audit work necessary to gain reasonable assurance whether (based on the
information presented) the paying agencies’ accounts are true, complete
and accurate. Disjunctions arise when it is unable to conclude positively.

(51) Post-payment checks on 2006 transactions will be carried out in the
period July 2007 to July 2008. These checks can cover more than the
transactions for the year 2006. The results will be reported to the
Commission by 1 January 2009 at the latest. The Commission will
then review them and may decide to exclude expenditure. For this rea-
son the Court cannot derive assurance as to the EAGGF transactions
for the year 2006.

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5.76. Although clearance systems (as well as post-payment
checks) have the objective of excluding expenditure which does
not comply with Community rules, at present they fail to do so
at the level of payments to final beneficiaries (52). The level of
irregular payments financed by the CAP is not yet known or esti-
mated by the Commission in a way considered appropriate by the
Court (53).

5.76. The conformity procedure is designed to exclude expenditure
from Community financing which has not been effected in compliance
with Community rules, thus shielding the Community budget from
expenditure that should not be charged to it. In contrast, it is not a
mechanism by which irregular payments to beneficiaries are recovered,
which according to the principle of shared management is the sole
responsibility of Member States.

5.77. The Commission should ensure that supervisory and con-
trol systems provide assurance as to the legality and regularity of
the transactions at the level of the final beneficiary and should
seek to ensure that irregular payments are recovered. The Court
has proposed different options to achieve this. The impact of the
Commission’s choice that the certifying bodies do more work to
verify and validate IACS statistics and post-payment checks can
only be evaluated later. Nevertheless where the Commission uses
the work of others as a source of assurance it should perform suf-
ficient work to ensure that it is reliable.

The results of the controls at the level of the final beneficiaries as com-
municated to the Commission by the Member States and published in
DG AGRI’s Annual Activity Reports for a significant part of the CAP-
expenditure provide for a reasonable indication of the extent of irregular
payments. To further improve the assurance which can be gained from
this information, as from 2007, the Commission has implemented the
Court’s recommendation that the certification bodies should do more
work to verify and validate the inspections statistics and post payment
checks.

5.77. A comprehensive system for the management and control of
agricultural expenditure ensures that irregular payments to final benefi-
ciaries are prevented or detected and recovered. This system relies on four
complementary levels:

(1) compulsory administrative structure at the level of Member States,
centred around the establishment of paying agencies and an author-
ity at high level which is competent for issuing and withdrawing the
agency’s accreditation. The decision for issuing the accreditation is
based on a detailed review by an external audit body;

(2) detailed systems for controls and dissuasive sanctions to be applied
by those paying agencies, with common basis features and special
rules tailored to the specificities of each aid regime;

(3) ex-post controls through independent certification bodies and spe-
cial departments performing checks under Regulation (EEC)
No 4045/89;

(4) clearance of accounts through the Commission (both annual finan-

cial clearance and multi-annual conformity procedures).

(52) Annual Report concerning the financial year 2005, paragraph 5.56.
(53) In order to estimate the level of irregularities, an appropriate sampling
method should be clearly defined (Opinion of the Court No 2/2004
on the single audit model, paragraph 48) and the legality and regu-
larity of expenditure should be verified at the level of the final ben-
eficiary (Opinion of the Court No 1/2005 on the financing of the
CAP, paragraph 24).

Taken together, the four levels are therefore the basis for the Com-
mission to gain reasonable assurance as to the effective manage-
ment of the risk of error in the legality and regularity of the
underlying transactions in agriculture.

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THE COMMISSION’S REPLIES

5.78. The Commission’s conformity decisions are not complete
for any year later than 1998. Since these decisions in respect of
2006 expenditure will be taken in the future, the expenditure is
provisional and assurance as to the legality and regularity of the
transactions underlying the Community accounts can only be
provided once a full clearance procedure is in place and applied.

5.78. By the end of 2006, only 12 audits carried out in the years
2002 and before, allowing financial corrections for the period prior
to 2001, have not yet been closed. This means that the conformity work
on expenditure from the years 2000 and before has largely been com-
pleted.

The Commission does not consider that the 2006 expenditure is provi-
sional and that assurance as to the legality and regularity of the under-
lying transactions can only be provided once a full clearance procedure is
in place and applied. Such an appreciation of the conformity procedure
does not take into account that this procedure is but one, albeit impor-
tant, part of the comprehensive system for the management and control
of agricultural expenditure.

This system, which is described in detail in the Commission’s reply to
paragraph 5.77, is the basis for the Commission to gain reasonable
assurance as to the effective management of the risk of error in the legal-
ity and regularity of the underlying transactions in agriculture.

As regards specifically financial year 2006, the preliminary findings of
the audits carried out in 2006 are already known. Generally speaking,
it can be concluded from these findings that the overall situation with
respect to deficiencies in the national control systems is comparable to the
situation in previous years.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Recoveries of irregular payments

5.79.
In its Special Report No 3/2004 on the recovery of irregu-
lar payments the Court identified a number of serious weaknesses
in the system of recording, recovering and writing off irregular
payments.

5.80. The Council and Commission have responded positively
to many of these by:

5.80.

(a)

setting up a joint Task Force Recovery (TFR) to resolve/clear
the backlog of irregularity cases over 0,5 million each (54).
The outcome was a Commission Decision (55), charging
317 million euro (56) to the Member States and 176 million
to the Community Budget;

(54) Notified to the Commission before 1999.
(55) Commission Decision 2006/678/EC (OJ L 278, 10.10.2006, p. 24).
(56) 165 cases, of which 157 relating to Italy.

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(b)

introducing new requirements for reporting and dealing with
irregularities (57), and taking steps to clarify the responsibili-
ties of DG AGRI and OLAF in respect of the financial follow
up of irregularities (although a draft memorandum of under-
standing between the parties has yet to be signed);

(b) The new regulation dealing with irregularities (3) has been success-
fully implemented by all 27 Member States from 1 January 2007
onwards and a Working Party of Cocolaf (4) was held on
23 May 2007 to present detailed practical guidelines to Member
States.

The instrument clarifying the responsibilities of all services con-
cerned is subject to an Inter Service Consultation during June/July
2007 and is expected to be applicable shortly thereafter.

(c) putting some 2 600 cases, communicated before 1999 and
under the ‘500 000 threshold’, of a total amount of
168,7 million euro (58) under the ‘50/50’ approach (59) appli-
cable from 16 October 2006.

5.81. However there are still some important issues which have
to be resolved:

5.81.

(a)

the Commission is not yet in a position to finalise the
‘Jordan/Iraq’ case relating to false proofs of arrivals of exports
of meat and poultry involving 35 million euro of alleged
irregular payments, since legal proceedings, including a pre-
liminary ruling procedure before the European Court of Jus-
tice are still pending in June 2007;

(b)

the placing of the 2 600 lower value task-force cases under
the new 50:50 clearance procedure implies that a follow-up
is made by the Commission to ensure that the amounts
charged to the Community under this procedure are correct;

(b) As far as the charging of sums is concerned, the Commission
observes that this is subject to the certification by the certifying bod-
ies and that the sum of 147 million euro is therefore reviewed in
detail by these bodies.

Furthermore, the Commission is in the process of following up on
the cases where amounts have been charged to it in the context of
the audits of the paying agencies.

(c)

the discussion of the 2nd Report from the Commission on
the implementation of Council Regulation No 1469/95
(referred to as the ‘blacklist’) has not yet reached an opera-
tional conclusion since the European Parliament has not
issued any opinion on the subject.

(c) The Special Committee on Agriculture (5) had a last debate and

adopted its conclusions on 6 June 2006 (6).

The Commission report (7) was transmitted to the European Par-
liament (Cocobu (8)) on 24 October 2005, however, it has not
been debated by the European Parliament yet.

(57) Under Commission Regulation (EC) No 1848/2006 (OJ L 355,

15.12.2006, p. 56).

(58) Situation as per 14 November 2005.
(59) 50 % of the financial consequences of non-recovery shall be borne by
the Member States and 50 % by the Community budget if recovery
has not taken place within four/eight years of the primary adminis-
trative or judicial finding/or not decided by national Courts. In the
clearance decision taken in April 2007 most of the cases referred to
are not yet decided upon as the accounts of AGEA in Italy are
disjoined.

(3) Commission Regulation (EC) No 1848/2006.
(4) Cocolaf: Advisory Committee for the Coordination of Fraud Prevention.
(5) The Special Committee on Agriculture (SCA) comprises permanent represen-
tatives of the Member States; the SCA prepares Council decisions on common
agricultural policy matters.

(6) Last document reference 7763/06.
(7) Second Report from the Commission on the application of Council Regula-

tion (EC) No 1469/95.

(8) Cocobu: Committee on Budgetary Control.

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THE COMMISSION’S REPLIES

Olive oil

5.82.
In its previous Annual Report (60) the Court raised con-
cerns about the reliability of the olive cultivation Geographical
Information System. For the 2004/2005 marketing year the
Court carried out a specific audit of the olive oil production aid
scheme in the main producer Member States (Italy, Spain
and Greece).

5.83. As part of the audit, 50 payments files were tested, 33 of
which were checked on the spot. Eight farmers (24 %) had
declared at least 5 % more olive trees than were counted. Two of
these led to significant overpayments.

5.83-5.84. The aid was paid on the basis of the quantity of olive oil
produced. The number of trees was an element of the system of control of
the scheme, among many other elements (control of the mills, control of
the yield, etc.).

5.84. The audit confirmed that the weaknesses previously iden-
tified persist and that the GIS in all three Member States is neither
complete nor reliable. Since the GIS data is used to calculate
entitlements under the SPS (61) the Court will pay particular atten-
tion to this aspect during its audit of 2007 expenditure.

A sanction on the amount of aid is foreseen in the regulation when the
discrepancy between the trees declared and the trees counted is higher
than 5 %. In the cases where those sanctions have not been applied or
have been badly applied by the Member States, or in the cases where the
olive GIS was not updated, the procedure of clearance of accounts is
ongoing or has already led to financial corrections.

Some 180 million euro of financial corrections have already been applied
by the Commission since financial year 2000 and more significant cor-
rections are in the pipeline.

As of 1 January 2006, the olive oil production aid has been fully
decoupled and integrated in the single payment scheme (only Spain kept
a small element of coupled aid).

Now, the olive parcel is to be considered as a ‘classical’ agricultural par-
cel which is controlled within the framework of the IACS. This should
significantly reduce any risk of error.

SPECIAL REPORTS

5.85. The Court has published one Special Report relevant to
agriculture in the last 12 months: Physical and substitution checks
on export refund consignments (Special Report No 4/2007). It
can be found on the Court’s website (www.eca.europa.eu).

(60) See paragraphs 5.25 to 5.27.
(61) The number of hectares to be taken into account for determining the
number of payment entitlements is based on an algorithm which
derives the olive area from the position of olive trees using GIS-based
automatic processing.

ANNEX 5.1

Evolution of key observations — Agriculture

.

1
5
1
1
2
0
0
7

.

2005

2006

Observations

Replies of the Commission

Observations

Recommendations

E
N

IACS

Area aid schemes

As in previous years, in certain Member States risk-based
transactions proved to have a lower rate of error than
randomly selected transactions (5.8).

The Commission’s audits have shown that some Member
States recorded remote sensing controls as random controls,
although the farmers have been selected on a risk basis
within the zone.

Animal Premium Schemes

In general, the national statistics for animal premiums are still
less reliable than the equivalent statistics for area aid
applications (5.24).

no reply

The DAS findings concerning IACS in Greece indicate that
there has been no significant improvement since last year
(5.10).

In 2005, the Commission continued with its enhanced audit
programme. Deficiencies are followed up under clearance of
accounts procedures. The Greek authorities have set up an
action plan targeting the deficiencies, in order to ensure that
the main IACS components are enhanced and used
effectively. The Greek authorities have included in their
action plan for 2006 the implementation of a new claim
procedure changing the role of farmers unions.

For the fifth consecutive year the Director General’s
declaration contains a reservation concerning insufficient
implementation of the IACS in Greece. For 2006 the
Commission and the Court have confirmed continuing
failure to implement key controls (5.11).

SPS

N/A

N/A

The United Kingdom allocated entitlements to landlords
who let out their land for most of the year (5.20).

Contrary to the rules some Member States have extended the
provision concerning consolidation of entitlements to all
cases where a farmer in 2005 had fewer hectares than
entitlements (5.23).

The SPS has had a number of side-effects: aid has been paid
to landlords and new beneficiaries (5.28); in many Member
States ‘farmers’ have been allowed to keep their windfall
profits (5.29); inappropriate investment criteria have led to
questionable allocation of extra entitlements (5.34).

Olive oil

The Court has found that in all Member States the failure to
update the GIS data (the alphanumerical database, the real
number of olive trees, new plantings and the production
potential) clearly demonstrates that the GIS can still not be
considered fully operational (5.25-5.26).

The deficiencies in the olive GIS are also known to the Com-
mission, which shares the concerns of the Court about the
implementation of the reform.

The on-the -spot visits in the main producer Member States
revealed general problems which affect the reliability and
accuracy of GIS and consequently the correct calculation of
entitlements under the SPS (5.84).

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2005

2006

Observations

Replies of the Commission

Observations

Recommendations

Ex-post scrutiny

The Commission still cannot provide full and comparable
information on the transactions checked (4045/89) and the
value of irregularities detected and recovered. It has made
regulatory changes to improve the reporting, but the effects are
not yet known (5.38).

As a follow-up to its work in 2003 (examining the Commis-
sion’s monitoring of 4045/89 checks) the Court re-visited
seven Member States to assess the progress made. Whilst the
Court’s follow — up found that improvements had been made
in the overall quality of checks examined, weaknesses persisted
in the recovery of irregularities detected by the checks, there
was a failure to complete the planned post-payment checks on
time and in two Member States a persistent failure to complete
the minimum number (5.39).

The Commission considers that it already receives sufficient
information regarding transactions tested and irregularities
detected.

The conformity unit responsible for rural development did
not carry out any audits covering Regulation (EEC)
No 4045/89 issues (5.50).

The reporting has been further improved by the introduc-
tion of Regulation (EC) No 40/2006, permitting the poten-
tial level of irregularities to be estimated for all categories of
expenditure.

Recovery of irregular payments is not the responsibility of
those carrying out post-payment checks but of the paying
agencies

The Commission still does not know how many of the
potential
irregularities initially reported under regulation
(EEC) No 4045/89 resulted in recovery or why they did
not (5.52).

The Commision has started an exercise to assess the extent of
the failure to complete the planned checks in certain Mem-
ber States (highlighted in previous Court reports). Initial results
have confirmed the failure of four Member States to complete
the minimum number of post-payment checks required but as
yet no remedial action has been taken (5.38).

The Commission has, in fact, already assesed the extent of
the backlog. Remedial action has been initiated through mis-
sions to two Member States where the backlog is most seri-
ous. The two Member States in question have been requested
to develop action plans to resolve the backlog.

Backlogs persist in Germany, Italy and Spain (5.53).

Such action plans including a clear calculation of the num-
ber of outstanding scrutinies versus available ressources and
including clear deadlines are to be communicated to the
Commission and their implementation will be closely fol-
lowed up.

Export refunds

Checks on export refunds:

The weaknesses found by the Commission during audits in
Member States in 2004 have not yet been the subject of a final
decision on whether or not a financial correction should be
imposed (5.34).

Two enquiries have been closed without a financial correc-
tion (Poland, Lithuania). For the remaining enquiries, where
deficiencies have been identified, clearance of accounts pro-
cedures are under way.

Rural development

The Court continues to find high incidence of errors because
farmers did not meet their commitments or the key eligibility
conditions were not checked by the authorities (5.29).

The Commission will examine in detail the problems iden-
tified by the Court when the replies from the Member States
have been received.

The Court’s own audit of physical and substitution checks
led to Special Report No 4/2007 of 21 June 2007.

An analysis carried out by the Court shows that the infor-
mation in respect of physical and substitution checks is not
reliable (5.55).

For agri-environmental measures the Court continues to find
a high incidence of errors because farmers do not meet their
commitments or the key eligibility conditions are not
checked by the authorities (5.44).

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Assessment of supervisory and control systems — single payment scheme (SPS) — managed under IACS (1)

ANNEX 5.2

Key internal control

Member State

Administrative procedures and controls to
ensure correct payment

Risk analysis and selection procedures for
inspections

Inspection methodology, quality control and
reporting of individual results

Preparation and reliability of statistics on
inspections and results

Austria

Belgium (Wallonia)

Germany (Brandenburg)

Italy

Ireland

Wales

Satisfactory

Partially satisfactory

Unsatisfactory

3/4/5

3/4/14

1/2/3

3/12

1/3/5

1/3/5/11

8

9/13

9/10

6

7

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Claim registration procedures do not provide sufficient proof of the actual date of receipt and/or are not adequately controlled.

The database used for administrative cross-checks and payment calculation is fed with reference parcel data only at the beginning of the claim year. Modifications made to the reference parcels during the claim year are not carried over
to the database before payments are made.

Incorrect calculation of payments where area determined is not sufficient for all entitlements declared.

No or insufficient administrative cross-checks whether area declared for set-aside meets the legal conditions.

Consolidation was systematically granted in cases other than provided in EU legislation and let to irregular payments (in Austria 5 570 entitlements, in Wales 4 552 entitlements and in Ireland more than 150 000 entitlements were affected
by irregular consolidation).

Minor differences between the statistics reported to the Commission and the underlying data transmitted to the auditors and substantial delays in transmitting statistics to the Commission.

Significant differences between statistics reported to the Commission and the underlying data transmitted to the auditors and substantial delays in transmitting statistics to the Commission.

The selection of inspections (campaign year 2005/06) was based on outdated application data (campaign year 2004/05).

Weaknesses detected concerning the quality control and/or the training system.

Deductions made for ineligible areas are systematically reduced by a 5 % measurement tolerance.

The same parcel can be claimed by different farmers under different EU aid schemes.

The land parcel identification system in certain cases does not allow to identify the location of the agricultural parcel within the reference parcel. The national instructions allow to exceed the eligible area of the reference parcel by a tolerance
of up to 5 % or 0,5 ha.

Where an agricultural parcel comprises two or more cadastral parcels measurements are carried out and tolerances applied separately for each cadastral parcel and not for the agricultural parcel as a whole. This leads to incorrect tolerance
margins being applied.

The Land Parcel Identification System is not updated by information held by cadastral authorities nor by information’s on parcels afforested.

(1) Aspects relevant to cross-compliance are not included.

.

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15.11.2007

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Official Journal of the European Union

C 273/119

CHAPTER 6

Structural Policies

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the statement of assurance

Specific characteristics of Structural Policies

Aims and objectives of Structural Policies

Instruments for funding Structural Policies

Size and form of Community funding of Structural Policies

Errors in co-financing of Structural Policies projects

Controls over Structural Policies projects

The Court’s audit

Key findings on regularity of Community funding of Structural Policies

Key findings on Control Systems in Member States

Key findings on the Commission’s audit activity

Conclusions and recommendations

Conclusions

Recommendations

Special Report issued since the last annual report

Paragraph

6.1

6.2-6.36

6.2-6.24

6.2

6.3-6.8

6.9-6.11

6.12-6.15

6.16-6.24

6.25

6.26-6.31

6.32-6.35

6.36

6.37-6.45

6.37-6.39

6.40-6.45

6.46

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

6.1. The EU implements a number of Structural Policies. They
are intended to reduce the developmental disparities between
regions. In the programming period 2000-2006, they accounted
for approximately one third of the total Community budget mak-
ing them the second largest part of the budget. In the new pro-
gramming period, running from 2007 to 2013, Structural Policies
will continue to be major policies of the European Union.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Specific characteristics of Structural Policies

Aims and objectives of Structural Policies

In the programming period 2000-2006, Structural Policies

6.2.
were directed to:

— structural adjustment of regions whose development was lag-

ging behind (Objective 1),

— economic and social conversion of areas facing structural dif-

ficulties (Objective 2),

— modernisation of systems of education and employment

(Objective 3),

— interregional cooperation throughout the European Union

(the Community Initiative Interreg III),

— regeneration of cities and neighbourhoods in crisis (the Com-

munity Initiative URBAN II),

— combating discrimination in the labour market (the Commu-

nity Initiative EQUAL),

— development of rural areas (the Community Initiative

Leader+),

— improvement of environment and transport infrastructure in

the least prosperous Member States, and

— experimental regional programmes (Innovative Actions).

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Instruments for funding Structural Policies

6.3. Community funding of Structural Policies is a form of
co-financing. It is matched by national funding. The European
Community provides funding for Structural Policies through
appropriations from its budget which are known as Structural
Funds and Cohesion Fund. There are four Structural Funds:

— the European Regional Development Fund (ERDF),

— the European Social Fund (ESF),

— the European Agricultural Guidance and Guarantee Fund —

Guidance section (EAGGF-Guidance), and

— the Financial Instrument for Fisheries Guidance (FIFG).

6.4. The ERDF supports Objectives 1 and 2 by co-financing
investment in infrastructure, the creation or maintenance of jobs,
local development initiatives and the activities of small and
medium-sized enterprises. It also provides funding for the Com-
munity Initiatives Interreg III and URBAN II.

6.5. The ESF supports Objectives 1, 2 and 3 by granting finan-
cial assistance to combat unemployment, develop human
resources and promote integration into the labour market. It also
provides funding for the Community Initiative EQUAL.

EAGGF-Guidance

6.6. The
by
co-financing rural development and modernisation of agricultural
structures. It also provides funding for the Community Initiative
Leader+.

supports Objective

1

6.7. The FIFG supports Objective 1 by co-financing measures
for strengthening the competitiveness of the fisheries sector in
order to foster the development of the areas dependent upon it.

6.8. The Cohesion Fund supports the improvement of environ-
ment and transport infrastructure in the Member States whose
gross national product per capita is below 90 % of the European
Union average.

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THE COMMISSION’S REPLIES

Size and form of Community funding of Structural
Policies

In 2006, Community funding of Structural Policies totalled
6.9.
32,4 billion euro. About 85 % of that amount was spent on
Objectives 1, 2 and 3. See Figure 6.1.

Figure 6.1 — Breakdown of Community funding of Structural Policies in 2006

6.10. The unit of financing of Structural Policies is a project.
Under the Structural Funds a project is financed within a frame-
work known as an operational programme. For the funding period
2000-2006 there were 545 operational programmes. They var-
ied in size from under 500 000 euro to over 8 billion euro. Project
expenditure within these programmes varied from a few hundred
euros of aid to an individual beneficiary up to hundreds of mil-
lions euros for a major infrastructure project. Under the Cohe-
sion Fund there are no operational programmes, only projects.
For the period 2000-2006 there were 1 094 Cohesion Fund
projects. They ranged from 50 000 euro to over 1 billion euro.

6.11. The co-financing of a project by a Structural Fund or the
Cohesion Fund generally takes the form of the reimbursement of
costs to the project. The reimbursement of project costs is based
on an expenditure declaration prepared by the project promoter (1).
A project promoter usually submits several interim expenditure
declarations and a final one at the end of the project.

(1) Project promoters range from private individuals to associations, pri-

vate or public companies to local, regional or national bodies.

6.11. The co-financing from Structural Funds by the Commission is
at programme level and is done by way of reimbursement of aggregated
statements of expenditure submitted generally three times per year.

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THE COMMISSION’S REPLIES

Errors in co-financing of Structural Policies projects

6.12. There is a high risk that the costs of Structural Policies
projects are incorrectly declared and, consequently, incorrectly
reimbursed. In the context of this report, an incorrect reimburse-
ment is an over-reimbursement. It may be a result of:

6.12. There is a high inherent risk because, for example, of decentrali-
sation of management to regional and local bodies in the Member States
and the large number of beneficiaries. If the first level management
checks and the certification function are working effectively, this risk can
be adequately addressed.

— an eligibility error,

— an occurrence error,

— an accuracy error, or

— a multiple error.

6.13. As its name suggests, an eligibility error means that reim-
bursement does not comply with an eligibility rule. Regulations
define in detail which expenditure is eligible for reimbursement
from a fund. An occurrence error is made when a reimbursement
includes a cost which is not supported by an invoice or some
other document of an equivalent probative value. An accuracy error
is made when a cost is reimbursed at an improper amount. A
multiple error is a combination of errors, for example a combina-
tion of an eligibility and accuracy error.

6.14. A project may also be affected by compliance errors. They
are mainly errors in contracting and failures to meet publicity
requirements. For most compliance errors the regulations do not
define an impact on reimbursement of project costs.

6.15. The Court however considers that some compliance
errors must be regarded as making expenditure ineligible for
reimbursement. For example, where a project should have been
awarded to a contractor by way of a tendering procedure but was
not, the Court considers such a project as ineligible and counts
the reimbursement of its expenditure as an eligibility error. The
same applies if a tendering procedure was carried out in such a
way that it was not valid. If only a part of tendering procedure
was not valid, then, in estimating the eligibility error, the Court
seeks to apply the rule of proportionality.

6.15. The Commission also considers that failure to hold a tender
where it is required under the Community rules on public procurement
makes a project partly or wholly ineligible for funding. It applies finan-
cial corrections in these and other cases of breaches of the public pro-
curement rules, based on guidelines setting out a scale which takes
account of the seriousness of the infringement.

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THE COMMISSION’S REPLIES

Controls over Structural Policies projects

6.16. There are two levels of controls over Structural Policies
projects. The first is the control system in the Member State. It is
intended to prevent the incorrect reimbursements of project costs
and other irregularities. The second level is the Commission’s
supervision. It is intended to mitigate the risk of control failures
in the Member States.

6.17. The control system in the Member State comprises four
key control functions. They must be clearly defined and assigned
to independent bodies (principle of segregation of duties). See
Figure 6.2. The Member State’s control system should ensure that
records are kept which enable the expenditure declarations made
to the Commission to be reconciled to the accounting records
and supporting documents of individual projects (audit trail
requirement).

6.16. Member State control systems operate on a multiannual basis.
They should ensure the certification of regular expenditure to the Com-
mission, but also provide for ongoing ex post audits and a winding up
declaration at closure.

The Commission’s supervision is based on management and audit activi-
ties which are also carried out on a multiannual basis.

6.17.
In addition to the ex post sample checking indicated in Fig-
ure 6.2, the audit bodies are also required to carry out systems audits.

Figure 6.2 — Key controls in Member State

6.18. The control functions and the corresponding control bod-
ies shown in the above figure are set up in many different ways
in the Member States. The control bodies are usually located in
government offices. In some Member States the control functions
are performed at the national level (centralised controls). In other
Member States the control functions are delegated through inter-
mediate bodies to an entity at a regional or local level or to a sec-
tor specific entity (decentralised controls) (2).

(2) The principle of segregation of duties does not strictly apply to the last
two functions in Figure 6.2, i.e. the regulations do not require that the
audit body and winding-up body be separate bodies.

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THE COMMISSION’S REPLIES

6.19. The Court assesses a key control by using the following
rating scale:

— satisfactory,

— partially satisfactory, or

— unsatisfactory.

6.20. A pattern of ratings of key controls indicates a level of
likelihood that the corresponding control system detects and pre-
vents an error. Since the likelihood of detecting and preventing an
error is a measure of the effectiveness of control, the Court uses the
ratings of key controls to categorise a control system as:

— effective,

— moderately effective, or

— ineffective.

6.21. As stated earlier, the second level of control over Struc-
tural Policies projects is the Commission’s supervision. It com-
prises mainly audit and financial corrections.

6.22. A Commission audit can be an effective supervisory
instrument:

— if it is based on an assessment of the risk of failures in a

Member State’s control system,

— if it provides an operationally useful result; that is, if it pro-
vides either a sound basis for corrective action or reasonable
assurance that there is no need for such action, and

— if there is corrective action based on the audit result.

6.21. The Commission’s supervision comprises, as well as its audit
work which may lead to financial corrections, coordination with national
audit bodies, provision of guidance, annual meetings with managing
authorities and audit bodies based on annual implementing and control
reports, on-going monitoring of programmes (participation in monitor-
ing committees, ad hoc meetings, etc.), and other actions required by
internal control standards.

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THE COMMISSION’S REPLIES

6.23. Accordingly, the Court assesses Commission audits by
using the following cumulative scale:

— there were major weaknesses in risk assessment,

— there was adequate risk assessment, but the audit result was

of little operational use,

— there was adequate risk assessment and an operationally use-

ful audit result, but no post-audit corrective action,

— there was adequate risk assessment, an operationally useful
audit result and corresponding post-audit corrective action.

6.24. Responsibility for the regularity of spending on Structural
Policies starts in a Member State, but the terminal point of the
accountability chain is the Commission. In other words the Com-
mission is ultimately responsible for the regularity of Community
spending on Structural Policies. Therefore, it is essential that the
Commission’s audit activity — being its main supervisory activ-
ity — is effective.

The Court’s audit

6.25. The Court audited 177 interim reimbursements made in
the year 2006. They were made to 167 Structural Funds projects
(77 ERDF projects, 60 ESF projects, 30 EAGGF projects) and 10
Cohesion Fund projects. The 167 Structural Funds projects were
carried out within 17 operational programmes. For each opera-
tional programme the respective Member State set up at least one
control system as illustrated in Figure 6.2. The Court examined
those control systems and the control system which a Member
State set up for its Cohesion Fund projects. The Court also exam-
ined part of the Commission’s supervisory activity. This was done
by way of analyses of 15 audits undertaken by the Commission.

6.24. Under shared management, while the Commission is account-
able to the budget authority under Article 274 of the EC Treaty and the
Financial Regulation, the Member States are required to cooperate with
the Commission at all stages in the control chain in order to ensure the
legality and regularity of expenditure.

6.25. The Commission reimburses Member States on the basis of
expenditure from projects aggregated in certified expenditure declarations
sent to the Commission. The Member State pays the project promoters
the contribution due for the expenditure they have declared, as included
in the expenditure certified to the Commission.

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THE COMMISSION’S REPLIES

Key findings on regularity of Community funding of Structural
Policies

6.26. Key findings on the regularity of Community funding of
Structural Policies projects in the budget year 2006 are presented
in three tables below: in Tables 6.1, 6.2 and 6.3.

6.26. Where errors have a financial impact, the multiannual nature
of the control system helps to offset the inherent risks, as corrections can
be made some time after the disbursement of funds. Where the Commis-
sion identifies failings it takes action: naming the Member States in the
annual activity reports, suspending payments and recovering funds where
appropriate.

Moreover, the Commission may have a different assessment of the finan-
cial impact of the findings, based on its own calculation of the eligible
costs as it results from its own audit work and the consideration of fur-
ther supporting documents submitted.

Table 6.1 — Cross-tabulation of compliance by correctness of reimbursement (1)

Projects where compliance
errors were

Projects which were

incorrectly reimbursed

correctly reimbursed

Total

present

not present

36 cases

45 cases

81 cases

41 cases

77 cases

Total

20 %

23 %

44 %

55 cases

100 cases

25 %

31 %

56 %

96 cases

177 cases

45 %

54 %

100 %

(1) This cross-tabulation is based on the Court’s sample of projects. Since for each project in the sample one reimbursement was audited, the

notion the sample of projects and the notion the sample of reimbursements can be used interchangeably.

Table 6.2 — Cross-tabulation of reimbursement correctness by fund (1)

Correctness of
Reimbursement

Eligibility error

Occurrence error

Accuracy error

Multiple error

Correct reimbursement

Total

ERDF

ESF

EAGGF

Cohesion Fund

Fund

Total

15 cases

9 cases

3 cases

2 cases

29 cases

20 %

10 %

13 cases

19 %

15 %

10 %

5 cases

7 cases

0 cases

1 case

2 cases

6 %

3 %

12 %

7 cases

1 case

12 %

13 cases

12 cases

0 cases

17 %

20 %

0 %

3 %

0 %

0 cases

10 cases

0 cases

0 %

0 %

25 cases

42 cases

25 cases

26 cases

7 cases

100 cases

55 %

42 %

87 %

70 %

16 %

7 %

6 %

14 %

56 %

77 cases

60 cases

30 cases

10 cases

177 cases

100 %

100 %

100 %

100 %

100 %

(1) This cross-tabulation is based on the Court’s sample of projects.

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THE COMMISSION’S REPLIES

6.27. Table 6.1 shows that only 31 % of projects in the Court’s
audit sample were found to be free from error, i.e. were correctly
reimbursed and were not affected by compliance errors.

6.27. Table 6.1 shows that 56 % of projects were correctly reim-
bursed, taking account of cases of compliance errors with no financial
impact.

6.28. Table 6.2 shows that incorrect cost reimbursement
occurred in all funds rather frequently. However, there appears to
be an association between fund and risk of incorrect reimburse-
ment. The distribution of errors in the Court’s audit sample sug-
gests that the reimbursements from the ERDF and the ESF were
more error prone than the reimbursements from the other two
funds.

6.29. The underlying cause of over-reimbursements varied
between the four funds. See Table 6.2. In the Court’s audit sample
the most frequent causes of incorrect reimbursements from the
ERDF were multiple and eligibility errors. Multiple errors were
usually a combination of an eligibility and accuracy error. Thus,
eligibility error was the most frequent single error underlying
incorrect reimbursements from the ERDF. The ERDF eligibility
errors mainly relate to:

— the application of incorrect grant rates (the split between
Community co-financing and the National matched fund-
ing),

— inclusion of costs which are not reimbursable (such as recov-

erable VAT), and

— lack of tendering.

6.30.
In comparison with other Structural Funds and the Cohe-
sion Fund, ESF had a greater proportion of occurrence errors.
They usually reflected a lack of evidence to support the calcula-
tion of overheads or the apportionment of staff costs which are
often the main costs in an ESF expenditure declaration. In some
cases project promoters sought to use a flat rate amount for the
staff costs or overheads which is a simplification allowed in cer-
tain circumstances. However, in the cases examined, where a flat
rate was used it was found that it was generally not applied cor-
rectly by the project promoter. There were also a number of ESF
cases where the errors in declaring overheads or staff costs are, by
their nature, accuracy errors. That is to say, they were failures to
calculate correctly the values for staff costs or overheads costs.

6.28. The Commission will follow up the findings and take appropri-
ate measures. It notes that in a small number of cases the Court’s clas-
sification of the findings as errors is based on a strict interpretation of
the complex legal provisions applicable.

In their own audit work Commission auditors have identified
6.29.
eligibility as a major source of risk and have therefore focused their audit
activity on the effectiveness of day-to-day checks by management.

6.30. The Commission considers that improvements in the way the
Member States implement the Article 4 checks could reduce the quantity
of such errors. Consequently, recommendations to improve the Article 4
checks have been addressed to the Member States concerned and general
guidelines on management verifications have been issued.

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6.31. An estimate of the impact of errors on Community fund-
ing of Structural Policies projects in budget year 2006 is given in
Table 6.3. In addition, there are also basic parameters of the esti-
mation of the impact of errors.

Table 6.3 — Summary of results of testing the regularity
of reimbursements

Sample size

Proportion of
reimbursements
in the sample
affected by error

Estimated impact
of errors

180
(177 reimbursements considered
as 180 sample units)

44 %

At least 12 % of the total amount
reimbursed should not have been
reimbursed

Key findings on Control Systems in Member States

6.32. Key findings on Control Systems in the Member States are
presented in Annex 6.1 where 19 control systems from the
Court’s audit sample are categorised as effective, moderately effec-
tive or ineffective.

6.32. The Court did not find significant deficiencies in the systems for
three Cohesion Fund projects it audited in Poland, the Czech Republic
and Latvia.

Concerning the systems in Spain for ERDF and the Cohesion Fund,
including those referred to by the Court, the result of the extensive audit
work carried out by the Commission at the end of 2006 to monitor the
implementation of the agreed action plan was that significant improve-
ments had been made at the level of the national managing authority
and some of the intermediate bodies (ministries and regions), which
would lead to a categorisation of Spain overall as ‘moderately effective’.

The Commission considers that the Court’s classification as unsatisfac-
tory of the systems operating for EAGGF in Poland and Spain is too
severe.

In Poland, for example, the Court’s assessment of the audit body is based
on the finding that ex post controls had not yet started. This body had
started systems audit already and the delayed start of the ex post con-
trols was justified by late certification of expenditure.

Both in Spain and Poland, the classification of the managing authority
is based mainly on formal aspects such as poor documentation on con-
trols.

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6.33. As explained earlier the categorisation of control systems
with regard to their effectiveness is based on the Court’s assess-
ment of the functioning of the control bodies. Those assessments
identified a number of weaknesses. The main weaknesses in the
functioning of the Managing Authority were the insufficient
on-the-spot checks of the reality of expenditure and the failure to
identify that cost statements were not supported by appropriate
evidence. The main weakness in the functioning of the Paying
Authority was the failure to identify that the Managing Authority
had not carried out adequate day to day checks. The main weak-
ness in the functioning of the Audit Body was the failure to carry
out sufficient checks of appropriate quality on the expenditure of
the programmes.

6.34. To illustrate the nature of the weaknesses that lead to the
overall assessment of a control system as ineffective, we can
examine one of the cases audited. In that example the Managing
Authority appeared to be operating well; they were examining all
of the cost declarations on the spot. However, the Audit Body
identified some serious errors in projects that had been checked
by an Intermediate Body on behalf of the Managing Authority.
The Audit Body informed the Managing Authority and the Pay-
ing Authority of the errors which were of such seriousness that
they recommended that all subsequent payments be stopped. Ini-
tially payments were stopped. However, after about five weeks
the Managing Authority commenced payments again and the
Paying Authority continued certifying to the Commission pay-
ment claims containing significant irregularities for almost two
years. Hence, the functioning of the Managing and Paying Author-
ity was unsatisfactory and therefore the control system failed to
prevent reimbursement errors.

6.35. The categorisation of the 19 control systems is sum-
marised in Table 6.4. The numbers in Table 6.4 represent sample
counts of the three categories of control system. Even though the
audit sample which they refer to is rather small, the numbers in
Table 6.4 give a general picture of the effectiveness of the con-
trol systems in the Member States. They allow the Court to claim,
with reasonable confidence, that the control systems in the Mem-
ber States are generally ineffective or only moderately effective.
This is broadly similar to the Court’s findings in previous years.

6.33. The Commission in its own audits has found similar weaknesses
in some national systems, for which it has taken the required measures.

6.34. The Commission agrees that the functioning of these authori-
ties was unsatisfactory. Nevertheless, it notes that in the affected region,
the managing authority had begun to carry out more thorough checks
and to correct the irregular expenditure found before the announcement
of the Court’s audit. It had also re-imposed the payments suspension,
albeit after an interval of 22 months.

systems

in their

respective annual activity reports

6.35. The Directorates General responsible for Structural Policies have
set out the results of their assessments of the effective functioning of
national
(see
http://ec.europa.eu/atwork/synthesis/aar/index_en.htm). The assess-
ments based principally on the results of the Commission’s extensive
audit work in all Member States indicate the following broad categori-
sation of systems (percentages in relation to volume of Community
funds): between 20 and 35 % satisfactory, around 60 % in need of
improvements to correct material deficiencies in key controls, and around
10 % seriously deficient. Thus, the majority of systems still require
improvement, although there are a significant number for which there is
evidence that they work satisfactorily. The annual activity reports also set
out the corrective measures underway to bring about the required
improvements, which include follow-up audits, monitoring of action
plans and the use of powers to suspend payments and apply financial
corrections.

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THE COMMISSION’S REPLIES

6.36.
For some of the audits the Commission accepts that there were
shortcomings in documentation making review difficult, but not that this
might indicate a lack of an operationally useful audit result, as stated in
footnote 7 to table 6.5.

Table 6.4 — Effectiveness of control systems in the
Court’s audit sample

Fund

Control system

ERDF

ESF

EAGGF

Cohesion
Fund

Total

Ineffective

Moderately
effective

Effective

Total

5

2

0

7

5

3

0

8

2

1

0

3

1

0

0

1

13

6

0

19

Key findings on the Commission’s audit activity

6.36. The key findings on the Commission’s audit activity come
from analyses of 15 audits carried out by DG REGIO and DG
EMPL. The 15 audits were rated on the cumulative scale defined
in Paragraph 6.23. The results are summarised in Table 6.5. As
can be seen in that table, just over half of the Commission’s audits
examined by the Court appear to have had all qualities of an effec-
tive supervisory instrument: there was an adequate risk assess-
ment, an operationally useful audit result and corresponding
post-audit corrective action.

Table 6.5 — Evaluation of a sample of the Commission’s
audits

Rating of audit

Number of audits

DG REGIO

DG EMPL

There were major weaknesses in risk
assessment.

There was adequate risk assessment, but
the audit result was of little operational
use.

There was adequate risk assessment and
an operationally useful audit result, but
no post-audit corrective action.

There was adequate risk assessment, an
operationally useful audit result and
corrective
corresponding post-audit
action (1).

There were weaknesses
audit
documentation making assessment of
the audit result difficult (2).

in

0

1

0

7

2

Total

10

0

0

0

1

4

5

(1) The follow-up associated with audit result is occasionally late.
(2) This is not a rating within the scale presented in Paragraph 6.23. The cases are
included for completeness and also because incomplete documentation might
be interpreted as an indication of a lack of an operationally useful audit result.

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CONCLUSIONS AND RECOMMENDATIONS

Conclusions

6.37. There is high risk that declared costs of Structural Policies
projects are misstated or ineligible for reimbursement. Mitigation
of that risk requires effective control systems in the Member States
as well as effective supervision by the Commission.

6.37.
Effective shared management also requires cooperation between
the Member States and the Commission at all stages in the control
chain. The Commission’s action plan towards an integrated internal con-
trol framework is intended to optimise this cooperation and the effective-
ness of the overall control framework. However, given that the intensity
of on-the-spot checks should reflect the costs and benefits of these con-
trols, some errors will still be found in interim payments even in an effec-
tive control framework.

6.38. However:

6.38.

— the control systems in the Member States are generally inef-

fective or moderately effective, and

— The Commission refers to its reply at point 6.35 indicating its
assessment that some 10 % of control systems are seriously defi-
cient, and the corrective measures which it takes in these cases.

— the Commission maintains only moderately effective super-
vision to mitigate the risk that the control systems in the
Member States fail to prevent reimbursement of overstated
or ineligible expenditure.

6.39. Therefore, the reimbursement of expenditure to Struc-
tural Policies projects is subject to material error. The Court is rea-
sonably confident that in the budget year 2006 at least 12 % of
the total amount reimbursed to Structural Policies projects should
not have been reimbursed. In addition, a significant percentage of
Structural Policies projects were subject to compliance errors
which the Court did not regard as making expenditure ineligible
for reimbursement.

— The Commission considers that it has put in place effective systems
to carry out its supervisory role. The Commission’s audit work is
only one aspect of its supervisory activity but is extensive. To arrive
at the assessments of systems referred to in the reply to para-
graph 6.35 it has audited systems representing 53 % and 82 % of
the planned ERDF and ESF allocations respectively to EU-15 pro-
grammes and 65 % and 92 % of those to EU-10 programmes. For
EAGGF Guidance and FIFG respectively 85 % and 91 % of sys-
tems in terms of the total planned contribution had been audited.
Necessarily the results of the Commission’s actions in a given year
are not apparent in the same year in relation to expenditure declared
and reimbursed.

6.39.
Structural Fund expenditure declared by a beneficiary is subject
to a series of control processes some of which take place before the cer-
tification of expenditure to the Commission and some afterwards. The
findings presented by the Court of Auditors show the situation at a par-
ticular point in the execution of these control processes. The Commission
maintains that a large proportion of these errors are likely to be corrected
through the operation of the multiannual corrective system, in particular
the continuing audit work of national and Community audit bodies. The
Commission accepts that it is necessary to provide better evidence of
financial corrections by Member States resulting from the Commission’s
and their own audit work.

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Recommendations

6.40. The following recommendations are intended to reinforce
the prevention of errors in the early stages of a project through
working with the project promoters and ensuring that the first
level controls are functioning effectively.

6.41. The Member State should seek to prevent errors from
occuring by working with the project promoters at the start of
each project. The Managing Authority should provide the project
promoters with training and guidance when setting up the project
systems to meet Community regulation requirements and when
drawing up the first expenditure declarations. Specific attention
should be given to ensuring that the project promoter is aware of
which costs are eligible for reimbursement and the need to keep
records to demonstrate how cost items are calculated and allo-
cated. A rigorous review of checklists used for their accuracy and
completeness is of paramount importance in this respect.

6.41. The Commission has already recommended Member States to
step up their information activities directed at beneficiaries and will take
further appropriate action.

Under the Commission implementing regulation for the 2007-2013
period (Regulation (EC) No 1828/2006), the managing authority is
required to ensure that beneficiaries are informed of the conditions of
funding and the information to be kept and communicated and to sat-
isfy itself that the beneficiary has the capacity to fulfil the conditions.

6.42. The Member State authorities should provide their staff
with training and guidance on the tasks required for reviewing
and assessing the projects. In particular, the Managing Authority
staff need to have the skills to review contracting procedures and
costing systems to be able to assess whether a project contract is
being awarded correctly and cost declarations are being prepared
in line with regulations.

6.42. The Commission has issued guidance on best practices in day-
to-day management checks and the checks to be made by the paying
authority before certification of expenditure. In addition, the Commis-
sion contributes to training activities for managing authorities on the
requirements under the Regulations. It will continue with these and simi-
lar actions.

6.43. The Commission should focus its audit and supervisory
efforts on the operations of the Managing Authorities in the
Member States, as this has been identified as one of the most
important functions in the effective implementation of the Struc-
tural Funds. Specifically the Commission should have a regularly
updated assessment of the effectiveness of all of the Managing
Authorities — either made by themselves or obtained from other
sources — to enable them to target their audit effort at the least
effective or highest risk Managing Authorities.

6.43. The Commission is already devoting a large proportion of its
supervisory activity to managing authorities. It issued guidance notes in
2006 on the first level management checks and the certification func-
tion, as mentioned above. Furthermore, the Commission is asking man-
aging authorities in certain Member States to assess their performance
on compliance with regulatory requirements through self assessment
questionnaires.

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6.44. The Commission should reinforce the feedback mecha-
nisms in the control system in Structural Funds. For instance, if
the Audit Body identifies that there is an error in an expenditure
declaration this information should not only be reported but also
action taken by the Managing Authority to rectify the problem
and consider how to prevent it happening again in the future.
This involves all of the control bodies working together to take
action when problems or issues are identified. The Commission
could reinforce the importance of the feedback mechanism by
informing the control bodies of the need to take action whenever
a weakness or error is identified whether it be from within their
own audit or reported from another control body. In addition,
when the Commission carries out an audit, it should review the
reporting of weaknesses and errors and identify whether the
action taken was sufficient to address the immediate and future
consequences of the issue.

6.44.
Feedback mechanisms are built into the control system through
requirements for the exchange of the results of checks done by the man-
aging authority, paying authority and audit body and via the annual
control reports to the Commission. The follow-up of audit results is a
permanent point on the agenda for discussion between the Member
States and the Commission at the annual bilateral audit coordination
meetings. It is also a regular component of systems audits. The Com-
mission will continue to carry out reviews of national systems audit
reports and to check that requisite follow-up action has been taken.

6.45. The Commission should actively encourage and facilitate
the use of the simplifications provided for in the new Structural
Funds regulations. For example, the use of flat-rate amounts for
indirect costs in the European Social Fund (3). Such simplifica-
tions will reduce the likelihood of errors and reduce the admin-
istrative burden on the project promoters.

6.45. The Commission is already acting on this recommendation. An
important element of simplification is the provision of guidance so as to
simplify the application of the regulations in practice. For example, for
the 2007-2013 period the Commission is issuing guidance on finan-
cial engineering operations and cost-benefit analysis in revenue generat-
ing projects.

SPECIAL REPORT ISSUED SINCE THE LAST ANNUAL
REPORT

6.46. The Court has issued one Special Report on Structural
Policies since its last Annual Report:

Special Report No 1/2007 concerning the implementation of the
mid-term processes on the Structural Funds 2000-2006.

(3) Article 11(3)(b) of Regulation (EC) No 1081/2006 of the European
Parliament and of the Council of 5 July 2006 on the European Social
Fund and repealing Regulation (EC) No 1784/1999 (OJ L 210,
31.7.2006, p. 12).

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ANNEX 6.1

Categorisation of control systems

Assessments of the functioning of:

Managing
Authority

Paying Authority

Audit Body

Winding-up
Body

Control system is:

Moderately effective

Ineffective

Ineffective

Moderately effective

Ineffective

Ineffective

Moderately effective

Ineffective

Moderately effective

Ineffective

Ineffective

Ineffective

Ineffective

Moderately effective

Moderately effective

Ineffective

Ineffective

Ineffective

Ineffective

Programme

EAGGF — Sachsen-Anhalt

EAGGF — Poland

EAGGF — Spain

ESF — Objective 3 — Germany — North
Rhine-Westphalia

ESF — Objective 3 — Germany — Lower Saxony

ESF — Objective 3 — France — Midi Pyrénées

ESF — Objective 3 — France — Nord-Pas de Calais

ESF — Objective 1 — Education measures — Slovenia

ESF — Objective 1 — Germany — Thüringen

ESF — Objective 1 — Fomento del empleo — Spain

ESF — Objective 3 — UK — Scotland

ERDF — Italy — Campania

ERDF — Spain — Pais Vasco

ERDF — Greece — Peloponnesus

ERDF — Portugal — Accessibility and transport

ERDF — Interreg — Austria/Hungary

ERDF — Spain — Valencia

ERDF — UK — Merseyside

CF — Spain — 7 projects

Legend:

Satisfactory

Partially satisfactory

Unsatisfactory

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CHAPTER 7

Internal Policies, including Research

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the Statement of Assurance

Audit scope

Specific characteristics of Internal Policies

Legality and regularity of underlying transactions

Material level of error in costs declared by the beneficiaries

Supervisory and control systems

Audit certification of cost statements

Ex-ante desk reviews of cost statements

The Commission’s ex-post financial audits

Follow-up to previous observations

Conclusion

Recommendations

Special Reports issued since the last Annual Report

Paragraph

7.1-7.2

7.3-7.33

7.3-7.4

7.5-7.7

7.8-7.11

7.10-7.11

7.12-7.28

7.14-7.17

7.18-7.23

7.24-7.28

7.29

7.30-7.31

7.32-7.33

7.34

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INTRODUCTION

Internal Policies cover a wide range of European Union
7.1.
(EU) actions contributing to the development of the internal mar-
ket. Payments in 2006 were 9 014 million euro (Figure 7.1). The
principal area of activity is Research and Technological Develop-
ment, which accounts for more than half of the expenditure.

Figure 7.1 — Breakdown of payments by budgetary area in 2006

Source: 2006 annual accounts.

7.2. The Commission directly manages most of the expendi-
ture (1). The majority of the actions are implemented through
multi-annual programmes, allocating grants to projects or mea-
sures carried out by private and public beneficiaries. The grants
are usually paid in instalments: an advance upon signature of the
grant agreement or contract, followed by interim and final pay-
ments which reimburse eligible expenditure reported by the ben-
eficiaries in periodic cost statements.

(1) Management of some programmes such as the European Refugee Fund
and the Schengen Facility is, however, shared with Member States. The
Commission delegates the management of parts of the Socrates,
Leonardo and Youth programmes to National Agencies (covering
around 70 % of the budget of the Directorate-General for Education
and Culture).

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SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

7.3. The audit covered the legality and regularity of the under-
lying transactions related to payments made in 2006 from all sec-
tions of the EU budget falling within Internal Policies. The specific
assessment is based on:

(a)

substantive testing of a random sample of nine commitments
and 150 payments made by the Commission in 2006;

(b) a review of the operation of selected supervisory and control

systems:

— audit certification of project cost statements,

— desk reviews of cost statements before reimbursement of

expenditure,

— ex-post audits of projects.

(c) a follow-up to the principal observations by the Court in

recent Statements of Assurance.

7.4. The Court’s sample of payments for substantive testing
included 58 advances (2), which are subject to less stringent pay-
ment conditions than interim and final payments. Testing of the
advances was therefore limited to a review at the Commission of
the project selection procedure, the financing decision and the
payment authorisation. Of the 92 interim and final payments (3),
62 were tested on documentation at the Commission and 30 were
audited at the premises of the beneficiary.

(2) 32 for the Sixth Framework Programme for Research and Technologi-
cal Development, five Galileo Joint Undertaking, four Trans-European
Network (Transport), four Socrates and 13 other.

(3) 17 Fifth Framework Programme for Research and Technological
Development, 28 Sixth Framework Programme for Research and
Technological Development, 2 TEN-Transport, one eTEN, four LIFE,
two Leonardo, two Socrates, one MEDIA and 35 other (e. g. payments
to staff and to experts).

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Specific characteristics of Internal Policies

7.5.
EU support for research and technological development
covers a wide range of research activities and is characterised by
a multiplicity of funding schemes supporting various thematic
areas and types of projects. The projects are carried out by
research institutes and universities, but also by individuals, com-
mercial firms or public administrations. They usually involve
multiple research partners working as a consortium across a
number of EU Member States, although a single ‘project coordi-
nator’ is nominated to maintain contact with the Commission
and to take charge of the financial and administrative aspects of
the contract. EU grants to partners in individual projects range
from a few hundred euros to tens of millions. Of the more than
15 000 final beneficiaries, approximately 2 % account for more
than 40 % of the total EU funding.

7.6. Other measures cover the spectrum of Internal Policies,
such as grants to actions supporting citizenship or for mobility in
the education and training sector. These grants range from
2 000 euro up to 20 000 euro. At the other end of the scale, sup-
port to a major road or rail infrastructure project for the Trans-
European Transport Network may be up to 10 million euro.

7.7. The principal risk to the legality and regularity of the
underlying transactions is that beneficiaries overstate costs in
their cost statements, and this is not subsequently detected and
corrected by the Commission.

7.7. The Commission largely concurs with the analysis of the Court of
Auditors on the nature of the main risks. The risk that beneficiaries over-
state costs in their cost statements largely stems from the applicable regu-
latory framework, which is based on the reimbursement of actual costs.
Despite the significant improvements introduced in the regulatory frame-
work, these factors remain for the most part unchanged and they will
continue to affect the management of the Research Framework Pro-
grammes in the coming years. Furthermore, many of the resulting errors
can only be detected by carrying out on-the-spot audits. Therefore the
Commission has devised a common audit strategy to increase assurance
on the legality and regularity of the expenditure on a multiannual basis
(see the Commission’s reply to paragraph 7.12).

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Legality and regularity of underlying transactions

7.8. Overstatement of expenditure by beneficiaries may be the
result of errors of:

— eligibility: reimbursement of costs which are ineligible under

the rules,

— occurrence: reimbursement of costs for which there is inad-

equate supporting evidence, or

— accuracy: reimbursement of incorrectly calculated costs.

7.9. A project may also be affected by errors with no impact on
cost reimbursement. A frequently encountered example is the fail-
ure of the Commission to reimburse beneficiaries within the
stipulated deadlines (detailed observations on late payments by
the Commission may be found in Annex 7.1).

Material level of error in costs declared by the
beneficiaries

7.9. The Commission has taken measures to improve the payment
times, see Annex 7.1.

7.10. The Court detected errors affecting the claims for reim-
bursement submitted by the beneficiaries in 26 out of the 150
transactions audited (see Table 7.1). Most of the errors were
found in the 30 transactions audited at the beneficiary. The most
frequently occurring errors were:

7.10. The audit of the Court found that most errors occurred in the
payments audited at the beneficiary. Such errors or ineligible expendi-
ture can indeed only be detected by on site checks or, to a limited extent,
by desk controls.

— inadequate supporting evidence to justify the costs claimed,
in particular for personnel costs, which is usually the largest
single cost category,

In a few cases the Commission may have a different assessment of the
financial impact of the findings, based on its own calculation of the eli-
gible costs as it results from its own audits and the consideration of fur-
ther supporting documents submitted by the beneficiary.

— use of budgeted figures which does not comply with the

requirement to use actual costs,

— unjustified allocation of indirect costs to the project,

— claims for costs incurred outside the eligibility period,

— inclusion of various ineligible costs.

Table 7.1 — Presentation of the results of transaction testing

Sample size

Proportion of transactions affected by an error

Estimated impact of errors on the population

150

17 %

2 % — 5 %

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7.11. The errors occur in the context of a complex legal frame-
work with numerous (not always clear) eligibility criteria. Simi-
larly to previous years, the Court found that beneficiaries are
often unable to substantiate personnel costs claimed in their cost
statements.

Supervisory and control systems

7.12. The Commission has to manage thousands of beneficia-
ries and the projects they undertake. Many errors of legality and
regularity can only be detected (and thereby corrected) by per-
forming on-the-spot checks. However, to undertake such checks
on each project each year would be prohibitive in terms of cost.
Therefore, the Commission needs a coherent control strategy —
defining type and intensity of checking — for keeping the inci-
dence of error to an acceptable level, balanced against the cost of
the checks involved (4).

7.13. A summary of the results of the Court’s review of selected
supervisory and control systems may be found in Annex 7.2.

(4) Opinion No 2/2004, paragraphs 50 to 53.

7.11. The Commission acknowledges that the substantiation of the
personnel costs to be charged to research projects are a frequent source of
discrepancies and errors. It has taken significant steps to address this
issue, see the replies to paragraphs 7.7 and 7.12.

For the Seventh Framework Programme (FP7), the use of average per-
sonnel costs will require the beneficiary to have their methodology con-
firmed by an independent auditor and accepted by the Commission. This
confirmation by the auditor includes checking that a reliable time record-
ing system is in place.

As part of its efforts to clarify the rules for the FP7, since April 2007
the Commission has published four of the six chapters of the Guide for
beneficiaries, including the Guide on financial issues. The Commission
plans to make available the remaining chapters in September 2007. At
the beginning of FP7, the Commission organised information days and
workshops for the beneficiaries, in order to explain the process and clarify
the beneficiaries’ rights and obligations.

7.12-7.13. The Commission has devised a common ex post audit
strategy for the Sixth Framework Programme (FP6), designed to increase
assurance on the legality and regularity of the expenditure on a multi-
annual basis. This strategy calls for a substantial increase in the number
of ex post audits, including the audit of contracts with the most signifi-
cant beneficiaries, i.e. those receiving the highest financial contributions.

The results of these audits will be thoroughly followed-up; recovering
from the beneficiary any amounts unduly paid and extrapolating any
systemic errors detected to all other, non-audited contracts with the same
beneficiary. The Commission will apply liquidated damages if the audi-
tee fails to implement audit results on systemic errors.

This strategy is expected to ensure that the level of ‘residual’ (non-
detected) error is significantly reduced.

The audited contracts will include: (1) the approximately 200 contrac-
tors representing the largest share of the budget (collectively the contracts
concerned represent over 40 % of the budget); (2) a representative, value-
based random sample from the remaining population; and (3) a risk-
based sample focusing on potentially riskier contractors.

The implementation of this audit strategy implies a substantial reinforce-
ment of the Commission’s audit staff, an increased number of audits and
reinforced implementation procedures regarding audit results.

The modalities for subsequently extending this control framework to FP7
are currently being considered. For FP7 steps have already been taken to
strengthen the quality of the audit certification of cost statements (see
paragraph 7.17).

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Audit certification of cost statements

7.14.
EU financial rules require that requests for payment of
grants above a certain threshold have to be accompanied by an
audit report or certificate (5). This requirement has, for cost claims
meeting certain criteria, been generalised for the Sixth Framework
Programme and some other Internal Policies programmes. There-
fore, cost statements are to be certified by an independent audi-
tor or by a competent public officer in the case of certain public
bodies.

7.15.
In 2005 the Court examined the use of audit certificates
for cost statements for the Sixth Framework Programme (6). For
2006, the Court analysed the use of audit certificates in all areas
of Internal Policies. The Court tested the operation of this control
for the 15 transactions in its sample audited on the spot where a
certificate had been provided. The Court compared the results of
its own testing with the certificate. The Court also reviewed the
Commission’s own reports on the functioning of the control.

Audit certificates do not yet function as a reliable control

7.16.
In nine out of the 15 cases examined by the Court, the
certifying auditor had issued an unqualified opinion whereas the
Court identified errors with significant financial impact on the
cost statements or systems not in line with requirements. In four
of the nine cases, the personnel cost accounting systems of the
beneficiaries did not comply with contractual provisions. In one
of these cases, personnel costs were overstated by more than
50 %. In another two of these cases, the beneficiary used a cost
calculation method which was not in line with the contractual
provisions.

7.16. The research family DGs are in general agreement with the
Court’s conclusion. Nevertheless, the Commission considers that the audit
certificates have contributed to a reduction in error rates for FP6 in com-
parison with FP5.

7.17. The Court’s findings are similar to the results of the Com-
mission’s own assessment of the audit certificates which finds that
the work performed by the certifying auditors is sometimes too
superficial without the appropriate amount of substantive test-
ing, that improved guidelines are needed to address the uncer-
tainty on eligibility issues and on the independence of the
auditors, and that the lack of a mandatory model audit certificate
and of standard terms of reference encourages incoherent
approaches.

7.17. Concerning the observed weaknesses in the reliability of audit
certificates for FP6, the Commission has responded by improving sup-
port to certifying entities, beneficiaries and operational departments
within the Commission. DG INFSO has set up ‘Clinics on audit certifi-
cates’, involving central and line departments, with the aim of ensuring
a consistent handling of audit certificates in the DG, in line with the con-
tractual provisions. The results are accessible on the DG’s intranet.

As described in its reply to paragraph 7.12, the Commission has also
devised a common ex post audit strategy for FP6 to increase assurance
of the legality and regularity of the expenditure on a multiannual basis.

(5) Article 180 of the Implementing Rules of the Financial Regulation
applicable to the general budget of the European Communities.
(6) Annual Report concerning the financial year 2005, paragraphs 7.15

to 7.17.

C 273/144

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Official Journal of the European Union

15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

For FP7, the Commission has introduced three further measures to
improve the quality of audit certificates: (1) ‘agreed upon procedures’,
which consist of a compulsory set of procedures and a mandatory report
to be provided by certifying auditors; (2) compulsory certification of the
cost calculation methodology for average personnel costs, and (3)
optional certification of both the personnel cost and indirect cost meth-
odologies. These measures are designed to ensure, before payments are
authorised, that beneficiaries’ costing methodologies comply with the
contractual provisions.

Outside the research area, in 2004, DG Environment developed, for the
LIFE programme, a template for an independent external audit report
together with clear instructions specifying the scope and objective of the
certification audit, the audit methodology, the auditor’s competence and
the expected audit results.

Ex-ante desk reviews of cost statements

7.18.
For interim and final payments to projects, the Commis-
sion performs desk reviews of the cost statements submitted by
beneficiaries before reimbursing the declared expenditure.

7.19. The audit examined the guidelines and procedures, the
reporting and monitoring arrangements, and the sharing of the
results of the desk reviews in the Directorates-General
for
Research (DG RTD), Information Society and Media (DG INFSO)
and Energy and Transport (DG TREN). The Court tested the
operation of these checks for 30 payments included in its sub-
stantive testing sample (paragraph 7.3).

Comprehensive procedures but limited monitoring and sharing of results

7.20. All the Directorates-General audited have detailed written
guidelines and procedures for performing the desk reviews and
make use of standard checklists.

7.21. DG RTD and DG TREN use monitoring tools (score-
boards) to provide aggregate information on the costs accepted or
rejected on the basis of the checks but there is no analysis of the
types and rates of errors which could contribute to developing a
risk-based control strategy.

7.21. The Commission is aware that the main problems are with the
personnel costs and the indirect costs and, on this basis, is seeking to
develop and apply a risk based control strategy.

15.11.2007

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.22. Desk controls of cost statements essentially focus on formal
aspects. This is why the Commission has privileged the use of standard
procedures and checklists to ensure the efficiency and effectiveness of these
controls. The Commission agrees that, subject to cost/benefit consider-
ations, the sharing of the results of these checks may be useful, in par-
ticular for DGs within the research area dealing with the same or similar
beneficiaries.

7.23. Guidelines, including checklists, have been prepared and are
regularly updated. Staff is also trained in order to improve the efficiency
of the controls.

7.22.
Sharing of the results of the checks by the DGs can con-
tribute to increased efficiency and effectiveness, for example by
identifying common problems and fostering a coordinated
approach. The Court found that the three Directorates-General
have made only slight efforts to share information on the results
of their checks, both within and between the Directorates-
General. In the absence of detailed monitoring of the results of the
checks, the exchange of experience is limited to discussions of
methodology and general issues.

In three out of the 30 cases reviewed, the Court identified
7.23.
problems in the cost statements which should have been detected
by the Commission’s ex-ante checks. In one case, the beneficiary
had used an inappropriate allocation method for indirect costs. In
another case the Commission applied an incorrect reimburse-
ment rate. In a further case, the Commission had requested the
necessary supporting documentation from the beneficiary but the
payment was made before receiving it.

The Commission’s ex-post financial audits

7.24. The Commission performs ex-post audits of projects at the
final beneficiaries after interim or final payments have been made.
The audits are carried out by units in the Directorates-General or,
more usually, by external audit firms on behalf of the Commis-
sion.

7.24. The number of ex post audits has now increased. The number
of audits planned for FP6 will take account of residual error and cost-
benefit considerations.

7.25. The Court analysed data on ex-post audits provided by the
Commission and reviewed arrangements for the sharing of audit
results by the Internal Policies Directorates-General.

Insufficient coverage of ex-post audits

In 2005 the Court criticised the marked reduction in the
7.26.
number of ex-post audits of Internal Policies projects by the Com-
mission compared to the previous year (7). During 2006, the
number of audits has recovered to pre-2005 levels (Table 7.2).
However, the proportion of audited contracts (2,3 %) remains
insufficient to compensate for the shortcomings in the other ele-
ments of the supervisory and control systems.

7.26. As indicated by the Commission in the Court’s Annual Report
concerning the financial year 2005, the reduction of the number of ex
post audits in 2005 was due to delays encountered with the newly
appointed external audit firm. 2005 must therefore be considered as an
atypical year. In 2006, 564 ex post audits were closed, more than in
2004 (see Table 7.2).

In order to further increase the assurance gained from ex post audits, the
Commission has devised a common ex post audit strategy for FP6 as
described in its reply to paragraph 7.12.

(7) Annual Report concerning the financial year 2005, paragraphs 7.19

to 7.20.

Table 7.2 — Ex-post financial audits completed 2004 to 2006

Number of completed audits

All programmes

Research programmes

Number of audited
contracts

Number of open contracts

Value of audited contracts
(million euro)

Value of open contracts
(million euro)

Adjustments of ineligible costs in favour
of the Commission as a result of the audits

% audited
contracts/open
contracts

Directorate General

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

2004

2005

2006

Value
(mio
euro)

%
value-
audited
con-
tracts

Value
(mio
euro)

%
value-
audited
con-
tracts

Value
(mio
euro)

%
value-
audited
con-
tracts

2004 2005 2006

Agriculture

5

7

5

6

20

7

245

153

158

16,18

22,67

13,96

42,54

35,48

36,56

0,00

0,0

1,68

7,4

1,26

9,1

2,4 13,1

4,4

Education and
Culture (1)

75

77

104

80

77

104

15 884 11 748 13 222

24,10

48,28

15,56

740,30

570,46

670,97

7,80 32,4

3,66

7,6

1,92 12,3

0,5

0,7

0,8

Employment and
Social Affairs

25

33

31

27

37

35

1 639

1 553

1 485

11,53

14,47

14,93

139,56

131,11

186,67

0,19

1,7

0,37

2,6

0,37

2,5

1,6

2,4

2,4

Environment

42

44

25

73

49

25

1 748

1 774

1 761

35,07

68,60

33,45

385,87

431,30

478,20

1,18

3,4

0,47

0,7

1,41

4,2

4,2

2,8

1,4

8

11

11

47

46

54

901

1 055

426

28,60

17,90

7,43

117,00

177,00

35,25

2,53

8,8

1,10

6,1

0,08

1,1

5,2

4,4 12,7

8

7

6

12

7

6

522

476

478

6,29

5,34

17,14

153,90

165,58

183,73

0,36

5,8

0,27

5,1

0,04

0,2

2,3

1,5

1,3

54

16

69

53

Enterprise and
Industry

43

8

52

34

Fisheries and
Maritime Affairs

18

11

4

15

7

1

7

59

81

20

100

1 077

1 099

1 166

87,09

21,49

66,48

689,41

899,46

929,55

9,95

1,8

0,85

0,0

5,47

8,2

7,5

1,8

8,6

44

64

8

69

1 684

1 672

2 369

38,12

22,28

28,66

221,96

305,75

1 179,00

1,00

2,6

1,38

6,2

0,64

2,2

3,8

0,5

2,9

41

29

27

238

239

215

12,23

50,25

97,51

270,01

174,51

203,30

1,16

9,5

1,39

2,8

0,10

0,1 17,2 12,1 12,6

Information
Society and
Media

95

30

84

93

30

80

230

72

196

2 320

5 727

1 810 115,37

32,61

79,45 1 745,00 2 030,00

2 004,00

8,20

7,1

4,71 14,4

6,42

8,1

9,9

1,3 10,8

Research

118

23

173

118

23

151

167

35

198

7 696

8 906 12 070 263,40

38,25

58,68 3 451,39 5 032,43

6 663,85

2,79

1,1

0,72

1,9

3,47

5,9

2,2

0,4

1,6

Total 491

267

564

313

68

334

828

400

821

33 954 34 402 35 160 637,99 342,15 433,24 7 956,94 9 953,07 12 571,08 35,16

5,5 16,59

4,8 21,19

4,9

2,4

1,2

2,3

Including the Education, Audiovisual and Culture Executive Agency.

(1)
(2) Excluding Trans-European Network (Transport) projects.

Justice, Freedom
and Security

Health and
Consumer
Protection

Energy and
Transport (2)

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15.11.2007

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

7.27. Research projects managed by DG RTD account for more
than half of the value of open contracts in 2006. The Court has
previously noted the insufficient coverage of the Fifth Framework
Programme (1998 to 2002) by DG RTD ex-post audits (8). The
Commission’s own Internal Audit Service (IAS) has also observed
that, for the Sixth Framework Programme (2002 to 2006), only
two audits were conducted in 2005 and that in 2006 the audit
coverage remained insufficient in relation to the underlying risks
associated with research projects.

7.28. As with the ex-ante desk reviews, sharing results of the
ex-post checks can increase their efficiency and effectiveness. The
Court found that the Directorates-General managing research
expenditure (9) share audit results, although they do not have
written procedures. The other Internal Policies Directorates-
General audited (10) do not systematically disseminate results to
other DGs and have not established any procedures. In Novem-
ber 2006, the Commission introduced an audit tracking system
to enable results of audits performed by all Commission depart-
ments to be registered in a central database accessible to all
Directorates-General. The Court examined the use of the tool by
the research DGs and found that it is used only by DG ENTR.

7.27. These problems have been reported in the DGs’ annual activity
reports and in the Commission’s synthesis report. Actions have already
been taken to correct this situation and to avoid similar difficulties in the
future.

See also the Commission’s reply to paragraph 7.12.

7.28. Audit results are shared among the research DGs on a system-
atic basis. The principles of audit result sharing are laid out in the com-
mon audit strategy for FP6. These principles are currently under further
development by a dedicated working group.

An increase of the audit coverage as targeted by the audit strategy requires
the implementation of the audit results on systemic errors to non-audited
projects across DGs. In that sense the systematic and consistent sharing
of audit results is important. The research DGs have given priority to
this.

The Commission’s new audit tracking system allows information on
audits to be linked to the Legal Entity File of the relevant beneficiary in
the Commission’s accounting system. Following its introduction late in
2006, data on audits will be progressively entered into the system,
including via interface from the existing DG-specific audit databases.

Follow-up to previous observations

7.29. The results of the Court’s follow-up of key observations
in recent Statements of Assurance may be found in Annex 7.1.
The observations concern the insufficient coverage of the Com-
mission’s ex-post audits, delays by the Commission in making
payments to beneficiaries and insufficient checks by the Commis-
sion of the management and control systems of the national man-
aging authorities for education and culture projects.

7.29.

See the Commission’s replies in Annex 7.1.

(8) Annual Report concerning the financial year 2004, paragraph 6.20
and Annual Report concerning the financial year 2005, para-
graph 7.20.

(9) Research; Energy and Transport; Information Society and Media;

Enterprise and Industry.

(10) Justice, Freedom and Security; Environment; Education and Culture;

Health and Consumer Protection.

C 273/148

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Conclusion

7.30. The Court’s audit revealed a material level of error in pay-
ments to beneficiaries. The Commission’s supervisory and con-
trol systems do not sufficiently mitigate the inherent risk of the
reimbursement of overstated costs.

7.30. The Commission continues to improve its control systems in the
context of the action plan towards an integrated control framework. A
multi-annual approach to mitigating the inherent risk of the reimburse-
ment of overstated costs has been introduced, including a substantial
increase in the number of ex post audits (see reply to paragraph 7.12).

7.31.
Improving the financial management of Internal Policies
poses a considerable challenge. On the one hand, the system
needs arrangements which satisfactorily protect the Communi-
ty’s financial interests and ensure that funds have been used for
the purposes intended; on the other hand, financial control
arrangements need to be proportionate and realistically designed.
The system as it now operates is not yet ‘transparent, robust and
simple to administer’ (11).

7.31. The Commission agrees with the Court’s assessment that fur-
ther improvements are needed in the financial management of Internal
Policies. The Commission’s common ex post audit strategy in the
research area is designed to ensure that the level of ‘residual’ (non-
detected) error is reduced to an acceptable level.

Recommendations

7.32. At present, most Internal Policies expenditure is used to
reimburse beneficiaries’ cost claims, including justification of time
spent on projects or measures. If such a system is to operate effec-
tively, the Commission needs to take the following measures:

7.32.

— simplify and clarify the rules for the calculation and report-
ing of costs by beneficiaries (paragraphs 7.8 to 7.11),

— The FP7 rules for participation and the model grant agreement
adopted by the Commission on 10 April 2007 are an important
simplification compared with previous Framework Programmes.
The ‘Guide for beneficiaries’, including in particular the ‘Guide to
financial issues’, as well as reporting guidelines are intended to con-
tribute to a better understanding of the rules by the beneficiaries.

The mechanism introduced for beneficiaries participating in mul-
tiple projects for an ex-ante certification of their methodology for the
calculation of average personnel costs and overheads is intended to
increase the reliability and accuracy of their cost claims and it con-
stitutes an important step towards simplification. Furthermore, it
increases the legal certainty both for beneficiaries and the Commis-
sion, and reduces the risks associated with this significant source of
errors.

(11) Opinion No 1/2006, paragraph 94.

15.11.2007

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— provide guidance to the certifying auditors on eligibility cri-
teria and the accounting requirements linked to EU grant
funding, proposing a model mandatory audit certificate and
clarifying the terms of reference (paragraphs 7.14 to 7.17),

— The Commission is creating a web-site dedicated to ex post audits,
in order to provide easily accessible information and guidance on
cost eligibility and certification issues.

For FP7, the Commission has developed audit certification on the
basis of ‘agreed-upon procedures’. This requires certifying auditors
to perform a compulsory set of procedures and report in a manda-
tory format.

— enhance its desk reviews of cost statements by better moni-
toring of errors and increased sharing of the results of the
checks (paragraphs 7.18 to 7.23),

— The Commission is constantly reviewing and updating its checklists
to improve the quality of ex- ante desk reviews. Further steps to
increase sharing the results of checks will be taken, subject to
cost/benefit considerations.

— perform an appropriate amount of ex-post audits in order to
address the risks to the legality and regularity of expenditure,
and ensure better internal dissemination of audit results
(paragraphs 7.24 to 7.28),

— The Commission is increasing the number of ex post audits,
including through the implementation of a common audit strategy
for FP6, as described in the reply to paragraph 7.12. A new inte-
grated IT system is also being implemented, which should help
ensure better dissemination of audit results.

— respect the time limits for making payments set out in the
Financial Regulation (paragraph 7.29 and Annex 7.1);

— The Commission is continuing its efforts to reduce the problem of

late payments, see Annex 7.1.

— follow up its audits of the management and control systems
of the National Agencies managing education and culture
projects and ensure that sufficient on-the-spot checks are
performed (paragraph 7.29 and Annex 7.1).

7.33. The Court, however, repeats its recommendation that
efforts should be continued to simplify the rules covering these
programmes, where possible making more extensive use of lump
sum financing and move to a results-based financing system (12).

— DG EAC is implementing an improved system following the adop-
tion of a new generation of programmes in education, training, and
youth. The programmes provide for a comprehensive set of checks
and controls of the respect of procedures and internal control mecha-
nisms in order to ensure and verify the regularity and legality of
transactions and the eligibility of activities.

Further simplification within the existing legal framework is

7.33.
among the priorities of the Commission.

Concerning the simplification of the rules for the reimbursement of costs
and in particular the use of lump sums, on 4 June 2007 the Commis-
sion adopted the use of lump sums for International Cooperation Part-
ner Countries within grant agreements for indirect actions concluded
under FP7.

SPECIAL REPORTS ISSUED SINCE THE LAST ANNUAL
REPORT

Special Report No 3/2007 concerning the management

7.34.
of the European Refugee Fund (2000-2004).

(12) See Annual Report concerning the financial year 2005, para-
graphs 7.8 and 7.29 and Opinion No 1/2006, paragraphs 58 to 61.

ANNEX 7.1.

Follow-up of key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

1.

Insufficient coverage of the Commission’s ex-post audits

The Commission has persistently fallen short of its target of auditing
10 % of the contractors (beneficiaries) for the Fifth Framework Pro-
gramme for Research and Technological Development. The Court
found undue delays in the completion of the audits, in the subsequent
reporting of findings to the Commission and in the launching of related
recovery procedures by the Commission.

The Commission has developed a specific audit
strategy for the Sixth Framework Programme
based on a detailed analysis of the population of
beneficiaries. The Commission will extend sys-
temic findings to all contracts of the most sig-
nificant beneficiaries.

The Commission has not yet set a concrete audit target for the Sixth
Framework Programme.

(Annual Report concerning the financial year 2003, paragraphs 6.27
to 6.33 and Annex 6.1; Annual Report concerning the financial year
2004, paragraphs 6.18 to 6.24 and Annex 6.1; Annual Report con-
cerning the financial year 2005, paragraphs 7.18 to 7.23).

2. Persistent late payments by the Commission

The Commission should ensure appropriate
coverage of the checks, based on a coherent
strategy which includes the largest beneficiaries
and a risk-based sample of others.

The common audit strategy for FP6 which is
being implemented by the Commission repre-
sents a sound basis for addressing the problems
identified by the Court.

The Commission notes that the Court considers the common audit strategy for
FP6 to be a sound basis for addressing the problems identified.

The Commission has also decided to substantially reinforce the ex post audit
functions. The measures will lead to an increased level of audit coverage.

DG EAC is revising its audit strategy thereby taking due account of the Court’s
recommendations.

In a significant proportion of cases, the Directorates-General respon-
sible for Internal Policies audited by the Court (DGs RTD, INFSO, TREN
and ENTR) have incurred undue delays in making payments to benefi-
ciaries, thus failing to comply with the time limits for expenditure
operations set out in the Financial Regulation. The Court found that
DG EAC has no reliable management information on its late payments.

DG RTD has harmonised the registration
method for the time to pay and revised its report-
ing scheme. For the difficult area of payments to
experts, the DG has adopted a specific action
plan.

The Directorates-General should continue to
develop the initiatives undertaken in 2006 in
order to tackle the problem of late payments.
Exchange of experience by the Directorates-
General could help to identify common issues
and to develop more efficient and effective con-
trols.

The Commission is continuing its efforts to reduce the problem of late pay-
ments. The DGs are gradually putting in place pro-active management reports
to enhance the monitoring of payment times. Performance indicators are being
developed and implemented.

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In 2005, 11 out of 69 Internal Policies payments audited by the Court
were made late (i.e. 16 %). For 2006, the Court identified late payments
in 21 out of 113 cases (i.e. 18,6 %).

(Annual Report concerning the financial year 2003, paragraph 6.22;
Annual Report concerning the financial year 2004, paragraph 6.27;
Annual Report concerning the financial year 2005, paragraph 7.10).

DG INFSO has improved its management infor-
mation on late payments and introduced regu-
lar training sessions to reduce payment times.

DG TREN has introduced systematic review of
payment deadlines,
improved monitoring of
delays and increased internal communication on
late payments.

DG ENTR now closely monitors the time needed
for payments and has introduced awareness-
raising actions led by its financial units.

DG EAC is awaiting the introduction of its new
accounting system in order to begin monitoring
late payments.

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Court observation

Action taken

Court analysis

Commission reply

3.

Insufficient checks by the Commission of the management and control systems of national managing authorities (National Agencies) for education and culture projects

The Commission has not complied with the requirement of the Finan-
cial Regulation to carry out checks on the management and control
systems of the National Agencies before entrusting them with the
implementation of Community actions.

DG EAC has continued its programme of sys-
tems audits in 2006, for which 96 of the 99
planned audits were completed by the end of
March 2007.

DG EAC should introduce systematic follow-up
to the audit reports and develop an overview of
the results of the audits, including clear identifi-
cation of the rates of error affecting the projects.

Systems audits performed by the Commission did not include on-the-
spot checks of projects, limiting the assurance provided on the legality
and regularity of the underlying transactions. The audit reports con-
tained several shortcomings, such as inappropriate or inconsistent clas-
sification of the importance of findings as well as insufficient action to
correct the identified weaknesses.

The task list of the externally contracted auditor
has been extended to include on-the-spot
checks. A pilot action for such checks has been
initiated for the Leonardo da Vinci vocational
training programme, but at the end of 2006 only
limited progress had been made.

(Annual Report concerning the financial year 2005, paragraphs 7.24
to 7.27).

The content of audit reports has been discussed
with the auditor to arrive at a common under-
standing.

DG EAC has completed all but one of its system audits by June 2007; only
the final acceptance of one report is outstanding. Conclusions have been drawn
and taken into account before contracting National Agencies (NAs) for the
new programmes. A series of follow-up audits are under preparation and will
be conducted in the course of 2007.

As concerns the implementation of the new programmes, the requirements of
the Financial Regulation are respected through the Commission’s analysis and
approval of ex-ante declarations of assurance issued by National Authorities
before the Commission enters into a contractual relation with the National
Agencies. Where relevant, the analysis takes account of the audit findings.
National Authorities will also issue annual ex post declarations of assurance
concerning the use of funds during the previous year.

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ANNEX 7.2

Assessment of supervisory and control systems

Key internal control

System concerned

Adequate guidelines

Adequacy of checks

Monitoring
of results

Sharing of results

Overall assessment

Audit certification of cost statements

Ex ante desk reviews of cost
statements

Commission’s ex-post financial audits

Legend:

Satisfactory

Partially satisfactory

Unsatisfactory

N/A

Not applicable: does not apply or not assessed

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CHAPTER 8

External actions

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the statement of assurance

Audit scope

Specific characteristics of external actions spending

Legality and regularity of underlying transactions

EuropeAid

DG ECHO

Supervisory and control systems

Components of the control strategy

Using the results

Coordination of the control strategy

Internal audit

Conclusions and recommendations

Paragraph

8.1-8.2

8.3-8.33

8.3

8.4-8.6

8.7-8.11

8.7-8.10

8.11

8.12-8.30

8.12-8.20

8.21-8.25

8.26-8.28

8.29-8.30

8.31-8.33

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INTRODUCTION

8.1. This chapter deals with the external aid financed from the
general budget (1). The main areas are food aid/food security,
humanitarian aid, NGO co-financing and relations with Asia,
Latin America, the Commonwealth of Independent States, the
Western Balkans, the Middle East and the Southern Mediterra-
nean. The Directorates-General for External Relations and for
Development are responsible for formulating development coop-
eration policies, country/regional strategies and multi-annual pro-
gramming, and the EuropeAid Cooperation Office (EuropeAid) is
responsible for their implementation. The Directorates-General
for Humanitarian Aid (DG ECHO) and Enlargement (DG ELARG)
are responsible for the formulation of both policy and strategy as
well as for implementation. DG ECHO for humanitarian aid and
DG ELARG is responsible for CARDS (2).

8.2. Diagrams III and IV of Annex I show the funds spent in
2006 for financial perspective Heading 4 ‘External actions’ (com-
mitments: 5 867 million euro; payments: 5 186 million euro).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

8.3. The objective of the audit was to provide a conclusion as
to the legality and regularity of the underlying transactions in
external actions. The audit comprised an evaluation of the Com-
mission’s supervisory and control systems which are designed to
ensure the legality and regularity of transactions, supported by
tests of transactions at the Delegations and implementing organi-
sations. Transactions processed by the Commission headquarters,
mainly relating to direct budget support and multi-regional
projects, were not included in the Court’s audit sample. The audit
included an assessment of the system of external audits carried
out by private firms on behalf of the Commission — an impor-
tant component of the Commission’s assurance as regards expen-
diture at project level.

(1) Aid provided through the European Development Funds is reported

separately as it is not financed from the general budget.

(2) Community Assistance for Reconstruction, Development and

Stabilisation.

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Specific characteristics of external actions spending

8.4. The majority (approximately 80 %) of external actions
expenditure is managed by the Commission’s Delegations in the
third countries concerned. Most of their payments are advances
made to the organisations implementing development projects
(e.g.
institutions
or NGOs).

international organisations,

government

8.4.
Final payments, including a clearing of the advances, are usually
made upon completion of the projects and approval by the Commission
of their final reports.

8.5. The projects supported are dispersed through more than
150 countries, and the implementing organisations vary greatly
both in size and administrative capacity. Within the projects there
are a large number of individual payments, which are subject to
complex rules, in particular concerning tendering and the origin
of supplies.

8.6. The main risk to legality and regularity is that project
claims may include ineligible expenditure, and this may go unde-
tected.

Legality and regularity of underlying transactions

EuropeAid

Transactions audited at Delegation level

8.7. The Court visited three Commission Delegations (China,
Jordan and Guatemala) to assess their supervisory and control
systems and to audit a number of transactions for which the
EuropeAid Cooperation Office was the Authorising Officer by
delegation.

8.8. The Court audited a sample of 20 payments (for a total of
17 million euro) and seven tenders (for a total of 11 million euro)
at the three Delegations focusing on the payments and reimburse-
ments made to the projects visited on-the-spot (see paragraph 8.9)
and high-value amounts. This work revealed a low level of errors.

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Transactions audited at implementing organisation level

8.9. The Court visited 11 projects managed by implementing
organisations, where a sample of 132 payments (for a total of
6,9 million euro) and 20 tenders (for a total of 9,4 million euro)
was audited. The selection of transactions ensured coverage of all
main cost categories.

8.10. As in previous years, the Court found that compliance
with the prescribed contracting procedures and the eligibility of
expenditure at project level were the highest risk areas and a
material incidence of error was found in the sample of transac-
tions of interim and final payments examined:

8.10. Certain comments made by the Court concerning current con-
tracts for which the final payments have not yet been made, in relation
to which corrective action should therefore be taken at the time of closure
under the Com mission’s control system.

For example, the Commission carries out mandatory audits and/or audits
based on risk analysis in order to detect and correct any errors made by
the implementing organisations before or even after the final payments.
These audits usually accompany clearances of accounts.

(a)

in nine out of the 11 projects audited on the spot, the Court
found that contracting procedures were not applied properly.
An example of non-compliance with the prescribed proce-
dures was the splitting of contracts in order to avoid stricter
tendering procedures;

(b)

the Court detected ineligible expenditure in three out of the
11 projects audited, such as the inclusion of ineligible cost
categories, the overspending of budget lines and expenditure
outside the specified implementation period of the projects;

(c)

in four out of the 11 projects the supporting evidence (e.g.
invoices, receipts and bank statements) necessary to validate
the payments checked was missing.

DG ECHO

8.11. As regards DG ECHO (DG for Humanitarian Aid), it was
found that the rules on eligibility of expenditure and on tender-
ing procedures give ambiguous definitions of certain points,
which should be clarified. Audits at two implementing partners
showed that rates of exchange, depreciation on equipment such
as vehicles, and interest received on advances were handled dif-
ferently by the implementing partners, resulting in variations in
the amounts of eligible expenditure in otherwise similar situa-
tions.

8.11. With the mobility between staff of partners and the variety of
types of operations, the Commission accepts that the implementing part-
ners can have varied the interpretation on eligibility or tendering rules.
Recognising this, the Commission made a major effort to clarify the
interpretation of various financial and contractual rules by the issue of
Fact Sheets and, in the spirit of partnership, has undertaken regular
training of partners and increased the vigilance so that partners are bet-
ter guided.

Different techniques for depreciation for vehicles are possible and the con-
cept of interest on prefinancing payments has been clarified in the imple-
menting rules of the Financial Regulation, and will be reflected in the
revised Framework Partnership Agreement between DG ECHO and
humanitarian organisations.

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Supervisory and control systems

Components of the control strategy

8.12.
In view of the specific characteristics of external aid
expenditure (see paragraphs 8.4 and 8.5), the Commission faces
a considerable challenge in implementing systems to control this
spending effectively and efficiently. Besides the ex ante checks
made on all payments the key supervisory and control systems
include:

8.12. The primary assurance mechanism is represented by the ex ante
checks made by the Commission’s services during the authorisation pro-
cess, in line with the applicable Financial Regulation. Such controls may
also rely, in relation to the type of action financed, on audit reports.

The elements mentioned by the Court should be considered as part of the
wider management and control system put in place by the Commission,
ranging from the ex ante assessment of the actions to be financed and
the selection of the operators to implement them to the various controls
carried out at different steps of the management cycle including moni-
toring of the programme implementation and on the spot checks.

— audits which include systems reviews and certification of
projects’ financial statements, usually carried out by profes-
sional external audit firms. When required routinely under
the terms of project financing agreements these audits are
usually commissioned by the beneficiary,

— additional project audits carried out for the Commission.
These are selected annually on the basis of risk analysis,

— ex post documentary checks on payments made by Commis-

sion services,

— verification missions to Delegations carried out by Commis-

sion headquarters’ staff.

Audits of Implementing Bodies

8.13.
EuropeAid operates a two-stage audit strategy in order to
verify the legality and regularity of expenditure at project level. A
first layer of assurance is provided by the certification audits
required in most project financing agreements and a second layer
consists of additional audits of projects selected on the basis of a
risk analysis.

8.14.
Financial and audit reports are required in most cases
before payments are made to project implementing organisations.
It is essential that these reports can be relied on as they are such
an important component of the control structure for payments.
The quality of the reports and particularly of the audit reports is
therefore of major importance in the approval process for most
payments processed through the Delegations.

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8.15. The Court made a desk review of 22 project audits as well
as examining project audits at the Delegations visited. For four of
the audits covered by the desk review, the terms of reference used
did not require testing of all key aspects.

8.15-8.16. The objective of financial audits is to certify the eligibility
of expenditure incurred by the beneficiary in the light of the contractual
provisions, including tendering procedures, if the action so requires of the
beneficiary.

8.16.
In all 10 audit reports reviewed at the Delegations, the
scope of the audit was insufficient. Some risk areas such as com-
pliance with the prescribed contracting procedures were not cov-
ered and for two out of the 10 audits the contracted auditors were
not provided with complete terms of reference.

8.17. The Court detected internal control weaknesses in eight
out of the 11 implementing organisations visited on the spot. The
main weaknesses detected were inadequate financial procedures,
insufficient documentation for the allocation of expenditure to
projects and budget lines, the entering of advances as actual
expenditure in the accounting system and the inconsistent use of
exchange rates.

The tendering procedures were mentioned in the terms of reference of the
selected audits, and the auditors did test such aspects during the audit
work. These elements are reflected in the corresponding work programs
of the auditors in the audit report.

New standard contracts and terms of reference for expenditure verifica-
tions to be launched by beneficiaries are applicable to contracts signed
after 1 February 2006. These further reinforce the verification of the con-
tractual aspects mentioned by the Court.

8.17.
Implementing organisations are not part of the Commission
Internal Control System, they are linked to the Commission by a con-
tractual relation for the implementation of a specific action. The Com-
mission monitoring and control system aims at ensuring the compliance
of contract partners with the contractual requirements and covers, where
necessary, relevant aspects of their internal control systems.

The fact that a weakness is identified at implementing organisation level
neither implies a weakness of the Commission control system nor that
this weakness will go undetected by the Commission.

8.18. DG ECHO commissions audits at its implementing part-
ners’ headquarters offices and of projects on the spot. In both
cases a review of internal controls is made and a sample of project
expenditure is tested. The majority of audits are done at the part-
ners’ headquarters. As the reality of project expenditure can be
more effectively checked at field level, there should be more
emphasis on on-the-spot audits.

8.18. The balance between headquarter and field audits has to be seen
in the context of an overall risk-based control strategy, where the Com-
mission puts important emphasis on monitoring operations during
implementation of the project through close follow-up performed by both
experts in the field and geographical desks at headquarters. Furthermore,
the Commission analyses in detail the information provided by partners
in the various reports.

Ex post controls

8.19.
EuropeAid has a programme of ex post controls which are
carried out at headquarters, and cover payments made by Com-
mission services on a sample basis to assess whether the Autho-
rising Officers carried out the required checks. The Commission
reviewed the usefulness of ex post controls in 2006 and re-oriented
them. However, as they do not cover transactions at the level of
project implementing organisations, they can only make a lim-
ited contribution to the overall assurance on systems and proce-
dures and the legality and regularity of
the underlying
transactions.

A new Framework Contract concluded in August 2006, has rebalanced
the audits in favour of field audits to better link them with headquarter
audits.

8.19.
Setting up a transactional ex-post control system, and defining
its 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. However, the control of, for
instance, a clearance of pre-financing transaction necessarily covers the
reporting made by the beneficiary on their own transactions. Transac-
tions at implementing organisation level fall within the scope of other
controls, notably audits.

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Verification missions to Delegations

8.20. The finance units of the EuropeAid geographic director-
ates (3) carry out a programme of verification missions to Delega-
tions, which consist of a review of their financial systems for
processing transactions, their contracting system and their super-
visory and control systems, completed by tests of transactions
processed by the Delegations and some project implementing
organisations. EuropeAid intends to introduce a standardised
methodology for these verification missions in 2007. However,
only one of the finance units carried out a programme of verifi-
cation missions to its Delegations in 2006, including implement-
ing organisations. One of the other two units did not carry out
any verification missions in 2006, and the other only visited two
Delegations and no implementing organisations.

8.20. All delegations were subject to a systematic verification exercise
before devolution was held to be operational (2001 to 2004).

All geographic Directorates carry out a monitoring of their delegations’
management of devolved operations, using a varying combination of
checks, inspections and audits.

Besides verification missions, this monitoring relies on regular reporting
from delegations (External assistance management reports — EAMRs),
the use of the information systems, the projects monitoring system by
external experts, regular contacts with the delegations and is comple-
mented by the activities of the IAC, IAS and Inspection Service. Verifi-
cation missions are to be considered in a multiannual perspective and
their number may vary from year to year in accordance with the Direc-
torates’ needs and priorities. The first of the two services mentioned by
the Court for instance has planned 4 missions in 2007, 2 of which have
already been carried out. The second one, which has consistently carried
out a programme of missions to its delegations since 2003, has planned
4 such missions in 2007.

Using the results

Collecting and collating the control information in EuropeAid

8.21. The value of the external audit reports as a source of
assurance, regarding the legality and regularity of expenditure for
which EuropeAid is responsible, depends on their coverage and
on the follow-up that they receive. It is therefore important that
both are completely and coherently documented and reported to
EuropeAid headquarters.

8.21. The majority of project audits are mandatory and/or ex ante
audits, i.e. they take place during the implementation of the action and
are provided for in the Financial Regulations, the specific programme
legal basis (complemented by EuropeAid financial and contractual pro-
cedures) and reflected in conventional (e.g. financing agreements with
third countries) and contractual documents.

8.22.
External assistance management reports from Delegations
should provide headquarters with important financial and tech-
nical information on a six-monthly basis. The Court’s review of a
sample of 16 such reports concluded that the same situation as
applied in previous years also existed in 2006, namely that the
information provided on external audits was incomplete (only
two reports gave any information on results) and inconsistent in
terms of the categories of audits included (planned and/or in
progress, managed by the Delegation or also by project imple-
menting organisations).

(3) The geographic directorates are: (1) Asia and Central Asia; (2) Europe,
the Southern Mediterranean, Middle East and Neighbourhood Policy;
(3) Latin America.

8.22. Delegations report on the implementation of their audit plans
in the EAMRs, also highlighting aspects of general interest, where
appropriate. As regards the use of audit results, relations between Euro-
peAid and the Delegations ensure proper, more regular and more detailed
exchanges of information.

The recently modified reporting format used by Delegations on the
implementation of the Annual Audit Plan for 2007 is now more
detailed and will allow a clearer distinction between the different phases
of the audit process and the origin of the audit. By including in the
EAMRs audits managed by project implementing organisations some
delegations went beyond reporting requirements.

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8.23. The Court has in previous years (4) drawn attention to the
lack of complete information at EuropeAid headquarters on these
audits, including their results and the corrective action needed
and taken. The availability of such information in an up-to-date
database would not only provide a comprehensive view of the
audit effort and its total contribution to assurance, key informa-
tion for the following year’s risk analysis, but could also allow all
the interested parties to have access to this important informa-
tion. This would be particularly valuable because of the varying
degrees of involvement of different Directorates-General. How-
ever, again in 2006, details of the majority of external audits were
not yet being input to the audit module of the Common Relex
Information System (CRIS Audit).

8.23. The current system for the planning and centralised monitoring
of external audits provides the information necessary for EuropeAid’s risk
analysis and audit strategy. The planning and follow-up of audit results
are both ensured by the authorising departments concerned at Headquar-
ters or in Delegations. No payment subject to an audit is authorised
before receiving and taking into account the results of such audits. Euro-
peAid intends to further improve the operation of CRIS-Audit building
on the experience gathered, as a tool complementary to the current sys-
tem. Meanwhile, the Commission has made the Annual Audit Plan
(AAP) 2007 reporting format more detailed.

On the need to share audit information with other Commission services
see the Commission reply to paragraph 8.25.

8.24. Although a sample of audits is reviewed annually by
EuropeAid headquarters in order to draw general conclusions,
there is not yet a systematic centralisation of results, errors dis-
covered and follow-up carried out. As a result, the value of these
audits to the Commission’s assurance on expenditure at project
level is not yet being fully used.

8.24.
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.

EuropeAid follows at central level the implementation of the AAP and
has been performing, since 2005, a review of audit reports issued dur-
ing the year. The objective of this review is to contribute to the monitor-
ing of audit activity at Headquarters and in the Delegations as well as
learn lessons and propose appropriate measures to further improve the
audit system based, inter alia, on an analysis of the typology of audit
findings (see also reply to paragraph 8.23).

Sharing audit information between Commission services

8.25. The three organisations selected for review by the Court
received funding from more than one Directorate-General. Better
coordination of audits and more extensive sharing of audit infor-
mation between the Commission services (for example, by using
CRIS Audit — see paragraph 8.23) would be valuable both to
avoid duplication of audit work, and to ensure that there is no
inadvertent under-coverage of an organisation in the light of its
total receipts from the Commission as a whole.

8.25. The Court correctly highlights the need for sharing information
of audit results, which should take place when it is expected to provide
clear added value.

The Commission services regularly exchange information resulting from
audits, assessments and evaluations. At present, this needs based
exchange and co-ordination seems to be adequate. The Commission is
willing to deepen this co-ordination if the need arises.

(4) See the Annual Report concerning the financial year 2005,

paragraph 8.9.

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Coordination of the control strategy

8.26. As noted in the Court’s Opinion No 2/2004 (5), any con-
trol system is a trade-off between the cost of operating the defined
intensity of checks on the one hand and the benefit these proce-
dures bring on the other. It is necessary to establish a strategy that
defines the contribution to overall assurance to be made by each
of the various control procedures in force, both to avoid unnec-
essary duplication and to ensure that techniques to be applied
selectively (such as project audits) are well targeted. In addition,
efficient reporting systems are needed to provide a reliable pic-
ture of control activities undertaken and of the main results so
that the maximum benefit can be obtained and informed deci-
sions made about the necessary types and intensity of control.

8.26. The Commission Services are fully aware of the need to have and
apply a control strategy that is cost effective, integrating audits, evalua-
tions, assessments, monitoring and supervisory activities. In line with the
Court’s Opinion, the Commission has set up an Action Plan ‘Towards
an Integrated Internal Control Framework’ which aims to develop a com-
mon, coordinated approach and tools for all Commission’s services. This
includes the formalisation and harmonisation of the presentation of the
internal control strategies the aim of which is to provide an overall view
of the internal control flow and related accountability chain and to docu-
ment how associated risks are addressed. Work is ongoing in line with
and following the schedule of the Action Plan.

8.27. The Common Relex Information System (CRIS) provides
data for the day-to-day management of projects. Largely as a
result of data definition limitations some desirable analyses of
information are not available from the system. For
financial
example, there is insufficient or inconsistent financial information
available by type of
implementing organisation or funding
method on which to base the more detailed risk analysis men-
tioned in paragraph 8.28. EuropeAid recognises the need to
enhance CRIS.

8.28. During 2006 EuropeAid brought into use a central risk
register, to be updated quarterly. At the end of December 2006,
critical risks had been identified for input to the 2007 Annual
Management Plan. However, there is, as in previous years, no
indication that the findings of project external auditors, and the
particular risks associated with the different types of implement-
ing organisations (NGO, international organisation, government
institution, etc.) and funding methods (grant, budgetary support,
trust fund, etc.) were taken into account in the analysis made. Nei-
ther is the identification of risks linked systematically to the find-
ings of the Commission’s internal audit services. These elements
would have provided very useful input for a comprehensive risk
analysis exercise, which would also help to focus the control
activities.

8.27.
Information from the system allows relevant analyses to be per-
formed in relation to the needs of EuropeAid, including by type of imple-
menting organisation or management mode. The system is being
constantly refined in line with evolving management needs.

8.28. The annual Risk Self-assessement is carried out in the context
of the Annual Management Plan and 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 mecanisms already in place. The fact
that the elements mentioned by the Court are not directly reflected in the
formulation of the risk (obviously synthetic) does not imply that these ele-
ments have not been taken into account during the exercice.

(5) Opinion No 2/2004 of the Court of Auditors on the ‘single audit’

model, paragraph 50.

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Internal audit

8.29.
In 2006 the Internal Audit Service (IAS) reported on the
EC/UN Financial and Administrative Framework Agreement
(FAFA) and on a follow-up of their 2003 audit of the EuropeAid
internal control system as a whole. An action plan to implement
those recommendations on FAFA that were accepted is being car-
ried out by EuropeAid and DG ECHO. The Court has reported on
FAFA (6), and will follow up this issue. As regards the internal
control system, EuropeAid had implemented most of the IAS rec-
ommendations and was making good progress with the remain-
der.

8.30. The Internal Audit Capability (IAC) serving both Europe-
Aid and DG ECHO completed a number of assignments in 2006,
including audits of the risk management systems and of procure-
ment in EuropeAid. The IAC does not at present provide an
annual overall assessment of the state of internal control in Euro-
peAid and DG ECHO. Such a periodic global assessment could be
a valuable assurance to the respective Directors-General. Despite
the creation during 2006 of two additional posts in the IAC, it
does not seem feasible with the present staff complement to carry
out, within the three-year cycle proposed, the full audit coverage
identified in the EuropeAid Audit Needs Assessment. A similar
audit needs assessment for the DG ECHO part of the work was
completed in early 2007.

8.30. The role of the IAC is not to provide an annual opinion on the
Annual Activity Reports (AAR) of the DGs, but to give advice regard-
ing the AAR process and in accordance with the nature and scope of its
work during the year in question, the IAC should express an opinion on
the state of control as a contribution to the preparation of the AAR (see
SEC(2003) 0059).

In giving the assurance, the Directors General rely on various informa-
tion resources (including amongst others the audits performed by the IAS
or other controlling bodies, including the IAC) which all collectively con-
tribute to the assurance.

In 2006 the IAC in EuropeAid was reinforced with 2 additional posts
allowing it to widen the scope of its work. As can be seen from the activi-
ties of the IAC in 2006, its work programme for 2006 has been com-
pleted as originally planned.

Conclusions and recommendations

8.31. The Court’s audit revealed a low level of error affecting
transactions checked at the level of the Delegations (see para-
graph 8.8). However, a material incidence of error was detected
in the sample tested at the level of the project implementing
organisations (see paragraphs 8.9-8.10).

8.31. The Commission estimates that the overall financial impact of
the errors on final payments for all external actions, based on the errors
detected by the Court and the audits and controls that the Commission
undertakes is acceptable, though could be improved further.

Certain comments made by the Court concerning current contracts for
which the final payments have not yet been made, in relation to which
corrective action should therefore be taken at the time of closure under
the Commission’s control system.

(6) See the Annual Report concerning the financial year 2005, para-
graphs 8.24-8.28, and the Annual Report concerning the financial
year 2006 on the activities funded by the European Development
Funds, paragraph 52.

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8.32. The Court’s overall assessment of the Commission’s
supervisory and control systems in 2006 is shown in Annex 8.2.
As explained in paragraphs 8.13 to 8.18, there continued to be
weaknesses in the systems designed to ensure the legality and
regularity of transactions at the level of project implementing
organisations.

8.32. The Commission internal control system is shaped to take into
account the multiannual character of external aid expenditure, ensuring
that controls on payment claims by the beneficiaries be effected at key
stages of project implementation, thus allowing errors on advance pay-
ments to be detected and remedied.

Measures were taken in 2006 to further strengthen the control systems,
including distribution of the improved practical guide for contractual
procedures covering both the budget and the EDF, the guide for pro-
gramme estimates, more detailed reporting guidelines for Delegations
and more rigorous ex-post controls.

The Commission is aware that there is room for improvement but con-
siders the systems currently in place provide reasonable assurance con-
cerning the legality and regularity of external action expenditure as a
whole.

In order to mitigate these weaknesses, the Court recom-

8.33.
mends that:

8.33.

(a)

external auditors of projects should carry out their work on
the basis of terms of reference that cover all known risk areas,
including compliance with the Commission’s requirements
regarding contracting procedures and the eligibility of expen-
diture, and clear reporting requirements should be set out
(see paragraphs 8.15 and 8.16);

(a) New standard contracts and terms of reference for expenditure veri-
fications, which entered into force on 1 February 2006, specifically
address the aspects mentioned by the Court.

(b)

the data definitions and rules for input to CRIS should be
developed so that it contains a reliable and useful analytical
record of all audits of projects, whether carried out by exter-
nal auditors or Commission staff, permitting the information
to be:

(b) The Commission intends to further improve the operation of CRIS-
Audit building on the experience gathered, as a complement to the
existing system.

— better summarised,

— linked to the corresponding project management infor-

mation,

— used to feed the risk assessment system,

— and ultimately shared in the RELEX family (see para-

graphs 8.23, 8.25 and 8.27);

(c)

the information provided by Delegations about audits should
be better reviewed by EuropeAid headquarters to ensure it is
complete and consistent. This should be supported by veri-
fication missions carried out by all directorates (see para-
graphs 8.20, 8.22 and 8.24);

(c) The Commission has recently modified the delegations reporting
format on the implementation of the Annual Audit Plan for 2007
so that it is now more detailed and will allow a clearer distinction
between the different phases of the audit process, and the reason for
the audit.

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(d) DG ECHO should clarify the rules on eligibility of expendi-
ture to prevent varying interpretations (see paragraph 8.11);

(d) The Commission continued to work with contracting organisations
on improving their understanding of the rules, to accommodate
varying interpretations. Fact sheets have been sent to all partners in
June 2007 to give a clear interpretation on existing rules.

(e)

the balance between DG ECHO’s headquarters and field
audits of implementing partners should be reviewed, in order
to obtain a better view of the reality of project expenditure
(see paragraph 8.18).

(e) The balance between headquarter and field audits has been reviewed
and should be seen in the context of an overall control strategy (see
paragraph 8.18).

.

1
5
1
1
2
0
0
7

.

ANNEX 8.1

Follow up of key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

Errors in payments made by implementing organisations

The Court found a material incidence of error in the
sample of payments tested at implementing organi-
sation level.

(Annual Report concerning the financial year 2005,
paragraph 8.20)

External audits of projects

External auditors were not provided with complete
terms of reference, meaning that some risk areas
were not covered by the audits, such as the need to
test compliance with the prescribed contracting pro-
cedures.

(Annual Report concerning the financial year 2005,
paragraph 8.15)

Information on audits and their results

Neither External Assistance Management Reports
(EAMRs) nor the computerised management infor-
mation system CRIS (Common Relex Information
System) contain complete and systematic informa-
tion on audits of projects and their results.

(Annual Report concerning the financial year 2005,
paragraphs 8.9 and 8.10)

Risk assessment

EuropeAid’s risk assessment should make reference
to the findings of audits at project level and differen-
tiate between the different types of implementing
organisations and funding methods.

(Annual Report concerning the financial year 2005,
paragraph 8.23(a))

Terms of reference for financial audits to be
launched by Beneficiaries have been revised.

The action taken had not yet delivered effective
results for the payments audited in 2006.

See the Commission’s replies to paragraphs 8.10, 8.15,
8.16 and 8.31.

New standard contracts and terms of reference for
expenditure verifications, which entered into force
on 1 February 2006, specifically address the con-
tractual aspects mentioned by the Court.

The full effect will not be visible until 2007 (the
majority of audit reports reviewed in the context of
the DAS 2006 were contracted before February
2006).

See the Commission’s replies to paragraphs 8.10, 8.15
and 8.16.

The entry of audit information in CRIS increased in
2006, but was not yet complete. EAMRs continued
to report audits inconsistently.

Although the use of CRIS increased, the potential
benefits of a complete central record of audits and
their results are not yet being realised.

See the Commission’s reply to paragraph 8.23.

The risk assessment has been improved by intro-
ducing a central Risk Register, updated quarterly.

Despite the introduction of the Risk Register, there
is still no link to audit findings or explicit analysis
by organisation and funding method.

See the Commission’s reply to paragraph 8.28.

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
7
3
/
1
6
5

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ANNEX 8.2

Assessment of supervisory and control systems

Key internal control

Procedures and
manuals

Management
ex ante checks

Internal audits

Transactional
ex post control

External audits

Management
reporting

Overall assessment

N/A

N/A

System concerned

EuropeAid
Co-operation office

DG Humanitarian Aid
(ECHO)

Commission’s
Delegations

Legend:

Satisfactory

Partially satisfactory

Unsatisfactory

N/A

Not applicable: does not apply or not assessed

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CHAPTER 9

Pre-accession strategy

TABLE OF CONTENTS

Introduction

Specific assessment in the context of the statement of assurance

Approach and scope of the audit

Audit findings

Legality and regularity of the underlying transactions

Supervisory and control systems

Conclusions and recommendations

Follow-up review of previous observations in Special Report No 6/2003 concerning Twin-
ning as the main instrument to support institution-building in candidate countries

Introduction

The Court’s observations

Recommendations

Paragraph

9.1-9.6

9.7-9.25

9.7-9.10

9.11-9.22

9.11-9.15

9.16-9.22

9.23-9.25

9.26-9.37

9.26-9.28

9.29-9.36

9.37

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INTRODUCTION

9.1. This chapter of the annual report deals with Heading 7 of
the Financial Perspectives covering expenditure under the pre-
accession instruments (Phare, ISPA and Sapard) for Central and
Eastern European countries (1), and the pre-accession assistance
programme for Turkey.

9.2. The Phare programme (2) and the pre-accession assistance
programme for Turkey (3) are managed by the Directorate-
General for Enlargement. These pre-accession programmes sup-
port institution-building and investments. ISPA (4) was set up to
facilitate accession in the fields of environment and transport and
is managed by the Directorate-General for Regional Policy.
Sapard (5)
the
Directorate-General for Agriculture and aims to help the benefi-
ciary countries deal with problems arising from structural adjust-
ment in their agricultural sectors and rural areas, as well as to
contribute to the implementation of the common agricultural
policy.

is implemented under the responsibility of

9.3. The Phare, Turkey and ISPA programmes and projects are
mainly implemented through a Decentralised Implementation
System (DIS), with ex ante control of procurement and contract
award decisions carried out by the Commission Delegations, or
through the Extended Decentralised Implementation System, in
which the Commission’s ex ante control of tendering and con-
tracting is waived (EDIS) (6). Under decentralised management,
payments to contractors and beneficiaries are made by the
national authorities, with ex post control by the Commission.

(1) The eight countries that became Member States in 2004 (the Czech
Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia
and Slovakia), the two countries that became Member States on 1 Janu-
ary 2007 (Bulgaria and Romania) and the candidate country Croatia.
(2) Poland, Hungary and Restructuring in the East, Council Regulation

(EEC) No 3906/89 (OJ L 375, 23.12.1989, p. 11).

(3) Council Regulation (EC) No 2500/2001 of 17 December 2001 con-
cerning pre-accession financial assistance for Turkey (OJ L 342,
27.12.2001, p. 1).

(4) Instrument for Structural Policies for Pre-Accession, Council Regula-

tion (EC) No 1267/1999 (OJ L 161, 26.6.1999, p. 73).

(5) Special Accession Programme for Agriculture and Rural Development,
Council Regulation (EC) No 1268/1999 (OJ L 161, 26.6.1999, p. 87).
(6) Under EDIS specific implementing agencies were accredited to imple-
ment the Phare and ISPA programme without the Commission’s ex
ante control of tendering and contracting.

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9.4.
Sapard, on the other hand, is also implemented in a decen-
tralised manner, but without ex ante approval by the Commission
for project selection, tendering and contracting. Based on its own
assessments, the Commission has conferred management of the
programme on each beneficiary country. Implementation and
payment functions are the responsibility of accredited paying
agencies, which reimburse expenditure incurred by beneficiaries.
Each paying agency is required to provide the Commission annu-
ally with a certificate on its accounts and an audit report by an
independent certifying body. The Commission checks to ensure
that systems are adequate and are operating as intended and car-
ries out clearance of accounts procedures at the end of a financial
year.

9.5.
In 2006, payments under the pre-accession programmes
totalled 2 277 million euros. Graph 9.1 shows a breakdown of
the funds committed and spent in 2006. For the eight Central and
Eastern European countries that became Member States in 2004,
no new expenditure was committed after accession (except for
Sapard, where some commitments were made up to the end of
2004). For Bulgaria and Romania the last commitment year was
2006. Former ISPA projects in the newly acceded countries are
treated as Cohesion Fund projects. Commission payments on
these projects can continue until 2010/2011. For Phare, pay-
ments will continue at least until the end of 2009.

Graph 9.1 — Commitments and payments in 2006

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9.6. A new single Instrument for Pre-accession Assistance, IPA,
will replace Phare, Turkey, ISPA and Sapard programmes for the
Financial Perspectives 2007-2013.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Approach and scope of the audit

9.7. The audit is based on two main sources of information:

(a)

substantive testing of transactions: a sample of 80 transac-
tions has been drawn from the pre-accession budget area;

(b) an assessment of the functioning of the supervisory and con-
trol systems at the following levels: Commission headquar-
ters, EC Delegations and national implementing and paying
agencies.

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Phare and Turkey programmes

9.8.

For the Phare and Turkey programmes, the Court:

(a)

carried out substantive tests on a total of 67 transactions at
the level of the Commission and at the beneficiary country
level in Bulgaria, the Czech Republic, Hungary, Latvia (desk
review), Lithuania, Poland, Romania, Slovakia and Turkey;

(b) evaluated the supervisory and control systems (implementa-
tion of internal control standards, system for ex post control
activities and closure of programmes at central level and vari-
ous tests of controls on the transactions selected for substan-
tive testing in the beneficiary countries).

ISPA

9.9.
For ISPA, substantive testing was carried out on seven pay-
ments and public procurement procedures relating to five projects
in Romania and two projects in Bulgaria (7). A review was made
of the supervisory and control systems put in place by the Com-
mission: in particular relating to the ex ante controls carried out
by the EC Delegations (paragraph 9.3) and to Directorate General
for Regional Policy audit activity. Finally, the progress of the
countries in obtaining EDIS approval was analysed.

Sapard

For Sapard, at Commission level, the audit involved an
9.10.
appraisal of the supervisory and control systems including the
Commission’s review of the certifying bodies’ reports and tests of
transactions on a sample of payments (six Commission pay-
ments). Furthermore, the Court’s audit comprised tests of controls
and tests of transactions on five projects in Romania and an addi-
tional sample of five projects in Latvia, covering the main mea-
sures implemented at the time of the audit. These audits involved
verifying the project documentation in the respective paying
agencies and the legality and regularity of the project on-the-spot.

(7) Payments to the third country benefiting from ISPA assistance (Croatia)

represented less than 1 % of total ISPA payments in 2006.

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Audit findings

Legality and regularity of the underlying transactions

9.11. The errors found by the audit of the underlying transac-
tions were not significant regarding the Phare, Turkey and ISPA
programmes. However in the case of Sapard, significant errors
were found.

9.11. The Commission considers that in the case of Sapard, for the
reasons set out under paragraph 9.14, the number of errors with finan-
cial impact is not significant.

Phare and Turkey programmes

9.12.
For the Phare Programme, the Court found one substan-
tive error: in Slovakia, where an incorrect co-financing ratio was
applied. In addition, some formal errors, such as non-compliance
with tendering and contracting rules were found.

ISPA

9.13. The ISPA transactions tested were not affected by signifi-
cant errors. Certain errors of a formal nature were identified
which mainly relate to the non respect of some PRAG (8) require-
ments (such as no explanation provided regarding the absence of
voting members in the meetings of the evaluation committee or
lack of publication of forecast and award notices in the Official
Journal).

Sapard

9.13. The Commission is looking into the circumstances of these
apparent breaches of requirements. Although forecast notices are gener-
ally required by the PRAG rules, there may be exceptions.

9.14. The Sapard transactions audited by the Court were
affected by significant errors. The Court found projects where the
beneficiaries of the community aid did not comply with their
contractual obligations. In particular, a project audited in Roma-
nia was found to have been ineligible for EU financing for failure
to adhere to the Commission’s prescribed procurement rules and
procedures. For certain projects, the checks actually carried out by
the authorities during the on-the-spot visits were not clearly evi-
denced or they were not appropriate even leading to a payment
for an investment that was not completely finalised.

9.14. Most of the errors found concern one project in Romania. The
error found in the procurement procedures concerned formal aspects of
the tender.

The Commission has examined the operation of public tendering and has
given it an appropriate follow-up in the conformity procedure.

As regards the on-the-spot checks, the Romanian authorities have taken
action to improve their procedures.

(8) Practical Guide to Phare, ISPA and Sapard contract procedures.

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9.15.
For the sample of payments audited at Commission level,
the Court reiterates its last year’s observation as to the legality and
regularity of the expenditure incurred under the so called ‘limited
time procedure’ (9) that consists in a change in the adopted (i.e.
accredited) procedures, whereby not all checks are performed
before projects are approved by the Sapard Agency. This proce-
dure has neither been accredited by the competent Bulgarian
authorities nor officially examined and approved by the Commis-
sion. The Commission recognized that this procedure does not
respect the rules and should not be applied. It nevertheless
decided that, based mainly on (unverified) information provided
by the Bulgarian authorities, an amount of 19 580 843,66 euro
was considered to be eligible and was subsequently paid in
November 2006.

9.15. The Commission regrets that the Bulgarian authorities failed to
inform it in due time of the implementation of the ‘Limited Time Pro-
cedure’ (LTP) but reiterates that this breach of some provisions of the
Multiannual Financing Agreement (MAFA) (1) constitutes a formal
error. The Commission is required to evaluate, inter alia, ‘the gravity of
the infringement and the financial loss to the Community’ (2). The Com-
mission carried out a mission to Bulgaria from 19 to 23 March 2007.
Its review of certain projects approved under the LTP showed that each
control stage of the accredited procedure was observed before the contract
with the beneficiary was signed, thus not affecting the eligibility of the
expenditure for projects processed under this procedure.

Supervisory and control systems

9.16. The assessment of the supervisory and control systems for
three different
area
the pre-accession budget
Directorates-General (paragraph 9.2). For all pre-accession instru-
ments the audit still revealed weaknesses in the control systems
of the national authorities involved in the implementation of the
projects.

involves

Phare and Turkey programmes

9.17. The ex post controls (closure audits) reviewed by the
Court, relating to projects financed under the 2000 and 2001
Phare national programmes and carried out during the year by
the contracted external auditors, showed a financially insignifi-
cant level of error. This was corroborated by the results of the
Court’s tests of transactions.

(9) Annual Report concerning the financial year 2005, paragraph 9.10.

(1) Article 5(4) of Section A.
(2) See paragraphs 2 and 4 of Article 12 of Section A of the MAFA.

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9.18. The EC Delegations’ ex ante control of the tendering and
awarding of contracts under decentralised management has been
an effective key control to ensure the legality and regularity of the
underlying transactions. Regarding the Phare and Turkey pro-
grammes, the Court has observed in the tendering files a high fre-
quency of corrective actions due to the Delegation’s ex ante
controls in Bulgaria, Romania and Turkey. This indicates that the
national supervisory systems at the DIS institutions are still weak.
Thanks to the maintaining of the ex ante control in the concerned
delegations, these weaknesses had no serious negative financial
consequences.

9.19.
In Romania two out of three Phare Implementing Agen-
cies received EDIS accreditation in December 2006. In Bulgaria
however, EDIS accreditation for Phare has been further delayed
confirming the Court’s finding that the national administration
supervisory systems at the DIS institutions are weak.

9.19. The Commission regrets the delays in the EDIS accreditation in
Bulgaria but confirms that delays in the accreditation could not be
avoided as management and control structures were not adequate to
waive ex ante control. To ensure the sound financial management of EC
funds under EDIS, the Commission had to insist on further improve-
ments of the administrative structures before granting it. In Romania,
the third Implementing Agency received EDIS in April 2007.

ISPA

9.20. The Commission has been, and still is, closely monitor-
ing systems and projects under ISPA. The Court’s audit resulted
in some recommendations for further improvement of the audit
tools and documentation (such as checklists).

9.20. The Court’s suggestions for checklists will be considered.

9.21.
In 2006 (June for Romania and November for Bulgaria)
the systems put in place for ISPA management allowed the Com-
mission to waive the ex ante approval requirement. However, for
some implementing agencies, the approval could not yet be given
or was given subject to particular safeguarding conditions. In its
Decision, the Commission included a number of issues to be fol-
lowed up by the different bodies involved. The implementation of
these issues was still ongoing at the end of 2006.

9.21. The issues are being followed up through monitoring activities,
checks on payment claims and audits.

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Sapard

9.22. The Court’s audit in Latvia and Romania found that the
Sapard administrative and control systems included the key con-
cepts (10) but their functioning showed the following weaknesses:

9.22.

(a) Both cases are being followed up in the conformity procedure.

(a)

changes in the accredited procedures in Romania (see also
Bulgaria above in paragraph 9.15) and in the RDP (Rural
Development Plan) in Latvia had not been given the neces-
sary prior approval by the Commission;

(b)

the insufficient accuracy and quality of the checks in one
project in Romania did not allow the detection of errors that
consequently were not corrected (see paragraph 9.14);

(c) a price database to check that purchases had been made at
reasonable prices which affect the eligible amount of a project
was not yet in place in Romania. This point was already
raised in 2005 annual report (point 9.17(c)).

(c) A price database is one tool to evaluate the reasonableness of prices
and, in the case of Sapard, it is not a regulatory requirement accord-
ing to the Multiannual Financing Agreement. However, the Com-
mission shares the Court’s view, that the existence of such a database
could provide even greater assurance of sound financial manage-
ment in private purchasing.

Conclusions and recommendations

9.23. The transactions audited by the Court were not affected
by significant errors, except for the transactions financed by
Sapard. This reflects the weaknesses detected in the functioning
of certain key controls in the Sapard systems (see 9.22). For the
Phare, Turkey and ISPA programmes, the EC Delegations’ ex ante
control of the tendering and awarding of contracts under decen-
tralised management, continued to be an effective control to
compensate the local lack of capacity to manage the procurement
process in the context of the rapidly increasing funding.

9.23. As stated in the Commission’s replies to paragraphs 9.11, 9.14
and 9.22, the Commission is of the opinion that the errors identified by
the Court in Sapard are not significant with the possible exception of
public tendering in Romania. The Commission is of course aware of the
potential risks related to Sapard, and will take these into account in its
audits, but has so far found no evidence of an overall material financial
risk.

9.24. The Court’s follow-up of key statement of assurance
observations is shown in Annex 9.1 and overall assessment of the
Supervisory and control systems in 2006 is shown in Annex 9.2.

(10) Adequate separation of duties, proper authorisation of transactions,
adequate documents and records, on the spot control (Physical con-
trol), independent checks.

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9.25. The Court recommends that the Commission:

9.25.

(a) monitor closely the effective functioning of national super-
visory and control systems, notably the preparation and
management of tenders in Turkey, procurement under EDIS
in Bulgaria and Romania and the timely delivery of national
co-financing;

(b) ensure that the Romanian and Bulgarian authorities bring the
systems to a good standard of financial management of the
Structural Funds providing adequate assurance of the correct-
ness, regularity and eligibility of claims on Community assis-
tance;

(a) The issues are being followed up through monitoring activities,

checks on payment claims and audits.

(b) Monitoring and audit work are continuing to this end.

(c)

for Sapard, should follow-up the improvement of the quality
of the Control Reports issued by the Romanian Authorities;

(c) The Commission is aware that the reporting of the on-the-spot
checks could be improved in some cases and is following this up in
the clearance of accounts procedure.

(d) ensure, through close monitoring, that no changes to the
accredited procedures are introduced by the Sapard paying
agencies without its prior approval.

(d) The Commission has expressed its concerns to the Romanian and
Bulgarian authorities, and has reminded them of the obligation, till
the date of their accession, to submit any proposed changes of the
procedures to the Commission before their implementation.

FOLLOW-UP REVIEW OF PREVIOUS OBSERVATIONS IN
SPECIAL REPORT NO 6/2003 CONCERNING TWINNING AS
THE MAIN INSTRUMENT TO SUPPORT
INSTITUTION-BUILDING IN CANDIDATE COUNTRIES

Introduction

In July 2003, the European Court of Auditors published
9.26.
Special Report No 6/2003 (SR 6/2003) concerning Twinning as
the main instrument to support institution-building in candidate
countries (11). The main conclusion was that Twinning is a posi-
tive instrument for institution building that acted as a catalyst in
setting candidate countries’ reform in motion. However, the
actual results of the projects were limited compared to the over
optimistic objectives. To increase the value for money and to
improve the achievement of results, the Special Report recom-
mended the Commission to (i) pay more attention to the formu-
lation of realistic and achievable objectives, (ii) monitor the
achievements more promptly, (iii) simplify the procedures, (iv)
use Twinning more selectively, and (v) use the gained knowledge
and experience to bolster the sustainability. European Parliament
and the Council supported these recommendations (12).

(11) OJ C 167, 17.7.2003
(12) European Parliament Report on the discharge for 2002 (A5-

0200/2004), Council meeting 2569 (6970/04).

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9.27. The objective of this follow-up review, carried out in
mid 2006, was to assess the overall progress of the Twinning
instrument since the publication of the Court’s Special Report,
and to assess to what extent the recommendations made in the
original report have been implemented.

9.28. The Commission (DG ELARG) acts as a facilitator and
co-ordinator of the Twinning instrument and thereby sets out the
rules and guidelines to be followed by the Twinning partners,
amongst others by maintaining the Twinning Manual. Line DGs
are part of the internal consultation structure and are involved in
programming the assistance. The Twinning partners, i.e. benefi-
ciary institutions and Member States, are exclusively responsible
for the implementation.

The Court’s Observations

9.29. The Commission has addressed many of the observations
identified in SR 6/2003. Through the revisions of the Twinning
Manual in 2004 and 2005 the Commission introduced remedial
measures such as reimbursing the Twinning partners for the
project preparatory costs only when deadlines are met, paying the
Resident Twinning Adviser’s (RTA) salary through the same body
as the project expenditure, setting conditions for the use of man-
dated bodies (i.e. the bodies which act in lieu of public adminis-
tration) in order to avoid unfair competition and preserve the
public character of Twinning, and promoting the use of the spe-
cial Twinning Light instrument for less complex projects. Since
2005 the Manual has covered, in addition to Phare, the CARDS,
MEDA and TACIS programmes as well.

9.30. The commitment of the beneficiary country, both at the
level of concrete project implementation and at the level of glo-
bal political commitment, is an essential precondition for the suc-
cess of any Twinning project. This is recognized in the Twinning
Manual. However, even in 2006 the outputs of some of the
projects were never used, because preconditions for successful
project implementation had not been fully met or the beneficiary
government had not committed itself to using the project out-
puts.

9.29. The Commission welcomes the Court’s acknowledgement of the
Commission’s commitment to maintain and develop twinning as an effi-
cient, credible and sound European institution building Instrument. Such
continuous adjustment is especially important since twinning is now
available for use in the European Neighbourhood policy area.

9.30. The success of each twinning project depends on the active
co-operation and full commitment of all stakeholders, including also the
selected Member States administrations.

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9.31. The project design has developed significantly since the
first round of Twinning projects. The scope of the later projects
is more focused and objectives are more precise and measurable.
One of the factors contributing to the improvement is that the
beneficiaries have gained more experience in the implementation
of EU projects. However, the initial design of a project, i.e. draft-
ing the project fiche, is still difficult for the beneficiaries who do
not have previous experience in Twinning or technical assistance
projects. This still leads to complex projects with over-ambitious
objectives in the start up phase of Twinning. For Twinning
projects with investment components the procurement proce-
dures often delayed the Twinning implementation which neces-
some
sitated substantial project
components to the follow-up projects.

re-design or

transfer of

9.31. Twinning projects arise from a dialogue between the Commis-
sion and beneficiary countries. The Commission has launched several ini-
to assist potential beneficiary administrations with the
tiatives
programming of targeted twinning projects:

— a 2004 CD Rom contained all requests for twinning assistance

(fiches) and was updated in 2006,

— a new template for twinning project requests (fiches) was developed

in the 2005 Common twinning manual,

— training efforts have been stepped up, including for instance the
launch of the bi-yearly in house training sessions for twinning
co-ordinators and training sessions in loco.

9.32. The RTAs produce quarterly progress reports which are
now closely monitored by the Commission. For the projects
reviewed by the Court the Delegations had regularly analysed and
commented on these reports, and proposed corrective actions
when needed

9.33. The Commission has not sufficiently simplified the pro-
cedures. The Twinning contracts still contain excessively detailed
budgets at activity level and CVs of all experts participating in the
project. Consequently, fine-tuning of activities, which is a normal
part of project management after the inception phase (e.g. adjust-
ing the number of workshop days, number of documents to be
translated), still necessitates a formal modification of the contract,
which complicates project management unnecessarily.

9.33.
In 2007 the Commission has further streamlined the twinning
rules including those governing budgetary modifications so as to increase
clarity and simplicity in the management of twinning projects. The
Twinning manual foresees a flexible structure to amend approved twin-
ning contracts. As in all contractual relationships, amendments have to
be notified beforehand. This is a logical requirement as these amend-
ments very often encompass an adjustment not only of the mandatory
results but also of the expenditure pattern of Community funds.

9.34. The Commission has not followed the Court’s recommen-
dation to use Twinning more selectively. The choice between
Twinning and technical assistance continues not to be based on
any in-depth analysis.

9.34. The identification and design of twinning projects is the out-
come of a process and dialogue between the Commission and the Ben-
eficiary country under the final scrutiny and approval of the Phare or
CARDS management committee.

9.35. All the projects reviewed in 2006 included measures sup-
porting the sustainability of their outputs. Examples include train-
ing of trainers components and using results in the follow-up
project.

15.11.2007

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Official Journal of the European Union

C 273/179

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

9.36.
In general, Twinning projects cover similar areas of inter-
vention in all beneficiary countries. However, a systematic
approach by the Commission to disseminating the best practice,
including an open database of projects and their results, is still
missing, and the RTA network, crucial for exchanging knowledge
and experience, has not been established. Moreover, there is no
systematic approach to ex post evaluation of project results. After
the end of the project there is no procedure established to verify
the use of the results achieved. Only thematic evaluations are car-
ried out at the programme level. However, these do not deal with
the individual projects but evaluate the whole instrument.

9.36. The Commission has made substantial efforts to disseminate
best twinning practices through the periodical issue of twinning news,
and publication of a new twinning brochure and a DVD.

Following-up the Court’s observations
the
co-operation of the beneficiary countries was requested in 2003 to set up
the RTA network, but in the absence of a positive feed-back, it has
proved impossible to set it up.

special

report,

in its

Besides the thematic evaluations, the Commission undertakes random
evaluations of individual projects.

Recommendations

9.37. The Court recommends that the Commission should:

9.37. The Commission welcomes the Court’s recommendations and
endeavours to take them into due account in the further development of
twinning.

(a)

consider setting stricter conditions for beneficiary govern-
ments to use the project outputs;

(a) The Commission will continue to ensure that beneficiary adminis-
trations ensure the sustainability of twinning project results. If that
condition is not met, the Commission can interrupt the implemen-
tation of the project.

(b) consider more effective ways of supporting beneficiaries to
design their first project, including the planning for procure-
ment;

(b) The Commission has already launched several initiatives to assist
potential beneficiaries and takes into account the need of improved
coordination to ensure timely procurement.

(c)

consider reducing the level of detail in Twinning contracts in
order to allow more flexibility for the project management;

(c) The Commission is committed to further streamline the rules gov-
erning budgetary modifications so as to increase clarity and sim-
plicity in the management of twinning projects.

(d) ensure well-founded choices between Twinning and techni-
cal assistance and raise the beneficiaries’ awareness of the dif-
ference between the two;

(d) The Commission will continue to highlight the specificities of twin-
ning and to ensure that the choice between twinning and technical
assistance is specifically addressed.

C 273/180

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15.11.2007

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(e)

establish (i) a systematic approach to ex post evaluation or
monitoring of project results and verifying whether the
results are used, (ii) a network of RTAs and (iii) a database of
project results in order to disseminate best practice.

(e)

(i) The Commission will continue undertaking regular impact
assessments that are disseminated during the annual meeting
of national contact points.

(ii) The Commission regrets that by now, due to the lack of
co-operation of other twinning stakeholders, it has unfortu-
nately not been possible to set up the recommended network.

(iii) The setting up of a data base raises several issues in relation
with continued co-operation with the providers of twinning
expertise and data protection.

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Follow up of key Statement of Assurance observations — Pre-accession strategy — Phare and Turkey part

ANNEX 9.1(a)

Court observation

Action taken

Court analysis

Commission reply

High frequency of corrective actions resulting from
the Delegations’ ex-ante controls.

from the Delegations to
Continuous support
improve the quality of the national authorities
work.

Also in 2006 the Court found a high frequency of
corrective actions due to the Delegations’ ex-ante
controls.

(Annual Report concerning the financial year 2005,
paragraph 9.13)

Insufficient procedure to remind the national
authorities about submitting final declarations and
lack of checklists for the review process.

(Annual Report concerning the financial year 2005,
paragraph 9.14)

Checklists have been developed. The period allowed
for
been
lengthened.

declarations

submitting

has

the

There are still delays in submitting the final decla-
rations.

The Commission makes all efforts to support the national
administrations in building and setting up the appropri-
ate structures and procedures in order to enhance their
management and control capability.

The Commission issues regular written reminders for the
need to submit final declarations in a timely manner. This
issue has also been raised in the Joint Monitoring Com-
mittees. As a result of these efforts, most of the delayed
final declarations have been received and dealt with.

EDIS accredited implementing agencies were not in
all cases the actual contracting authority.

Due to national legislation (about ownership etc)
the implementing agencies cannot in all cases be
the formal contracting authority.

This observation is no longer an issue.

(Annual Report concerning the financial year 2005,
paragraph 9.15)

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Follow up of key Statement of Assurance observations — Pre-accession strategy — Sapard part

ANNEX 9.1(b)

Court observation

Action taken

Court analysis

Commission reply

Changes in the implementing or paying arrange-
ments of the Sapard Agency without prior approval
by the Commission.

The Commission reminded the concerned national
authorities of their obligation to submit any pro-
posed changes to the procedures to the Commis-
sion before their implementation.

Also in 2006 the Court found that procedural
changes were introduced without prior approval by
the Commission.

The Commission has expressed its concerns to the Roma-
nian and Bulgarian authorities, and reminded them of the
obligation (till the date of their accession) to submit any
proposed changes of the procedures to the Commission
before their implementation.

The Commission followed up the observations via
the clearance of accounts process.

Also in 2006 the Court detected weaknesses in the
application of the procurement procedures.

The Commission is following this up in the clearance of
accounts procedure and financial corrections are being pro-
posed as appropriate.

(Annual Report concerning the financial year 2005,
paragraph 9.10)

Insufficient documentation underlying public ten-
ders did not ensure that bids were received within the
deadlines and were duly examined.

(Annual Report concerning the financial year 2005,
paragraph 9.17(a))

Inadequate systems to check the reasonableness of
prices (such as a price database) affecting eligible
amounts.

The Commission reminded the concerned national
authorities to implement a database.

Cases of inadequacies in the database still existing. Despite not being a regulatory requirement, a prices data-
base could provide even greater assurance of sound finan-
cial management in private purchasing.

(Annual Report concerning the financial year 2005,
paragraph 9.17(c))

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Assessment of supervisory and control systems — Pre-accession strategy — Phare and Turkey part

ANNEX 9.2(a)

System concerned

DG Enlargement, central
services

Commission’s Delegation

DIS implementing agencies

EDIS accredited implementing
agencies

Legend:

Procedures
and manuals

Ex ante control

Internal audits

Ex post control
activities

Management
reporting

Overall assessment

Key internal control

N/A

N/A

N/A

Satisfactory

Partially satisfactory

Unsatisfactory

N/A

Not applicable: does not apply or not assessed

Assessment of supervisory and control systems — Pre-accession strategy — Sapard part

ANNEX 9.2(b)

Key controls

System concerned

Segregation
of duties

Internal Audit

Audit trail

Management
checks

DG Agriculture

N/A

N/A

On-the-spot
controls

Overall assessment

Preliminary
administrative
& technical
controls/
assessments

N/A

Management and
control agency in
Latvia

Management and
control agency in
Romania

Legend:

Satisfactory

Partially satisfactory

Unsatisfactory

N/A

Not applicable: does not apply or not assessed

15.11.2007

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Official Journal of the European Union

C 273/185

CHAPTER 10

Administrative expenditure

TABLE OF CONTENTS

Introduction

Administrative expenditure of the Institutions and Community bodies

Specific assessment in the context of the Statement of Assurance

Conclusions in the context of the Statement of Assurance

Specific observations on each Institution

Audit Scope

Parliament

Council

Commission

Court of Justice

Court of Auditors

European Economic and Social Committee

Committee of the Regions

European Ombudsman and European Data-Protection Supervisor

Conclusion on the audit of the specific risk areas

Special Reports issued since the last Annual Report

European Union Agencies

The European Schools

Paragraph

10.1

10.2-10.26

10.5-10.6

10.6

10.7-10.25

10.7-10.8

10.9-10.13

10.14

10.15-10.16

10.17

10.18

10.19-10.21

10.22-10.23

10.24

10.25

10.26

10.27-10.32

10.33-10.34

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THE COURT’S OBSERVATIONS

INTRODUCTION

10.1. This chapter covers:

— the administrative expenditure of the Institutions and Com-

munity bodies (1);

— the Agencies and other decentralised bodies and

— the European Schools.

ADMINISTRATIVE EXPENDITURE OF THE INSTITUTIONS
AND COMMUNITY BODIES

10.2. The audit of administrative expenditure of the Institutions
consists of two parts. The first part addresses the specific assess-
ment in the context of the statement of assurance. The second
part consists of specific observations for each Institution as
required by Article 143(4) of the Financial Regulation. These
observations are based on audits of areas selected on the basis of
identified risks from previous audit findings.

10.3. The appropriations relating to this expenditure are man-
aged directly by each Institution and are used to pay the salaries,
allowances and pensions of persons working for the Institutions,
as well as rent, purchases and miscellaneous expenses. In 2006
administrative expenditure by the European Union’s institutions
was 6 699 million euro, as further specified in Table 10.1.

Table 10.1 — Payments by Institution

(million euro)

European Parliament

Council

Commission

Court of Justice

Court of Auditors

European Economic and Social Committee

Committee of the Regions

European Ombudsman

European Data Protection Supervisor

2005

1 235

533

3 952

211

92

96

64

6

2

Total

6 191

10.4.
Past audits by the Court had shown that the errors found
were not material. A follow-up to observations from past Annual
Reports is presented in Table 10.2.

(1) Commission, Parliament, Council, Court of Justice, Court of Auditors,
European Economic and Social Committee, Committee of the Regions,
European Ombudsman, European Data Protection Supervisor
(Article 1 of the Financial Regulation).

2006

1 440

585

4 150

238

99

108

69

7

3

6 699

Table 10.2 — Follow-up to observations from past Annual Reports

Observations

Action taken

Further action needed?

Reimbursement of accommodation costs incurred on mission.

Annual Reports concerning the financial year 2004, paragraph 9.6,
and 2005, paragraph 10.7:

The amended Staff Regulations, which entered into force on 1 May 2004,
state that accommodation costs incurred on mission are reimbursed up to a
maximum fixed for each country, on production of supporting documents
(Article 13 of Annex VII to the Staff Regulations). Contrary to this rule, all
the Institutions, except the Court of Justice, the Court of Auditors and the
Ombudsman, provided in their internal rules for the payment of a flat-rate
sum, ranging from 30 to 60 % of the maximum allowable amount, to staff
who do note produce any evidence of having incurred accommodation
costs.

The European Economic and Social Com-
mittee and the Committee of the Regions
amended their internal rules in December
2005 so as to ensure compliance with the
Staff Regulations.

Parliament, Commission and Council
should amend their internal rules in order
to ensure
that accommodation costs
incurred on mission are reimbursed in
compliance with the Staff Regulations.

Additional pension scheme for Members of the European Parliament

Annual Reports concerning the financial year 2002, paragraphs 9.17
to 9.20, and 2005, Table 10.2:

If the additional pension scheme for Members of the European Parliament
is to continue, a sufficient legal basis has to be created as soon as possible.
There should be clear rules established in the scheme to define the liabilities
and responsibilities of the European Parliament and of the members of the
scheme in case of a deficit.

The additional pension scheme is men-
tioned in Article 27 of the Statute for Mem-
bers of the European Parliament adopted
by the Parliament on 28 September 2005.
The Statute will enter into force on the first
day of the European Parliament parliamen-
tary term beginning in 2009. No rules have
been established defining the liabilities and
responsibilities of the European Parliament
and of the members of the scheme in case
of a deficit

Until the first day of the European Parlia-
ment parliamentary term beginning in
2009 the Statute has no legal effect and
cannot provide a legal basis for the parlia-
mentary contribution to the ASBL pension
fund. Appropriate rules should be estab-
lished defining the liabilities and responsi-
bilities of the European Parliament and of
the members of the scheme in the event of
a deficit.

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The European Parliament’s replies

As Parliament indicated in its previous replies to the Court’s Observations, it faces
particular problems in regard to missions owing to the nature of its activities and
their dispersal over three places of work. The application of a flat-rate system takes
account of the legal advice tendered to Parliament’s Bureau on this subject and is
intended to strike a reasonable balance between the requirements of the regulatory
framework and the exigencies of the institution’s particular working environment.
Moreover, the simplified provisions which have now been introduced will help to
reduce the administrative costs generated by the management of a particularly high
number of missions. See also Parliament’s resolution of 24.4.2007 (1), para-
graph 12, granting discharge in respect of the 2005 accounts.

The Council’s replies

The new internal mission rules of the GSC no longer provide for the 30 percent flat-
rate payment. Before entering into force (foreseen for October 2007), these rules still
have to be the subject of formal consultations with the staff representatives.

The Commission’s replies

The Guide to missions — the internal rules adopted by the Commission governing
missions of its staff — is currently under review to take due account of the remark
of the Court. Adoption of the new rules is scheduled for the beginning of 2008.

The European Parliament’s replies

As Parliament indicated in its replies to the Court’s observations concerning 2005,
the fact that the Statute for Members states (Article 27) that the pension fund ’shall
be maintained after the entry into force of this Statute for Members or former Mem-
bers who have already acquired rights or future entitlements in that fund’ is implicit
recognition of a legal basis for the pension fund, including during the period prior
to the Statute’s entry into force.

The working party with responsibility for the introduction of measures to implement
the Statute for Members is continuing its work on, among other things, drafting
rules governing the liabilities and responsibilities of Parliament and the members of
the scheme in the event of a deficit.

The outcome of the invitation to tender published in the Official Journal with a view
to an independent actuarial study being carried out on the pension fund has been
communicated to Parliament’s Bureau. The study, which is to commence in the near
future, will enable the Bureau subsequently to lay down measures seeking to guar-
antee the payment of additional pensions after the Statute’s entry into force in 2009
and to draw up the agreement governing the relations between and respective respon-
sibilities of the fund and Parliament.

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Observations

Action taken

Further action needed?

Payment by the Council of additional annual leave not taken

Annual Reports concerning the financial years 2004, paragraph 9.18,
and 2005, Table 10.2:

At the Council additional annual leave granted before 31 December 1997
as a compensation for overtime is paid on retirement if the official has not
taken the additional leave. As staff of the A and B categories are not entitled
to compensation for overtime, such payments are not in accordance with
Article 56 of the Staff Regulations.

Even though the General Secretariat has
taken appropriate action in order to gradu-
ally eliminate the stock of compensatory
leave for A and B staff granted before
31 December 1997, payments were still
made in 2006 to compensate for additional
leave not taken.

The payment of additional annual leave not
taken should be discontinued.

The Council’s replies

Reimbursement of travel expenses of delegates of Council Members

Annual Report concerning the financial year 2005, paragraph 10.11:

The Council reformed its system for reimbursing the travel expenses of del-
egates of Council Members with Decision 190/2003, applicable from
1 January 2004. The reimbursement is paid within the limit of a fixed allo-
cation per Member State. The Court found that the new system greatly
reduced the administrative burden on the Council of paying delegates’
expenses, but that there had been insufficient checks on the validity of Mem-
ber States’ statements before payment of the July 2005 instalment.

Internal Audit reports in February and
November 2006 identified problems
related to unclear eligibility rules and inad-
equate records of attendance at meetings.
The situation did not change substantially
in 2006 with respect to 2005.

An improvement of the system for record-
ing attendance at meetings is planned by
the General Secretariat.

Further checks and controls should be
introduced in order to ensure the validity
of Member States’ statements.

The General Secretariat of the Council is aware of the position of the Court of Audi-
tors concerning payment for old stock of days of compensatory leave not taken, and
fully concurs with the Court’s comments stressing the need to bring the current regu-
larisation process to a close as soon as possible. As the Court noted, a compulsory
instruction aiming at elimination of the remaining stocks by 2009 has been issued
to this end. In addition, measures have been taken since 1997 to ensure that this
situation will not recur in future.

However, the General Secretariat considers that the Appointing Authority’s obliga-
tion to respect the acquired rights of those concerned and the fundamental principles
of European law relating to legitimate expectations and equal treatment means that
it is necessary to retain a system of eliminating stocks of leave by granting time off
work as well as by payment for a short transitional period. The General Secretariat
is currently exploring all options for speeding up the process of eliminating stocks
even further, including reducing the time at present allowed for using up such stocks.

The Council’s replies

Since the introduction of the new system for reimbursing the travel expenses of del-
egates of Council Members, the Council Secretariat has gradually introduced rigor-
ous checks on the statements supplied by Member States. Where anomalies or errors
come to light, Member States are being invited to make the necessary corrections and
to resubmit their statements.

Currently the GSC is working on:

— revision of the decision, notably envisaging a clarification of the eligibility

rules

— the replacement of attendance forms by an electronic badge system.

Follow up of family allowances by the Commission

Annual Report concerning the financial year 2005, paragraph 10.12:

Staff receiving the household allowance and having no dependent children
are not regularly required to update the information. There was no evidence
that 676 out of 1 605 Commission staff concerned based in Brussels had
been requested to confirm or update their original declarations. Insufficient
checks were also carried out concerning cases where national dependent
child allowances might have been received and, if so, should have been
deducted from the allowances paid according to the Staff Regulations.

The follow up of the different types of
allowances is still mainly based on the vol-
untary transmission of information by the
staff. Nevertheless, the Commission fol-
lowed up 231 of the 676 cases in 2006
and plans to follow up the remainder of
these cases within two years.

Further action needs to be taken by the
Commission to verify family allowances on
a regular basis.

The Commission’s replies

The Commission plans to complete the follow-up of the remainder of these cases by
the beginning of 2008. The PMO is developing a new IT system, IRIS, which will
fully computerise the documentation of procedures and monitor compliance with
those procedures. The new system will be introduced in stages between mid 2007
and 2009.

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Observations

Action taken

Further action needed?

The internal audit service of the Court of Justice

Annual Reports concerning the financial years 2004, paragraph 9.21,
and 2005, paragraphs 10.13 and 10.14:

The Court of Auditors observed that the head of the Internal Audit Service
was responsible for ex-ante verification of the authorising officers’ opera-
tions. The same situation was noted concerning the financial year 2005.
Such an involvement in the carrying out of financial operations is not com-
patible with the total independence with which the internal auditor ought
to perform his audit duties, in accordance with the principle stated in
Article 86 of the Financial Regulation.

In the second half of 2005 the internal auditor carried out some specific
audits and addressed recommendations to the services concerned. However,
at the time of the audit by the Court of Auditors no reports by the internal
auditor were available.

In 2006 the head of the Internal Audit Ser-
vice continued to be responsible for ex ante
verification of
the authorising officers’
operations. The Internal Audit Service
issued two audit reports and made several
recommendations which resulted in signifi-
cant savings.

The supervisory and control setup should
be reorganized in order to ensure the total
independence of the Internal Audit Service.

(1) P6_TA-PROV(2007)0133 — European Parliament decision of 24 April 2007 on the discharge for implementation of the European Union general budget for the financial year 2005, Section I — European Parliament (C6-0465/2006-2006/2071(DEC))

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THE COURT’S OBSERVATIONS

Specific assessment in the context of the Statement of Assurance

10.5. The audit appraised the legality and regularity of the
transactions underlying the accounts of the Institutions’ adminis-
trative expenditure, in order to provide a specific assessment in
the context of the statement of assurance. The Court assessed the
supervisory and control systems and examined a random sample
of 61 transactions drawn from the whole area of administrative
expenditure.

Conclusions in the context of the Statement of Assurance

10.6.
Subject to the issues mentioned in paragraphs 10.9
to 10.12, in 2006 all the Institutions had implemented a satisfac-
tory framework of supervisory and control systems as required by
the Financial Regulation and the sample tested showed no mate-
rial level of error. However, the Court draws attention to the
weaknesses in the Institutions supervisory and control systems
which need to be rectified as indicated at paragraph 10.25.

Specific observations on each Institution

Audit scope

10.7. The audit of the specific risk areas referred to in para-
graph 10.2 included an assessment of the relevant supervisory
and control systems and a number of samples drawn concerning
the following:

(i) negotiated procurement procedures (Commission’s OIB and
OIL, Parliament, Council, Court of Justice, European Eco-
nomic and Social Committee and Committee of the Regions),

(ii) payment of expenses and allowances to Members of Institu-
tions (Parliament, European Economic and Social Commit-
tee and Committee of the Regions),

(iii) headquarters control over Commission Delegations (Com-

mission’s DG RELEX),

(iv) procedures used to assure that the minimum internal con-

trol standards are implemented (Council),

(v)

Internal Audit function (Court of Justice).

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THE COURT’S OBSERVATIONS

10.8. The weaknesses found are summarised in the subsequent
text and concluded upon in paragraph 10.25. The errors and
weaknesses cannot be extrapolated for the whole area of admin-
istrative expenditure because the specific audit areas for each
Institution were selected based on known risks.

Parliament

10.9.
Since 1998 the Court has, on several occasions (2),
pointed out weaknesses in the regulatory framework established
by the Bureau (a body consisting of the Parliament’s President
and 14 Vice-Presidents) for the payment of allowances for assis-
tance to Members of the European Parliament (MEPs). In 2006
the expenditure for the MEPs assistance allowances amounted to
around 132 million euro.

In 2004 the rules concerning the submission of support-
10.10.
ing documentation by MEPs were amended and the resulting obli-
gations were set out in a Quaestors’ communication of July 2005.
In that context, MEPs were required to present by 1 Novem-
ber 2005 documentary evidence of the use of their allowance, for
the period July 2004-June 2005. This deadline was subsequently
extended several times and, according to the data available to the
Court, the supporting documents presented by the MEPs and
regarded as adequate justifications by the responsible administra-
tive department only cover 27,2 % (11,9 million euro) for 2004
(July-December) and 22,5 % (27,1 million euro) for 2005 (full
year) of the relevant expenditure.

10.11. On 23 March 2007 a Quaestors’ communication
extended the deadline for submitting supporting documents,
relating to the year 2006, to 30 April 2007, without mentioning
that documents still had to be presented for 2004 and 2005. As
of 1 May 2007, no measures had been taken by the Bureau to
ensure that the obligation to supply adequate supporting docu-
mentation had been complied with.

(2) Special Report No 10/98, paragraph 1.37, and, in particular, para-
graph 9.22 of its Annual Report concerning the financial year 2002
where the Court already noted that as new rules, issued in April 2000,
were not applied strictly, the risk of inappropriate use of the allow-
ance remained. Lately, Annual Report concerning the financial year
2005, paragraph 10.10.

10.10-10.11.

THE REPLY OF THE EUROPEAN PARLIAMENT

Due to a lack of clarity of the initial text, and the impact of the enlarge-
ment of the Union in 2004, the Quaestors, after in-depth political and
technical consultations, needed to draw up and adopt implementing
measures. The Bureau agreed consequently to extend the deadline and
instructed the Quaestors to examine ways to simplify the technical docu-
mentation to be submitted in relation to regularisation of expenses.

Considering the widely differing situations in the Member States and the
time needed to comply with the new requirements, it was not deemed
appropriate to impose a final deadline for obligations which derived from
a rule which was under review.

Moreover, the Bureau adopted on 25 September 2006 a new set of rules,
called the ‘Codex’ (rights and obligations of assistants and their Mem-
bers) which had an impact on the rules governing the Parliamentary
Assistance Allowance (new revision adopted by the Bureau on
13 December 2006).

Regarding that, the Quaestors informed all Members that the documen-
tation had to be delivered before 30 April 2007. A huge number of
documents has been received and is now under examination.

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THE COURT’S OBSERVATIONS

10.12. The Court notes, therefore, that the Bureau has not
ensured that the rules requiring the submission of adequate sup-
porting documentation have been implemented effectively. As
the major part of the amounts paid for MEPs assistance allowance
have not been subsequently justified by appropriate supporting
documents of the expenses incurred on behalf of the MEPs, the
Court considers that there is not sufficient documentation to
demonstrate that the MEPs have actually employed or engaged
the services of one or more assistants and that the duties or ser-
vices mentioned in the contracts signed by the MEPs have been
really carried out. The Bureau should take action in order to
obtain the documents considered essential to prove that the
expenditure was justified. Should these documents not be pre-
sented within reasonable time, appropriate measures, such as sus-
pension of payments and/or issuing of recovery orders, should be
initiated for the sums not justified.

10.13. The internal auditor finalised a comprehensive audit of
the Parliament’s procurement procedures in 2006. The audit
identified numerous weaknesses in the operation of internal and
management controls over the procurement procedures, in par-
ticular concerning planning, compliance with applicable regula-
tions and rules, reliability of management information and sound
financial management. A detailed action plan comprising
144 individual actions was drawn up and some concrete mea-
sures have already been taken in 2006 by the Secretary General,
such as the establishment of an advisory body (the Procurement
Forum) and the setting up of a central register of contracts. The
Court’s examination of a sample of negotiated procurement pro-
cedures and contracts at the Parliament confirmed the findings of
the Parliament’s internal auditor.

10.12.

THE REPLY OF THE EUROPEAN PARLIAMENT

It must be recalled that before any payment is made under the parlia-
mentary assistance allowance, basic mandatory documents have to be
submitted, such as application forms and contracts between the Member
and the assistant(s), service provider or paying agent.

Other documents such as, proof of social security coverage when the
assistant is an employed worker, is also requested to be delivered within
three months. All Members comply with these conditions.

The supplementary documentation requested since the rules changed in
2004 and, more recently on 13 December 2006, concerns mainly con-
tracts with service providers (approximately half the assistants) and
relates to the obligation for providing invoices or fee statements to the
Members who must forward a copy of the ‘statement of amounts invoiced
[by the service provider], accompanied by a declaration, certifying that
all tax and social security obligations resulting from the applicable
national legislation are complied with’ to the Parliament’s services. The
delivery of all those documents needed more time than foreseen. As men-
tioned above, a huge number of documents has been received and is now
under examination.

Following the examination, Members who do not comply with the obli-
gation to deliver the necessary evidence regarding payments will receive
an individualised letter, explaining what is still missing. Should a Mem-
ber not comply why with the obligation to submit the missing documen-
tation, the Authorising Officer by Delegation can suspend payments and
the Secretary General can decide to recover unduly paid sums. Such deci-
sions are taken in cooperation with the Quaestors.

10.13.

THE REPLY OF THE EUROPEAN PARLIAMENT

It is important to note that the audit of procurement procedures carried
out by the Internal Auditor and finalised in 2006 was conducted in
2003, which was the first year of implementation of the new Financial
Regulation.

Measures were in fact implemented in 2003 and during the following
years. Therefore, in connection with 2006 and the measures referred to
by the Court, it should be pointed out that the new advisory body, the
Procurement Forum, is the replacement for the Interservice Group on Pro-
curement set up in 2003 to provide support for authorising officers and
that the central register of contracts introduced in 2006 is the result of
developments carried out over the preceding years.

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THE COURT’S OBSERVATIONS

Council

10.14. The examination of a sample of negotiated procurement
procedures and contracts at the Council found that a contract for
the provision of telecommunication services for meetings of the
European Council concluded for a maximum duration of four
years was prolonged for a further year. The extension of the con-
tract (for an estimated cost of 900 000 euro) was incorrectly jus-
tified by the Council
to
Article 126(1)(e) of the Implementing Rules to the Financial
Regulation (hereinafter: IR) (3) which concerns ‘additional services
and works not included in the initial contract but which, through
unforeseen circumstances, have become necessary’. The Court
considers that an open tendering procedure should have been car-
ried out before the expiry of the contract.

administration with reference

10.14.

REPLY BY THE COUNCIL

The contract in question covers the availability of telecommunications
infrastructure (telephone lines and ISDN-lines) to be used by journalists
during EU summits (on average 3 times per year). Several months before
the end of the contract the department of the authorising officer identi-
fied the need to open a procurement procedure to cover this requirement.
However, at that particular time all administrative departments of the
Secretariat had to concentrate their efforts on the projects related to the
occupation of the new LEX-building (for 1 300 persons) in early 2007.
It was therefore decided to extend the existing contract by nine months.

The GSC is aware of the fact that, — as stated by the Court of Auditors
in its report, it should have carried out a new tendering procedure before
the expiry of the contract. Given the exceptional circumstances however,
it saw no alternative but to extend the current contract, limiting the
extension as much as possible.

It should be noted that the GSC recently launched a tendering procedure
for the above mentioned requirement.

Commission (4)

10.15. The Annual Activity Report of DG RELEX for 2006
stated that improvements in supervisory controls over Delega-
tions were implemented in 2006, notably through the establish-
ment of an Ex post Control Unit
in the External Service
Directorate. The Director General’s reservation of earlier years
was lifted. However, in spite of the improvements made in 2006,
the Court’s audit found that the risk of duplicate payments had
not been adequately addressed.

10.15.

REPLY OF THE COMMISSION

The Director General considered that the Ex post Control Unit effec-
tively contributed to provide him with the appropriate level of assurance
on the quality of the financial management in Delegations by undertak-
ing a large number of ex post control activities. The External Service
directorate is continuously developing its sampling methodologies and
verification techniques and the detection of double payments will be
addressed in that process.

(3) Commission Regulation (EC, Euratom) No 2342/2002 of 23 Decem-
ber 2002 laying down detailed rules for the implementation of Coun-
cil Regulation (EC, Euratom) No 1605/2002 on the Financial
Regulation applicable to the general budget of the European Commu-
nities (OJ L 357, 31.12.2002, p. 1).

(4) The Commission departments responsible for most of the administra-
tive expenditure are the following: Directorate-General (DG) Person-
nel and Administration (ADMIN), DG for Translation (DGT), DG for
Interpretation (SCIC), DG Communication (COMM), DG for External
Relations (RELEX), Office for Infrastructures and Logistics — Luxem-
bourg (OIL), Office for Infrastructures and Logistics — Brussels (OIB),
Office for the Administration and Settlement of Individual Entitle-
ments (PMO), European Personnel Selection Office (EPSO) and Publi-
cations Office (OPOCE).

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THE COURT’S OBSERVATIONS

10.16.
In 2006 improvements were made in the OIB’s contracts
and procurement management system, and the reservation in the
2005 Director’s declaration was removed. Although no reserva-
tions were made in 2005 and 2006 concerning the OIL, the Inter-
nal Audit Service in April 2007 reported weaknesses in OIL’s
procurement management and controls. The Court’s examination
of a sample of negotiated procurement procedures at OIB and
OIL showed that in a number of cases poor procurement plan-
ning and insufficient analysis of market conditions had resulted
in negotiating with only one supplier, instead of launching calls
for tenders.

10.16.

REPLY OF THE COMMISSION

Improvements in procurement management have been made already as
of 2006 following the action plan set up in 2005.

For OIB these include: internal reorganisation, training of staff (com-
pulsory), more efficient management of a four-year rolling plan via an
IT application, reinforcement of internal procedures, self-assessment by
the management of the main strengths and weaknesses in the procure-
ment and establishment of a subsequent action plan, reinforcement of
internal networks and dissemination of information and best practices.

Improvements continue in 2007 namely through the reinforcement of
resources and their qualifications, the improvement of the planning pro-
cess and the improvement of the market analysis for the most complex
and important tenders.

Article 126(1)b of the Implementing Rules (IR), permits negotiated pro-
cedures due to the ‘supplier captivity’ in certain domains.

Table: Market’s procedures of OIB and OIL > EUR 60 000

2006 Procedures
(amounts in million euro)

Total numbers

Negotiated

Total amount

Amount of negotiated procedures

OIB

34

4

137,0

2,5

OIL

12

1

14,5

0,07

Although the IAS report identified weaknesses in OIL, none of its rec-
ommendations were classified as criticism, and this justifies the absence
of reservations. Nevertheless, OIL drew up an action plan to address the
weaknesses noted by both the Court of Auditors and the IAS.

The action plan has just been introduced following IAS recommenda-
tions, and its effects should soon become visible.

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

Court of Justice

10.17. With the exception of the issue mentioned in Table 10.2
concerning the Internal Audit Service the audit did not give rise
to any observations.

Court of Auditors

10.18. The Court of Auditors is audited by an independent
external audit firm which issued a ‘certificate concerning the regu-
larity and fairness of the financial statements at 31 Decem-
ber 2006’, accompanied by a ‘report on the administrative and
accounting procedures, the soundness of the financial manage-
ment and the internal control system’. The report states that, in
the auditor’s opinion, his work did not ‘disclose any facts which
might cast doubt on the adequacy of the administrative and
accounting procedures or internal control or the compliance of
financial management with the applicable regulations’. Certificate
and report will be published in the Official Journal.

European Economic and Social Committee

10.19. The examination of a sample of negotiated procurement
procedures and contracts managed by the ‘Joint Services’ of the
European Economic and Social Committee and the Committee of
the Regions revealed management and control weaknesses. In
2006 the expenditure relating to contracts resulting from a nego-
tiated procedure, instead of a call for tenders, was a high percent-
age of the whole expenditure for procurement. For budget
lines 2 0 1 0 (insurance), 2 0 2 0 (water, gas, electricity and heat-
ing), 2 0 3 0 (Cleaning and maintenance) and 2 2 0 0 (new pur-
chases of technical equipment and installations) this percentage
exceeded 50 % of the total of the appropriations committed,
which amounted to 6,4 million euro. This practice does not com-
ply with the general rule, set out in Article 89 of the Financial
Regulation, that ‘all procurement contracts shall be put to tender
on the broadest possible base’. The negotiated procedure is an
exception applicable only within the strict
in
Articles 126, 127 and 129 IR.

limits

set

10.17.

REPLY OF THE COURT OF JUSTICE

The only observation made by the Court of Auditors concerns internal
audit. On that head, the Court of Justice emphasises that, in order to act
on the remarks previously made by the Court of Auditors in its annual
reports, the administrative organisation of the verification and audit sys-
tem has been altered. Two administrative units have been created, with-
out any hierarchical or operational inter-connection: an internal audit
unit, run by the internal auditor, and a unit responsible for verification
operations. This new organisation will be in operation from 1 Octo-
ber 2007, the date on which the internal auditor and the head of the
verification unit, newly appointed by the Administrative Committee of
the Court of Justice, will take up their duties.

10.19.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The total amount does indeed correspond to +/– 50 %. However, elec-
tricity and gas account for nearly half of this amount. This market was
opened up only recently to competition. An interinstitutional procedure
was launched in 2004 but was unsuccessful. The EESC participates in a
new interinstitutional procedure, which is ongoing. A contract for an
interpretation equipment system extension for new meeting rooms was
awarded to the supplier of the system that was already installed in all
other meeting rooms for reasons of technical compatibility. For several
contracts, previously awarded by negotiated procedure, calls for tender
were launched in the meantime (buildings maintenance contract, build-
ing inspection, elevator inspection, elevator maintenance, hygienic sup-
plies and waste disposal) and in several cases new contracts have been
signed since. As for the insurance contracts, an initiative for an interin-
stitutional call for tender in 2003 was not successful. The EESC is pre-
paring to either launch its own call for tender or to be associated with
interinstitutional contracts, with an aim to establishing a new legal
framework in 2008.

The EESC considers that, when there was no call for tender for a con-
tract, the situation was justified by the circumstances (e.g. previous call
not successful, technical compatibility, etc.) and this explains the volume
of contracts awarded without call for tender.

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THE COURT’S OBSERVATIONS

10.20. Article 123(2) IR requires that in negotiated procedures
the number of candidates invited to negotiate or to tender may
not be less than three, provided that a sufficient number of can-
didates satisfy the selection criteria, and that the number of can-
didates invited to tender must be sufficient to ensure genuine
competition. For 70 % of the contracts examined during the audit,
a tender was requested from only one potential supplier. The
Court considers that for most of these contracts (with a total
value of 1,8 million euro), it would have been possible to request
tenders from more than one supplier.

10.20.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The Court sampled 10 cases, 7 of which were awarded after negotiated
procedure with one potential supplier. For three cases (interpretation
equipment system extension, buildings maintenance contract extension,
insurance contracts), please refer to the comments on point 10.19. One
case concerns an expenditure on the Committee of the Regions’ own
appropriations (not shared with the EESC) and does not involve the
EESC’s authorizing officer. In two cases, a call for tender could theoreti-
cally have been launched, but this was not considered economical (ban-
ners and posters: small amounts and a new framework contract signed
in the meantime; security badges: ordered with the supplier, not via dis-
tributors). In one case (a contract to carry out a conformity study for the
JDE ‘Belliard I & II’ building), the Committees had no other choice but
to implement EP resolution P6_TA(2005)0410, adopted on
15.12.2005, requesting this audit to be done by SICABEL. Hence, this
contract was awarded to SICABEL by negotiated procedure and the CoA
was kept fully informed on this.

10.21. The proportion of negotiated procedures in relation to
the number of contracts awarded by the authorising officer by
delegation responsible for Chapters 2 0 (investments in immov-
able property, rental of buildings and associated costs) and 2 2
(movable property and associated costs) of the budget had
increased significantly in relation to earlier years. It was also dis-
tinctly higher than the average recorded for the Institution. As far
as March 2007, the authorising officer had not reported to the
Institution setting out any measures taken to reverse that trend,
as required by Article 54 IR.

10.21.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The EESC does not believe that there is a negative trend regarding the
number of negotiated procedures for chapters 20 and 22. Nevertheless,
the measures to reduce the number of negotiated procedures have been
incorporated in the final version of the annual report on financial year
2006 of the authorizing officer by delegation. Please also see comments
on point 10.19 for further details.

Committee of the Regions

10.22. The remarks in paragraphs 10.19 to 10.21 also apply to
the Committee of the Regions, as they concern contracts man-
aged by the Committees’ ‘Joint Services’.

10.22.

THE REPLY OF THE COMMITTEE OF THE REGIONS

The Committee of the Regions has noted the comments of the Court in
relation to contracts managed by the Joint Services with the EESC and is
committed to improving financial management practices and methods in
the Joint Services. In this regard, the Secretary General of the CoR has
written to the Secretary General of the EESC proposing the implemen-
tation of a number of corrective measures. in particular in the area of
financial circuits and tendering procedures. It is hoped that these mea-
sures can be implemented by agreement between the two Committees as
soon as possible.

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Official Journal of the European Union

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THE COURT’S OBSERVATIONS

10.23. According to the Committee’s rules, its Members may be
refunded travel expenses for the cost of the flight tickets actually
paid. Administrative costs incurred for the purchase of such tick-
ets are reimbursed on presentation of the travel agency invoice.
In various cases, travel expenditure was refunded on the basis of
hand-written travel agency invoices always showing the same
amount. In the context of an ex post verification procedure the
Committee’s administration found that this amount was on aver-
age 83 % higher than the price charged by the airline for the ticket
used. There was no evidence of the actual administrative cost
invoiced for the purchase. The Committee’s administration car-
ried out a broad investigation into the matter, which was com-
pleted in July 2007. In the Court’s opinion the results of this
investigation do not demonstrate that the amounts paid for
administrative costs were justified.

European Ombudsman and European Data-Protection
Supervisor

10.24. The audit did not give rise to any material observations.

Conclusion on the audit of the specific risk areas

10.25. The audit of the specific risk areas in some Institutions
showed weaknesses in the supervisory and control systems related
to the payment of allowances to Members of some of the Insti-
tutions. Concerning the European Parliament, the Bureau should
initiate appropriate measures when the documents considered
essential are not presented within reasonable time limits (see
paragraphs 10.9 to10.12). As to the negotiated procurement pro-
cedure, the Court noted that in many cases the Commission and
other Institutions did not respect the general principle of com-
petitive tendering (see paragraphs 10.13, 10.14, 10.16 and 10.19
to10.21). In particular the European Economic and Social Com-
mittee and the Committee of the Regions largely disregarded the
limited extent to which the negotiated procedure can be used
according to the Financial Regulation. This can result in an
increased risk for the legality and regularity of the expenditure.

10.23.

THE REPLY OF THE COMMITTEE OF THE REGIONS

According to the Committee’s rules, its members may be refunded travel
expenses corresponding to flight tickets and related administrative costs
on presentation of a travel agency invoice accompanied by the original
air ticket and original boarding pass The CoR rules allow members to
travel with full flexibility tickets. The Committee has ascertained that the
members had effectively paid the amounts invoiced by the travel agency,
although the actual cost of the tickets used was lower. The difference
between the amounts invoiced by the travel agency and the actual cost of
the tickets is due to the fact that, as the travel agency stated on 9 Feb-
ruary 2007, the travel agency guaranteed full flexibility for the tickets,
with the effect that the members travelled with full flexibility at a cost
equivalent to airline costs for a fully flexible ticket.

In order to guarantee full transparency, the Committee has subjected fur-
ther reimbursements to compliance with a number of conditions. It has
also requested the members concerned to cease travelling under the pre-
vious arrangements and to ensure that their reimbursement claims reflect
the actual price indicated on the flight ticket issued.

10.25.

THE REPLY OF THE EUROPEAN PARLIAMENT

See the reply to paragraph 10.12.

10.25.

REPLY OF THE COMMISSION

The Commission is pursuing its efforts to improve procurement through
better market analysis and planning. The Financial Regulation (1) per-
mits negotiated procedures in a number of cases, of which supplier cap-
tivity is one (see paragraph 10.16.).

10.25.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

Please see comments on points 10.19, 10.20 and 10.21.

(1) Council Regulation (EC) No 1995/2006 of 13 December 2006 amending
Regulation (EC) No 1605/2002 on the Financial Regulation applicable to
the general budget of the European Communities (OJ L 390, 30.12.2006,
p. 1).

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THE COURT’S OBSERVATIONS

Special Reports issued since the last Annual Report

10.26.
expenditure on buildings.

Special Report No 2/2007 concerning the Institutions’

EUROPEAN UNION AGENCIES

10.27. Agencies are distinct bodies from the Commission hav-
ing their own legal personalities. The Commission has a major
supervisory role vis à vis the agencies through its participation in
their management boards and its power to propose or appoint
executive directors. The Commission’s budget is also their main
source of financing except for the two self-financed agencies (5).
The Commission has to approve the measures taken by the agen-
cies to implement the financial and the staff regulations. The
information and the observations set out below concern the role
of the Commission towards the Agencies.

10.28. Audits of the European Union’s agencies and other sat-
ellite bodies (6) are the subject of Specific Annual Reports. In
2006, the European Court of Auditors audited 24 agencies, five
more (7) than in 2005. Their budgets amounted to 1 080,5 mil-
lion euro in 2006, as against 928,4 million euro in 2005. The
number of authorised posts for all the agencies rose from 2 588
in 2005 to 3 212 in 2006. See Table 10.3.

(5) Office for Harmonisation in the Internal Market and Community Plant

Variety Office.

(6) Hereinafter referred to as the ‘agencies’.
(7) The following agencies achieved financial autonomy in 2006: Euro-
pean Police College, European Railway Agency, Intelligent Energy
Executive Agency, European Agency for the Management of Opera-
tional Cooperation at the External Borders and the Education, Audio-
visual and Culture Executive Agency.

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Official Journal of the European Union

C 273/199

Table 10.3 — EU agencies — Principal data

Agencies and other decentralised bodies
of the European Union

Headquarters

First year of
financial
autonomy

Budget (1)
(million euro)

Authorised posts

2006

2005

2006

2005

Agencies

European Centre for the Development of Voca-
tional Training

Thessalonica

1977

European Foundation for the Improvement of
Living and Working Conditions

Dublin

European Environment Agency

Copenhagen

European Training Foundation

European Monitoring Centre for Drugs and
Drug Addiction

European Medicines Agency

Turin

Lisbon

London

1977

1994

1994

1995

1994

Translation Centre for the Bodies of the Euro-
pean Union

Luxembourg

1995

Community Plant Variety Office

Office for Harmonisation in the Internal Mar-
ket

European Agency for Safety and Health at
Work

European Fundamental Rights Agency (2)

Angers

Alicante

Bilbao

Vienna

European Agency for Reconstruction

Thessalonica

European Police College (3)

Eurojust

European Aviation Safety Agency

European Maritime Safety Agency

European Food Safety Authority

European Network and Information Security
Agency

Bramshill

The Hague

Cologne

Lisbon

Parma

Heraklion

1995

1995

1996

1998

2000

2006

2002

2003

2003

2003

2005

European Railway Agency (3)

Valenciennes

2006

European Centre for Disease Prevention and
Control

Stockholm

2005

European Agency for the Management of
Operational Cooperation at the External Bor-
ders (3)

Warsaw

2006

European GNSS Supervisory Authority (3)

Brussels (4)

2006

Executive Agencies

Intelligent energy Executive Agency (3)

Education, Audiovisual and Culture Execu-
tive Agency (3)

Brussels

Brussels

2006

2006

16,8

19,8

37,1

27

13

139

40,9

11,2

16,6

18,8

32,1

26,7

13

110,1

28,4

12,1

211,7

218,4

14,1

9,4

271

5

14,7

65,7

44,6

40,2

6,8

14,4

17,1

19,2

7

5,6

29,2

13,4

8,2

276,5

—

13

57,5

35,3

36,7

6,8

—

4,8

—

—

—

—

95

94

115

105

77

424

189

41

675

40

37

108

22

112

328

132

250

44

95

50

28

30

46

75

91

94

115

104

77

379

181

38

675

40

37

114

—

87

200

95

194

38

—

29

—

—

—

—

(1) Payment appropriations.
(2) Formerly the European Monitoring Centre on Racism and Xenophobia.
(3) Agency having required its financial independance in 2006.
(4) Provisional seat.

Total

1 080,5

928,4

3 212

2 588

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THE COURT’S OBSERVATIONS

10.29. The disbursement of subsidies paid by the Commission
from the Community budget is not based on sufficiently justified
estimates of the agencies cash requirements. This, combined with
the size of carry-overs, leads them to hold sizeable cash bal-
ances (8). The Court recommends that the level of subsidies paid
to the agencies is in line with their real cash requirements.

10.30. The general Financial Regulation of June 2002 was
modified in 2006 (9). The amendments made focus on the bud-
getary principles, the internal control systems and the presenta-
tion of the accounts. They have not yet been incorporated into
the agencies’ framework financial regulation and in their various
specific financial regulations.

10.29.

REPLY OF THE COMMISSION

Agencies are expected to present to the Commission requests for payment
of all or part of the Community subsidy, supported by a cash-flow fore-
cast, under terms and at intervals agreed with the Commission. As a
general rule, the Commission makes payments by tranches; sums that
were not spent have to be recovered by the Commission. The Commis-
sion services are studying the introduction of provisions in the appropri-
ate act (2) in order to enable the Commission to take into account the real
needs of the agency throughout the year. This should lead to a more
rigourous planning and increase transparency.

10.30.

REPLY OF THE COMMISSION

The revision of the two framework financial regulations for agencies (3)
will incorporate amendments adopted by the Council in the general FR
and could therefore only start once the general FR and its IR were
adopted. The draft regulation for regulatory agencies was adopted by the
Commission in July 2007 and submitted to the other institutions for
their opinion (4).

10.31. The introduction in the agencies of the new system,
ABAC, will take several years (10). During this period, the Com-
mission needs to ensure that the current SI2 system is adequately
maintained in the agencies until the new system is implemented.

10.31.

REPLY OF THE COMMISSION

The SI2 module is being phased out gradually but will be maintained
until 31 December 2008. Agencies have autonomy to choose between
ABAC or any other system. A dedicated project team reporting directly
to the Commission’s Accountant plans, analyses, and co-ordinates all
activities accompanying the roll out of ABAC within an Agency, both
in timing and resources.

(8) Amount of cash held by Agencies at the end of 2006 (excluding Office
for Harmonisation in the Internal Market, Community Plant Variety
Office and Translation Centre for the bodies of the European Union
— and the European GNSS Supervisory Authority): 213 million euro
to be compared to 810 million euro appropriations.

(9) Council Regulation (EC, Euratom) No 1995/2006 of 13 Decem-
ber 2006, amending Regulation (EC, Euratom) No 1605/2002 on the
Financial Regulation applicable to the General Budget of the European
Communities (OJ L 390, 30.12.2006, p. 1).

(10) At the end of 2006, 14 agencies had still to implement ABAC. The
Commission plans to implement ABAC in four agencies each year at
the most.

(2) Commission Regulation (EC, Euratom) No 2343/2002 of 23 Decem-
ber 2002 on the framework Financial Regulation for the bodies referred to in
Article 185 of Council Regulation (EC, Euratom) No 1605/2002 on the
Financial Regulation applicable to the general budget of the European Com-
munities (OJ L 357, 31.12.2002, p. 1).

(3) Regulatory and executive.
(4) The revision of the framework financial regulation for executive agencies was

adopted in May 2007 and is already with the institutions.

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THE COURT’S OBSERVATIONS

10.32.
In 2006, two Agencies decided to bear all the school
costs for their staff children without applying Article 3 of
Annex VII of the Staff Regulation and thereby creating unjusti-
fied disparities with other Community staff. This shows the neces-
sity for the Commission to improve its monitoring of the
implementation of the Staff Regulations by the Agencies.

10.32.

REPLY OF THE COMMISSION

The guidelines make two key recommendations: (i) to adopt rules
designed to implement the Staff Regulations (SR) in line with the Com-
mission Implementing Rules (IR) with limited changes justified by the
specific characteristics of Agency staff; and (ii) to define a more consis-
tent staff policy based on tasks and requirements of each agency. As
Regulatory Agencies are independent Community bodies, it lies within
their responsibilities to adopt such rules. The Commission agreement can
be given to IR identical to the Commission rules or deviating from them,
when justified by the special attributes of Agencies (size, staffing struc-
ture, mandate etc). The Commission is working closely together with the
Agencies in order to have the Commission IR applied in Agencies to the
fullest extent possible. The Commission has also in cooperation with
Agencies drawn up models of IR based on the Commission IR aiming to
obtain a common core of principles and rules to ensure equal treatment
of staff subject to the SR.

As regards the matter of schooling for Agency staff children, the Com-
mission has proposed two solutions in the Guidelines: (i) to set up, in
cooperation with the European School system, European sections in local
national or international schools (European schooling) or (ii) to sign ser-
vice contracts between the Agency and the surrounding international
schools.

As regards European Schooling, there is, already at this time, the pos-
sibility for national authorities to select and fully finance local schools to
become ‘accredited’ to give European Schooling according to a harmon-
ised curriculum based on mother tongue education. In the future and in
the context of the reform of the European School System, this possibility
will be broadened and further consolidated. The Member States would
bear the overall cost of this type of schooling, and the Commission is
drawing up, as part of the reform, an approach to an EU contribution
proportional to the number of children of Agency staff enjoying this type
of schooling.

As regards the service contracts, the Agency would pay the school fees
directly to the school. The school would then be considered as non-fee-
paying and the staff concerned would not receive education allowance
under Article 3 of Annex VII of the Staff Regulations.

In full coherence with this position, the Commission has repeatedly
reminded the two agencies in question of the fact that their approach is
not foreseen in the Guidelines, nor compliant with the Staff Regulations.
This was done most recently in its comments to Multiannual Staff Policy
Plans of Agencies which were transmitted to the Budgetary Authority in
the framework of the 2008 budgetary procedure.

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THE COURT’S OBSERVATIONS

EUROPEAN SCHOOLS

10.33. The Court’s Specific Annual Report on the European
Schools (not published in the Official Journal) is submitted to the
Board of Governors and to the Directors of the European Schools.
The Schools’ 2006 budget of 231,1 million euro was financed
mainly by a Commission grant (127,1 million euro) and by con-
tributions from the Member States (50,7 million euro) (11). The
principal data concerning the European Schools are set out in
Table 10.4.

Table 10.4 — European Schools — Principal data

European School

Country

Office

Luxembourg I

Luxembourg II

Brussels I Uccle

Brussels II (Woluwé)

Brussels III (Ixelles)

Mol

Varese

Karlsruhe

Munich

Frankfurt

Alicante

Bergen

Culham

Belgium

Luxembourg

Luxembourg

Belgium

Belgium

Belgium

Belgium

Italy

Germany

Germany

Germany

Spain

Netherlands

United Kingdom

2006

8,8

34,1

6,9

27,8

27,6

25,8

10,9

16,5

11,7

18,5

10,7

11,1

10,0

10,8

Budget (1) (2)
(million euro)

Grant received from
the Commission (3)
(million euro)

2005

2006

2005

8,5

33,3

6,6

27,1

27,3

25,6

10,7

16,4

11,8

18,7

9,4

10,4

10,8

11,2

7,5

21,5

3,7

19,0

18,0

17,0

6,1

8,4

3,4

1,0

4,7

6,0

5,4

5,4

6,6

19,4

3,7

16,0

17,1

16,9

6,0

8,4

4,3

0,9

3,5

3,2

5,0

5,4

School population (4)

2006

—

3 285

922

2 954

2 919

2 646

654

1 317

964

1 599

937

990

563

832

2005

—

3 190

891

2 617

3 014

2 781

622

1 318

1 044

1 557

876

987

626

856

Total

231,1

227,8

127,1

116,4

20 582

20 379

(1) Total revenue and expenditure as foreseen in the budget of each European School and the Office including all modifications made to the budgets initially adopted.
(2) Source: European Schools, clôture des comptes 2006.
(3) Source: European Schools, clôture des comptes 2006.
(4) Source: 2006 Annual report of the Secretary General to the Board of Governors of the European Schools.
NB: Variations in totals are due to the effects of rounding.

10.34. The Court found no material errors that might call into
question the reliability of the accounts that it examined and the
legality and regularity of
the transactions underlying these
accounts.

(11) Source: General introduction to the 2007 budget of the European

Schools.

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CHAPTER 11

Financial instruments and banking activities

TABLE OF CONTENTS

Introduction

Banking measures in the Mediterranean area

Background

Observations concerning the management of the individual measures by the Com-
mission and the EIB

Risk capital operations (RCO)

Interest rebates

FEMIP Support Fund for Technical Assistance

Reporting obligation towards the Budgetary Authorities

Classification of bank accounts in the Communities’ financial statements

Conclusions and recommendations

Guarantee Fund for external actions

The ECSC in Liquidation

Follow up of previous observations

Paragraph

11.1-11.2

11.3-11.18

11.3-11.5

11.6-11.13

11.6-11.11

11.12

11.13

11.14

11.15

11.16-11.18

11.19-11.20

11.21-11.22

11.23

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

11.1. The Communities’ financial instruments relating to bank-
ing activities operate both in the Member States and, to a greater
extent, outside the Union, in the context of external policies. Their
main aims are to boost economic development, improve infra-
structure and create jobs, notably in small and medium-sized
enterprises (SMEs), through measures to enhance their access to
finance. The European Coal and Steel Community in Liquidation
is involved in similar transactions.

11.2. The Court’s audit covered banking measures in the Medi-
terranean area, the operation of the Guarantee Fund for External
Actions and the activities of the European Coal and Steel Com-
munity in Liquidation (ECSC i.L.).

BANKING MEASURES IN THE MEDITERRANEAN AREA

Background

11.3. Co-operation between the EU and Mediterranean non-
member countries started some 30 years ago and has been gradu-
ally developed over the years (1). The ‘Euro-Mediterranean
Partnership’ (2) was established by Council Regulation (EC)
No 1488/96 of 23 July 1996 (MEDA I). A new amended Regu-
lation (3) (MEDA II) came into force in December 2000 (4). Since
October 2002, the European Investment Bank (EIB) has brought
together its operations in the Mediterranean region under the
‘Facility for Euro-Mediterranean Investment and Partnership
(FEMIP)’.

(1) For example by ‘Protocols’ — separate bilateral, financial agreements
between the EU and Mediterranean countries — and by Council Regu-
lation (EC) No 1763/92 of 29 June 1992 setting rules for financial
co-operation with Mediterranean non-member countries.

(2) The partner countries and territories in the MEDA Regulation are:
Morocco, Algeria, Tunisia, Egypt, Israel, Jordan, Gaza and the West
Bank, Lebanon, Syria, Turkey, Cyprus and Malta. Cyprus and Malta
have become EU Member States, Turkey is receiving special pre-
accession assistance.

(3) Council Regulation (EC) No 2698/2000 of 27 November 2000 (MEDA
II)(OJ L 311, 12.12.2000, p. 1), amending the old Regulation (EC)
No 1488/96 (MEDA I) (OJ L 189, 30.7.1996, p. 1).

(4) The European Neighbourhood and Partnership Instrument has been

established with effect from 2007 (OJ L 310, 9.11.2006, p. 1).

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THE COMMISSION’S REPLIES

11.4. Banking measures under the MEDA Regulation are
financed from the EU budget and operated by the EIB: risk capital
operations (RCO), interest rebates for certain EIB loans (5) and
financing of Technical Assistance (TA) through a FEMIP Support
Fund (6).

11.5. The objective of the Court’s audit was to assess whether
the related banking measures have been executed, monitored and
accounted for in line with the relevant regulations and procedures
both at the level of the Commission and of the EIB. The audit cov-
ered operations financed under the MEDA Regulation and some
ongoing operations financed under previous legal provisions with
outstanding disbursements or significant amounts at stake. The
findings are based on documentary checks of 90 operations — 30
operations sampled for each of the three banking measures
involved, including evaluation of the monitoring and control sys-
tem. For the key financial data, see Table 11.1.

Table 11.1 — Key financial data

(in million euro)

31.12.2005

31.12.2006

Risk capital operations (RCO)

net value of all ongoing operations

223,9

210,8

Loans with interest rebates

Loan amounts (all Mediterranean)

Interest rebates (all Mediterranean)

Technical assistance-FEMIP Support Fund

Budgetary appropriations (all)

Disbursements to trust accounts

(1) The total as at 30 June 2005 amounted to 489 million euro.
Source: European Investment Bank.

3 348,2

not available (1)

105,0

40,5

3 513,2

479,5

105,0

50,0

(5) EIB loans from its own resources to which interest rebates from the

EU budget are allocated.

(6) The FEMIP Support Fund should be distinguished from the FEMIP
Trust Fund which is financed directly by the EU Member States
through contributions totalling 32,5 million euro. In addition, the
Commission contributed 1 million euro to the Trust Fund.

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THE COMMISSION’S REPLIES

Observations concerning the management of the individual measures
by the Commission and the EIB

Risk capital operations (RCO)

11.6. The most important RCO are conditionally repayable
individual and global loans as well as participations in investment
funds. Because of their nature, however, having no fixed repay-
ment terms nor a specified rate of interest, they may be consid-
ered as quasi-equity investments.

Provision of risk capital through conditional loans

11.7. The individual loan allocations made in the context of
three global loans, out of the nine global loans audited, totalling
16,8 million euro exceeded the overall ceiling of 15 million euro
set by the EIB and approved by the Commission for those loans.

Provision of risk capital through investment funds

11.6. The Commission has classified these assets under investments
‘available for sale’ in the 2006 final accounts.

11.7.

In the end, the allocated amount was not fully disbursed.

11.8. The Court’s audit revealed that the investment funds
included in the RCO portfolio did not fully comply with the
MEDA Regulation as:

11.8.

— the portfolio includes seven investment funds which are
located outside the EU (Jersey, Guernsey, the Isle of Man and
the British Virgin Islands). In total 36,2 million euro are com-
mitted to these funds;

— Following a specific request by the EIB in 2003, the Commission
confirmed that the investment funds should be located either in the
European Union or in one of the Mediterranean Partner Countries
(MPCs).

— investment funds made investments outside the list of eli-
gible partner territories and countries (the United Arab Emir-
ates and the Isle of Man). This was notably due to the fact
that the investment rules of the funds did not include the
necessary investment restriction.

— The Commission does not receive exhaustive lists of investments
made through investment funds. In future, the Commission will
ensure that adequate reporting requirements fill this gap.

11.9. There was no control procedure in respect of cross-
investments between funds. It was difficult therefore to verify that
the overall ceilings had been respected.

11.9. The Commission is currently able to monitor their investments
and would intervene if it believed that cross-investments between funds
became a problem.

Weaknesses in the monitoring, accounting for and valuation of RCO

11.10. The monitoring of RCO has not been adequate in the
past. Intermediaries’ reporting obligations, such as the communi-
cation of financial statements, sub-loan contracts and evidence of
disbursements, were not consistently followed up. This led to

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

late recoveries and uncertainty about the valuation of RCO. Fol-
lowing an internal re-organisation of the relevant EIB service in
2005 the financial monitoring has improved, although certain
deficiencies relating to past operations still have to be addressed.

In the provisional consolidated financial statements of
11.11.
the European Communities RCO were classified under ‘loans
granted from the EC budget and the ECSC i.L.’. Because of their
nature as quasi-equity investments (see paragraph 11.6), they
should, according to the Commission’s accounting rule No.11
(Financial assets and liabilities), be classified under the heading
‘investments available for sale’ and valued using fair values. How-
ever, they are held at historic costs less any provisions for impair-
ment, as their fair value cannot currently be reliably measured.
The provisions for impairment are based on the provisional or
definitive write-offs. While such a valuation method is acceptable
in the circumstances, it is not consistently applied. The Court
found some cases where provisional estimates for impairments
available to the EIB had not been communicated to the Commis-
sion. This shows that the convention between the Commission
and the EIB needs to be updated so that the Commission receives
all relevant information in time to allow it to take it into account
in the application of its accounting rules. Furthermore, the Com-
mission should more actively monitor the application of the con-
vention rather than as at present relying entirely on the
information provided by the EIB.

Interest rebates

11.12.
Interest rebates are paid from the Community budget for
certain EIB loans in the field of the environment. Globally, the
related operations were satisfactorily managed. However, a num-
ber of weaknesses were noted. In particular, recent loan contracts,
amounting to 135 million euro and benefiting from interest
rebates of 26,8 million euro, allowed for payment in currencies
other than the euro, contrary to Article 6 of the MEDA II Regu-
lation. Furthermore, one project benefiting from an interest rebate
of 8,5 million euro was closed although the beneficiary had not
submitted the required report confirming the successful execution
of the project.

11.11. The Commission has made the necessary reclassification of
these assets under investments ‘available for sale’ in the 2006 final
accounts. Reporting and accounting standards have evolved significantly
over the period of the MEDA mandates. The European Bank of Invest-
ment (EIB) and the Commission have been following developments and
are currently reviewing the situation together, looking for the best cost-
benefit solution and also taking into account information available
according to the contracts signed with final beneficiaries many years ago
(hence not including current reporting standards). New reporting require-
ments will also be agreed as regards the content of the annual executive
reports, enabling the Commission to monitor more thoroughly the appli-
cation of the relevant legal base and mandate.

11.12. Under MEDA II, only one disbursement was made in one
project in another currency. For subsequent disbursements under this
loan, the EIB notified the borrower that it would not be able to disburse
in other currencies than the euro. The Bank is preparing amendments to
the finance contracts so as to comply with the euro denomination require-
ment.

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THE COMMISSION’S REPLIES

FEMIP Support Fund for Technical Assistance

11.13. TA projects are to support beneficiaries during different
stages of the project cycle, that is project identification, prepara-
tion and implementation. Overall, TA projects are adequately
managed. Out of the 30 operations examined eligibility problems
were found in three cases despite the fact that the framework
agreement does not foresee derogation possibilities:

(a)

for two projects examined environmental impact assessment
studies were financed for a total of 1,15 million euro which
should instead be financed by the promoters,

(b) an external TA mid-term evaluation amounting to 0,2 mil-
lion euro was also financed from the TA support fund,
whereas this is not in line with the definition of eligible TA
projects in the framework agreement.

11.13. The European Directives related to environmental
impact
assessments (EIAs) are demanding, especially concerning the public con-
sultation process. The EIA is an integral part of the EIB investment
project cycle. Locally financed and implemented EIAs often do not meet
the requirements of EU directives. Moreover, the EIB is sometimes criti-
cized by non-governmental organizations (NGOs) to be not strict
enough with respect to these requirements. With regard to the EIB invest-
ment amounting to 0,2 million euro, an EIA was set as conditionality
for loan disbursement.

The Commission agreed to the financing of the Mid Term Evaluation
from the Facility for Euro-Mediterranean Investment and Partnership
(FEMIP) support fund after having assessed compliance with the eligi-
bility criteria. The mid-term evaluation exercise supports EIB investments
through improved technical assistance operations. Hence, both the Com-
mission and the EIB found it appropriate to finance the mid-term evalu-
ation exercise from the FEMIP support fund.

11.14. The Commission will consider providing more detailed infor-
mation to the budgetary authority.

11.15.
in the sense indicated by the Court.

For the 2006 final accounts a reclassification has been applied

Reporting obligation towards the Budgetary Authorities

11.14.
Since the start of the MEDA programme in 1996 the
Commission is required to submit to the European Parliament
and the Council an annual report giving information on the mea-
sures financed during the year (Article 15 of the MEDA Regula-
tion). While the Commission has published a general annual
report on development cooperation, this report does not cur-
rently provide sufficient
information on progress achieved
through the financial instruments.

Classification of bank accounts in the Communities’ financial
statements

11.15. Budgetary resources are transferred to specific interest-
bearing bank accounts (7) held at the EIB in the name of the Com-
mission. The amounts in these accounts were recorded as pre-
financings in the provisional consolidated financial statements of
the Communities. This classification differed from that used in
accounting for similarly conducted programmes mandated by the
Commission to other financial institutions. In these other cases
the bank accounts were classified under ‘cash and cash equiva-
lents’.

(7) As at 31 December 2006 a total of 233,1 million euro are kept on

these specific bank accounts.

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THE COMMISSION’S REPLIES

Conclusions and recommendations

11.16. The management of banking measures under the MEDA
Regulation, in respect of Technical Assistance and loans with
Interest Rebates was overall satisfactory. However, in respect of
Risk Capital Operations, the Court found weaknesses in the
execution and monitoring procedures as well as in the commu-
nication of all relevant data by the EIB to the Commission in
order to allow the latter to fully apply its accounting rules. For
RCO and interest rebate operations it was also found that benefi-
ciaries did not always fulfil their contractual and reporting obli-
gations. Appropriate action should be taken to ensure that the
financial intermediaries and borrowers meet their contractual
obligations.

11.16. The Commission will take appropriate action to ensure that the
financial intermediaries and borrowers meet their contractual obliga-
tions.

11.17. The management convention between the Commission
and the EIB for RCO and interest rebates needs improvement and
should be updated.

11.17. The Commission is in discussion with the EIB on the new
reporting requirements in line with the new accounting rules and is look-
ing for the best cost-benefit solution.

11.18. The Commission should establish stricter monitoring
procedures to ensure the completeness and reliability of the finan-
cial data. The Commission should provide more complete infor-
mation on progress achieved through the financial instruments
and should also treat the various bank accounts opened for man-
dated actions consistently.

11.18. The Commission has mandated the EIB to implement opera-
tions on its behalf and has assigned to it some management responsi-
bilities which are clearly laid out in the Convention and must be respected.
The Commission is ready to further strengthen its monitoring of EIB
mandated actions, respecting the provisions of the Convention.

The Commission will consider providing more detailed information to the
budgetary authority.

For the 2006 final accounts a reclassification has been applied in the
sense indicated by the Court.

GUARANTEE FUND FOR EXTERNAL ACTIONS

the Guarantee Fund for External
11.19. The purpose of
Actions (8) (‘the Fund’), which guarantees loans to third countries,
is to reimburse the Community’s creditors (9) in the event of
a beneficiary’s defaulting and to avoid direct calls on the

(8) Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994
(OJ L 293, 12.11.1994, p. 1), as last amended by Regulation (EC, Eura-
tom) No 89/2007 of 30 January 2007 (OJ L 22, 31.1.2007, p. 1).
(9) Principally the EIB, but also Euratom external lending and EC macro-

financial assistance (MFA) loans to third countries.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Community budget. The administrative management of the Fund
is carried out by DG ECFIN while the EIB is responsible for its
treasury management (10). At 31 December 2006, the Fund’s total
resources were 1 379 million euro.

11.20. The Court found that the Guarantee Fund was managed
during 2006 in a satisfactory manner. No guarantee calls were
made to the Fund in 2006.

THE ECSC IN LIQUIDATION

11.21. After the expiry of the Treaty establishing the European
Coal and Steel Community on 23 July 2002, the assets and liabili-
ties of the ECSC were transferred to the European Commu-
nity (11). Their net worth, referred to as the European Coal and
is allocated to
Steel Community in Liquidation (ECSC i.L.),
research in the coal and steel industry. As at 31 December 2006,
the total assets of the ECSC i.L. were 2 174 million euro com-
pared to 2 214 million euro as of the 31 December 2005.

11.22. The winding-up of the financial operation of the ECSC
i.L. is proceeding in compliance with the relevant legislation,
including the multiannual financial guidelines.

FOLLOW UP OF PREVIOUS OBSERVATIONS

11.23.

See Annex 11.1.

(10) Management agreement between the EIB and the European Commu-

nity, as last amended on 28 April 2002 and 8 May 2002.

(11) Protocol on the financial consequences of the expiry of the ECSC
Treaty and on the Research Fund for Coal and Steel (OJ C 80,
10.3.2001, p. 67).

Court’s observations

Situation in 2006

Further action needed

Commission reply

ANNEX 11.1

Follow-up of the Court’s previous observations

Specific observations concerning the Financial Mechanism projects

Public tendering

Paragraph 10.33 of the Annual Report concerning the financial
year 2002 identified preferences for installation of an electric
transformer for the construction of a wind farm in Spain (Gali-
cia) where the concession for the installation of a wind farm
required 74 % local production in Galicia (80 % including civil
engineering work). The beneficiary had to prove that the prod-
uct could not be found on the domestic market in order to
obtain specific permission from the regional authorities to buy
the equipment in Sweden. The Commission was invited to
examine the situation in order to ensure that there were no pref-
erences for national products.

Overview of assets held by Financial Institutions on behalf of the Com-
mission

Paragraph 10.16 of the Annual Report concerning the financial
year 2004 indicated that:

(10.16(b)) a contribution to a banking operation that the Kredi-
tanstalt für Wiederaufbau is carrying out in Bosnia and Herze-
govina for which 44,25 million euro were paid, was not
registered as an asset by the Commission and therefore not
recorded in the accounts;

(10.16(c)) EU funding totalling 16 million euro has been pro-
vided to the European Agency for Reconstruction (EAR) for
banking operations in Kosovo, Montenegro and Serbia, man-
aged by KfW. Neither the Commission nor the EAR had
included these amounts in its provisional 2004 accounts.

A similar problem was outlined in paragraphs 10.17 and 10.18
of the Annual Report concerning the financial year 2004 with
regard to existing assets held by financial institutions on behalf
of the Commission. Such an overview should ensure that the
assets are subject to regular and adequate monitoring.

The Commission has examined the case without the EIB and
found the alleged breach of the relevant Directive but consid-
ered that no further action is opportune.

In line with its reply to the findings of the Court the Commis-
sion included the amounts in its 2004 final financial state-
ments. However, in 2005 the amounts no longer appeared in
the financial statements without justification.

The Commission needs to implement valid
monitoring and control procedures in respect of
its assets kept in financial participations to ensure
that such assets are always properly recorded.

In 2006 the Commission booked 46,1 million euro coming
from those participations as assets and created a profit in the
economic outturn account. The Commission decided (1) to
use these amounts for a financial participation by purchasing
922,5685 ‘C’ shares of 50 000 euro each in the ‘European
Fund for South East Europe’ (2) (a profit oriented private
SICAV) (3) The shares were bought (4) on behalf of the Com-
mission by the European Investment Fund in the context of a
specific trust agreement. The financial participation was
valued at 49,4 million euro at the end of 2006.

With the introduction of the new accounting system in 2005
the Commission has obtained a partial overview of assets held
on its accounts.

The Commission examined the case from both the angles of public pro-
curement and free movement of goods. It found a potential but
unproven breach of the public procurement rules in force at the time
but no evidence of any infringement of the free movement of goods pro-
visions. It considered that no further action on the public procurement
issue was opportune as under the current legislation the operator would
no longer fall under the rules.

Since 2006 the Commission ensures that the recording and monitor-
ing of assets kept in financial participations is done properly, in
time and in the correct classification. The loans of 44,250 million
euro to the Kreditanstalt für Wiederaufbau were not included in the
assets of 2005. However, by signature of a transfer agreement on
19 June 2006, the Commission (EC) and the European Agency for
Reconstruction (EAR) authorised the transfer of outstanding loans
under the ‘European Funds’ to the European Fund for Southeast Europe
(EFSE). The amount is included in the assets of the 2006 balance
sheet of the EC and will be further monitored.

The Commission will examine actions to be taken to improve the situ-
ation and apply appropriate measures.

(1) Decision C(2006) 2307 of 8.6.2006.
(2) The Fund has A (private investments), B (mezzanine paticipations) and C (donor shares) shares. Losses are allocated first to the C shares and if the C shares are completely used to the B shares. The price of the B shares with lower risk was set at 25 000 euro which is half the price of

the high risk C shares (50 000 euro).

(3) The Fund is established under Luxembourg law as a SICAV: ‘Société d’Investissment à capital Variable — Fonds d’Investissement Spécialisé’.
(4)

It was not a cash transaction as the assets were brought in from existing revolving loans managed by the German Kreditanstalt für Wiederaufbau (KfW) which were subject to the Court’s findings in the 2004 Annual report outlined above.

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ANNEXES

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Official Journal of the European Union

I

ANNEX I

Financial information on the general budget

CONTENTS

BACKGROUND INFORMATION ON THE BUDGET

1. Origin of the budget

2.

Legal basis

3. Budgetary principles laid down in the Treaties and the Financial Regulation

4. Content and structure of the budget

5.

Financing of the budget (budgetary revenue)

6. Types of budget appropriation

7.

Implementation of the budget

7.1. Responsibility for implementation

7.2. Implementation of revenue

7.3. Implementation of expenditure

7.4. The consolidated statements on budgetary implementation and determination of the balance of the financial year

8.

Presentation of the accounts

9.

External audit

10. Discharge and follow-up

EXPLANATORY NOTES

Sources of financial data

Monetary unit

Abbreviations and symbols

DIAGRAMS

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BACKGROUND INFORMATION ON THE BUDGET

1.

ORIGIN OF THE BUDGET

The budget comprises the expenditure of the European Community and the European Atomic Energy Community (Euratom). It also
includes administrative expenditure on cooperation in the fields of ‘justice and home affairs’ and the common foreign and security policy,
as well as all other expenditure that the Council considers should be borne by the budget for the purpose of implementing these policies.

2.

LEGAL BASIS

The budget is governed by the financial provisions of the Rome Treaties (1) (2) (Articles 268 to 280 EC and Articles 171 to 183 Euratom)
and by the financial regulations (3).

3.

BUDGETARY PRINCIPLES LAID DOWN IN THE TREATIES AND THE FINANCIAL REGULATION

All items of Community revenue and expenditure are to be included in a single budget (unity and accuracy). The budget is authorised for
one financial year only (annuality). Budgetary revenue and expenditure must balance (equilibrium). The accounts are established, imple-
mented and presented in euro (unit of account). Revenue is to be used without distinction to finance all expenditure and, like the expen-
diture, is to be entered in full in the budget and subsequently in the financial statements without any adjustment of one item against
another (universality). The appropriations are earmarked for specific purposes by title and chapter; the chapters are further subdivided
into articles and items (specification). The budgetary appropriations are to be used in accordance with the principles of economy, effi-
ciency and effectiveness (sound financial management). The budget is established and implemented and the accounts are presented in
observance of the principle of transparency (transparency). There are some minor exceptions to these general principles.

4.

CONTENT AND STRUCTURE OF THE BUDGET

The budget consists of a ‘Summary statement of revenue and expenditure’ and sections divided into ‘Statements of revenue and expen-
diture’ for each institution. The eight sections are: (I) Parliament; (II) Council; (III) Commission; (IV) Court of Justice; (V) Court of Auditors;
(VI) Economic and Social Committee; (VII) Committee of the Regions; (VIII) European Ombudsman and European Data-protection
Supervisor.

Within each section, items of revenue and expenditure are classified under budget headings (titles, chapters, articles and, where appli-
cable, items) according to their type or the use to which they are to be applied.

5.

FINANCING OF THE BUDGET (BUDGETARY REVENUE)

The budget is mainly financed from the Communities’ own resources: GNI-based own resources; own resources accruing from VAT; cus-
toms duties; agricultural duties and sugar and isoglucose levies (4).

Besides own resources, there are other, marginal items of revenue (see Diagram I).

6.

TYPES OF BUDGET APPROPRIATION

To cover estimated expenditure, the following types of budget appropriation are distinguished in the budget:

(a) differentiated appropriations (DA) are used to finance multiannual activities in certain budgetary areas. They comprise commitment

appropriations (CA) and payment appropriations (PA):

— commitment appropriations make it possible to enter into legal obligations during the financial year for activities whose imple-

mentation extends over several financial years;

(1) Treaty of Rome (25 March 1957): Treaty establishing the European Economic Community (EEC).
(2) Treaty of Rome (25 March 1957): Treaty establishing the European Atomic Energy Community (Euratom).
(3) Mainly the Financial Regulation (FINREG) of 25 June 2002 (OJ L 248, 16.9.2002).
(4) Principal legal acts relating to own resources: Council Decision 2000/597/EC, Euratom of 29 September 2000 (OJ L 253, 7.10.2000); Council Regu-
lation (EC, Euratom) No 1150/2000 of 22 May 2000 (OJ L 130, 31.5.2000); Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989
(OJ L 155, 7.6.1989); Sixth Council Directive of 17 May 1977, common system of VAT: uniform assessment basis (OJ L 145, 13.6.1977); Council
Directive 89/130/EEC, Euratom of 13 February 1989 on the harmonisation of the compilation of GNI (OJ L 49, 21.2.1989), Council Regulation (EC,
Euratom) No 1287/2003 of 15 July 2003 on the harmonisation of gross national income at market prices (OJ L 181, 19.7.2003).

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— payment appropriations make it possible to cover expenditure arising from commitments entered into during current and pre-

ceding financial years;

(b) non-differentiated appropriations (NDA) make it possible to ensure the commitment and payment of expenditure relating to annual

activities during each financial year.

It is thus important to establish the following two totals for each financial year:

(a)

the total of appropriations for commitments (AFC) (5) = non-differentiated appropriations (NDA) + commitment appropriations
(CA) (5);

(b)

the total of appropriations for payments (AFP) (5) = non-differentiated appropriations (NDA) + payment appropriations (PA) (5).

Revenue raised in the budget is intended to cover the total appropriations for payments. Commitment appropriations do not need to be
covered by revenue.

The following simplified presentation (with illustrative amounts) shows the impact of these types of appropriations in each budget year.

Year 1: AFC: 150

Year 2: AFC: 180

Year 3: AFC: 215

(5)

It is important to note the differences between ‘appropriations for commitments’ and ‘commitment appropriations’ and between ‘appropriations for
payments’ and ‘payment appropriations’. The two terms ‘commitment appropriations’ and ‘payment appropriations’ are used exclusively in the con-
text of differentiated appropriations.

IV

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IMPLEMENTATION OF THE BUDGET

7.1.

Responsibility for implementation

The Commission implements the budget on its own responsibility in accordance with the Financial Regulation and within the limits of
the allotted appropriations; it also confers upon the other institutions the requisite powers for the implementation of the sections of the
budget relating to them (6). The Financial Regulation lays down the implementation procedures and, in particular, the responsibilities of
the authorising officers, accounting officers, administrators of imprest accounts and internal auditors of the institutions. In the two larg-
est areas of expenditure (EAGGF-Guarantee and Structural Funds) the management of Community funds is shared with the Member States.

7.2.

Implementation of revenue

The estimated revenue is entered in the budget subject to changes deriving from amending budgets.

The budgetary implementation of revenue consists of establishing the entitlements and recovering the revenue due to the Communities
(own resources and other revenue). It is governed by certain special provisions (7). The actual revenue of a financial year is defined as the
total of sums collected against entitlements established during the current financial year and sums collected against entitlements still to be
recovered from previous financial years.

7.3.

Implementation of expenditure

The estimated expenditure is entered in the budget.

The budgetary implementation of expenditure, i.e. the evolution and utilisation of appropriations, may be summarised as follows:

(a) appropriations for commitments:

(i)

evolution of appropriations: the total appropriations for commitments available in a financial year are made up as follows: initial
budget (NDA and CA) + amending budgets + assigned revenue + transfers + commitment appropriations carried over from the
preceding financial year + non-automatic carry-overs from the preceding financial year not yet committed + released commit-
ment appropriations from preceding financial years which have been made available again;

(ii) utilisation of appropriations: the final appropriations for commitments are available in the financial year for use in the form of

commitments entered into (appropriations for commitments utilised = amount of commitments entered into);

(iii) carry-overs of appropriations from one financial year to the next financial year: appropriations belonging to the financial year which
have not been utilised may be carried over to the next financial year following a decision by the institution concerned. Appro-
priations available as assigned revenue are automatically carried over;

(iv) cancellation of appropriations: the balance is cancelled;

(b) appropriations for payments:

(i)

evolution of appropriations: the total appropriations for payments available in a financial year are made up as follows: initial bud-
get (NDA and PA) + amending budgets + assigned revenue + transfers + appropriations carried over from the previous financial
year in the form of automatic carry-overs or non-automatic carry-overs;

(6) See Articles 274 of the EC Treaty, 179 of the Euratom Treaty and 50 of the FINREG.
(7) See Articles 69 to 74 of the FINREG and Council Regulation (EC, Euratom) No 1150/2000 of 22 May 2000 (OJ L 130, 31.5.2000).

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(ii) utilisation of appropriations of the financial year: the appropriations for payments of the financial year are available in the financial
year for use as payments. They do not include appropriations carried over from the previous financial year (utilised appropria-
tions for payments = amount of payments made against the appropriations of the financial year);

(iii) carry-overs of appropriations from one financial year to the next financial year: unutilised appropriations of the financial year may be
carried over to the next financial year following a decision by the institution concerned. Appropriations available as assigned
revenue are automatically carried over;

(iv) cancellation of appropriations: the balance is cancelled;

(v)

total payments during the financial year: payments against appropriations for payments of the financial year + payments against
appropriations for payments carried over from the preceding financial year;

(vi) actual expenditure charged to a financial year: expenditure in the consolidated statements on budgetary implementation (see para-
graph 7.4) = payments against appropriations for payments of the financial year + appropriations for payments of the financial
year carried over to the following financial year.

7.4.

The consolidated statements on budgetary implementation and determination of the balance of the financial year

The consolidated statements on budgetary implementation are drawn up after the closure of each financial year. They determine the bal-
ance of the year, which is entered in the budget of the next financial year through an amending budget.

8.

PRESENTATION OF THE ACCOUNTS

The accounts for a given financial year are forwarded not later than 31st of March of the following financial year to the Parliament, the
Council and the Court of Auditors; these accounts comprise financial statements and statements on budgetary implementation, together
with a report on the budgetary and financial management.

9.

EXTERNAL AUDIT

Since 1977 the external audit of the budget has been carried out by the Court of Auditors of the European Communities (8). The Court
of Auditors examines the accounts of all revenue and expenditure of the budget. It must provide the European Parliament and the Coun-
cil with a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions. It also
considers whether revenue has been received and expenditure incurred in a lawful and regular manner, and whether the financial man-
agement has been sound. The audits may be carried out before the closure of the financial year in question and are performed on the basis
of records and, where necessary, on the spot in the institutions of the Communities, in the Member States and in third countries. The
Court of Auditors draws up an annual report for each financial year and may also, at any time, submit its observations on specific ques-
tions and deliver opinions at the request of any of the institutions of the Communities.

10.

DISCHARGE AND FOLLOW-UP

Since 1977 the following provisions have been applicable (9): Parliament, on the recommendation of the Council, gives, before 30 April
of the second year following the financial year in question, discharge to the Commission in respect of its implementation of the budget.
To this end, the Council and Parliament in turn examine the accounts presented by the Commission and the annual report and special
reports of the Court of Auditors. The institutions must take appropriate action in response to the comments appearing in the decisions
giving discharge and report on the measures taken.

(8) See Articles 246, 247 and 248 of the EC Treaty, 160a, 160b and 160c of the Euratom Treaty and Articles 139 to 147 of the FINREG.
(9) See Articles 276 of the EC Treaty and 180b of the Euratom Treaty.

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EXPLANATORY NOTES

SOURCES OF FINANCIAL DATA

The financial data contained in this Annex have been drawn from the annual accounts of the European Communities and from other
financial records provided by the Commission. The geographical distribution is in accordance with the country codes in the Commis-
sion’s system of accounting information (ABAC). As the Commission points out, all the figures given by Member State — for both rev-
enue and expenditure — are the result of arithmetic that gives an incomplete view of the benefits that each State derives from the Union.
They must therefore be interpreted with circumspection.

MONETARY UNIT

All the financial data are presented in millions of euro. The totals are rounded from each exact value and will not therefore necessarily
represent the sum of the rounded figures.

ABBREVIATIONS AND SYMBOLS

AFC

AFP

AT

BE

CA

CY

CZ

DA

DE

DIA

DK

Appropriations for commitments

Appropriations for payments

Austria

Belgium

Commitment appropriations

Cyprus

Czech Republic

Differentiated appropriations

Germany

Diagram referred to within other diagrams (e.g. DIA III)

Denmark

EAEC or Euratom

European Atomic Energy Community

EC

EE

EEC

EFTA

EL

ES

EU

EU-25

FI

FR

FINREG

GNI

HU

European Community(ies)

Estonia

European Economic Community

European Free Trade Association

Greece

Spain

European Union

Total for the 25 Member States of the European Union

Finland

France

Financial Regulation of 25 June 2002

Gross National Income

Hungary

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IE

IT

LT

LU

LV

MT

NDA

NL

OJ

PA

PL

PT

S

SE

Sl

SK

T

UK

VAT

0,0

—

Ireland

Italy

Lithuania

Luxembourg

Latvia

Malta

Non-differentiated appropriations

Netherlands

Official Journal of the European Union

Payment appropriations

Poland

Portugal

Budgetary section

Sweden

Slovenia

Slovakia

Budgetary title

United Kingdom

Value-added tax

Data between zero and 0,05

Lack of data

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DIAGRAMS

BUDGET FOR THE FINANCIAL YEAR 2006 AND BUDGETARY IMPLEMENTATION DURING THE FINANCIAL
YEAR 2006

DIA I

DIA II

DIA III

DIA IV

DIA V

DIA VI

Budget 2006 — Estimated revenue and final appropriations for payments

Budget 2006 — Appropriations for commitments

Appropriations for commitments available in 2006 and utilisation thereof

Appropriations for payments available in 2006 and utilisation thereof

Own resources in 2006 — Actual revenue by Member State

Payments made in 2006, in each Member State

HISTORICAL DATA IN RESPECT OF THE IMPLEMENTATION OF THE BUDGET (2002-2006)

DIA VII

Evolution and utilisation of appropriations for payments for the period 2002-2006, by financial perspective heading

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Diagram I
Budget 2006 — Estimated revenue and final appropriations for payments

[for revenue criteria, see ‘Background information on the budget’, paragraph 7.2; for expenditure criteria, see ‘Background information
on the general budget’, paragraph 7.3 and for more detailed information, see Diagram IV, column (a)]

estimated REVENUE:

(million euro and %)

estimated EXPENDITURE:
(final appropriations for payment)

IE

FI

PT

EL

DK

AT

PL

SE

(4)

BE

NL

ES

UK

IT

Total
estimated
revenue:

Total
appropriations
for payment:

107 378,5 (1)

107 378,5 (2)
3 840,2 (3)

111 218,7

Own resources
by Member
State

Appropriations
by institution

FR

DE

Revenue by type

Approps. by heading

Revenue key:
Total own resources (by Member State)
Agricultural duties
‘Sugar’ and ‘isoglucose’ levies
Customs duties
Own resources accruing from VAT
GNI-based own resources
Other revenue
Surplus available from the previous year

863,4
150,6
13 874,9
17 186,1
70 451,5
2 349,2
2 502,8

(0,8 %)
(0,1 %)
(12,9 %)
(16 %)
(65,6 %)
(2,2 %)
(2,3 %)

Expenditure key
Financial perspective headings:
1. Agriculture
2. Structural operations
Internal policies
3.
4. External action
5. Administration
6. Reserves
7. Pre-accession strategy
8. Compensation
Appropriations available for other institutions
Appropriations availabe to the Commission
of which operating appropriations

50 498,5
32 570,6
10 807,8
5 731,3
7 713,0
386,0
2 438,0
1 073,5
3 043,0
108 175,7
103 505,7

(45,4 %)
(29,3 %)
(9,7 %)
(5,2 %)
(6,9 %)
(0,3 %)
(2,2 %)
(1 %)
(2,7 %)
(97,3 %)
(93,1 %)

(1) After amending budgets.
(4) Revenue contribution by CZ, HU, SK, SI, LU, LT, CY, LV, EE, MT was

grouped together.

(2) After amending budgets and transfers between budget headings.
(3) Assigned revenue, appropriations made available again and carried over.

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Diagram II
Budget 2006 — Appropriations for commitments
[after amending budgets; for more detailed information, see Diagram III, column (b)]

(million euro and %)

Note:
The total appropriations for commitment are not bal-
anced by the budgetary revenue of 2006 as the com-
mitment appropriations also include amounts to be
financed by budgetary revenue from subsequent years.

i

g
n
d
a
e
h

y
b

s
n
o
i
t
a
i
r
p
o
r
p
p
A

Total appropriations
for commitments

122 794,4
million euro

Expenditure key
Financial perspective headings:
1. Agriculture
Structural operations
2.
3.
Internal policies
4. External action
5. Administration
6. Reserves
7.
8. Compensation

Pre-accession strategy

50 236,6
44 659,6
10 898,2
6 014,0
6 913,6
278,0
2 720,9
1 073,5

(40,9 %)
(36,4 %)
(8,9 %)
(4,9 %)
(5,6 %)
(0,2 %)
(2,2 %)
(0,9 %)

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Diagram III

Appropriations for commitments available in 2006 and utilisation thereof

Sections (S) and titles (T) corresponding to the 2006
budgetary nomenclature and financial perspective headings

Financial
perspective

Final appropriations

Utilisation of appropriations

Amount (1)

Rate (%)

Commitments
entered into

Utilisation
rate (%)

Carry-overs
to 2007 (2)

Rate (%) Cancellations Rate (%)

(million euro and %)

(a)

(b)

(b)/(a)

(c)

(c)/(b)

(d)

(d)/(b)

(e) =
(b) – (c) – (d)

(e)/(b)

Budgetary nomenclature
Parliament (S. I)
Council (S. II)
Commission (S. III) (3)
Economic and financial affairs (T.01)
Enterprise (T.02)
Competition (T.03)
Employment and social affairs (T.04)
Agriculture and rural development (T.05)
Energy and transport (T.06)
Environment (T.07)
Research (T.08)
Information society (T.09)

I
II
III
III.1
III.2
III.3
III.4
III.5
III.6
III.7
III.8
III.9
III.10 Direct research (T.10)
III.11 Fisheries (T.11)
III.12 Internal market (T.12)
III.13 Regional policy (T.13)
III.14 Taxation and customs union (T.14)
III.15 Education and culture (T.15)
III.16 Press and communication (T.16)
III.17 Health and consumer protection (T.17)
III.18 Area of freedom, security and justice (T.18)
III.19 External relations (T.19)
III.20 Trade (T.20)
III.21 Development and relations with ACP States

(T.21)

III.22 Enlargement (T.22)
III.23 Humanitarian aid (T.23)
III.24 Fight against fraud (T.24)
III.25 Commission’s policy coordination and legal

advice (T.25)

III.26 Commission’s Administration (T.26)
III.27 Budget (T.27)
III.28 Audit (T.28)
III.29 Statistics (T.29)
III.30 Pensions (T.30)
III.31 Reserves (T.31)
IV
V
VI
VII
VIII

Court of Justice (S. IV)
Court of Auditors (S. V)
Economic and Social Committee (S. VI)
Committee of the Regions (S. VII)
European Ombudsman and European
Data-protection Supervisor (S. VIII)

1 368,5
626,1
120 235,3
489,2
467,4
103,0
11 929,9
54 664,8
1 539,2
367,5
4 031,9
1 601,6
644,9
1 089,0
79,4
28 930,7
136,1
1 225,0
214,8
587,9
625,0
3 652,3
85,6

1 389,3
2 410,6
663,4
65,9

225,6
713,5
1 153,6
11,8
139,6
947,7
49,0
252,3
113,6
112,4
74,4

11,8

1 343,7
574,7
118 609,3
385,0
431,6
100,0
11 910,4
54 276,6
1 467,0
349,2
3 932,5
1 528,4
412,5
1 055,7
74,9
28 904,1
121,7
1 146,8
205,9
534,6
590,5
3 615,8
83,1

1 292,0
2 354,1
662,4
61,6

218,5
662,4
1 146,9
11,3
126,5
947,1
—
238,6
101,2
109,0
72,9

10,6

Grand total appropriations for commitments

123 515,0

122 794,4

99,4

121 060,1

98,2
91,8
98,6
78,7
92,3
97,1
99,8
99,3
95,3
95,0
97,5
95,4
64,0
96,9
94,3
99,9
89,5
93,6
95,8
90,9
94,5
99,0
97,1

93,0
97,7
99,9
93,5

96,9
92,8
99,4
96,6
90,6
99,9
—
94,6
89,1
97,0
97,9

89,9

98,6

9,5
17,8
837,2
1,5
14,1
2,5
10,2
51,6
51,4
8,1
88,7
66,0
231,6
3,6
1,8
1,7
2,8
70,5
2,4
17,1
12,0
32,1
1,6

91,1
40,1
0,6
0,1

5,5
24,0
1,6
0,2
2,7
0,0
—
1,6
0,1
0,2
0,1

—

0,7
2,8
0,7
0,3
3,0
2,4
0,1
0,1
3,3
2,2
2,2
4,1
35,9
0,3
2,2
0,0
2,1
5,8
1,1
2,9
1,9
0,9
1,8

6,6
1,7
0,1
0,1

2,4
3,4
0,1
1,8
1,9
0,0
—
0,7
0,1
0,2
0,2

—

15,3
33,6
788,8
102,7
21,7
0,5
9,3
336,6
20,7
10,2
10,8
7,2
0,9
29,7
2,7
24,9
11,5
7,7
6,5
36,2
22,5
4,4
1,0

6,2
16,4
0,3
4,2

1,6
27,1
5,1
0,2
10,4
0,7
49,0
12,0
12,2
3,2
1,4

1,1
5,4
0,7
21,0
4,6
0,5
0,1
0,6
1,3
2,8
0,3
0,4
0,1
2,7
3,4
0,1
8,5
0,6
3,0
6,2
3,6
0,1
1,1

0,4
0,7
0,0
6,3

0,7
3,8
0,4
1,7
7,4
0,1
100,0
4,8
10,8
2,8
1,9

1,2

10,1

866,6

0,7

867,7

0,7

Financial perspective
Agriculture
Structural operations
Internal policies
External action
Administration
Reserves
Pre-accession strategy
Compensation

1
2
3
4
5
6
7
8

52 618,0
44 617,0
9 385,0
5 269,0
6 528,0 (4)
458,0
3 566,0
1 074,0

50 236,6
44 659,6
10 898,2 (1)
6 014,0 (1)
6 913,6 (1)
278,0
2 720,9
1 073,5

95,5
100,1
116,1
114,1
105,9
60,7
76,3
100,0

49 865,2
44 578,8
10 195,0
5 867,2
6 674,6
127,6
2 678,2
1 073,5

99,3
99,8
93,5
97,6
96,5
45,9
98,4
100,0

Grand total appropriations for commitments

123 515,0

122 794,4

99,4

121 060,1

98,6

2,5
46,4
548,8
131,3
112,0
—
25,5
—

866,6

Grand total appropriations for payments

119 112,0

111 218,7

93,4

106 575,5

95,8

2 660,9

0,0
0,1
5,0
2,2
1,6
—
0,9
—

0,7

2,4

368,9
34,4
154,4
15,5
127,0
150,4
17,2
—

867,7

1 982,4

0,7
0,1
1,4
0,3
1,8
54,1
0,6
—

0,7

1,8

(1) Final budget appropriations after taking account of transfers between budget headings, appropriations corresponding to assigned revenue or similar and appropriations carried over from the previous

financial year. As a consequence the ceiling for some financial perspective headings is exceeded by the available appropriations.
Including appropriations corresponding to assigned revenue or similar.

(2)
(3) For Section III (Commission) the titles (T) correspond to the activities/policy areas as defined by the institution for implementing activity based budgeting (ABB).
(4) The Interinstitutional Agreement of 1999 states in its annex that the ceiling for this heading is presented net of staff contributions to the pension scheme, up to a maximum of 1 100 million euro at

1999 prices for the period 2000-2006. In 2006 this reduction amounts to 180 million euro.

XII

EN

Official Journal of the European Union

15.11.2007

Appropriations for payments available in 2006 and utilisation thereof

Diagram IV

Sections (S) and titles (T) corresponding to the 2006 budgetary
nomenclature and financial perspective headings

Final
appropriations (1)

Payments made in
2006

Utilisation rate
(%)

(million euro and %)

Utilisation of appropriations

Carry-overs to 2007

Rate (%)

Cancellations

Rate (%)

(a)

(b)

(b)/(a)

(c)

(c)/(a)

(d) = (a) – (b) – (c)

(d)/(a)

Budgetary nomenclature
Parliament (S. I)
Council (S. II)
Commission (S. III) (2)
Economic and financial affairs (T.01)
Enterprise (T.02)
Competition (T.03)
Employment and social affairs (T.04)
Agriculture and rural development (T.05)
Energy and transport (T.06)
Environment (T.07)
Research (T.08)
Information society (T.09)

I
II
III
III.1
III.2
III.3
III.4
III.5
III.6
III.7
III.8
III.9
III.10 Direct research (T.10)
III.11 Fisheries (T.11)
III.12 Internal market (T.12)
III.13 Regional policy (T.13)
III.14 Taxation and customs union (T.14)
III.15 Education and culture (T.15)
III.16 Press and communication (T.16)
III.17 Health and consumer protection (T.17)
III.18 Area of freedom, security and justice (T.18)
III.19 External relations (T.19)
III.20 Trade (T.20)
III.21 Development and relations with ACP States

(T.21)

III.22 Enlargement (T.22)
III.23 Humanitarian aid (T.23)
III.24 Fight against fraud (T.24)
III.25 Commission’s policy coordination and legal

advice (T.25)

III.26 Commission’s Administration (T.26)
III.27 Budget (T.27)
III.28 Audit (T.28)
III.29 Statistics (T.29)
III.30 Pensions (T.30)
III.31 Reserves (T.31)
IV
V
VI
VII
VIII

Court of Justice (S. IV)
Court of Auditors (S. V)
Economic and Social Committee (S. VI)
Committee of the Regions (S. VII)
European Ombudsman and European
Data-protection Supervisor (S. VIII)

1 701,3
736,3
108 175,7
455,2
478,0
110,4
9 613,7
54 002,8
1 481,7
344,7
3 998,3
1 660,0
625,5
977,4
83,8
19 992,6
126,1
1 267,2
236,4
822,5
650,2
3 530,3
91,8

1 310,7
2 166,1
635,0
72,5

240,7
789,1
1 162,6
12,5
133,2
947,7
157,0
267,0
119,9
123,8
82,0

12,7

1 440,3
584,7
104 026,7
342,3
330,3
97,4
9 563,8
53 581,8
1 301,1
293,2
3 372,8
1 426,5
392,7
788,8
71,7
19 835,6
106,1
1 108,2
188,7
424,4
560,8
3 318,0
79,8

976,8
2 113,1
625,1
57,6

209,7
646,1
1 144,9
10,9
111,3
947,0
—
237,8
99,4
107,9
69,3

9,6

Grand total appropriations for payments

111 218,7

106 575,5

Financial perspective
Agriculture
Structural operations
Internal policies
External action
Administration
Reserves
Pre-accession strategy
Compensation

1
2
3
4
5
6
7
8

50 498,5
32 570,6
10 807,8
5 731,3
7 713,0
386,0
2 438,0
1 073,5

49 798,8
32 399,3
9 013,7
5 186,2
6 699,7
127,6
2 276,7
1 073,5

Grand total appropriations for payments

111 218,7

106 575,5

84,7
79,4
96,2
75,2
69,1
88,3
99,5
99,2
87,8
85,1
84,4
85,9
62,8
80,7
85,6
99,2
84,2
87,5
79,8
51,6
86,3
94,0
87,0

74,5
97,6
98,4
79,5

87,1
81,9
98,5
87,3
83,5
99,9
—
89,0
82,9
87,1
84,5

75,3

95,8

98,6
99,5
83,4
90,5
86,9
33,1
93,4
100,0

95,8

224,1
109,0
2 282,7
7,5
58,1
11,4
28,3
78,3
102,2
32,8
584,7
207,8
223,2
45,0
8,3
16,7
9,4
119,6
30,5
287,1
18,7
96,5
8,0

125,0
23,9
5,6
6,3

26,6
97,6
11,9
1,3
10,5
0,1
—
14,9
7,4
11,4
9,6

1,8

2 660,9

271,3
58,4
1 317,9
213,1
785,1
—
15,0
—

2 660,9

13,2
14,8
2,1
1,6
12,2
10,3
0,3
0,1
6,9
9,5
14,6
12,5
35,7
4,6
9,9
0,1
7,5
9,4
12,9
34,9
2,9
2,7
8,7

9,5
1,1
0,9
8,7

11,0
12,4
1,0
10,2
7,9
0,0
—
5,6
6,2
9,2
11,7

14,2

2,4

0,5
0,2
12,2
3,7
10,2
—
0,6
—

2,4

36,9
42,6
1 866,3
105,4
89,6
1,5
21,6
342,7
78,4
18,7
40,8
25,7
9,6
143,7
3,8
140,3
10,5
39,4
17,3
111,0
70,6
115,8
3,9

209,0
29,1
4,3
8,6

4,4
45,4
5,9
0,3
11,4
0,7
157,0
14,4
13,1
4,6
3,2

1,3

1 982,4

428,5
112,9
476,2
332,0
228,2
258,4
146,3
—

1 982,4

2,2
5,8
1,7
23,2
18,8
1,4
0,2
0,6
5,3
5,4
1,0
1,5
1,5
14,7
4,5
0,7
8,3
3,1
7,3
13,5
10,9
3,3
4,3

15,9
1,3
0,7
11,9

1,8
5,8
0,5
2,5
8,6
0,1
100,0
5,4
11,0
3,7
3,9

10,5

1,8

0,8
0,3
4,4
5,8
3,0
66,9
6,0
—

1,8

(1) Final budget appropriations after taking account of transfers between budget headings, appropriations relating to assigned revenue or similar and appropriations carried over from the previous finan-

cial year.

(2) For Section III (Commission) the titles (T) correspond to the activities/policy areas as defined by the institution for implementing activity based budgeting (ABB).

Diagram V
Own resources in 2006 — Actual revenue by Member State

.

1
5
1
1
2
0
0
7

.

Revenue Outturn

(million euro and %)

E
N

BE

CZ

DK

DE

EE

EL

ES

FR

IE

IT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

SI

SK

FI

SE

UK (1)

EU 25

— Traditional own resources

1 520,9

149,0

323,3

2 927,9

19,3

204,4

1 197,9

1 282,6

202,3

1 573,3

— VAT resources

— GNI resources

453,4

173,7

301,6

3 296,4

21,5

317,9

1 668,7

2 906,8

245,1

1 679,8

1 932,7

632,5

1 399,3 13 896,4

80,3

1 162,8

6 127,8 11 026,4

914,0

9 247,3

— United Kingdom correction

249,2

80,1

168,7

380,5

9,2

149,0

805,3

1 420,1

120,7

1 006,3

32,6

23,6

86,5

10,7

22,5

25,3

38,0

29,3

18,9

104,2

10,8

1 644,4

195,3

272,0

117,8

36,9

115,7

7,7

887,1

385,4

414,9

226,4

35,3

47,8

55,0

130,3

399,9

2 550,5

15 028,3

58,6

246,8

456,9

3 178,8

17 206,2

95,7

145,1

142,5

501,3

28,3

3 497,1

1 557,2

1 563,4

909,4

174,6

254,8

1 071,2

1 812,7 11 872,7

70 132,0

11,6

21,4

18,9

61,3

3,4

102,8

71,4

196,2

124,8

21,4

33,1

111,7

28,1 – 5 221,4

– 15,3

TOTAL

4 156,1

1 035,3

2 193,0 20 501,2

130,3

1 834,1

9 799,7 16 635,9

1 482,0 13 506,8

153,3

155,1

233,8

217,2

782,5

50,2

6 131,5

2 209,2

2 446,6

1 378,4

279,1

401,6

1 559,9

2 697,7 12 380,6

102 351,2

4,1 %

1,0 %

2,1 %

20,0 %

0,1 %

1,8 %

9,6 %

16,3 %

1,4 %

13,2 %

0,1 %

0,2 %

0,2 %

0,2 %

0,8 %

0,0 %

6,0 %

2,2 %

2,4 %

1,3 %

0,3 %

0,4 %

1,5 %

2,6 %

12,1 %

100,0 %

(1) For the United Kingdom a correction (5 221,4 million euro) is applied to the gross amount of own resources (17 602,0 million euro). The financing of this adjustment is borne by the other Member States.

This correction was solely assigned to the VAT and GNI elements of gross own resources in accordance with their respective amounts.

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
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t
h
e

E
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o
p
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a
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U
n
o
n

i

X

I
I
I

Diagram VI
Payments made in 2006, in each Member State (1)
Note: Payments made in 2006 = payments against 2006 operating appropriations plus payments against carry-overs from 2005.

Financial perspective headings

(million euro and %)

BE

CZ

DK

DE

EE

EL

ES

FR

IE

IT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

SI

SK

FI

SE

UK

Third
Coun-
tries and
misc. (2)

Total

— Agriculture

956,1

498,3 1 164,8 6 566,9

75,6 3 071,2 6 681,4 10 091,7 1 736,4 5 486,0

51,4

136,6

308,8

46,3

840,9

9,4 1 220,1 1 274,9 2 141,6

951,3

159,9

277,5

818,2

924,6 4 307,8

1,0 49 798,8

— Structural operations

310,5

463,6

124,9 4 389,5

142,5 3 590,5 5 767,0 2 235,4

475,5 4 531,0

14,7

140,6

191,8

20,8

691,2

16,3

465,0

304,5 1 963,1 2 533,9

93,5

268,0

316,7

308,3 3 023,2

17,5 32 399,3

— Internal policies

964,3

51,4

162,5

962,7

50,1

142,6

345,5

713,4

82,2

758,8

18,9

62,0

228,5

73,8

123,5

10,1

393,2

210,4

275,3

124,5

76,6

59,9

103,1

294,0

737,4 1 989,2

9 013,7

I

X
V

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

— External action

— Reserves

93,1

—

0,0

—

— Pre-accession strategy

12,4

95,2

— Compensation

— 201,9

2,3

—

1,0

—

16,7

—

0,0

—

18,0

20,8

—

3,3

0,9

17,0

10,0

0,6

25,6

—

—

—

—

0,2

—

—

0,3

—

—

—

—

—

3,0

5,4

—

3,0

0,0

—

0,0

—

0,3

—

0,3

—

59,9

55,2

0,2

133,5

3,4

—

—

— 134,1

3,9

7,2

—

31,9

102,9

4,1

—

0,3

—

1,3

—

0,7

—

0,2

394,0

— 514,3

0,9

—

0,3

—

0,0

—

0,3

—

17,4

69,4

61,0

13,0

1,6

—

—

—

1,8

—

0,0

—

10,9 4 988,8

5 186,2

— 127,6

127,6

1,2 1 391,2

2 276,7

—

— 1 073,5

TOTAL 2 336,4 1 310,3 1 455,5 11 953,8

292,3 6 805,2 12 811,0 13 050,8 2 294,7 10 804,4

227,6

403,0

791,5

141,5 1 821,5

142,0 2 082,6 1 791,3 5 289,0 3 610,9

408,4

688,1 1 239,6 1 528,6 8 080,5 8 515,3 99 875,8

2,3 %

1,3 %

1,5 % 12,0 %

0,3 %

6,8 % 12,8 % 13,1 %

2,3 % 10,8 %

0,2 %

0,4 %

0,8 %

0,1 %

1,8 %

0,1 %

2,1 %

1,8 %

5,3 %

3,6 %

0,4 %

0,7 %

1,2 %

1,5 %

8,1 %

8,5 %

100,0 %

(1) The geographical breakdown is not by payments made to the Member States but by expenditure according to the data in the Commission’s computerised accounting system ABAC.
(2) The amounts under ‘Third Countries and miscellaneous’ mainly include expenditure related to the projects implemented outside the Union and participation by third countries. Expenditure in respect of which the geographical distribution could

not be made is also included.

.

1
5
1
1
2
0
0
7

.

Diagram VII
Evolution and utilisation of appropriations for payments for the period 2002-2006, by financial perspective heading

Financial perspective heading

(million euro)

.

1
5
1
1
2
0
0
7

.

Headings

— Agriculture

— Structural operations

— Internal policies

— External action

— Administration

— Reserves

— Pre-accession strategy

— Compensation

2002

2003

2004

2005

2006

Available
appropria-
tions (1)

44 940,0

31 603,3

7 956,8

4 969,8

5 856,6

651,8

2 600,9

—

Payments made

43 520,6

23 499,0

6 566,7

4 423,7

5 211,6

170,5

1 752,4

—

Available
appropria-
tions (1)

45 095,7

31 837,8

7 256,8

4 898,9

6 087,1

363,8

2 798,5

—

Payments made

44 379,2

28 527,6

5 671,8

4 285,8

5 305,2

147,9

2 239,8

—

Available
appropria-
tions (1)

44 308,3

34 635,1

8 992,1

5 098,0

6 927,2

442,0

3 219,9

1 409,5

Payments made

43 579,4

34 198,3

7 255,2

4 605,8

5 856,4

181,9

3 052,9

1 409,5

Available
appropria-
tions (1)

48 908,0

32 838,3

9 753,6

5 435,4

7 301,2

346,0

3 546,5

1 305,0

Payments made

48 465,8

32 763,2

7 972,1

5 013,1

6 191,4

140,1

2 984,6

1 305,0

Available
appropria-
tions (1)

50 498,5

32 570,6

10 807,8

5 731,3

7 713,0

386,0

2 438,0

1 073,5

Payments made

49 798,8

32 399,3

9 013,7

5 186,2

6 699,7

127,6

2 276,7

1 073,5

(1) Available appropriations = Appropriations for payments of the financial year + appropriations carried over from the previous financial year.

TOTAL

98 579,3

85 144,5

98 338,7

90 557,5

105 032,1

100 139,4

109 434,0

104 835,2

111 218,7

106 575,5

E
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O

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i
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J
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15.11.2007

EN

Official Journal of the European Union

XVII

ANNEX II

Reports and opinions adopted by the Court of Auditors since 2002

The Court of Auditors is required by the terms of the Treaties to
produce an annual report. It is also required, by the Treaties and
other legislation at present in force, to produce special annual
reports on certain Community bodies and activities. The Treaties

also give the Court the power to submit observations on specific
questions and to deliver opinions at the request of one of the
institutions. The reports and opinions adopted by the Court since
2002 are listed below.

Title

Publication

Annual Reports and Statements of Assurance

Twenty-fifth annual report concerning the financial year 2001:

OJ C 295, 28.11.2002

— Report and Statement of Assurance on the activities financed from the general budget

— Report and Statement of Assurance on the activities of the sixth, seventh and eighth EDFs

Twenty-sixth annual report concerning the financial year 2002:

OJ C 286, 28.11.2003

— Report and Statement of Assurance on the activities financed from the general budget

— Report and Statement of Assurance on the activities of the sixth, seventh and eighth EDFs

Twenty-seventh annual report concerning the financial year 2003:

OJ C 293, 30.11.2004

— Report and Statement of Assurance on the activities financed from the general budget

— Report and Statement of Assurance on the activities of the sixth, seventh, eighth and ninth EDFs

Twenty-eighth annual report concerning the financial year 2004:

OJ C 301, 30.11.2005

— Report and Statement of Assurance on the activities financed from the general budget

— Report and Statement of Assurance on the activities of the sixth, seventh, eighth and ninth EDFs

Twenty-ninth annual report concerning the financial year 2005:

OJ C 263, 31.10.2006

— Report and Statement of Assurance on the implementation of the budget

— Report and Statement of Assurance on the activities of the sixth, seventh, eighth and ninth EDFs

Thirtieth annual report concerning the financial year 2006:

Published in this OJ

— Report and Statement of Assurance on the implementation of the budget

— Report and Statement of Assurance on the activities of the sixth, seventh, eighth and ninth EDFs

Special Reports

Revenue

— Special Report No 11/2006 on the Community transit system

OJ C 44, 27.2.2007

Common agricultural policy

— Special Report No 5/2002 on extensification premium and payment schemes in the common

OJ C 290, 25.11.2002

organisation of the market for beef and veal

http: //www.eca.eu.int

XVIII

EN

Official Journal of the European Union

15.11.2007

Title

Publication

— Special Report No 6/2002 on the audit of the Commission’s management of the EU oilseeds sup-

OJ C 254, 22.10.2002

port scheme

— Special Report No 7/2002 on the sound financial management of the common organisation of

OJ C 294, 28.11.2002

markets in the banana sector

— Special Report No 1/2003 concerning the prefinancing of export refunds

OJ C 98, 24.4.2003

— Special Report No 4/2003 concerning rural development: support for less-favoured areas

OJ C 151, 27.6.2003

— Special Report No 9/2003 concerning the system for setting the rates of subsidy on exports of

OJ C 211, 5.9.2003

agricultural products (export refunds)

— Special Report No 12/2003 on the sound financial management of the common organisation

OJ C 298, 9.12.2003

of the market in dried fodder

— Special Report No 13/2003 concerning production aid for cotton

OJ C 298, 9.12.2003

— Special Report No 14/2003 on the measurement of farm incomes by the Commission

OJ C 45, 20.2.2004

[Article 33(1)(b) of the EC Treaty]

— Special Report No 3/2004 on recovery of irregular payments under the Common Agricultural

OJ C 269, 4.11.2004

Policy

— Special Report No 6/2004: The organisation of the system for the identification and registration

OJ C 29, 4.2.2005

of bovine animals in the European Union

— Special Report No 7/2004 on the common organisation of the market in raw tobacco

OJ C 41, 17.2.2005

— Special Report No 8/2004 on the Commission’s management and supervision of the measures

OJ C 54, 3.3.2005

to control foot-and-mouth disease and of the related expenditure

— Special Report No 9/2004 on Forestry Measures within Rural Development Policy

OJ C 67, 18.3.2005

— Special Report No 3/2005 concerning rural development: the verification of agri-environment

OJ C 279, 11.11.2005

expenditure

— Special Report No 7/2006 — Rural Development Investments: Do they effectively address the

OJ C 282, 20.11.2006

problems of rural areas?

— Special Report No 8/2006 — Growing success? The effectiveness of the European Union sup-

OJ C 282, 20.11.2006

port for fruit and vegetable producers’ operational programmes

— Special Report No 4/2007 on physical and substitution checks on export refund consignments Being published

Structural policies

— Special Report No 3/2002 concerning the Community Initiative Employment — Integra

OJ C 263, 29.10.2002

— Special Report No 4/2002 on local actions for employment

OJ C 263, 29.10.2002

— Special Report No 7/2003 on the implementation of assistance programming for the period

OJ C 174, 23.7.2003

2000 to 2006 within the framework of the Structural Funds

— Special Report No 4/2004 on the programming of the Community initiative concerning trans-

OJ C 303, 7.12.2004

European cooperation — Interreg III

— Special Report No 1/2006 on the contribution of the European Social Fund in combating early

OJ C 99, 26.4.2006

school leaving

http: //www.eca.eu.int

15.11.2007

EN

Official Journal of the European Union

XIX

Title

Publication

— Special Report No 10/2006 on ex post evaluations of objectives 1 and 3 programmes 1994

OJ C 302, 12.12.2006

to1999 (Structural Funds)

— Special Report No 1/2007 concerning the implementation of the mid-term processes on the

OJ C 124, 5.6.2007

Structural Funds 2000 to 2006

Internal policies, including research

— Special Report No 2/2002 on the Socrates and Youth for Europe Community action pro-

OJ C 136, 7.6.2002

grammes

— Special Report No 11/2003 concerning the Financial Instrument for the Environment (LIFE)

OJ C 292, 2.12.2003

— Special Report No 1/2004 on the management of indirect RTD actions under the fifth frame-

OJ C 99, 23.4.2004

work programme (FP5) for research and technological development (1998 to 2002)

— Special Report No 6/2005 on the trans-European network for transport (TEN-T)

OJ C 94, 21.4.2006

— Special Report No 3/2007 concerning the management of the European Refugee Fund (2000

OJ C 178, 31.7.2007

to 2004)

External action

— Special Report No 1/2002 concerning macrofinancial assistance (MFA) to third countries and

OJ C 121, 23.5.2002

structural adjustment facilities (SAF) in the Mediterranean countries

— Special Report No 2/2003 on the implementation of the food security policy in developing

OJ C 93, 17.4.2003

countries financed by the general budget of the European Union

— Special Report No 8/2003 concerning the execution of infrastructure work financed by the EDF OJ C 181, 31.7.2003

— Special Report No 10/2003 concerning the effectiveness of the Commission’s management of

OJ C 211, 5.9.2003

development assistance to India in targeting the poor and ensuring sustainable benefits

— Special Report No 15/2003 concerning the audit of microproject programmes financed by the

OJ C 63, 11.3.2004

EDF

— Special Report No 10/2004 concerning the devolution of EC external aid management to the

OJ C 72, 22.3.2005

Commission delegations

— Special Report No 2/2005 concerning EDF budget aid to ACP countries: the Commission’s man-

OJ C 249, 7.10.2005

agement of the public finance reform aspect

— Special Report No 4/2005 concerning the Commission’s management of economic coopera-

OJ C 260, 19.10.2005

tion in Asia

— Special Report No 2/2006 concerning the performance of projects financed under TACIS in the

OJ C 119, 19.5.2006

Russian Federation

— Special Report No 3/2006 concerning the European Commission Humanitarian Aid Response

OJ C 170, 21.7.2006

to the Tsunami

— Special Report No 5/2006 concerning the MEDA Programme

OJ C 200, 24.8.2006

— Special Report No 6/2006 concerning the environmental aspects of the Commission’s develop-

OJ C 235, 29.9.2006

ment cooperation

— Special Report No 5/2007 concerning the Commission’s management of the CARDS Pro-

Being published

gramme

Pre-accession strategy

— Special Report No 5/2003 concerning PHARE and ISPA funding of environmental projects in

OJ C 167, 17.7.2003

the candidate countries

http: //www.eca.eu.int

XX

EN

Official Journal of the European Union

15.11.2007

Title

Publication

— Special Report No 6/2003 concerning twinning as the main instrument to support institution-

OJ C 167, 17.7.2003

building in candidate countries

— Special Report No 2/2004 concerning pre-accession aid: ‘Has Sapard been well managed?’

OJ C 295, 30.11.2004

— Special Report No 5/2004 concerning PHARE support to prepare Candidate Countries for man-

OJ C 15, 20.1.2005

aging the Structural Funds

— Special Report No 4/2006 concerning PHARE investment projects in Bulgaria and Romania

OJ C 174, 26.7.2006

Administrative expenditure

— Special Report No 3/2003 on the invalidity pensions scheme in the European institutions

OJ C 109, 7.5.2003

— Special Report No 1/2005 concerning the management of the European Anti-fraud Office

OJ C 202, 18.8.2005

(OLAF)

— Special Report No 5/2005: Interpretation expenditure incurred by the Parliament, the Commis-

OJ C 291, 23.11.2005

sion and the Council

— Special Report No 9/2006 concerning translation expenditure incurred by the Commission, the

OJ C 284, 21.11.2006

Parliament and the Council

— Special Report No 2/2007 concerning the Institutions’ expenditure on buildings

OJ C 148, 2.7.2007 and
OJ C 178, 31.7.2007

Financial instruments and banking activities

—

Special Annual Reports

Financial statements of the ECSC

— Report on the financial statements of the ECSC at 31 December 2001

OJ C 158, 3.7.2002

— Report on the financial statements of the ECSC at 23 July 2002

OJ C 127, 29.5.2003

ECSC annual report

— Annual Report and Statement of Assurance concerning the ECSC for the financial year 2001

OJ C 302, 5.12.2002

— Annual Report and Statement of Assurance concerning the ECSC for the financial year ended

OJ C 224, 19.9.2003

23 July 2002

Euratom Supply Agency

— Report on the financial statements of the Euratom Supply Agency for the financial year 2001 Not published in OJ

— Report on the financial statements of the Euratom Supply Agency for the financial year 2002 Not published in OJ

— Report on the annual accounts of the Euratom Supply Agency for the financial year 2003

Not published in OJ

— Report on the annual accounts of the Euratom Supply Agency for the financial year 2004

Not published in OJ

— Report on the annual accounts of the Euratom Supply Agency for the financial year 2005

Not published in OJ

— Report on the annual accounts of the Euratom Supply Agency for the financial year 2006

Not published in OJ

http: //www.eca.eu.int

15.11.2007

EN

Official Journal of the European Union

XXI

Title

Publication

Joint European Torus (JET)

— Report on the 2001 accounts of the JET joint undertaking

Not published in OJ

European Foundation for the Improvement of Living and Working Conditions (Eurofound, Dublin)

— Report on the financial statements of the European Foundation for the Improvement of Living

OJ C 326, 27.12.2002

and Working Conditions for the financial year 2001

— Report on the financial statements of the European Foundation for the Improvement of Living

OJ C 319, 30.12.2003

and Working Conditions for the financial year 2002

— Report on the financial statements of the European Foundation for the Improvement of Living

OJ C 324, 30.12.2004

and Working Conditions for the 2003 financial year

— Report on the annual accounts of the European Foundation for the Improvement of Living and

OJ C 332, 28.12.2005

Working Conditions for the financial year 2004

— Report on the annual accounts of the European Foundation for the Improvement of Living and

OJ C 312, 19.12.2006

Working Conditions for the financial year 2005

— Report on the annual accounts of the European Foundation for the Improvement of Living and

Being published

Working Conditions for the financial year 2006

European Centre for the Development of Vocational Training (Cedefop, Thessaloniki)

— Report on the financial statements of the European Centre for the Development of Vocational

OJ C 326, 27.12.2002

Training for the financial year 2001

— Report on the financial statements of the European Centre for the Development of Vocational

OJ C 319, 30.12.2003

Training for the financial year 2002

— Report on the annual accounts of the European Centre for the Development of Vocational Train-

OJ C 324, 30.12.2004

ing for the 2003 financial year

— Report on the annual accounts of the European Centre for the Development of Vocational Train-

OJ C 332, 28.12.2005

ing for the financial year 2004

— Report on the annual accounts of the European Centre for the Development of Vocational Train-

OJ C 312, 19.12.2006

ing for the financial year 2005

— Report on the annual accounts of the European Centre for the Development of Vocational Train-

Being published

ing for the financial year 2006

European Schools

— Report on the financial statements of the European Schools for the financial year 2001

Not published in OJ

— Report on the financial statements of the European Schools for the financial year 2002

Not published in OJ

— Report on the annual accounts of the European Schools for the financial year 2003

Not published in OJ

— Report on the annual accounts of the European Schools for the financial year 2004

Not published in OJ

— Report on the annual accounts of the European Schools for the financial year 2005

Not published in OJ

— Report on the annual accounts of the European Schools for the financial year 2006

Not published in OJ

European Central Bank (ECB, Frankfurt)

— Report on the audit of the operational efficiency of the management of the European Central

OJ C 259, 25.10.2002

Bank for the financial year 2001

http: //www.eca.eu.int

XXII

EN

Official Journal of the European Union

15.11.2007

Title

Publication

— Report on the audit of the operational efficiency of the management of the European Central

OJ C 45, 20.2.2004

Bank for the financial year 2002

— Report on the audit of the operational efficiency of the management of the European Central

OJ C 286, 23.11.2004

Bank for the financial year 2003

— Report on the audit of the operational efficiency of the management of the European Central

OJ C 119, 19.5.2006

Bank for the financial year 2004

Management of the ‘Schengen contracts’

— Special Annual Report on the financial statements in respect of the management, by the
Secretary-General/High Representative of the Council, of contracts concluded in his name on
behalf of certain Member States, and relating to the installation and functioning of the Help Desk
Server of the Management Unit and of the Sirene Network Phase II (Schengen contracts) for the
financial year ended 31 December 2001

Not published in OJ

— Special Annual Report on the 2002 financial statements relating to the ‘Schengen contracts’

Not published in OJ

Management of ‘Sisnet contracts’

— Special Annual Report on the financial statements in respect of the management, by the Deputy
Secretary-General of the Council, of contracts concluded in his name on behalf of certain Mem-
ber States, relating to the installation and the functioning of the communication infrastructure
for the Schengen environment, known as ‘Sisnet’, for the financial year ended 31 December 2001

Not published in OJ

— Special Annual Report on the 2002 financial statements relating to ‘Sisnet’

— Special Annual Report on the 2003 financial statements relating to ‘Sisnet’

— Special Annual Report on the 2004 financial statements relating to ‘Sisnet’

— Special Annual Report on the 2005 financial statements relating to ‘Sisnet’

Not published in OJ

Not published in OJ

Not published in OJ

Not published in OJ

— Special Annual Report on the annual accounts for the final year 2006 relating to ‘Sisnet’

Not published in OJ

Community Plant Variety Office (CPVO, Angers)

— Report on the financial statements of the Community Plant Variety Office for the financial year

OJ C 326, 27.12.2002

2001

— Report on the financial statements of the Community Plant Variety Office for the financial year

OJ C 319, 30.12.2003

2002

— Report on the annual accounts of the Community Plant Variety Office for the 2003 financial

OJ C 324, 30.12.2004

year

— Report on the annual accounts of the Community Plant Variety Office for the financial year

OJ C 332, 28.12.2005

2004

— Report on the annual accounts of the Community Plant Variety Office for the financial year

OJ C 312, 19.12.2006

2005

— Report on the annual accounts of the Community Plant Variety Office for the financial year

Being published

2006

Office for Harmonisation in the Internal Market (OHIM, Alicante)

— Report on the financial statements of the Office for Harmonisation in the Internal Market for

OJ C 326, 27.12.2002

the financial year 2001

— Report on the financial statements of the Office for Harmonisation in the Internal Market for

OJ C 319, 30.12.2003

the financial year 2002

— Report on the annual accounts of the Office for Harmonisation in the Internal Market for the

OJ C 324, 30.12.2004

2003 financial year

— Report on the annual accounts of the Office for Harmonisation in the Internal Market for the

OJ C 332, 28.12.2005

financial year 2004

— Report on the annual accounts of the Office for Harmonisation in the Internal Market for the

OJ C 312, 19.12.2006

financial year 2005

— Report on the annual accounts of the Office for Harmonisation in the Internal Market for the

Being published

financial year 2006

http: //www.eca.eu.int

15.11.2007

EN

Official Journal of the European Union

XXIII

Title

Publication

European Agency for Safety and Health at Work (EASH, Bilbao)

— Report on the financial statements of the European Agency for Safety and Health at Work for

OJ C 326, 27.12.2002

the financial year 2001

— Report on the financial statements of the European Agency for Safety and Health at Work for

OJ C 319, 30.12.2003

the financial year 2002

— Report on the annual accounts of the European Agency for Safety and Health at Work for the

OJ C 324, 30.12.2004

2003 financial year

— Report on the annual accounts of the European Agency for Safety and Health at Work for the

OJ C 332, 28.12.2005

financial year 2004

— Report on the annual accounts of the European Agency for Safety and Health at Work for the

OJ C 312, 19.12.2006

financial year 2005

— Report on the annual accounts of the European Agency for Safety and Health at Work for the

Being published

financial year 2006

European Environment Agency (EEA, Copenhagen)

— Report on the financial statements of the European Environment Agency for the financial year

OJ C 326, 27.12.2002

2001

— Report on the financial statements of the European Environment Agency for the financial year

OJ C 319, 30.12.2003

2002

— Report on the annual accounts of the European Environment Agency for the 2003 financial year OJ C 324, 30.12.2004

— Report on the annual accounts of the European Environment Agency for the financial year 2004 OJ C 332, 28.12.2005

— Report on the annual accounts of the European Environment Agency for the financial year 2005 OJ C 312, 19.12.2006

— Report on the annual accounts of the European Environment Agency for the financial year 2006 Being published

European Monitoring Centre for Drugs and Drug Addiction (EMCDDA, Lisbon)

— Report on the financial statements of the European Monitoring Centre for Drugs and Drug

OJ C 326, 27.12.2002

Addiction for the financial year 2001

— Report on the financial statements of the European Monitoring Centre for Drugs and Drug

OJ C 319, 30.12.2003

Addiction for the financial year 2002

— Report on the annual accounts of the European Monitoring Centre for Drugs and Drug Addic-

OJ C 324, 30.12.2004

tion for the 2003 financial year

— Report on the annual accounts of the European Monitoring Centre for Drugs and Drug Addic-

OJ C 332, 28.12.2005

tion for the financial year 2004

— Report on the annual accounts of the European Monitoring Centre for Drugs and Drug Addic-

OJ C 312, 19.12.2006

tion for the financial year 2005

— Report on the annual accounts of the European Monitoring Centre for Drugs and Drug Addic-

Being published

tion for the financial year 2006

European Medicines Agency (EMA, London)

— Report on the financial statements of the European Agency for the Evaluation of Medicinal Prod-

OJ C 326, 27.12.2002

ucts concerning the financial year 2001

— Report on the financial statements of the European Agency for the Evaluation of Medicinal Prod-

OJ C 319, 30.12.2003

ucts concerning the financial year 2002

— Report on the annual accounts of the European Agency for the Evaluation of Medicinal Prod-

OJ C 324, 30.12.2004

ucts concerning the 2003 financial year

http: //www.eca.eu.int

XXIV

EN

Official Journal of the European Union

15.11.2007

Title

Publication

— Report on the annual accounts of the European Medicines Agency for the financial year 2004 OJ C 332, 28.12.2005

— Report on the annual accounts of the European Medicines Agency for the financial year 2005 OJ C 312, 19.12.2006

— Report on the annual accounts of the European Medicines Agency for the financial year 2006

Being published

Translation Centre for the bodies of the European Union (TCBEU, Luxembourg)

— Report on the financial statements of the Translation Centre for Bodies of the European Union

OJ C 326, 27.12.2002

for the financial year 2001

— Report on the financial statements of the Translation Centre for Bodies of the European Union

OJ C 319, 30.12.2003

for the financial year 2002

— Report on the annual accounts of the Translation Centre for the bodies of the European Union

OJ C 324, 30.12.2004

for the 2003 financial year

— Report on the annual accounts of the Translation Centre for the bodies of the European Union

OJ C 332, 28.12.2005

for the financial year 2004

— Report on the annual accounts of the Translation Centre for the bodies of the European Union

OJ C 312, 19.12.2006

for the financial year 2005

— Report on the annual accounts of the Translation Centre for the bodies of the European Union

Being published

for the financial year 2006

European Training Foundation (ETF, Turin)

— Report on the financial statements of the European Training Foundation for the financial year

OJ C 326, 27.12.2002

2001

— Report on the financial statements of the European Training Foundation for the financial year

OJ C 319, 30.12.2003

2002

— Report on the annual accounts of the European Training Foundation for the 2003 financial year OJ C 324, 30.12.2004

— Report on the annual accounts of the European Training Foundation for the financial year 2004 OJ C 332, 28.12.2005

— Report on the annual accounts of the European Training Foundation for the financial year 2005 OJ C 312, 19.12.2006

— Report on the annual accounts of the European Training Foundation for the financial year 2006 Being published

European Fundamental Rights Agency (FRA, Vienna) — European Monitoring Centre on Racism and Xenophobia

— Report on the financial statements of the European Monitoring Centre on Racism and Xeno-

OJ C 326, 27.12.2002

phobia for the financial year 2001

— Report on the financial statements of the European Monitoring Centre on Racism and Xeno-

OJ C 319, 30.12.2003

phobia for the financial year 2002

— Report on the annual accounts of the European Monitoring Centre on Racism and Xenophobia

OJ C 324, 30.12.2004

for the 2003 financial year

— Report on the annual accounts of the European Monitoring Centre on Racism and Xenophobia

OJ C 332, 28.12.2005

for the financial year 2004

— Report on the annual accounts of the European Monitoring Centre on Racism and Xenophobia

OJ C 312, 19.12.2006

for the financial year 2005

— Report on the annual accounts of the European Fundamental Rights Agency for the financial

Being published

year 2006

European Agency for Reconstruction (EAR, Thessaloniki)

— Report on the financial statements of the European Agency for Reconstruction for the financial

OJ C 326, 27.12.2002

year 2001

— Report on the financial statements of the European Agency for Reconstruction for the financial

OJ C 319, 30.12.2003

year 2002

http: //www.eca.eu.int

15.11.2007

EN

Official Journal of the European Union

XXV

Title

Publication

— Report on the annual accounts of the European Agency for Reconstruction for the financial year

OJ C 41, 17.2.2005

2003

— Report on the annual accounts of the European Agency for Reconstruction for the financial year

OJ C 332, 28.12.2005

2004

— Report on the annual accounts of the European Agency for Reconstruction for the financial year

OJ C 312, 19.12.2006

2005

— Report on the annual accounts of the European Agency for Reconstruction for the financial year

Being published

2006

European Maritime Safety Agency (EMSA, Lisbon)

— Report on the annual accounts of the European Maritime Safety Agency for the 2003 financial

OJ C 324, 30.12.2004

year

— Report on the annual accounts of the European Maritime Safety Agency for the financial year

OJ C 332, 28.12.2005

2004

— Report on the annual accounts of the European Maritime Safety Agency for the financial year

OJ C 312, 19.12.2006

2005

— Report on the annual accounts of the European Maritime Safety Agency for the financial year

Being published

2006

European Aviation Safety Agency (EASA, Cologne)

— Report on the annual accounts of the European Aviation Safety Agency for the 2003 financial

OJ C 324, 30.12.2004

year

— Report on the annual accounts of the European Aviation Safety Agency for the financial year

OJ C 332, 28.12.2005

2004

— Report on the annual accounts of the European Aviation Safety Agency for the financial year

OJ C 312, 19.12.2006

2005

— Report on the annual accounts of the European Aviation Safety Agency for the financial year

Being published

2006

European Food Safety Authority (EFSA, Parma)

— Report on the annual accounts of the European Food Safety Authority for the 2003 financial

OJ C 324, 30.12.2004

year

— Report on the annual accounts of the European Food Safety Authority for the financial year

OJ C 332, 28.12.2005

2004

— Report on the annual accounts of the European Food Safety Authority for the financial year

OJ C 312, 19.12.2006

2005

— Report on the annual accounts of the European Food Safety Authority for the financial year

Being published

2006

Eurojust

— Report on the financial statements of Eurojust for the financial year 2002

— Report on the annual accounts of Eurojust for the 2003 financial year

— Report on the annual accounts of Eurojust for the financial year 2004

— Report on the annual accounts of Eurojust for the financial year 2005

— Report on the annual accounts of Eurojust for the financial year 2006

OJ C 319, 30.12.2003

OJ C 324, 30.12.2004

OJ C 332, 28.12.2005

OJ C 312, 19.12.2006

Being published

Convention

— Report on the accounts drawn up by the Secretary-General of the Convention on the future of
the European Union for the financial year 2002 (started on 21 February and ended on 31 Decem-
ber 2002)

OJ C 122, 22.5.2003

— Report on the accounts drawn up by the Secretary-General of the Convention on the future of

OJ C 157, 14.6.2004

the European Union for the financial year ended 31 December 2003

http: //www.eca.eu.int

XXVI

EN

Official Journal of the European Union

15.11.2007

Title

Publication

Galileo Joint Undertaking (Brussels)

— Report on the accounts of the Galileo Joint Undertaking for the financial year ended 31 Decem-

Not published in OJ

ber 2003

— Report on the accounts of the Galileo Joint Undertaking for the financial year ended 31 Decem-

Not published in OJ

ber 2004

— Report on the annual accounts of the Galileo Joint Undertaking for the financial year ended

Not published in OJ

31 December 2005

— Report on the annual accounts of the Galileo Joint Undertaking for the financial year ended

Not published in OJ

31 December 2006

European Network and Information Security Agency (ENISA, Heraklion)

— Report on the annual accounts of the European Network and Information Security Agency for

OJ C 312, 19.12.2006

the financial year 2005

— Report on the annual accounts of the European Network and Information Security Agency for

Being published

the financial year 2006

European Centre for Disease Prevention and Control (ECDC, Stockholm)

— Report on the annual accounts of the European Centre for Disease Prevention and Control for

OJ C 312, 19.12.2006

the financial year 2005

— Report on the annual accounts of the European Centre for Disease Prevention and Control for

Being published

the financial year 2006

European GNSS Supervisory Authority (Brussels)

— Report on the annual accounts of the European GNSS Supervisory Authority for the financial

Being published

year 2006

European Railway Agency (ERA, Valenciennes)

— Report on the annual accounts of the European Railway Agency for the financial year 2006

Being published

European Police College (CEPOL, Bramshill)

— Report on the annual accounts of the European Police College for the financial year 2006

Being published

European Agency for the Management of Operational Cooperation at the External Borders (FRONTEX, Warsaw)

— Report on the annual accounts of the European Agency for the Management of Operational

Being published

Cooperation at the External Borders for the financial year 2006

Education, Audiovisual and Culture Executive Agency (EACEA, Brussels)

— Report on the annual accounts of the Education, Audiovisual and Culture Executive Agency for

Being published

the financial year 2006

Intelligent Energy Executive Agency (IEEA, Brussels)

— Report on the annual accounts of the Intelligent Energy Executive Agency for the financial year

Being published

2006

http: //www.eca.eu.int

15.11.2007

EN

Official Journal of the European Union

XXVII

Title

Publication

Opinions

— Opinion No 1/2002 on a proposal to amend the financial regulation of the Office for Harmoni-

Not published in OJ

sation in the Internal Market (OHIM-Alicante)

— Opinion No 2/2002 on an amended proposal for a Council Regulation on the Financial Regu-

OJ C 92, 17.4.2002

lation applicable to the general budget of the European Communities

— Opinion No 3/2002 concerning a proposal for the Financial Regulation applicable to the bud-

Not published in OJ

get of Eurojust

— Opinion No 4/2002 on an amended proposal for a Council Regulation amending Regulation
(Euratom, ECSC, EEC) No 549/69 determining the categories of officials and other servants of
the European Communities to whom the provisions of Article 12, the second paragraph of
Article 13 and Article 14 of the Protocol on the Privileges and Immunities of the Communities
apply

OJ C 225, 20.9.2002

— Opinion No 5/2002 on a proposal for a Council Regulation introducing special measures to ter-
minate the service of officials of the Commission of the European Communities as part of the
reform of the Commission

OJ C 236, 1.10.2002

— Opinion No 6/2002 on a proposal for a Council Regulation introducing special measures to ter-
minate the service of officials of the General Secretariat of the Council of the European Union

OJ C 236, 1.10.2002

— Opinion No 7/2002 on an amended proposal for a Council Regulation introducing special mea-
sures to terminate the service of European Parliament officials and temporary staff working in
the Political Groups

OJ C 236, 1.10.2002

— Opinion No 8/2002 concerning a proposal for a revised Financial Regulation applicable to the

Not published in OJ

budget of the European Agency for Reconstruction

— Opinion No 9/2002 concerning the financing of the common agricultural policy

OJ C 285, 21.11.2002

— Opinion No 10/2002 on a Commission proposal for amendment of the constituent acts of Com-

OJ C 285, 21.11.2002

munity Bodies following the adoption of the new Financial Regulation

— Opinion No 11/2002 on a proposal for a Commission regulation on the framework financial
regulation for the bodies referred to in Article 185 of Council Regulation (EC, Euratom)
No 1605/2002 on the Financial Regulation applicable to the general budget

OJ C 12, 17.1.2003

— Opinion No 12/2002 on the proposal for a Council regulation on a Financial Regulation appli-
cable to the ninth European Development Fund under the ACP/EU Partnership Agreement
signed at Cotonou on 23 June 2000

OJ C 12, 17.1.2003

— Opinion No 13/2002 concerning a draft Commission regulation laying down detailed rules for
the implementation of Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on
the Financial Regulation applicable to the general budget of the European Communities

OJ C 12, 17.1.2003

— Opinion No 14/2002 on a proposal for a Council Regulation amending the Staff Regulations of
officials and the Conditions of Employment of other servants of the European Communities

OJ C 21, 28.1.2003

— Opinion No 1/2003 on a proposal for a regulation for the Budget Committee of the Office for
Harmonisation in the Internal Market (Trade Marks and Designs) laying down the financial pro-
visions applicable to the Office (Financial Regulation)

Not published in OJ

— Opinion No 2/2003 on a proposal for a regulation of the Administrative Council of the Com-
munity Plant Variety Office laying down the financial provisions applicable to the Office (Finan-
cial Regulation)

Not published in OJ

— Opinion No 3/2003 concerning the draft financial regulation of the European Food Safety

Not published in OJ

Authority

http: //www.eca.eu.int

XXVIII

EN

Official Journal of the European Union

15.11.2007

Title

Publication

— Opinion No 4/2003 concerning a draft Financial Regulation applicable to the Translation Cen-

Not published in OJ

tre for bodies of the European Union

— Opinion No 5/2003 on a proposal for a Council Regulation introducing, on the occasion of the
accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slo-
vakia and Slovenia, special temporary measures for recruitment of officials of the European
Communities

OJ C 224, 19.9.2003

— Opinion No 6/2003 concerning the draft financial regulation of the European Agency for the

Not published in OJ

Evaluation of Medicinal Products

— Opinion No 7/2003 on a proposal for a Council regulation amending Regulation (EC, Euratom)
No 1150/2000 implementing Decision 2000/597/EC, Euratom on the system of the Commu-
nities’ own resources

OJ C 318, 30.12.2003

— Opinion No 8/2003 on a proposal for a decision of the European Parliament and of the Council
establishing a Community action programme to promote activities in the field of the protection
of the Community’s financial interests

OJ C 318, 30.12.2003

— Opinion No 9/2003 on a draft Commission regulation on a standard financial regulation for the
executive agencies pursuant to Council Regulation (EC) No 58/2003 laying down the statute for
executive agencies to be entrusted with certain tasks in the management of Community pro-
grammes

OJ C 19, 23.1.2004

— Opinion No 10/2003 on a proposal for a Council regulation amending Regulation (EC, Eura-

OJ C 19, 23.1.2004

tom) No 2728/94 establishing a Guarantee Fund for external actions

— Opinion No 1/2004 on an amended proposal for a Council Regulation amending the Staff Regu-
lations of officials and the Conditions of Employment of other servants of the European Com-
munities

OJ C 75, 24.3.2004

— Opinion No 2/2004 on the ‘single audit’ model (and a proposal for a Community internal con-

OJ C 107, 30.4.2004

trol framework)

— Opinion No 1/2005 on the proposal for a Council Regulation on the financing of the common

agricultural policy

OJ C 121, 20.5.2005 and
OJ C 167, 7.7.2005

— Opinion No 2/2005 on the proposal for a Council Regulation laying down general provisions
on the European Regional Development Fund, the European Social Fund and the Cohesion Fund

OJ C 121, 20.5.2005

— Opinion No 3/2005 on the draft Regulation (EC) of the Commission amending Regulation (EC,
Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implemen-
tation of Council Regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial
Regulation applicable to the general budget of the European Communities

OJ C 124, 23.5.2005

— Opinion No 4/2005 on a proposal for a Council Decision on the system of the European Com-
munities’ own resources and on a proposal for a Council Regulation on the implementing mea-
sures for the correction of budgetary imbalances in accordance with Articles 4 and 5 of the
Council Decision of (…) on the system of the European Communities’ own resources

OJ C 167, 7.7.2005

— Opinion No 5/2005 on the draft Amendment of the financial regulation of the Community Plant
Variety Office adopted by the Administrative Council of the Office on 16 September 2004

Not published in OJ

— Opinion No 6/2005 on a proposal for a Regulation of the European Parliament and of the Coun-
cil amending Regulations (EC) No 1073/1999 and (Euratom) No 1074/1999 concerning inves-
tigations conducted by the European Anti-Fraud Office (OLAF)

OJ C 202, 18.8.2005

— Opinion No 7/2005 on a draft Commission Regulation amending Regulation (EC)

OJ C 249, 7.10.2005

No 1653/2004 as regards the post of accounting officers of executive agencies

http: //www.eca.eu.int

15.11.2007

EN

Official Journal of the European Union

XXIX

Title

— Opinion No 8/2005 on a proposal for a Regulation of the European Parliament and of the Coun-
cil on mutual administrative assistance for the protection of the financial interests of the Com-
munity against fraud and any other illegal activities

Publication

OJ C 313, 9.12.2005

— Opinion No 9/2005 concerning a proposal for a Council Regulation amending Regulation (EC,
Euratom) No 2728/94 establishing a Guarantee Fund for external actions (COM(2005) 130
Final)

OJ C 313, 9.12.2005

— Opinion No 10/2005 on the draft Council Regulation amending Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of
the European Communities

OJ C 13, 18.1.2006

— Opinion No 11/2005 on the draft Commission Regulation amending Regulation (EC, Euratom)
No 2342/2002 laying down detailed rules for the implementation of Council Regulation (EC,
Euratom) No 1605/2002 on the Financial Regulation applicable to the general budget of the
European Communities

OJ C 13, 18.1.2006

— Opinion No 1/2006 on the proposal for a regulation of the European Parliament and of the
Council laying down the rules for the participation of undertakings, research centres and uni-
versities in actions under the Seventh Framework Programme and for the dissemination of
research results (2007 to 2013)

OJ C 203, 25.8.2006

— Opinion No 2/2006 on a proposal for a Council Decision on the system of the European Com-

OJ C 203, 25.8.2006

munities’ own resources

— Opinion No 3/2006 on a proposal for a Council Regulation introducing, on the occasion of the
accession of Bulgaria and Romania, special temporary measures for the recruitment of officials
of the European Communities

OJ C 273, 9.11.2006

— Opinion No 4/2006 on the draft Council Regulation amending Regulation (EC, Euratom)
No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of
the European Communities

OJ C 273, 9.11.2006

— Opinion No 5/2006 on a proposal for an amendment to the Financial Regulation of the Euro-

Not published in OJ

pean Schools

— Opinion No 6/2006 on a proposal for a decision by the European Parliament and the Council
amending and extending Decision No 804/2004/EC of the European Parliament and of the
Council of 21 April 2004 establishing a Community action programme to promote activities in
the field of the protection of the Community’s financial interests (Hercule II programme)

OJ C 302, 12.12.2006

— Opinion No 7/2006 on a proposal for a Regulation of the European Parliament and of the Coun-
cil amending Regulation (EC) No 1073/1999 concerning investigations conducted by the Euro-
pean Anti-Fraud office (OLAF)

OJ C 8, 12.1.2007

— Opinion No 8/2006 on a proposal for a Council Regulation repealing Council Regulation (EC)

OJ C 8, 12.1.2007

No 2040/2000 on budgetary discipline

— Opinion No 1/2007 on the draft Commission Regulation (EC, Euratom) amending Regulation
(EC, Euratom) No 2342/2002 laying down detailed rules for the implementation of Council
Regulation (EC, Euratom) No 1605/2002 on the Financial Regulation applicable to the general
budget of the European Communities

OJ C 46, 28.2.2007

— Opinion No 2/2007 on the draft Council Regulation amending the Financial Regulation appli-

OJ C 101, 4.5.2007

cable to the ninth European Development Fund

— Opinion No 3/2007 on a proposal for a Regulation of the European Parliament and of the Coun-
cil amending Council Regulation (EC) No 515/97 on mutual assistance between the administra-
tive authorities of the Member States and cooperation between the latter and the Commission
to ensure the correct application of the law on customs and agricultural matters

OJ C 101, 4.5.2007

http: //www.eca.eu.int

XXX

EN

Official Journal of the European Union

15.11.2007

Title

— Opinion No 4/2007 on a draft Commission Regulation (EC) amending Regulation (EC)
No 1653/2004 on a standard financial regulation for the executive agencies pursuant to Coun-
cil Regulation (EC) No 58/2003 laying down the statute for executive agencies to be entrusted
with certain tasks in the management of Community programmes

Publication

OJ C 216, 14.9.2007

— Opinion No 5/2007 on the proposal for a Council Regulation on the Financial Regulation appli-

Not published in OJ

cable to the Euratom Supply Agency

— Opinion No 6/2007 on the annual summaries of Member States; ‘national declarations’ of Mem-

OJ C 216, 14.9.2007

ber States; and audit work on EU funds of national audit bodies

http: //www.eca.eu.int