Report from the Commission to the Council on the follow-up to 2006 Discharge Decisions (Summary) - Council Recommendations submitted pursuant to Article 276 of the EC Treaty, Article 180b of the Euratom Treaty and Article 147 of the Financial Regulation for the general budget, and Article 119(5) of the EDF Financial Regulation and similar provisions in the former ad hoc EDF Financial Regulation {SEC(2008)2580}
Date: 2008-10-15
Institutions: European Commission
Subjects: budgetary discharge, financial year, general budget (EU), implementation of the budget

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 15.10.2008 
COM(2008) 628 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 

on the follow-up to 2006 Discharge Decisions 
(Summary) - Council Recommendations submitted pursuant to Article 276 of the EC 
Treaty, Article 180b of the Euratom Treaty and Article 147 of the Financial Regulation 
for the general budget, and Article 119(5) of the EDF Financial Regulation and similar 
provisions in the former ad hoc EDF Financial Regulation 

{SEC(2008)2580} 

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TABLE OF CONTENTS 

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

I. 

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

A) Introduction (Commission working document, points 1-2)...................................................4 

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

(Commission working document, points 3-5) ..............................................................4 

C) Commission Internal Control (Commission working document, points 6-10)......................4 

D) Budgetary management (Commission working document, points 11-14) ............................5 

E) Revenue (Commission working document, points 15-17).....................................................5 

F) The Common Agricultural Policy (Commission working document, points 18-20) .............5 

G) Structural measures (Commission working document, points 21-25)...................................6 

H) Internal policies, including research (Commission working document, points 26-32) .........7 

I) External actions (Commission working document, points 33-35) ..........................................7 

J) Pre-accession Strategy (Commission working document, points 36-38) ...............................8 

K) Administrative expenditure (Commission working document, points 39-46) ......................8 

L) Financial instruments and banking activities (Commission working doc., points 47-48) .....9 

II. 

III. 

Court of Auditors’ special reports (Commission working document, points 49-63) ...9 

European Development Funds (Commission working document, points 64-66).........9 

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PREAMBLE 

As the Treaties and Financial Regulations require, the Commission has prepared Follow-up Reports 
to the 2006 discharges, which relate to the Council Recommendation of 12 February 2008 and the 
Resolutions  voted  by  the  European  Parliament  on  22 April  2008.  The  present  Follow-Up  Report 
deals with the recommendations made by the Council. A separate Follow-up Report deals with the 
recommendations made by Parliament. 

The  summary  Follow-up  Reports,  which  are  published  in  all  EU  official  languages,  are 
supplemented  by  Commission  working  documents  giving  detailed  answers  to  each  specific 
recommendation  of  both  the  Council  and  Parliament.  The  replies  indicate  actions  that  the 
Commission  intends  to  take  or  has  already  taken  and  also  the  recommendations  that  the 
Commission will not or is not able to follow up. Due to translation constraints the detailed working 
documents  are  published  in  English,  French  and  German.  Each  chapter  of  the  summary  reports 
includes cross-references to the relevant recommendation numbers in the working documents. 

The  Commission  has  identified  a  total  of  66  recommendations  made  by  the  Council  to  the 
Commission  in  the  context  of  the  2006  discharge.  The  Commission  considers  that  for  42 
recommendations  the  required  action  has  already  been  taken,  though  in  some  cases  results  of  the 
actions will need to be examined. For another 24 recommendations the Commission agrees to take 
the action recommended by the Council.  

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I. 

COUNCIL RECOMMENDATION ON THE GENERAL BUDGET 

A) Introduction (Commission working document, points 1-2) 

The  Commission  shares  the  Council's  view  on  the  need  for  all  actors  involved  in  the 
implementation  of  the  budget  to continue  to  do  their  best  to  improve  the  functioning  of  the 
supervisory  and  control  systems  and  to  continue  to  make  progress  towards  achieving  an 
unqualified DAS in all areas of the budget. 

The  Commission  presented  in  February  2008  a  progress  report  on  the  Commission  Action 
plan towards an integrated internal control framework (COM(2008) 110) and concluded that 
most  of  the  "gaps"  have  been  filled.  Work  will  be  completed  in  2008  and  the  first  impact 
report will be issued in early 2009. 

The Commission is completing the assessment of the costs of control in agriculture, the ERDF 
and direct centralised management. The results will form the basis of a communication by the 
Commission  in  autumn  2008  aimed  at  relaunching  the  inter-institutional  discussion  on 
tolerable risk.  

As  regards  simplification  little  further  change  is  expected  under  current  legislation.  For  the 
2007-2013  legislative  round  some  elements  intended  to  reduce  errors  were  introduced  in 
specific  sectors,  including  rural  development  and  structural  actions.  The  Commission  has 
clarified  rules  through  guidelines  on  e.g.  FP7,  the  implementing  rules  for  Structural  Funds 
2007-2013, the Education Policy 2007. The Commission will continue to provide support and 
further guidance where necessary. It will also ensure that future legislative proposals include 
clear and straightforward rules. 

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

document, points 3-5) 

As  recommended  by  the  Council,  the  Commission  has  taken  due  note  of  the  accounting 
related remarks of the Court in its 2006 Annual Report whilst preparing the 2007 Community 
accounts, including as regards cut-off procedures. The split between the Directorate-General 
for Education and Culture and the Executive Agency has been made and the annual accounts 
for 2007 have been prepared separately. 

C) Commission Internal Control (Commission working document, points 6-10) 

Further  efforts  are  needed  to  resolve  weaknesses  in  the  supervisory  and  control  systems,  in 
particular  those  highlighted  in  the  reservations  of  the  delegated  authorising  officers,  and  in 
relation to budget areas that were not considered satisfactory  by  the Court  of  Auditors. The 
Commission will take vigorous action to address the causes of reservations in the 2007 annual 
activity reports and will closely monitor progress. 

The  Commission  will  make  all  necessary  efforts  to  demonstrate  the  effectiveness  of  its 
controls. It has included in the notes to the annual accounts of the European Communities for 
the  financial  year  2007  a  new  section  about  the  recovery  of  undue  payments  following 
Commission correction decisions. The objective of this section is to give an overview of the 

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procedure in place for the recovery of undue payments and to present a best estimate of the 
total amount. 

The Commission's accounting system is being extended to allow, from 2008, full reporting on 
the  correction  of  errors  by  the  Commission,  including  those  relating  to  payments  of  earlier 
years, and to provide fuller information on the Commission's capacity to recover funds on a 
multi-annual basis. 

The  Commission  is  also  stepping  up  its  action  to  obtain  reliable  information  from  Member 
States on financial corrections and recoveries carried out by them. Information on recoveries 
was presented in  the  financial  report  of the  EAGGF  Guarantee  Section  and  the  18th  annual 
report on implementation of the Structural Funds and in the notes to the final accounts 2006. 

D) Budgetary management (Commission working document, points 11-14) 

The  Commission  fully  agrees  with  the  importance  of  realistic  budgeting  and  has  taken  the 
recommended action to ensure effective budgetary management throughout the programming 
period. The PDB 2009 has been drawn up completely in accordance with these principles. 

Commitments are consistently budgeted higher than payments on account of the longer period 
for payments than commitments. As commitments are also generally increasing year on year, 
the  level  of  outstanding  commitments  (RAL)  will  increase  as  well.  The  n+2/n+3  rule  in 
Cohesion Policy however ensures that commitments are largely used up within 2-3 years.  

E) Revenue (Commission working document, points 15-17) 

The Commission is pleased that the Court again in 2006 found that the overall functioning of 
the  supervisory  and  control  systems  for  revenue  was  satisfactory  and  that  overall  the 
underlying transactions were legal and regular. 

On the basis of a working document prepared by the Commission, the Advisory Committee 
on Own Resources (ACOR) discussed the Council's request for a qualitative assessment of the 
administration,  management  and  control  of  traditional  own  resources  and  VAT  own 
resources. It was concluded that this assessment would be better provided in the wider context 
of the Budget review. 

The B account guidelines have been issued and were discussed in the December 2007 meeting 
of ACOR. 

As  regards  the  lifting  of  reservation  on  items  in  Member  States'  annual  VAT  statements 
placed  by  the  Commission  in  its  control  reports,  the  Commission  plans  a  three-pronged 
approach.  Reservations  are  to  be  categorised  in  a  framework  which  will  clearly  identify 
priorities.  When  necessary,  contacts  will  be  made  with  Member  States  designed  solely  to 
review and devise pathways to  resolve outstanding  reservations (one such review is already 
planned  for  2008).  Where  Member  States  cannot  show  progress  towards  the  lifting  of 
reservations, the Commission will consider starting infringement procedures. 

F) The Common Agricultural Policy (Commission working document, points 18-20) 

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The  Commission  and  the  Member  States  continue  efforts  in  strengthening  the  management 
and  control  systems  notwithstanding  the  significant  improvements  already  achieved  in  the 
management  of  Common  Agricultural  Policy  (CAP)  expenditure.  The  European  Court  of 
Auditors acknowledges that the Integrated Administration and Control System (IACS), where 
properly applied, is an effective control system to limit the risk of irregular expenditure. 

IACS  currently  covers  about  84.5%  of  the  EAGF-expenditure.  The  effects  of  the  different 
reforms  will  extend  this  coverage to about  89% by 2010 and to about 92% by 2013, which 
should enhance the positive trend and contribute to reducing the overall risk even further.  

As  regards  eligibility  conditions  for  agri-environmental  measures  in  rural  development,  the 
Member  States  are  now  under  the  obligation  to ensure  that  all  rural  development  measures, 
including  agri-environmental  measures,  are  verifiable  and  controllable  and  that  control 
arrangements at the level of the Member States provide reasonable assurance that eligibility 
criteria and other commitments are respected. The issue has been taken up also in the context 
of the rural development programming for the period 2007-2013. 

As regards clearance of accounts, the application of the new "50/50 rule" specified in Article 
32(5) of Regulation (EC) No. 1290/2005 is based on figures provided by Member States and 
certified by the certification bodies. The Commission is following-up the application of this 
rule by means of on-the-spot checks and desk audits, which may lead to financial corrections 
in case of non-compliant practices. 

G) Structural measures (Commission working document, points 21-25) 

The  Commission  is  continuing  to  work  closely  with  the  Member  States  to  improve 
management  and  control  systems  for  structural  actions  expenditure.  Recent  actions  include 
the  issue  of  guidance  on  good  practices  in  management  verifications  (COCOF  08/0020/02) 
and  checks  by  certifying  authorities  (COCOF  08/0014/01)  and  a  training  seminar  for  500 
representatives  of  national  managing  and  certifying  authorities  in  June  2008.  Further 
measures are set out in the Commission's Action Plan of 19 February 2008 to strengthen its 
supervisory  role  in  this  area  (COM(2008)  97).  The  Commission  also  holds  annual 
coordination  meetings  with  national  audit  bodies,  in  addition  to  regular  discussions  of 
management  and  control  issues  with  Member  States  in  the  structural  actions  management 
committee (COCOF) and ad hoc technical meetings.  

The Commission’s guidance, training and coordination activities all aim to simplify the day-
to-day use of the funds by clarifying requirements and avoiding duplication of controls. The 
Commission  is  taking  specific  actions  to  encourage  use  of  the  provisions  for  flat  rates  and 
partial  closure  and  to  provide  guidance  on  eligibility  rules.  These  are  set  out  in  the  Action 
Plan of 19 February 2008, actions 4.3 and 4.4. 

The  Commission  considers  that  its  audit  activity  is  already  effective  in  bringing  about 
improvements in management and control systems, for example through the implementation 
of remedial action plans, but is seeking to increase its impact by speeding up the adoption of 
decisions where appropriate to suspend payments or apply financial corrections. 

The  Commission  is  now  reporting  on  financial  corrections  and  recoveries  resulting  from  its 
own or the Court of Auditors' audit work in the structural actions area in its annual accounts 

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and also on a quarterly basis. Figures on recoveries by Member States are also published in 
the Annual Report on implementation of the Structural Funds. 

H) Internal policies, including research (Commission working document, points 26-32) 

The  principal  risk  to  the  legality  and  regularity of  research  expenditure  is  that  beneficiaries 
overstate  costs  in  their  cost  statements,  and  that  this  is  not  subsequently  detected  and 
corrected  by  the  Commission.  Many  errors  affecting  legality  and  regularity  can  only  be 
detected (and therefore corrected) by performing on-the-spot checks. To address this problem, 
the Commission has shifted the focus of its control strategy towards detection and correction 
of  errors  ex-post,  after  the  payment  has  been  made.  The  Research  DGs  have  implemented 
their  FP6  audit  strategy  consisting  of  an  increase  in  the  number  of  audits,  a  new  sampling 
strategy  and  the  correction  of  systemic  errors  if  they  have  been  repeated  by  the  same 
beneficiary  in  other,  non-audited  contracts.  The  audit  strategy  is  being  implemented  over  a 
period  of  four  years.  Because  of  its  multi-annual  nature,  the  effectiveness  of  the  Research 
DG's control strategy can only be fully measured and assessed at the final stages in the life of 
the framework programme. Efforts have also been made to simplify and clarify the guidelines 
for calculation and reporting of costs for beneficiaries and certifying auditors. 

In  the  education  and  culture  area,  the  Commission  is  implementing  a  revised  supervision 
strategy  based  on  the  "integrated  control  framework"  approach.  This  includes  ex-ante 
declarations of assurance for the 2007-2013 period issued by National Authorities and annual 
ex-post  declarations  of  assurance  concerning  the  use  of  funds  during  the  previous  year. 
Follow-up of systems audit recommendations has been incorporated in the assessment process 
of  the  ex-ante  declarations  of  assurance  2007-2013  issued  by  National  Authorities  and  is 
constantly monitored. Moreover, the rules for the new programmes 2007-2013 in the area of 
education  and  culture  have  been  simplified  and  lump-sum  and  flat-rate  financing 
arrangements are largely used. 

The  Commission  is  taking  appropriate  measures  to  comply  with  Council's  recommendation 
related to delayed payments to beneficiaries and the need to comply with the time limits for 
expenditure operations set out in the  Financial Regulation. The  efforts made have increased 
the  percentage  of  payments  made  on  time.  The  issue  is  being  monitored  closely  and  is 
receiving the highest attention to ensure further improvement. 

I) External actions (Commission working document, points 33-35) 

The  Commission  has  taken  a  series  of  actions  aimed  at  improving  the  systems  designed  to 
ensure  the  legality  and  regularity  of  external  actions  expenditures  at  the  level  of  project 
implementing  organisations:  standard  Terms  of  Reference  for  expenditure  verifications  for 
grants and fee-based service contracts (mandatory since February 2006), new standard Terms 
of  Reference  for  financial  and  systems  audits  (mandatory  since  October  2007),  annual 
consolidation of external audit results in a synthesis report aimed at identifying a typology of 
findings and identifying corrective actions, development of CRIS audit which would improve 
the reporting on audit results. 

In  the  area  of  humanitarian  aid,  the  balance  between  headquarter  and  field  audits  has  been 
reviewed and should be seen in the context of an overall control strategy. The number of field 
audits has increased to 37 in 2007 compared to 20 field audits performed in 2006. 

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J) Pre-accession Strategy (Commission working document, points 36-38) 

The  Commission  continues  to  monitor  closely  the  national  supervisory  and  control  systems 
for  expenditure  under  the  pre-accession  programmes,  and  where  necessary,  strongly 
encourages  the  beneficiary  countries  to  take  action  to  redress  unsatisfactory  situations.  As 
regards  the  Sapard  programme,  the  Commission  has  further  intensified  its  checks  and  their 
follow-up as recommended by Council. Closure of Sapard programmes has been made on the 
basis  of  the  payment  application  for  the  final  balance,  the  decision  on  the  clearance  of  the 
accounts and the final implementation report. 

K) Administrative expenditure (Commission working document, points 39-46) 

As regards procurement, OIB and OIL have put in place specific control measures to improve 
procurement  management,  as  mentioned  in  the  Commission's  reply  to  the  Court's  2006 
Annual  Report.  For  real  estate  expenditure,  negotiated  procedures  are  allowed  under  art. 
126(1)(h) of the Implementing Provisions. 

As  regards  the  Communities'  pension  liabilities,  the  Commission  gave  the  figures  and 
estimates as requested at the time of the PDB presentation in the Council's Budget Committee 
on 10.6.2008 and further documents were transmitted on 13.6.2008. This will henceforth be 
part of the standard presentation. 

As  regards  agencies,  the  Commission  adopted  on  9.7.2008  the  revision  of  the  framework 
Financial  Regulation1,  which  contains  provisions  reinforcing  the  agencies'  obligation  to 
submit,  in  their  payment  requests,  rigorous  forecasts  on  their  real  cash  requirements 
throughout  the  year  in  order  to  avoid  unnecessary  cash-flows.  This  should  enable  the 
Commission to follow more closely the cash balances of the agencies and hence should lead 
to more rigorous planning and increased transparency, in line with the Joint Declaration of 13 
July 2008. 

The  agencies  are  independent  Community  bodies  which  are  fully  responsible  legally  and 
financially  for  the  management  of  their  own  resources.  Within  the  limits  of  the  resources 
available the Commission has supported and will continue to support the agencies to enable 
them to make use of the knowledge, experience and advice of the Commission in the area of 
financial management. 

Moreover,  a  horizontal  evaluation  is  to  be  launched  in  the  context  of  the  Commission's 
Communication  "European  Agencies:  the  way  forward"  from  March  2008.  Among  other 
things,  the  evaluation  will  also  assess  the  impact  of  agencies  on  the  Commission's  internal 
organisation  and  activities.  The  inter-institutional  working  group  that  the  Commission 
proposes to set up with the European Parliament and the Council will contribute inter alia to 
defining the objectives and the scope of this horizontal evaluation. The Commission intends 
to report on the results of this evaluation by 2009-2010. 

1 

Commission  Regulation  (EC,  Euratom)  N°  652/2008  amending  Regulation  (EC,  Euratom)  N° 
2343/2002 on the framework Financial Regulation for the bodies referred to in Article 185 of Council 
Regulation (EC, Euratom) N° 1605/2002 on the Financial Regulation applicable to the general budget 
of the European Communities. 

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L)  Financial 

instruments  and  banking  activities 

(Commission  working  doc., 

points 47-48) 

As regards the management of banking measures in the Mediterranean area under the MEDA 
Regulation, the weaknesses found by the Court concern the past and have been corrected. The 
management convention between the Commission and the European Investment Bank (EIB) 
is in the process of being renegotiated. 

II. 

COURT  OF  AUDITORS'  SPECIAL  REPORTS  (Commission  working  document, 
points 49-63) 

The Council has made a number of recommendations to the Commission concerning special 
reports  published  by  the  Court  of  Auditors  in  2006  and  2007.  The  Commission's  replies  to 
these recommendations can be found in the Commission working document (points 49-63). 

III. 

EUROPEAN  DEVELOPMENT  FUNDS 
points 64-66) 

(Commission  working 

document, 

The  Commission  has  taken  due  note  of  the  Council's  recommendations  concerning  the 
European  Development  Funds.  As  regards  the  accounts,  after  the  migration  from  OLAS  to 
CRIS,  accounting  procedures,  and  specifically  closures  of  accounts,  will  be  automated. 
However,  although  closures  are  performed  manually  in  OLAS,  a  large  number  of  effective 
checks are carried out to avoid errors. 

As  regards  budgetary  support  the  Commission  confirms  that,  in  the  procedures  for  granting 
budgetary support and before making transfers of funds, it ensures that the conditions of the 
Cotonou Agreement and of the financing agreements are met. 

Information as regards risk management, analysis of the internal control system and the audit 
of transactions can be found in the EuropeAid 2007 Annual Activity Report. 

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