Annual Report of the Court of Auditors on the implementation of the budget concerning the financial year 2007, together with the institutions’ replies
Date: 2008-11-10
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 Commu-
nities, as last amended by Council Regulation (EC) No 1525/2007 of 17 December 2007 and Articles 139 and 156 of Council Regula-
tion (EC) No 215/2008 of 18 February 2008 on the Financial Regulation applicable to the 10th European Development Fund,

the Court of Auditors of the European Communities, at its meeting of 24 and 25 September 2008, adopted its

ANNUAL REPORTS

concerning the financial year 2007

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

The Members of the Court of Auditors are:
Vítor Manuel da SILVA CALDEIRA (President), Hubert WEBER, Maarten B. ENGWIRDA, Máire GEOGHEGAN-QUINN,
David BOSTOCK, Morten Louis LEVYSOHN, Ioannis SARMAS, Július MOLNÁR, Vojko Anton ANTONČIČ, Gejza HALÁSZ,
Jacek UCZKIEWICZ, Josef BONNICI, Irena PETRUŠKEVIČIENĖ, Igors LUDBORŽS, Jan KINŠT, Kersti KALJULAID, Kikis KAZAMIAS,
Massimo VARI, Juan RAMALLO MASSANET, Olavi ALA-NISSILÄ, Lars HEIKENSTEN, Karel PINXTEN, Ovidiu ISPIR,
Nadejda SANDOLOVA, Michel CRETIN, Harald NOACK, Henri GRETHEN.

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ANNUAL REPORT ON THE
IMPLEMENTATION OF THE BUDGET

(2008/C 286/01)

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TABLE OF CONTENTS

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

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

Page

7

9

Chapter 2 — Commission internal control system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39

Chapter 3 — Budgetary management

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

65

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

81

Chapter 5 — Agriculture and Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Chapter 6 — Cohesion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Chapter 7 — Research, Energy and Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

Chapter 8 — External Aid, Development and Enlargement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

Chapter 9 — Education and Citizenship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

Chapter 10 — Economic and Financial Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Chapter 11 — Administrative and other expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Annex I

— Financial information on the general budget

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Annex II

— List of Special Reports adopted by the Court of Auditors since the last Annual

Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

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GENERAL INTRODUCTION

0.1. The European Court of Auditors is the EU institution estab-
lished by the Treaty to carry out the audit of EU finances. As the
EU’s external auditor it contributes to improving EU financial
management and acts as the independent guardian of the finan-
cial interests of the citizens of the Union. More information about
the Court can be found in its annual activity report which,
together with its special reports on specific subjects and its opin-
ions on proposed legislation, are available on the Court’s website
www.eca.europa.eu.

0.2. This document, covering the 2007 financial year, com-
prises the Court’s 31st annual report on the implementation of
the general budget of the European Union. The replies of the
Commission — or other EU institutions and bodies where appro-
priate — are presented with the report. A separate annual report
covers the European Development Funds.

0.3. The general budget of the EU is decided annually by the
Council and the European Parliament. The Court’s annual report
provides a basis for the discharge procedure which brings the
annual budgetary process to an end. A central part of this report
is the Court’s Statement of Assurance on the reliability of the
annual accounts of the European Communities and on the legal-
ity and regularity of the underlying transactions.

0.4. Chapter 1 of the report includes this Statement of Assur-
ance as well as further information to support it. Chapter 2
reports on the Commission’s internal control system and chapter
3 covers the Commission’s management of the 2007 budget. The
remaining chapters — 4 to 11 — deal with the revenue side of
the budget and the different areas of expenditure in the form of
groups of policy areas.

0.5. Chapter 4 to 11 each contain the following elements:

In addition to recommendations on specific areas in the
0.7.
individual revenue and expenditure chapters the Court sets out
more cross-cutting ones in paragraphs 1.52 to 1.54, 2.41, 2.42,
3.29, 3.32 and 3.33.

A more wide-ranging approach is taken in the Court’s contribu-
tion to the current review of the EU budget, launched by the
Commission in 2007. In this contribution the Court states that
the review should address the quality of EU budgetary transac-
tions — legality, regularity and value for money — as well as
spending priorities and equity. The Court furthermore:

— welcomes the Commission’s view that EU spending must
reflect an assessment that it adds value to the Union and calls
for this criterion to be more clearly articulated;

— lists key principles to be applied in designing arrangements
for EU spending: clarity of objectives, simplification, realism,
transparency and accountability;

— recommends the political authorities to be prepared to think
radically about the design of expenditure programmes for
example by recasting them in term of outputs, by consider-
ing critically the appropriate level of national, regional and
local discretion in managing programmes and by making
better use of the concept of tolerable risk;

— points out that there is considerable scope for simplifying
and clarifying the own resources systems through which the
budget is financed.

— summary and analysis of the results of the audit work car-
ried out for the Statement of Assurance in the form of spe-
cific assessments of the budgetary area concerned;

— reports on progress made in implementing recommenda-
tions of the Court and the Budgetary Authorities arising from
previous audits.

0.8. The implementation of the budget is the responsibility of
the Commission. However, Member States cooperate with the
Commission to ensure that funds are used in accordance with the
principles of sound financial management. There is a tendency
towards an increased role for Member States, and often also
national supreme audit institutions (SAIs), in the supervision and
control of EU funds. For example, 2007 was the first year for
which Member States were required to produce an annual sum-
mary of available audits and declarations.

0.6. The specific assessments are based mainly on an assess-
ment of the operation of the principal supervisory and control
systems governing revenue and expenditure and on the results of
the Court’s testing of transactions. The Court’s overall appraisal of
all these elements forms the basis for the Statement of Assurance.

0.9. As outlined in the Court’s opinion No 6/2007 annual sum-
maries, as well as voluntary initiatives from Member States to
issue declarations and the decisions by some national audit bod-
ies to audit these, could stimulate improved management and
the
control of EU funds. For 2007 the Court

found that

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Commission adequately supervised the annual summaries process
(see paragraphs 2.19 and 2.20). However, due to the disparity of
presentation and the frequent absence of a statement of their
completeness and accuracy,
the summaries cannot yet be
regarded as providing a reliable assessment of the functioning of
the control systems.

0.10. The Court endeavours to make use of the national SAIs’
audit work on national declarations, under the conditions out-
lined in its opinion. In general the Court aims to improve the
cooperation with national SAIs, both by developing common
auditing standards tailored for the EU area together with its fel-
low SAIs, and by bilateral cooperation with individual SAIs. A
recent positive example of cooperation is the special report on

administrative cooperation in the field of VAT (No 8/2007) where
reports from several national SAIs were referred to.

0.11.
Since 2005 the general budget has been structured solely
around Activity Based Budgeting (ABB) policy areas. This year the
Court has modified the structure of its report to reflect this change
as well as the introduction of a new financial framework. This
year, for the first time each of the specific assessments are cen-
tered round groups of ABB policy areas outlined in table 1.2. This
has resulted in the introduction of two new specific assessments,
one on Education and Citizenship and one on Economic and
Financial Affairs (previously covered under Internal policies), as
well as the merger of two previous assessments (Pre-accession aid
and External actions) into one on External Aid, Development and
Enlargement.

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CHAPTER 1

The Statement of Assurance and supporting information

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

I-XII

TABLE OF CONTENTS

Paragraph

Opinion on the reliability of the accounts

Opinion on the legality and regularity of the transactions underlying the accounts

Information in support of the Statement of Assurance

Introduction

Reliability of the accounts

General background

Audit scope and approach

Further steps taken to strengthen the transition to accruals based accounts

Consolidated financial statements as at 31 December 2007

Consolidated balance sheet as at 31 December 2007

Consolidated economic outturn account

Other issues

Legality and regularity of transactions underlying the 2007 accounts

New structure of the DAS specific assessments

The Court’s approach

General overview of audit results 2007

Assessment of progress made towards an effective Community internal control
framework

VII-VIII

IX-XII

1.1-1.54

1.1-1.5

1.6-1.31

1.6-1.8

1.9

1.10-1.18

1.19-1.20

1.21-1.26

1.27-1.28

1.29-1.31

1.32-1.54

1.32

1.33-1.37

1.38-1.41

1.42-1.54

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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 ‘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 2007; and

(b)

the legality and regularity of the transactions underlying those accounts.

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 ‘Annual Accounts of the European Communities’ and the legality and regularity of the
transactions underlying them:

(a) Management’s responsibility in respect of the ‘Annual Accounts of the European Communities’ includes: designing, imple-
menting 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
‘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 con-
solidated accounts, declaring, inter alia, that he has reasonable assurance that they present a true and fair view of the finan-
cial position of the European Communities in all material aspects.

(1) The ‘Annual Accounts of the European Communities’ are presented in volume I of the Annual Accounts of the European Communities financial

year 2007.

(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 2007 financial year are prepared (as they have been since the 2005 financial year) 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 Communi-
ties, while the ‘Consolidated reports on implementation of the budget’ continue to be primarily based on cash movements.

(6) Before the adoption of the 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 Regula-
tion).

(7) The 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. The Court con-
ducted its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI Inter-
national Standards of Supreme Audit Institutions, 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 ‘Annual Accounts of
the European Communities’ are free from material misstatement and the transactions underlying them are legal and regular.

IV. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
accounts and the legality and the regularity of the transactions underlying them. The procedures selected depend on the auditor’s
judgement, including the assessment of the risks of material misstatement of the consolidated accounts and of material non-
compliance of the underlying transactions with the requirements of the legal framework of the European Communities, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair
presentation of the 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 also includes
evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates made, as well as evalu-
ating the overall presentation of the consolidated accounts and the annual activity reports.

V.
In the case of Revenue, the scope of the Court’s audit work was limited. Firstly, VAT and GNI own resources are based on
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.

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, the ‘Annual Accounts of the European Communities’ present fairly, in all material respects, the finan-
cial position of the Communities as of 31 December 2007, and the results of their operations and cash flows for the year then
ended, in accordance with the provisions of the Financial Regulation and the accounting rules adopted by the Commission’s
accounting officer.

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VIII. Without calling into question the opinion expressed in paragraph VII, the Court notes that weaknesses in the accounting
systems, which are partly due to the complex legal and financial framework, still put at risk the quality of financial information
of certain Directorates-General of the Commission (in particular for pre-financing, the related cut-off and for invoices/cost claims)
and decentralised bodies whose accounts are subject to consolidation (in particular for fixed assets of the European GNSS (8)
Supervisory Authority (GSA)). These weaknesses led to a number of corrections after the presentation of the provisional accounts.

Opinion on the legality and regularity of the transactions underlying the accounts

IX.
In the Court’s opinion, revenue, commitments and payments for ‘Administrative and other expenditure’ and ‘Economic and
financial affairs’ are free from material error. In these areas the supervisory and control systems are implemented in a manner
which ensures adequate management of the risk of illegality and irregularity.

X.
In the Court’s opinion, in the other areas of expenditure payments are still materially affected by errors, although to different
levels. The Commission and the Member States and other beneficiary states need to make further efforts to implement adequate
supervisory and control systems, so as to improve the management of the risk of illegality and irregularity. These areas are: ‘Agri-
culture and natural resources’, ‘Cohesion’, ‘Research, energy and transport’, ‘External aid, Development and enlargement’ and ‘Edu-
cation and citizenship’.

(a)

(b)

(c)

(d)

In ‘Agriculture and natural resources’, the Court found that the transactions underlying the expenditure declared for this
policy group, taken as a whole, are affected by a material level of error of legality and/or regularity. On the basis of its audit
work, the Court concludes that supervisory and control systems are only partially effective in providing assurance as to com-
pliance with EU rules. However, the Court concludes that the Integrated Administration and Control System (IACS) contin-
ues to be effective in limiting the risk of irregular expenditure where properly implemented and if accurate and reliable data
are entered into the system.

In ‘Cohesion’, the Court found that the reimbursement of expenditure to Cohesion policies projects is affected by a material
level of error of legality and/or regularity. The Court concludes on the basis of its audit work that the supervisory system of
the Commission and the control systems of the Member States are generally only partially effective in preventing overstated
or ineligible expenditure.

In ‘Research, energy and transport’, the Court found that payments for the policy group are affected by a material level of
error of legality and/or regularity. The Court concludes on the basis of its audit work that, despite some improvements, the
Commission’s supervisory and control systems are only partially effective in mitigating the risk of reimbursement of over-
stated or ineligible costs.

In ‘External aid, development and enlargement’, the Court found that transactions underlying the expenditure in the policy
group are affected by a material level of error of legality and/or regularity, mostly at the level of implementing organisations.
The Court concludes on the basis of its audit work that, despite the improvements at the level of the Commission, the super-
visory and control systems are only partially effective in providing assurance that expenditure is eligible and supported by
adequate evidence.

(8) GNSS: Global Navigation Satellite Systems.

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(e)

In ‘Education and citizenship’, the Court found that payments for the policy group are affected by a material level of error of
legality and/or regularity. The Court concludes on the basis of its audit work that the supervisory and control systems are
only partially effective in providing assurance that expenditure is eligible and supported by adequate evidence.

XI. The Court emphasises that:

(a) Rural development accounts for a disproportionately large part of the overall error rate estimated for the area of ‘Agriculture
and natural resources’; for EAGF expenditure the Court estimates the value of the error rate to be slightly below materiality
whereas for EAFRD expenditure it is estimated to be significantly above.

(b) Complicated or unclear legal requirements (such as eligibility rules) have a considerable impact on the legality and/or regu-
larity of transactions underlying the expenditure in the areas of ‘Agriculture and natural resources’, ‘Cohesion’, ‘Research,
energy and transport’ as well as ‘Education and citizenship’.

XII. The Court has identified further progress in the Commission’s supervisory and control systems, in particular concerning,
on the one hand, the impact of the reservations on the assurance given in the declarations by the Directors-General; and, on the
other hand, the greater consistency of these declarations with the Court’s findings. However, the Court notes that the Commis-
sion is not yet able to demonstrate that its actions to improve supervisory and control systems have been effective in mitigating
the risk of error in large areas of the budget.

24 and 25 September 2008

Vítor Manuel da SILVA CALDEIRA
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 EU activity.

1.2. The aim of the work on the reliability of the accounts of the
European Communities is to obtain sufficient appropriate evi-
dence to conclude on the extent to which revenue, expenditure,
assets and liabilities have been properly registered and that the
annual accounts faithfully reflect the financial position as of
31 December 2007, and the results of their operations and cash
flows for the year then ended (see paragraphs 1.6 to 1.31).

1.3. The aim of the Court’s audit work on the legality and regu-
larity of the transactions underlying the 2007 accounts is to
gather sufficient appropriate evidence, of a direct or indirect
nature, to give an opinion on whether they are in accordance with
the applicable regulations or contractual provisions, and have
been correctly calculated (see paragraphs 1.32 to 1.54 of this
chapter for horizontal issues and chapters 2 and 4 to 11 for
details).

1.4. Once again, the Court assessed the progress made by the
Commission in strengthening its internal control system and to
the follow-up given to the action plans adopted within the con-
text of the Roadmap towards an integrated internal control frame-
work (see chapter 2).

1.5.
In addition, in the absence of Commission indicators over
a series of years and to complement those provided for 2007 (9),
the Court presents 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 chap-
ters 2 and 4 to 11).

(9) See paragraph 1.5 of the Annual Report concerning the financial year

2006 and chapter 2 of the present Annual Report.

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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 annual accounts for
the financial year 2007, drawn up by the Commission’s Account-
ing Officer and approved by the Commission in compliance with
Article 129 of the Financial Regulation of 25 June 2002 (10) and
sent to the Court on 28 July 2008. 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 as well as the economic outturn account — and the ‘consoli-
dated reports on the implementation of the budget’ — covering
the revenue and expenditure for the year.

1.7. The 2007 annual accounts are the third 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). In comparison to the 2005 and 2006 annual
accounts, the following major changes occurred:

— the scope of consolidation has been increased from 16 agen-
cies consolidated in 2005 to 26 agencies in 2007 (24 in
2006);

— the information given on the different forms of recovery of
undue expenditure made by the Commission has been
regrouped;

— a reconciliation of the economic outturn to the budgetary

outturn has been provided;

— for the first time this year, the Accounting Officers of the
other institutions and bodies provided the Commission’s
Accounting Officer with duly signed ‘transmission letters’,
most of them materially similar to the management repre-
sentation letter (11) provided by the Commission’s Account-
ing Officer.

(10) 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
Council Regulation (EC, Euratom) No 1995/2006,
(OJ L 390,
30.12.2006, p. 1) requires that the final accounts shall be sent before
31 July of the following financial year.

(11) These letters are used to let the management acknowledge that the
financial statements are sufficient and appropriate and without omis-
sion of material facts.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.8. The Commission’s Accounting Officer provided the Court
with a representation letter confirming that subject to certain
limitations the consolidated accounts are complete and reliable
(see however paragraphs 1.29 and 1.31) and that most of the
Commission’s local systems have been validated (see however
paragraphs 1.13 to 1.16).

Audit scope and approach

1.9. The transition to accruals based accounting, and the result-
ing significant changes in the structure and in the content of the
accounts of the European Communities, require a multiannual
adaptation process for the Commission. In its audit of the 2007
accounts the Court paid particular attention to the changes intro-
duced as a result of the ongoing modernisation of the Commu-
nities accounting system (12). The audit concentrated on the
following elements (13):

— assessment of whether measures taken within the Commis-
sion, in order to remedy weaknesses identified in the new
financial reporting framework and accounting systems of
certain institutions and Directorates-General (14), contribute
to the reasonable assurance that the accounts give a true and
fair view. This was done, in particular, by analysing the bases
for the validations (according to Article 61 of the Financial
Regulation) by the Authorising Officers of the 2007 accounts
falling under their responsibility, as well as by analysing the
validation of the Accounting Officer for the cut-off method-
ology and the state of readiness of the local financial man-
agement systems which provide data for the Commission’s
accounts (see paragraphs 1.13 to 1.18);

— verification of the reliability of the 2007 accounts, concen-
trating on elements for which a modified opinion was given
in the context of the 2006 Statement of Assurance (15) (pre-
financings, invoices/cost statements and cut-off). This was
done by carrying out analytical reviews and substantive tests
on representative statistical samples (see paragraphs 1.23,
1.24, 1.25 and 1.26).

(12) See communication from the Commission — Modernisation of
European Communities

System of

the Accounting
the
(COM(2002) 755 final of 17.12.2002).

(13) The Court’s findings on previous stages of the modernisation were
presented in the Annual Report concerning the financial year 2004
(see paragraphs 1.21 to 1.45), the Annual Report concerning the
financial year 2005 (see paragraphs 1.5 to 1.58) and in the Annual
Report concerning the financial year 2006 (see paragraphs 1.6
to 1.36). Results of subsequent stages will be included in future
Annual Reports.

(14) See paragraph IX of the Court’s Statement of Assurance concerning

the financial year 2006.

(15) See paragraph VIII and IX of the Court’s Statement of Assurance con-

cerning the financial year 2006.

10.11.2008

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17

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Further steps taken to strengthen 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 modernised
accruals based accounts. A pilot study was launched in July 2006
on the quality of accounting data and has been completed. As a
result, the Commission’s Accounting Officer finalised a series of
measures which were disseminated to all Directorates-General in
March 2007. Their purpose is to improve the accounting control
environment at the level of individual Directorates-General. They
include the development of an accounting risk analysis, the
deployment of risk-based accounting review exercises, the elabo-
ration of specific accounting manuals and the documentation of
year-end accounting closure files. The project applies for the first
time to the annual accounts of 2007.

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 1.18). Furthermore, it
was noted that the guidelines on the accounting control environ-
ment, issued by the Commission’s Accounting Officer, were not
fully applied by a limited number of operational Directorates-
General for the cut-off calculation.

1.12. Table 1.1 contains a follow-up of the Court’s reservations
concerning the reliability of the accounts which were expressed
in the Statement of Assurance for the 2006 financial year, as well
as the other points raised by the Court, which were partly settled
or which still need to be addressed in the context of the measures
taken by the Commission to consolidate the transition to mod-
ernised accruals based accounts.

Validation of local systems

1.11. Although weaknesses were identified in the quality of some
accounting data, these had no material impact on the reliability of the
accounts.

1.13. Many Directorates-General use their own local IT-systems
for financial management purposes and for the creation of trans-
actions which are sent to the central accounting system (ABAC)
via an interface.

1.13. As the situation is constantly evolving, the accounting services’
validation team needs to keep track of this evolution, and has introduced,
as was already mentioned last year, a procedure for the validation of
changes in the local systems.

Table 1.1 — Follow-up of the reservations expressed in the Statement of Assurance concerning the financial year 2006 as to the reliability of the accounts and certain other
observations made in the Annual Report concerning the financial year 2006

Reservations in the Statement of Assurance concerning
the financial year 2006

Commission’s replies in the Annual Report concerning
the financial year 2006

Developments in 2007

Errors have been identified in amounts registered in the account-
ing system as invoices/cost statements and pre-financing leading to
an overstatement of the accounts payable by some 201 million
euro and the total amount of long-term and short-term pre-
financing by some 656 million euro.

Certain other observations made in the context of the Annual
Report concerning the financial year 2006

For accounts payable the level of errors found by the Court was
limited.

Only a low level of error in terms of financial impact as regards these items of
the balance sheet have been identified. However, the frequency of these errors
underlines the need for further improvement of the reliability of the basic
accounting data at the level of the operational Directorates-General.

Due in part to the complex system of financial management and
despite improvements made, weaknesses in the accounting sys-
tems of certain institutions and Directorates-General of the Com-
mission still put at risk the quality of the financial information, in
particular for cut-off and employee benefits. This led to a number
of corrections after the presentation of the provisional accounts.

The Commission stated that it will endeavour to continue
improving its year-end accounting procedures. In 2006 the Com-
mission improved the estimation of its cut-off amounts by tak-
ing several actions. As for the pension scheme for some Members
of the European Parliament, in the absence of an actuarial evalu-
ation no meaningful provision can be made in the accounts.

Weaknesses in the accounting systems of certain Directorates-General of the
Commission and other bodies still put at risk the quality of financial informa-
tion, in particular for pre-financing, related cut-off and invoices/cost statements.
This led to corrections after the presentation of the provisional accounts. The
provision for pension rights for some Members of the European Parliament is
now recognised in the consolidated balance sheet.

The Commission’s Accounting Officer was not able to provide
validation for three local subsidiary accounting systems. Further-
more, the number and importance of issues and matters for fur-
ther consideration remain much the same as for the previous year.
Therefore, in the light of the continuing problems, the Director-
General for Budget should have made a specific reservation on
these issues.

Significant progress was made in 2006 in relation to the three
services concerned. Their systems will be examined in 2007 in
order to decide whether the improvements are sufficient to war-
rant their validation. In view of the progress made, a reservation
in the 2006 Annual Activity Report was not necessary.

The Commission’s Accounting Officer was still not able to provide validation to
two of the local systems nor to validate a third system without qualification. As
in previous years the number and importance of horizontal issues and other
matters for consideration remain much the same.

Although the explanatory notes to the consolidated accounts con-
tain information about possible corrections, they do not identify
the amounts and areas of expenditure which may be subject to fur-
ther verification and clearance of accounts procedures.

The right to make checks on expenditure many years after it was
incurred should not imply that all the expenditure concerned
remains to be accepted. Quantifiable amounts of potential recov-
eries are disclosed in the notes to the consolidated accounts.

As for the past, the amounts and areas of expenditure which may be subject to
further verification and clearance of accounts procedures are not disclosed in the
notes to the accounts.

Further measures are necessary in order to ensure completeness
and reliability of the accounting data and information presented in
the explanatory notes concerning the amounts recovered in
response to illegal or irregular operations.

The 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.

Despite the improvements noted, further measures are necessary in order to
ensure completeness and reliability of the accounting data and information pre-
sented in the explanatory notes concerning the amounts recovered in response
to illegal or irregular operations, in particular at the level of the Member States
and for deductions from subsequent payments.

The reconciliation between budgetary and economic outturn still
presents unexplained minor differences and the intelligibility of the
accounts would be improved if such a reconciliation was included
in the annual accounts.

The Commission accepts that the reconciliation procedure needs
to be improved and will consider including a full reconciliation
in the annual accounts.

The Commission has improved its reconciliation procedure and has included the
reconciliation between budgetary and economic outturn in the consolidated
annual accounts.

1
8

E
N

O

f
f
i
c
i
a
l

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n
a
l

o
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a
n
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n
o
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i

.

1
0
1
1
2
0
0
8

.

10.11.2008

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Official Journal of the European Union

19

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.14.
For the financial year 2007, the services of the Commis-
sion’s Accounting Officer carried out a follow-up of the previous
year’s findings (16). In addition six further services (17) were sub-
ject to in-depth reviews as part of a cyclical approach aiming at
full coverage of Commission’s services on a medium term. Two
other services (18) were also subject to review but their reports
were not finalised in time for the Commission’s Accountant Glo-
bal Validation Report for 2007.

1.15. The Commission’s Accounting Officer was still not able
to validate the local systems of the Directorate-General for Edu-
cation and Culture (19) and the Directorate-General for External
Relations (20), as indicated in his management representation
letter (see paragraph 1.8), nor to validate without qualifications
the local system of EuropeAid Co-operation Office (21) regarding
the financial year 2007. The non-accounting reservation
issued for the Joint Research Centre (22) in 2006 was kept for

(16) See paragraphs 1.20 and 1.21 of the Annual Report concerning the
financial year 2005 and paragraphs 1.15 to 1.17 of the Annual
Report concerning the financial year 2006. As at end of 2006, the
Accounting Officer had still not provided its validation to three local
accounting systems and a number of other issues remained for con-
sideration.

(17) Directorates-General for Development, Enlargement, Environment,
Maritime Affairs and Fisheries, Internal Audit Service, Interpretation.
(18) Directorates-General for Economic and Financial Affairs, Health and

Consumers.

(19) The validation report for the Directorate-General for Education and
Culture was not finalised in time for the Global Validation Report.
The new system Symmetry is now foreseen for 2009 with a limited
pilot phase envisaged for 2008.

(20) The validation report for the Directorate-General for External Rela-
tions was not finalised in time for the Global Validation Report. The
validation report transmitted end of May 2008 maintained the vali-
dation suspended.

(21) During 2007, EuropeAid Co-operation Office still had a reservation
on reporting consistency due to lack of systematic reconciliation with
the central system. However, this issue was addressed at the end of
July 2008.

(22) The Joint Research Centre has implemented by the end of 2007 a new
interface to upload contract information into the ABAC Contracts
system. Data has been uploaded for new contracts from 2007, but
none yet for 2006 and 2005 contracts.

1.14. The accounting services’ validation team follows up matters
raised in previous reports in order to ensure that recommendations made
are being implemented, thus ensuring that the quality of local financial
management systems is constantly improving.

It is intended that the first complete cycle of verification of the respect of
validation criteria in all Directorates-General and Services will be com-
pleted by the end of 2008 or the beginning of 2009.

The report for the Directorate-General for Economic and Financial
Affairs was transmitted to the Court on 4 June 2008. The report for the
Directorate-General for Health and Consumers was transmitted to the
Court on 2 September 2008.

1.15. Work is still ongoing with the aim to reach the validation for
the Directorates-General for External Relations and for Education and
Culture.

The qualification to the validation for the EuropeAid Co-operation Office
has now been removed as this Directorate-General was able to provide
sufficient evidence regarding its consistency of reporting, and that a sys-
tematic reconciliation of CRIS with ABAC had been put in place.

The missing interface between the Joint Research Centre (JRC) local IT
system, JIPSY, and ABAC for the transfer of the JRC’s contracts to the
central database of ABAC Contracts has been put in place, and all con-
tracts for 2007 have been put in the central database. JRC has still to
upload the contracts for the remaining period from 2005 until end
2006, which is planned to be done before the year’s end.

The non-validation of the RELEX system concerned a local accounting
system (BCC-NT/Rai-Web) which was not in conformity with the vali-
dation criteria. The ABAC IT system was deployed to all Commission
delegations within the timeframe foreseen, and, as from January 2007,
the administrative expenditure of the delegations is now managed within
the ABAC system. The situation is therefore improved compared
to 2006.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

the financial year 2007. The number and importance of horizon-
tal issues and other matters for consideration remain much the
same as in previous years (23).

1.16. The Court’s audit confirmed that the decisions of the
Commission’s Accounting Officer were well founded: the issues
and matters outstanding were important.

Strengthening of cut-off procedures

1.17.
Since the transition to accruals accounting, the Commis-
sion’s Accounting Officer invited the Commission services to
carry out an ex-post testing of their cut-off methodology, where
relevant (24), combining data from budgetary sources and from
general accounting in order to check the adequacy of methods.
Out of the nine Directorates-General examined (25), six were par-
tially concerned by this testing representing under 20 % of the
total cut-off amount, one Directorate-General improved its pro-
cedures by testing and correcting its cut-off procedures (26), oth-
ers tested their methodology but corrective actions were
postponed (27) and some Directorates-General (28) still have not
yet carried out ex-post testing of their cut-off methodologies. This
may lead to inaccuracies in the accounting data.

1.17. The Accounting Officer considered the accounting data to be
sufficiently accurate for the final accounts.

1.18.
Some Directorates-General (representing approximately
20 % of the total cut-off amount) establish their cut-off of accrued
charges according to a pro rata temporis method (29). However, if
the contract dates in the accounting systems used as a basis for
the cut-off calculations are incorrect or changes therein are not
updated, they affect adversely the reliability of the accounts.

1.18. The quality-control plan of the main Directorate-General con-
cerned focused on activity dates. 935 contracts have been reviewed,
including all contracts with long duration. As a consequence, remaining
activity date errors relate to short duration contracts having a much lower
impact on cut off than last year’s. In the Court’s sample of 20 transac-
tions for this Directorate-General, there are 3 errors due to wrong activ-
ity dates. This is an improvement compared to last year.

(23) Notably general issues regarding cut-off procedures, late clearing and
errors in recording pre-financing, timeliness of transactions’ posting,
ABAC contracts, registration of guarantees, varying knowledge on
accrual accounting principles across the services, data consistency
between local systems and ABAC.

(24) Ex-post testing is only required when the pro-rata temporis technique

is used and the interval between two progress reports is long.

(25) See also paragraph 1.18 of the Annual Report concerning the finan-

cial year 2006.

(26) Directorate-General for the Information Society and Media.
(27) E.g. Directorates-General for Research, Education and Culture and

EuropeAid Co-operation Office.

(28) E.g. Directorates-General for Energy and Transport and Enlargement.
(29) The pro rata temporis method is an estimation technique allowing to

attribute proportional values to the length of time involved.

10.11.2008

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Official Journal of the European Union

21

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Consolidated financial statements as at 31 December
2007

General remarks

1.19. During 2007, the Commission took measures to ensure
the complete and correct registration of new pre-financing pay-
ments and related guarantees, as well as of new open invoices/cost
statements, and the cut-off.

1.20. The Court’s audit of loans, inventories, long-term receiv-
ables, cash and cash equivalents, employee benefits, provisions
and financial and other long-term liabilities and reserves did not
produce any significant findings. However, a number of errors
were identified concerning other elements which are presented
hereafter.

Consolidated balance sheet as at 31 December 2007

Pending issues in the accounts as regards the European satellite
system

1.21. The European GNSS (30) Supervisory Authority (GSA), a
EU Agency created in 2004 (31), officially took over responsibil-
ity (32) from the former Galileo Joint Undertaking (GJU) on 1 Janu-
ary 2007. The new body was originally intended to operate as a
public private partnership; following a decision of the Council
made in November 2007 the Galileo programme is now to be
financed from the EU budget. At the end of 2007, despite the sig-
nature of agreements (33) between the interested parties (GJU,
European Space Agency, Authority), ownership of the projects’
assets from the GJU to the Authority had not been completely
transferred and no list of Galileo assets held by the European
Space Agency had been established. The Court therefore did not
express an opinion on the reliability of the Authority’s accounts
for the year ended 31 December 2007.

(30) GNSS: Global Navigation Satellite Systems.
(31) Council Regulation (EC) No 1321/2004 (OJ L 246, 20.7.2004, p. 1),
extended by Regulation (EC) No 1942/2006 (OJ L 367, 22.12.2006,
p. 18).

(32) The Authority GSA shall manage the public interests relating to the
European GNSS programmes and act as the regulatory authority for
the programme during the development and operational phases and
will play a key role for the achievement of the Galileo Programme.

(33) The Commission lodged a proposal to amend the founding Regula-
tion No 1321/2004 on 19 September 2007. This proposal does not
clarify the new role of the Authority and refers without any further
detail to delegation agreements to be concluded by the Authority and
the European Space Agency (ESA) regarding the management of the
programme’s funds and the ownership of its assets.

1.21. At the end of 2007, despite the signature of agreements between
the interested parties (GJU, European Space Agency, GSA), ownership
of the projects’ assets had not been completely transferred from the ESA
to the European Communities. As there is some uncertainty and delay in
the transfer of assets, for reasons of prudence, the European Communi-
ties have not recognised the assets of the programme in their balance
sheet. It is intended that the assets will be recognised once these transfer
issues have been resolved.

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Official Journal of the European Union

10.11.2008

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Risk capital operations

1.22.
In the consolidated financial statements of the European
Communities, all risk capital operations (218 million euro as at
31 December 2007) are classified as ‘long term investments’
(assets available for sale). They are held at historic cost 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 that impairments are only based on write-offs while pro-
visional estimates for impairments were available to the manager
of the operations (European Investment Bank) but had not been
communicated to the Commission (34).

1.22. Reporting and accounting standards have evolved significantly
over the period of the MEDA mandates which cover these risk capital
operations (RCO). The EIB and the Commission have been following
developments and are currently reviewing the situation together, looking
for the most cost-effective solution and also taking into account infor-
mation available according to the contracts signed with final beneficia-
ries many years ago (hence not including current reporting standards).
This review has confirmed that the current valuation exercise of the Risk
Capital Operations is a very time-consuming and challenging exercise
due to the high number and the complex cascade structure of the RCO
transactions. The EIB has also underlined that the valuation of the RCO
transactions is based, to the extent it is possible, on relevant international
accounting principles, notably IAS 39.

Pre-financings and related guarantees

1.23. The Court’s audit of a representative statistical sample of
150 pre-financings registered in the accounting system identified
a low level of error in terms of financial impact as regards this
item of the balance sheet. However, the frequency of these errors
underlines the need for further improvement of the accuracy of
the operational
the basic accounting data at
Directorates-General. The most common types of errors are:

the level of

— pre-financing entries were not recorded in line with the dif-
ferent management types as presented in the notes to the
financial statements;

— pre-financing amounts remained open although they had

been used by the beneficiaries before the year-end.

Furthermore, additional audit work on the identification
revealed problems of

1.24.
and validation of pre-financings
completeness/accuracy for the balance sheet:

1.24.

— some payments were booked as expenses in the economic
outturn account whilst they should have been booked as pre-
financings in the balance sheet;

(34) See also paragraph 1.26 of the Annual Report concerning the finan-

cial year 2006.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

— some pre-financings remain in the balance sheet although
the relevant information, such as audit certificates, were
available in order to proceed with their clearing by recording
the corresponding expenses in the economic outturn
account. Furthermore, an inconsistent treatment of clearing
of pre-financings has been observed. The Directorate-General
for the Information Society and Media proceeds correctly to
the clearing of pre-financings in the case of cost claims not
accompanied by audit certificates whilst the Directorate-
General for Research, in the same circumstances, leaves the
pre-financing open.

— The Commission agrees with the Court that it is best practice to
clear open pre-financing amounts with the minimum of delay and
its goal is to have all services do this as soon as sufficient support-
ing documentation is available. In the meantime, year-end book-
ings ensure that the criticised practice does not affect the reliability
of the accounts.

Furthermore, the Directorate-General for the Information Society
and Media and the Directorate-General for Research are cooperat-
ing to find a common way for dealing with this question in line
with the recommendations made by the accounting services.

Accounts payable

1.25. The audit of a representative statistical sample of 150
invoices/cost statements from the population of accounts payable
registered in the accounting system identified a low level of error
in terms of financial impact as regards this balance sheet item.
However, the frequency of these errors underlines the need for
further improvement of the reliability of the basic accounting
data at the level of the operational Directorates-General. Most of
the errors concern invoices or cost statements recorded for the
wrong amounts.

1.26.
Significant delays were identified in the treatment of some
invoices and cost-claims. This has an impact on the accounts in
so far as delays in the eligibility analysis of invoices prevent the
triggering of the clearing of pre-financings. This may lead to an
inaccurate liability position towards third parties and the book-
ing of an expense amount, based on a cut-off estimate, instead of
an amount supported by invoices already received.

Consolidated economic outturn account

1.27. The recording of payments under the wrong management
type has an impact on the accuracy of the breakdown of expenses
by management type in the notes to the economic outturn
account as well as in the segment reporting (see also para-
graph 1.23).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Off-balance sheet disclosures

1.28. Although the explanatory notes to the annual accounts
contain information about the fact that some transactions are
likely to be corrected at a later date by the Commission’s depart-
ments or the Member States, the amounts and areas of expendi-
ture which may be subject to further verification and clearance of
accounts procedures (35) are still not identified in the notes.

1.28. The Financial Regulation and the sectoral regulations regard-
ing agriculture and the structural funds give the Commission the right
to make checks on all expenditure for many years after it is 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.

Other issues

Recovery of undue payments

1.29.
Following a recommendation of the Court, more infor-
mation concerning the recovery of undue payments has been pre-
sented in the notes to the financial statements. However, the notes
to the financial statements do not yet contain complete and reli-
able information on the financial correction activities made by the
Member States. They provide this information in particular in
respect of withdrawals, recoveries and pending recoveries in the
area of Structural Actions (36). As a result of the high proportion
of ineligible expenditure repeatedly indicated in the Court’s
Annual Reports, and in order to be compatible with the presen-
tation of a true and fair view, the Court considers that appropri-
ate information should be presented in the notes to the accounts
on these correction mechanisms.

1.30. Based on the examination of
the certifying bodies
work (37) the Court reiterates (38) its doubts as regards the accu-
racy of the receivables from Member States in the area of agricul-
ture. Further the Court notes that the different policies applied to
the date of recognition of debts by the Paying Agencies result in
an inconsistent presentation of the global value of debts (see para-
graphs 5.44 and 5.45).

(35) 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, paragraph 1.57 of the
Annual Report concerning the financial year 2005 and para-
graph 1.34 of the Annual Report concerning the financial year 2006.
(36) See also section 6 on the recovery of undue payments in the Annual
Accounts of the European Communities concerning the financial year
2007, Volume I, pp. 75-80.

(37) Commission Regulation (EC) No 885/2006 (OJ L 171, 23.6.2006,

p. 90), Annex III.

(38) See paragraph 5.61 of the Annual Report concerning the financial

year 2006.

1.29. Chapter 6 of the 2007 annual accounts gives an overview of the
procedures in place for the recovery of undue payments, and presents a
best estimate of the total amount of such recoveries, including recoveries
made by Member States regarding agricultural expenditure.

Only summary information was provided in the notes to the accounts on
Member States’ recoveries of Structural Funds because of the timing of
the submission of this information and the need to clarify some of the
data with the Member States. However, the Commission provided more
detailed information to Parliament in July 2008 in the second quarterly
report on the Action Plan for strengthening the Commission’s supervi-
sory role in structural actions expenditure, and it is publishing the fig-
ures in an annex to the Annual Report on the Structural Funds for
2007, as it did last year for the 2006 information. Under the action
plans, the Commission is making efforts to improve the reliability and
completeness of the information received from Member States, by,
amongst other things, carrying out on-the-spot audits in Member States.

1.30. The Commission considers the information which it received on
receivables from Member States in the area of agriculture to be suffi-
ciently reliable for clearance and accounting purposes.

The Commission has provided additional clarifications concerning debt
recognition by the paying agencies in its revised guidelines for financial
year 2008. The ‘different policies’ referred to by the Court are the result
of the different national legal systems for the recovery of undue payments.

See also replies to paragraphs 5.44 and 5.45.

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25

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

1.31.
Furthermore, the notes to the accounts do not disclose the
recoveries made by deduction from a subsequent payment (off-
setting).

1.31. As indicated in the notes to the accounts, the information sys-
tems did not allow for the identification of this information in 2007.
The systems have since been adapted by the Commission during 2008
so that all recoveries made by deduction from a subsequent payment can
be identified and explained.

Legality and regularity of transactions underlying
the 2007 accounts

New structure of the DAS specific assessments

1.32.
Following the introduction by the Commission of Activ-
ity Based Budgeting (ABB) and Activity Based Management
(ABM), the Court decided to redefine the specific assessments in
which it divides the budget for DAS purposes in terms of suitable
groups/clusters of ABB policy areas (see Table 1.2).

The Court’s approach

Sources and methods

1.33. The Court uses an assurance model which draws on two
principal sources of evidence:

1.33.

(a) an assessment of the operation of the supervisory and con-
trol systems applied in the collection and disbursement of
funds from the EU budget by EU institutions, Member States,
regions, third countries, etc., aiming to provide representa-
tive information on the implementation and functioning of
key controls in respect of their ability to prevent or detect
and correct errors;

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Official Journal of the European Union

10.11.2008

Table 1.2 — Expenditure outturn in 2007 by Annual Report chapters

Sections (S) and titles (T) corresponding to the 2007 budgetary nomenclature allocated per chapter of the Court’s Annual Report

Payments made in 2007

Annual Report chapters

(million euro)

Taxation and customs union (T.14)

Agriculture and rural development (T.05)

Environment (T.07)

Fisheries and maritime affairs (T.11)

Health and consumer protection (T.17)

Employment and social affairs (T.04)

Regional policy (T.13)

Revenue (1)

38,1 (7)

Agriculture and natural resources (2)

51 044,3

Cohesion (1)

42 015,2

Part of T.05 and T.11 are included in this chapter of the Annual Report concerning the financial year 2007

Research, energy and transport (1)

4 483,8

Research (T.08)

Energy and transport (T.06)

Information society and media (T.09)

Direct research (T.10)

External relations (T.19)

Development and relations with ACP States (T.21)

Enlargement (T.22)

Humanitarian aid (T.23)

Education and culture (T.15)

Communication (T.16)

Area of freedom, security and justice (T.18)

Economic and financial affairs (T.01)

Enterprise (T.02)

Competition (T.03)

Internal market (T.12)

Trade (T.20)

Parliament (S. I)

Council (S. II)

Commission (S. III)

Court of Justice (S. IV)

Court of Auditors (S. V)

Economic and Social Committee (S. VI)

Committee of the Regions (S. VII)

European Ombudsman (S. VIII)

European Data-protection Supervisor (S. IX)

External aid, development and enlargement (3)

6 198,9

Education and citizenship (4)

1 453,0

Economic and financial affairs (5)

489,9

Administrative and other expenditure (6)

8 230,1

(1) Expenditure relating primarily to Financial Framework heading 1, ‘Sustainable growth’.
(2) Expenditure relating primarily to Financial Framework heading 2, ‘Preservation and management of natural resources’.
(3) Expenditure relating primarily to Financial Framework heading 4, ‘EU as a global player’.
(4) Expenditure relating primarily to Financial Framework heading 3, ‘Citizenship, freedom, security and justice’.
(5) Expenditure relating to Financial Framework headings 1 and 3
(6) Expenditure primarily relating to Financial Framework headings 5, ‘Administration’, and 6, ‘Compensations’ — see paragraph 11.1 for further details.
(7) This figure refers to ‘operational expenditure’ and not to the value of the ‘revenue’.

Grand totals

113 953,3

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

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 the legality
and regularity of underlying transactions in order to arrive at the
high level of assurance necessary to provide a robust conclusion.

(b) Under the legislation applicable (1), the Commission operates a
control cycle in relation to Community-funded expenditure which is
carried out over a period of years. It applies for instance clearance-
of-accounts procedures in agriculture, financial correction mecha-
nisms in structural measures, and recoveries in internal policies and
external actions. Errors which are detected during the course of a
multiannual project and the associated undue payments may be
recovered in a later year than the one under examination, such as
through reducing the final payment to take account of the short-
coming found.

The application of these procedures by Member States and the
Commission, and the other control measures effected provide, with
the limitations described in the 2007 annual activity reports, rea-
sonable assurance that the resources assigned to the Commission’s
activities have been used for their intended purpose and in accor-
dance with the principles of sound financial management. The con-
trol procedures put in place give the necessary guarantees concerning
the legality and regularity of the underlying transactions.

Thus the Commission assumes its final responsibility for the imple-
mentation of the budget laid down by Article 274 of the EC Treaty.

The Commission welcomes the Court’s increased emphasis on exam-
ining measures taken to detect and correct errors, principally through
financial corrections, clearance and recoveries. The Commission has
made substantial efforts to improve the quality of data on recover-
ies provided by Member States and is currently carrying out work
to verify the completeness and accuracy of these data.

Progress has been made in producing reliable evidence of the opera-
tion of the multi-annual corrective mechanisms. The Commission
has included in the notes to the annual accounts of the European
Communities for the financial year 2007 a new chapter about the
recovery of undue payments. The objective of this chapter is to give
an overview of the procedure in place for the recovery of undue pay-
ments and to present a best estimate of the total amount recovered.

(1) Article 53 of the Financial Regulation.

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1.34. The principal sources described above can be comple-
mented 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
the
legality/regularity of the underlying transactions;

in place

systems

ensure

that

the

(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) (39).

Definition and treatment of errors

1.35.
Errors may relate to a ‘condition for payment’ or to an
‘other compliance issue’. In general, payment conditions are
breached when legal requirements of the respective aid scheme or
contract are not fulfilled. On the other hand, other compliance
issues are specific conditions to be fulfilled, which result from
related policy objectives (protection of the environment, good
agricultural practices, etc.) or systems requirements (minimum
number of controls, prescribed structures and procedures, etc.).

1.36. The Court classifies errors as being either ‘quantifiable’ or
‘non-quantifiable’. The first category refers to errors, which have
a direct and measurable financial impact on the amount of under-
lying transactions financed from the EU budget (40).

1.37. Only quantifiable errors are taken into consideration
when estimating the financial impact of errors for the population
as a whole. Frequency of errors refers in this report to quantifi-
able and non-quantifiable errors (41).

(39) More detailed information can be found on the Court’s Internet site

www.eca.europa.eu.

(40) This includes, for example, serious cases of non-respect of public pro-
curement procedures affecting the conditions for payment (see for
instance paragraph 6.17).

(41) Quantifiable and non-quantifiable errors are classified as being either
limited or serious based on nature, context, financial importance
and/or proportion of transaction affected. Serious quantifiable errors
refer to errors above 2 %.

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General overview of audit results 2007

1.38.
In the area of Revenue, Economic and financial affairs and
Administrative and other expenditure, where the supervisory and
control systems, taken as a whole, are properly and correctly
applied (see paragraphs 4.40 to 4.41, 10.32 to 10.33 and 11.25),
the Court estimates that the errors have a financial impact of less
than 2 % of the total amounts (see Table 1.3). In addition, the
Court’s assessment of the declarations by Directors-General and
authorising officers by delegation confirmed that no, or only
minor reservations had to be presented (see paragraphs 2.6, 2.7
and 2.9 and Table 2.1).

1.38. The conclusions of the synthesis report 2007 state that the
internal control systems in place, subject to the limitations described in
the 2007 annual activity reports, provide reasonable assurance that the
resources assigned to the Commission’s activities have been used for their
intended purpose and in accordance with the principles of sound finan-
cial management.

However, it acknowledges that further efforts are needed to resolve a
number of weaknesses, in particular those highlighted in the reservations
of the delegated authorising officers — and those belonging to budget
areas that were not considered satisfactory by the Court of Auditors.

Table 1.3 — Summary of 2007 DAS results on the legality and regularity of underlying
transactions

Specific assessments of the 2007 DAS Annual Report

Paragraphs in
Annual Report

Functioning
of supervisory and
control systems

Error range

Revenue (1)

Agriculture and natural resources

Cohesion

Research, energy and transport

External aid, development and enlargement

Education and citizenship

Economic and financial affairs

Administrative and other expenditure

4.40-4.41

5.50-5.55

6.32

7.40-7.41

8.31-8.32

9.24

10.32-10.33

11.25

(2)

(3)

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 (in particular con-
cerning weaknesses of supervisory and control systems and types of error) 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 1.33 to 1.37).

Legend:

Functioning of supervisory and control systems

Effective

Partially effective (4)

Not effective

Error range (5)

Less than 2 % (below materiality threshold)

Between 2 % and 5 %

Greater than 5 %

(1) See scope limitations in paragraphs 4.4 and 4.9.
(2) The Court concludes that IACS continues to be effective in limiting the risk of irregular expenditure where properly implemented and if

accurate and reliable data is introduced as regards SPS payments based upon allocated entitlements (see paragraph 5.52).

(3) Rural development accounts for a disproportionately large part of the overall error rate: for EAGF expenditure the Court estimates the

value of the error rate to be slightly below 2 % (see paragraph 5.13)

(4) Systems are classified as ’partially effective’ 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.
(5) The error range cannot be interpreted as a confidence interval (in a statistical sense). It is the Court’s division of the scale of error rates into

three intervals.

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1.39.
In the area of Agriculture and Natural Resources, Cohe-
sion, Research, Energy and Transport, External Aid, Development
and Enlargement and Education and Citizenship, where supervi-
sory and control systems are at best only partially effective, (see
paragraphs 5.50 to 5.55, 6.32, 7.40 to 7.41, 8.31 to 8.32
and 9.25), the Court estimates that for these areas the errors have
a financial impact of more than 2 % of the total expenditure (42)
(see Table 1.3). In addition, the Court’s assessment of the decla-
rations by Directors-General and authorising officers by delega-
tion confirmed that major reservations were either presented or,
in the Court’s view, should have been presented for the areas in
question (see paragraphs 2.6 to 2.11 and Table 2.1).

1.39. The Commission aims to ensure that supervisory and control
systems are effective in detecting and correcting errors, with due regard
to the costs and benefits of the checks which have to be made on the spot.
Its action plan towards an integrated internal control framework has
been largely implemented and improvements are gradually being seen. Its
full impact is longer term.

As regards agriculture and rural development, the Commission under-
lines the Court’s finding that the most likely overall error rate is not sig-
nificantly different from last year’s, as reported in its 2006 statement of
assurance. Control statistics received from Member States indicate as well
that the error rate found at the level of final beneficiaries under the
EAGF, which accounts for about 85 % of total agriculture and rural
development expenditure, is below the materiality threshold. This recon-
firms for 2007 the positive results from 2006 acknowledged by the
Court in the Annual report 2006 (2). The annual activity report for
2007 of the Directorate-General for Agriculture and Rural Development
provides further details.

The Integrated Administrative Control System (IACS) covering most of
agricultural expenditure is effective in limiting the risk of irregular expen-
diture, where accurate and reliable data is introduced and the system is
properly implemented.

The 2007 agriculture and rural development expenditure likely to be
excluded from Community financing by future conformity decisions,
amounting to an estimated sum of EUR 439 million, together with the
EUR 152 million of recoveries from final beneficiaries (3).

In the cohesion area, the Commission is implementing an Action Plan
(COM(2008) 97 final) to strengthen its supervision of Member States’
systems so as to reduce errors.

The control strategy of the Research, energy and transport area aims to
detect and correct errors. When fully implemented over a period of four
years, this should ensure that the residual error rate (errors that remain
uncorrected) is below the materiality threshold, as described in detail in
the Annual Activity Reports of the Research Directorates-General.

(42) For Agriculture and Natural Resources the overall error rate is not significantly
different from the value obtained last year but does not take account of certain
serious errors which could not be quantified (see paragraph 5.13).

(2) OJ C 273, 15.11.2007.
(3) In 2007, 607 million euro was recovered by financial correction and 247 million euro
recovered from final beneficiaries by Member States (chapter 6 of the notes to the annual
accounts 2007).

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The errors in External aid, development and enlargement mostly concern
expenditure made by the organisations implementing the projects on
advance payments made by the Commission. Mandatory financial audits
foreseen under the Commission’s control system before the final payments
should allow the Commission to detect and correct such errors.

The errors concerning the Directorate-General for Education and Cul-
ture (DG EAC) are related to final payments of actions under the former
legal framework. The design of the new programmes for the 2007-2013
period has taken into account the Court of Auditors’ recommendations
of previous years to simplify the rules and to make extensive use of lump
sum financing. This should reduce the error rate in the future.

Furthermore, the results of the ex-post controls carried out by DG EAC,
as presented in its annual activity report 2007, do not identify a mate-
rial level of error.

See also replies to paragraphs 2.8, 2.11, 5.50 to 5.55, 6.32, 7.41-
7.42, 8.31 to 8.33 and 9.25.

1.40. The Commission would also point out that for the cohesion
area, there was an increase in the proportion of projects in which no
errors were found, and the Court’s overall assessment of the supervisory
and control systems improved from ‘not effective’ to ‘partially effective’.

As regards IACS, the Commission considers that the introduction in SPS
of support schemes that in the past had a higher level of risk, such as the
olive oil sector, has reduced the risk of incorrect spending by cancelling
the old production aid system.

1.40. Compared to previous years the following changes have
been noted: a reduction in the sample estimate of the level of
error has been identified for the policy areas formerly covered
under
Internal policies (43) and External actions (44)
(see
Table 1.3). The value of agricultural expenditure covered by IACS
has significantly increased through the inclusion of some higher
risk spending areas, including olive oil. The Court concludes,
however, that IACS continues to be effective in limiting the risk
of irregular expenditure where properly implemented and if accu-
rate and reliable data is introduced as regards SPS payments based
upon allocated entitlements. The recent introduction in SPS of
support schemes, such as those related to olive oil, is a positive
development although in the short term might lead to a higher
frequency of errors (see paragraph 5.52).

(43) The former ‘Internal policies’ are now covered under the policy
groups ‘Research, Energy and Transport’, ‘Education and Citizenship’
and ‘Economic and Financial Affairs’ (see Table 2.1).

(44) The former ‘External actions’ are now a part of the policy group
‘External Aid, Development and Enlargement’ (see Table 2.1).

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1.41. The Court emphasises that its audits in the areas of ‘Agri-
culture and Natural Resources’, ‘Cohesion’, ‘Research, Energy and
Transport’ as well as ‘Education and Citizenship’ show that com-
plicated or unclear eligibility criteria or complex legal require-
ments have a considerable impact on the legality and/or regularity
of underlying transactions (45).

1.41.
Simplification is a major element of the Commission’s better
regulation programme. The Member States are also required to simplify
the eligibility criteria in their national programmes. However, a certain
level of complexity is unavoidable and should be taken into account in
future discussions on a tolerable level of risk.

Assessment of progress made towards an effective
Community internal control framework

Introduction

1.42.
Paragraph 1.39 and Table 1.3 show that the majority of
spending by value has only partially or wholly ineffective super-
vision and control, and underlying transactions continue to con-
tain a material level of error. However, the 2007 and previous
annual reports identify that:

1.42. The Court’s assessment concerns the effectiveness of the super-
vision and control in preventing errors. The Community internal control
framework includes those controls necessary to detect and correct errors,
as well as those designed to prevent errors from occurring. The Commis-
sion will assess the impact of this framework on the effectiveness of the
systems as a whole.

For example, the control strategy of the research, energy and transport
area, as described in detail in the Annual Activity Reports of the Research
Directorates-General, aims to detect and correct errors so that, when fully
implemented over a period of four years, it should ensure that the residual
error rate is below the materiality threshold.

The level of residual risk (errors that remain uncorrected) which can be
accepted will be examined towards the end of 2008 in a Communica-
tion from the Commission.

(a) Commission internal control arrangements continue to
improve (i.e., annual activity reports — see paragraphs 2.8,
2.10 to 2.12 and 2.37) or remain at a high level (i.e. compli-
ance with internal control standards — see paragraphs 2.25
and 2.39);

(b)

the Commission has made progress in implementing its
action plan for an integrated internal control framework (see
paragraphs 2.29 to 2.36 and 2.39);

(c)

the Commission’s management of the budget has improved
over the last few years (see paragraphs 3.4, 3.6, 3.11, 3.15
and 3.30 to 3.32).

These seemingly contradictory observations are analysed in the
following paragraphs.

(45) For example, because of the often complex eligibility conditions,
errors were significantly more frequent among transactions underly-
ing the European Agricultural Fund for Rural Development (EAFRD)
examined by the Court than among transactions financed by the
European Agricultural Guarantee Fund (EAGF) and examined by the
Court. For EAGF expenditure the Court estimates the value of the
error rate to be slightly below 2 % whereas for EAFRD expenditure it
is estimated to be significantly above (see paragraph 5.13 of the
present Annual Report and paragraph 1.42 of the Annual Report
concerning the financial year 2006).

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Framework for supervision and control (46)

1.43. The EU budget involves payments made to millions of
individual final beneficiaries. Payments are made based on the
compliance of the final beneficiaries with legal or regulatory con-
ditions (such as beneficiary or costs meeting sometimes compli-
cated eligibility rules), as well as the accuracy and existence of the
underlying activities and/or costs. Some of these funding condi-
tions are determined by Community rules, including rules of gen-
eral application such as the public procurement directives, while
others are decided by the Member States. Final beneficiaries are
either paid directly (such as in the case of direct management) or
through the reimbursement of claims of eligible spending from
Member State authorities (notably in the case of shared manage-
ment).

1.44.
Payments are legal and regular when these conditions are
met, and the right beneficiaries receive the right amounts at the
right time. This requires adequate supervision and control. Ensur-
ing that the budget is properly spent — expenditure is legal and
regular as well as providing value for money — is the responsi-
bility of the Commission. For around 80 % of spending — cohe-
sion and agriculture — the task of implementation is shared with
Member States, which in practice means they have specific obli-
gations to select projects for funding, make payments and oper-
ate control systems, which manage the risks effectively and to
report on the outcome.

Factors affecting whether or not errors occur, or are not
1.45.
prevented or detected and corrected by control systems, are mul-
tiple. They include: the complexity of the eligibility rules and obli-
gations with which beneficiaries must comply, and their
familiarity with them; the way that claims are made and pro-
cessed; the number and extent of checks made; the extent of sanc-
tions imposed on over-claiming beneficiaries when errors are
detected; and the visibility — and associated deterrent effect — of
the control procedures. Therefore, well designed rules and regu-
lations which are clear to interpret and simple to apply, decrease
the risk of errors.

(46) Court’s opinion No 2/2004 on the ‘single audit’ model (and a pro-

posal for a Community internal control framework).

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1.46. Whatever management approach is involved, supervision
and control arrangements correspond to a framework compris-
ing three broad functional levels:

(a) primary level controls, which check compliance of final ben-

eficiaries with their regulatory obligations;

(b)

secondary level controls, which check the effectiveness of the
primary controls; and

(c) overall supervision by the Commission, to ensure that Member
States and/or Commission Directorates-General meet their
obligations and responsibilities in respect of their manage-
ment of the budget (47).

How the different levels of control operate

1.47. The nature of EU spending means that the main risk of
error resides at the level of the final beneficiary, who deliberately,
negligently or inadvertently makes claims for reimbursement of
expenditure that is ineligible because it does not meet the regu-
latory conditions, or is not properly documented or incorrectly
calculated. This is borne out by the Court’s previous audit find-
ings, as well as those in this annual report (see paragraphs 5.12
to 5.16, 6.22 to 6.27, 7.14 to 7.22, 8.9, 9.8 to 9.11 and 10.16
to 10.19). Not only does the main risk reside at this level, but also
errors can often only be detected reliably on the spot, making
desk-based checks only partially effective. This — together with
the fact that many millions of payments are made each year —
means that primary level of controls are expensive to undertake,
with overall cost being a direct function of the coverage.

1.48. On-the-spot checks made at this level often represent only
a small proportion (usually 5 to 10 % per year, depending on the
area) of individual claims. The Court finds weaknesses concern-
ing the checks in agriculture (see paragraphs 5.27, 5.28, 5.30
to 5.32 and 5.34 to 5.36) and Cohesion policies (see para-
graph 6.29), corresponding to weaknesses within Member State
authorities. Cases of poor quality primary controls were also iden-
tified for direct management, including Commission level checks
on reimbursements to research beneficiaries failing to operate sat-
isfactorily (paragraphs 7.29 and 7.30) and poor quality audits car-
ried out by independent auditors on individual claims (see
paragraphs 7.32 to 7.33 and 10.29 to 10.30).

(47) Overall supervision by the Commission may also draw on primary

and secondary level controls.

1.47. The Commission agrees that desk-based checks on claims can
only be partially effective in preventing errors. Therefore the Commis-
sion’s internal control framework increases assurance on the legality and
regularity of the expenditure on a multiannual basis through a higher
number of on-the-spot audits.

See also replies to paragraphs 5.12 to 5.16, 6.23 to 6.27, 7.15
to 7.22, 8.9, 9.8 to 9.10 and 10.16.

1.48. Whilst it is true that on-the-spot checks are rarely conducted for
all beneficiaries of the scheme, the regulatory administrative checks are
always carried out in respect of all individual claims. This is because
on-the-spot checks are too costly.

The recommended frequency of on-the-spot primary controls in structural
actions expenditure is much higher than the Court suggests as indicated
in the guidance note on good practice for management verifications for
the 2000-2006 period.

The Court’s comments principally concern errors which can only be
detected by checks on-the-spot, which are too costly to be undertaken
before paying every claim. Beneficiaries can be required to submit with
their final claim a certificate established by an independent auditor.

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In the research, energy and transport area, the control systems have been
significantly strengthened with the introduction of audit certificates as
from the sixth Framework Programme.

The Commission agrees that the reliability of the Sixth Framework Pro-
gramme (FP6) audit certification is not fully satisfactory, considering the
remaining level of errors noted in audits. Nevertheless, the overall level
of errors in FP6 is lower than the errors noted in uncertified cost claims
related to the Fifth Framework Programme (FP5). This indicates that
audit certificates do contribute to improving the accuracy of cost claims.

For the Seventh Framework Programme (FP7), the Commission has fur-
ther improved the reliability of audit certificates by using ‘agreed upon
procedures’, setting out in detail the audit work to be performed by the
certifying auditors and encouraging optional certification of the cost
methodology.

1.49. The Commission’s supervision is aimed at improving manage-
ment and control systems so that they prevent or detect and correct errors,
as the Court recommends, and also at ensuring that required corrective
measures are taken. It is not itself aimed at individual error detection.

(a) The Court’s findings referred to in paragraphs 5.47 and 5.48 are
inherent in the conformity clearance mechanism in agriculture and,
thus, cannot be considered as weaknesses of that mechanism. The
Commission considers that the mechanism is functioning well and
fully achieves the objective for which it has been designed, which is
to exclude expenditure from Community financing which has not
been effected in conformity with Community rules.

Moreover, where undue payments to beneficiaries can be identified
as a result of the conformity clearance, Member States are required
to follow them up by recovery actions against these beneficiaries.
However, even where recoveries from beneficiaries are not needed
because the financial correction only relates to deficiencies in the
Member States’ management and control system and not to undue
payments, these corrections are an important means to improve the
Member States’ systems and thus to prevent or detect and recover
irregular payments to beneficiaries.

See also replies to paragraphs 5.47 and 5.48.

1.49. The nature of primary level controls means that poor per-
formance at this level cannot be compensated for directly by sec-
ondary level controls. The effectiveness of the latter is therefore
determined by their ability to promote adequate control arrange-
ments at the primary level, rather than the ability to detect and
correct individual errors. The Court’s audit work on the 2007
financial year again found that secondary checks by Member
States and supervisory checks by the Commission (48), are not
achieving the desired level of effectiveness. For example, the Court
found weaknesses in:

(a)

the Commission’s conformity clearance in agriculture (see
paragraphs 5.47 and 5.48);

(48) This does not refer to the Commission’s Internal Audit Service and

Internal Audit Capabilities.

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(b) audits in Cohesion spending (see paragraphs 6.30 and 6.31);

(b) The Commission considers that in most cases the audits examined
by the Court in the Cohesion Policy area led to effective corrective
measures and operationally useful results. Furthermore, the Annual
Activity Reports of the competent Directorates-General set out in
detail the results of the audit activity, in particular remedial actions,
suspensions and financial corrections.

See also replies to paragraphs 6.30 and 6.31.

(c)

ex-post financial audits in research, energy and transport (see
paragraph 7.34); and

(c) The Research Directorates-General have significantly increased their

audit efforts in 2007 and have met their annual targets.

Attention is now turned towards the correction of the detected errors.
The Research Directorates-General are actively striving to improve
the monitoring tools and are issuing more precise administrative
and financial guidelines. These are expected to improve the efficiency
and completeness of the recovery process (including extrapolation
and follow-up of the Court’s findings).

(d)

ex-ante declaration of assurance in respect of the quality of
management and related monitoring visits (see para-
graphs 9.16, 9.17 and 9.20).

(d) The Directorate-General for Justice, Liberty and Security (DG JLS)
has improved its guidance and has set up an action plan for final-
ising its monitoring visits. See replies to paragraphs 9.16, 9.17
and 9.20.

1.50. Weak primary and secondary controls cannot be com-
pensated by the Commission’s supervision. The purpose of this
supervision is to ensure that adequate primary and secondary
level control arrangements are in place, and are being operated
effectively. Weaknesses at the lower levels should be identified
(for example in the Directorate-Generals’ annual activity reports),
and measures taken to remedy the situation (see paragraph 2.40).
Supervision occurs at different levels within the Commission,
both at Directorates-General involved in shared management
expenditure, and at the highest level of the Commission in respect
of individual Directorates-General.

1.50.
In agriculture, weaknesses in Member States’ management and
control systems are detected through conformity clearance procedures and
may lead to financial corrections being imposed on Member States. These
corrections are an important means to improve the Member States’ sys-
tems and thus to prevent or detect and recover irregular payments to ben-
eficiaries.

In the cohesion sector, the Commission is acting in accordance with the
Court’s recommendations. It is targeting its audit work at improving the
effectiveness of primary controls and at the same time is investing in pre-
ventive activities such as guidance on good practices and training of
national authorities. It also takes actions to mitigate the risk of deficient
systems through the application of financial corrections. The Commis-
sion identifies systems with significant deficiencies, and presents the cor-
rective actions being undertaken to remedy these, in the Annual Activity
Reports of the Directorates General concerned.

See also reply to paragraph 2.40.

1.51. This process is hampered by factors directly linked to the
number of beneficiaries, the complexity of the rules, the difficulty
in checking compliance and the dissuasive effect of financial cor-
rections and sanctions.

1.51. These are inherent risks of certain policy areas which have to be
taken into account in determining the control strategy, in particular in
the context of multiannual programmes.

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Cost and benefits of controls should be balanced and approved

1.52. The Court’s Opinion No 2/2004 recommends that con-
trol systems governing Community expenditure should strike an
appropriate balance between the cost of controls, and the ben-
efits they bring in terms of reducing the risk of error in transac-
tions to a reasonable level (residual risk). This requires recognition
by all participants in the budget process:

1.52. The Commission agrees with the recommendations in the
Court’s Opinion No 2/2004, and is implementing them within its
Action Plan towards an Integrated Internal Control Framework, as pre-
sented in its progress report (COM(2008) 110 final). It is continuing
its work on the costs and benefits of controls under point 10 of this
Action Plan and will re-launch the debate on tolerable risk towards the
end of 2008.

(a) not all final beneficiaries can be checked on the spot, and
therefore some residual risk of error will always be present.
The key issue is to set that risk at an appropriate (tolerable)
level, taking into account the nature of the different types of
spending, the complexity of existing rules and the dissuasive
effect of sanctions available;

(b) costs of control are an important issue, both for the EU bud-

(b)

It is particularly the cost of on-the-spot checks which is high.

get and Member or beneficiary states; and

(c)

the balance between cost and residual risk for individual
spending areas is of such importance that it should be
approved by the political level (i.e. by the budget/discharge
authorities) in the name of the citizens of the Union;

(d)

if a scheme cannot be satisfactorily implemented at an
acceptable level of cost and with tolerable risk it should be
reconsidered.

1.53.
Establishing an internal control framework based around
these rational principles would allow control systems to be
defined in terms of what they should achieve (49) (output targets),
as well as agreed criteria against which to judge and audit their
performance.

1.53. The Commission will examine this idea. The current guidance
in the Cohesion policy area already encourages a results-oriented
approach to controls based on the recording of error rates and their varia-
tion over time, and a requirement to monitor and report error rates is
mandatory in the legislation for the 2007-2013 period. In agriculture,
the results of the checks required under IACS are closely monitored.

1.54. The Court encourages the Commission to conclude its
analysis on the cost of controls and on the different levels of risk
inherent in the spending areas (50). A realistic, transparent, ratio-
nal and cost-effective approach to risk management would, in the
Court’s view, be to the benefit of contributors and beneficiaries
alike.

(49) Also in terms of residual risk output targets, rather than inputs (i.e.
percentage of claims to be checked) as presently (see para-
graph 2.42(b)).

(50) A Communication on this issue is to be published by the Commis-

sion in October 2008.

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39

CHAPTER 2

Commission internal control system

TABLE OF CONTENTS

Introduction

Audit findings concerning Commission’s Management Representations

Synthesis report of the Commission

Annual Activity Reports and Declarations by Directors-General

Process of preparation

Declarations by the Directors-General

Legality and regularity indicators

Assurance drawn from Annual Summaries

Materiality criteria and criteria for defining reservations

Commission’s internal control standards

Compliance with baseline requirements

Effectiveness at the end of 2007

Effectiveness and the transition to the revised standards

Action plan

General assessment

Assessment by action

Implementation of actions has progressed …

… with one notable exception

First assessment of the impact of the Action Plan

Overall conclusions and recommendations

Conclusions

Recommendations

Paragraph

2.1

2.2-2.23

2.2-2.5

2.6-2.23

2.8

2.9-2.14

2.15

2.16-2.20

2.21-2.23

2.24-2.28

2.25

2.26

2.27-2.28

2.29-2.36

2.29

2.30-2.33

2.30

2.31-2.33

2.34-2.36

2.37-2.42

2.37-2.40

2.41-2.42

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

2.1. This chapter reports on the Commission’s progress in 2007
in improving the effectiveness of its supervisory and control sys-
tems in its Directorates-General in order to ensure the legality and
regularity of transactions financed by the EU budget. In particu-
lar, it analyses the extent to which:

2.1.

(a)

(b)

(c)

the management representations contained in the annual
activity reports and the declarations of the Directors-General
and in the Commission’s Synthesis report are confirmed by
the Court’s audit findings (paragraphs 2.2 to 2.14);

the Commission has succeeded in increasing assurance on
legality and regularity by the use of indicators, relevant mate-
riality criteria and annual summaries (paragraphs 2.15
to 2.23);

the Commission has made progress on the implementation
of internal control standards and on the integrated internal
control framework, and the extent to which it has been able
to demonstrate their impact on 2007 expenditure (para-
graphs 2.24 to 2.36).

(c) The internal control systems in place, with the limitations described
in the 2007 annual activity reports, provide reasonable assurance
that the resources assigned to the Commission’s activities have been
used for their intended purpose and in accordance with the prin-
ciples of sound financial management. The control procedures put
in place and the follow-up of the Court’s audit findings give the nec-
essary guarantees concerning the legality and regularity of the
underlying transactions.

The Commission is taking action to further improve its internal
control system in the light of its own experience and to address
issues raised by auditors. Actions taken in 2007 included the revi-
sion of the internal control standards for effective management, the
continued implementation of the Action Plan towards an Integrated
Internal Control Framework and revised guidelines for the annual
activity reports.

The Commission is tackling issues, such as those highlighted in the
reservations of the delegated authorising officers. It will explain
more clearly the reasons where there are differences of opinion
between the Court’s annual view, required by the EC Treaty, and the
managers’ multiannual view, which takes into account the measures
taken to detect and correct errors which occur during the year.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

AUDIT FINDINGS CONCERNING COMMISSION’S
MANAGEMENT REPRESENTATIONS

Synthesis report of the Commission

2.2. By adopting the Synthesis Report the Commission assumes
its political responsibility for the operational implementation of
the budget through its Directors-General (1). The Commission
considers that the ‘control procedures put in place give the nec-
essary guarantees concerning the legality and regularity of the
underlying transactions for which the Commission takes overall
responsibility pursuant to Article 274 of the EC Treaty.’

2.3. The Commission acknowledges nevertheless that further
efforts are needed to resolve a number of weaknesses, in particu-
lar those highlighted in the reservations of the delegated autho-
rising officers and those belonging to the budget areas that were
not considered satisfactory by the Court of Auditors. In this
respect the Court considers that the scope of some reservations
should be greater than presented by the Commission’s Directors-
General (paragraph 2.12 and Table 2.1)

2.3. The Commission welcomes the improved assessment of the Court
in table 2.1 concerning the evidence given by the Directors-General in
their 2007 annual activity reports for the Court’s DAS conclusions.

The Commission considers that the scope of potential reservations was
in line with the criteria it established (see reply to paragraph 2.12).

The synthesis report takes account of reservations made by the Directors-
General in their 2007 annual activity reports and observations made by
the Court of Auditors in the 2006 annual report. The Commission is
then able to conclude that the internal control systems in place, with the
limitations described in the 2007 annual activity reports, provide rea-
sonable assurance that the resources assigned to the Commission’s activi-
ties have been used for their intended purpose and in accordance with the
principles of sound financial management.

(1) Communication from the Commission to the European Parliament,
the Council and the Court of Auditors — Synthesis of the Commis-
sion’s management achievements in 2007, COM(2008) 338 final,
4.6.2008.

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

Policy Group (1)

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

2005

2006

2007

Agriculture and
natural
resources

— Insufficient implementation of IACS in Greece

×

×

— Expenditure under Rural Development

×

×

Cohesion

— ESF: management

and

control

systems

(2000/2006)

×
United Kingdom

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

×
Spain, United King-
dom, France, Italy,
Slovakia, Portugal,
Belgium and Luxem-
bourg

— ERDF: management

and control

systems

(2000/2006)

×
United Kingdom
and Spain

×
England and Scot-
land (United King-
dom)

×
Czech Republic,
Finland, Germany,
Greece, Ireland,
Italy, Luxembourg,
Poland, Slovakia and
Spain

×
On a total of 51
programmes

×
Bulgaria, Czech
Republic, Slovakia,
Hungary and Poland

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

×
Spain

×

×
6th Framework Pro-
gramme

×
6th Framework Pro-
gramme

— Interreg: management and control systems

(2000/2006)

— Cohesion Funds: management and control sys-

tems (2000/2006)

×
Greece

Research,
energy and
transport

— Insufficient assurance/weaknesses on manage-

ment through National Agencies

— Lack of evidence to determine the residual level
of error with the regard to the accuracy of cost
claims

×

×

— Error frequency (eligibility) in the cost claims

for research contracts

×
5th Framework Pro-
gramme

×
5th Framework Pro-
gramme

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

2005

2006

2007

— Management and control systems in the Mem-
ber States concerning rural development

×

— On the control, inspection and sanction sys-
tems relating to fisheries resources: catch data
are incomplete and unreliable, inspection sys-
tems do not provide assurance

×

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

×

— Management and control systems in the Mem-

×

×

ber States (2000/2006) (4)

— Error frequency for 6th Framework Programme

×

of research (4)

Impact of these most
important reservations
on the Director-
General’s assurance in
the Court’s view (2)

2005

2006

2007

B

B

B

B

B

B

B

B

B


















Evidence given by the annual
activity report for the Court’s
audit conclusions (3)

2005

2006

2007

B (5)
C (6)

B (5)
C (6)

B

C

C

B

B

B

B


















4
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
0
1
1
2
0
0
8

.

Policy Group (1)

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

2005

2006

2007

Impact of these most
important reservations
on the Director-
General’s assurance in
the Court’s view (2)

2005

2006

2007

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

2005

2006

2007

Evidence given by the annual
activity report for the Court’s
audit conclusions (3)

2005

2006

2007

.

1
0
1
1
2
0
0
8

.

B

B

B

E
N

External aid,
development
and enlarge-
ment

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

×

— Phare: Potential irregularities in the manage-
ment of Phare funds by certain Implementing
Agencies in Bulgaria

Education and
citizenship

— Absence of a structured ex-post control system
and of on-the-spot controls in the DG as well as
controls carried out in the representations for
the major part of the year — 10 out of 12
months

— Weaknesses in the management and control
system of the European Refugee Fund in Italy
for
the programming period 2000-2004
and 2005-2007

— Limited assurance as to the underlying opera-
tions’ legality and regularity implemented by 14
Member States in the framework of the Euro-
pean Refugee Fund II (2005-2007)

— Weaknesses in the European Fund for Refugee’s

management and control systems

Economic and
financial affairs

— Possibility that additionality requirements are
not sufficiently met for one financial activity
implemented by an external body

— The rate of residual errors with regard to the
accuracy of cost claims in Sixth Research Frame-
work Programme — FP6

— Unsatisfactory functioning of the financing of

European standardisation

NA (1)

NA (1)

Administrative
expenditure

— Implementation of internal control standards in

the EU’s delegations

×

×

×

×

×

×

×
(Italy)

×

×

×



















— 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

A

A

A

— Weaknesses in the assessment by the Commis-
sion of the ex-ante declarations submitted by
Member States for the Lifelong Learning Pro-
gramme

NA

B

NA

B

×

×

×

NA

NA

A

A

A

— Weaknesses in the supervisory and control sys-

tems in the EU’s delegations (4)

×



















NA

B

NA

A

A

A

A

Key:
(1) The Court has decided to regroup the specific assessments for DAS purposes around policy groups. These correspond to the different chapters in this current Annual Report, but may not always allow a direct comparison with the data in the equivalent table in the Court’s Annual

(2)

Report 2006.
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 but with qualifications concerning identified weaknesses in the internal control system.
C: no assurance.

(3) 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: supporting evidence for the Court’s DAS conclusions after corrections.
C: no supporting evidence for the Court’s DAS conclusions.

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

Court of Auditors.

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

4
3

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.4.
For the Structural Funds, the Commission indicates that it
provided aggregate figures for financial corrections made at
national level through withdrawals and recoveries by Member
States (2). However, the Commission should put more emphasis
in its Synthesis Report on ‘gaps and inconsistencies’ in the data
from the Member States. The measures intended to improve the
quality of the information should therefore not be limited solely
to the Commission, as stated in the Synthesis Report, but also
extended to Member States (see also paragraphs 1.42, 2.31
to 2.33 and 3.26 to 3.28).

2.5.
For some of the Commission’s multiannual objectives its
assessment is different to that made by the Court. The Commis-
sion rates, for example, its objectives of achieving an effective
internal control system and of promoting accountability through
Annual Activity Reports as completed. However the Court notes
that although the internal control standards have been imple-
mented, the effectiveness of a number of supervisory and control
systems in preventing or detecting and correcting errors cannot
yet be demonstrated (see also paragraph 2.26) and that the scope
and scale of some of the reservations in the Annual Activity
reports should be broader in order to fully reflect their potential
impact (see paragraph 2.12).

2.4. The annex to the 2006 annual report on the Structural Funds,
to which the Synthesis Report (COM(2008) 338 final) refers, and the
2007 annual accounts acknowledge that there are gaps and inconsis-
tencies in the data received from Member States.

The 2007 Synthesis Report repeats the Commission’s commitment (see
section 3.1) to provide the European Parliament with quarterly reports
on the progress in implementing its action plan to strengthen the Com-
mission’s supervisory role under shared management of structural actions
(COM(2008) 97 final). These quarterly reports include information on
corrections and recoveries imposed by the Commission in the area of
shared management, and the second quarterly report contains informa-
tion on withdrawals and recoveries by Member States reported in 2008
in relation to the previous year. The Commission’s action plan includes
measures aimed at improving the quality of the information provided by
Member States.

See also replies to paragraphs 2.32, 2.33 and 3.26, and 3.27 to 3.28.

2.5. The Commission’s synthesis report (COM(2008) 338 final,
annex 3) rated some of the initiatives to meet the objectives as being
completed. This does not imply that the Commission considers that no
further actions will be taken to improve the internal control systems or
the annual activity reports in future. The Commission is committed to
continuously improving its internal control system.

For example in 2007 the Commission closed two specific initiatives
under the objective promoting accountability through annual activity
reports and a new action has been introduced which consists in promot-
ing consistency in the treatment of reputational risks and in addressing
more clearly the link between error rates, materiality and reservations.

The action concerning the annual activity reports and Synthesis has been
taken. Directors-General now give a fuller explanation on their environ-
ment, on the risks faced and on the overall impact on assurance. For
example, in the areas of cohesion and agriculture, the reservations made
by the Directors-General in their 2007 annual activity reports were in
the Commission’s view in line with the materiality criteria established
and covered all systems where there were material deficiencies and that
the potential impact of reservations was adequately assessed.

Before signing their declarations, the Directors-General consider the
effectiveness of the control framework as a whole, not just its effective-
ness in preventing errors.

See also the replies to paragraphs 2.12, 2.25 and 2.26.

(2) By referring to the annex to the report on the Structural Funds

SEC(2007) 1456.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Annual Activity Reports and Declarations by
Directors-General

2.6.
In its examination of annual activity reports and the decla-
rations of the Directors-General, the Court has assessed the extent
to which they present a fair picture (i.e. with no significant dis-
tortions) of the effectiveness of the procedures in place. In par-
ticular, whether supervisory and control systems generate the
necessary assurance in so far as the legality and regularity of the
underlying operations are concerned.

2.7. A review was carried out on all annual activity reports,
complemented by an in-depth analysis on those of 15 Director-
ates-General.

Process of preparation

2.8. The guidance (3) for the 2007 annual activity reports
emphasised the need expressed by the central services of the
Commission to clarify the link between the effectiveness of inter-
nal control systems and the basis on which the declarations are
built. In practice, most Directors-General explained in detail the
‘building blocks’ or key elements on which they have based their
assurance.

Declarations by the Directors-General

2.9. All the Directors-General stated that they had obtained rea-
sonable assurance that the resources allocated to them had been
used for the specified purposes and that the internal controls
which they had introduced ensured the legality and regularity of
the underlying transactions, in a number of cases subject to res-
ervations. The Court assessed the basis for these statements by
comparing their coverage and impact with the results of the
Court’s own audit.

(3) 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
the year 2007, SEC(2007) 1645 of 12.12.2007.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.10. Out of the 40 declarations for 2007, 13 (4) contain one
or more reservations, the majority of which refer to weaknesses
concerning the legality and regularity of the underlying transac-
tions. The total number of reservations fell from 20 (2006)
to 17 (2007), although their combined financial impact increased.

2.11.
For Directorates-General for Regional policy and for
Employment, Social Affairs and Equal Opportunities the total
estimated financial quantification of the impact of their reserva-
tions increased from approximately 140 million euro in 2006 to
nearly 725 million euro in 2007 (5). For the Directorate-General
for Agriculture and Rural Development the new reservation for
2007 on Rural Development expenditure is based on information
from Member States which shows an error rate in excess of 3 %.
However, this information had not been validated by the certifi-
cation bodies or accepted by the Directorate-General. The most
significant reservations in the context of the legality and regular-
ity of underlying transactions are shown in Table 2.1.

2.11. The annual activity reports of the Directorates-General for
Regional Policy, and for Employment, Social Affairs and Equal Oppor-
tunities set out both the amounts at risk, namely the payments relating
to the systems affected by deficiencies, and the quantification of the finan-
cial impact. The latter is made by reference to scales of flat rate correc-
tions for deficiencies in the management and control systems. The
Commission considers that this approach gives a fair assessment of the
potential financial impact of deficiencies detected.

The reservation for 2007 on Rural Development expenditure was based
on information made available by the Member States by 31 March
2008 as well as audit results of the Court.

For the 2008 budget, the Commission is expecting to have validated
information from Member States before the end of March 2009.

2.12. The table shows that the annual activity reports provide
clear and unambiguous evidence for the Court’s DAS conclusions
for administrative expenditure and for economic and financial
affairs only. For most policy areas the annual activity reports are
closer to the conclusions of the relevant DAS specific assessment
than in previous years, particularly in the case of agriculture and
cohesion policies. The Court notes, however, that the scope and
scale of these reservations should be broader in order to fully
reflect their potential impact and, for a number of policy areas the
Directors-General still arrive at a more positive conclusion on the
legality and regularity of EU spending than the Court’s own audit
findings.

2.12. While the Court expresses an annual audit opinion on the legal-
ity and regularity of the underlying transactions (as required by the EC
Treaty), the opinion of the Directors-General focuses on whether funds
have been used for their intended purpose, taking account of the multi-
annual nature of controls, and their effectiveness in detecting and cor-
recting errors. Directors-General express a management opinion based
on information which includes the Commission’s own audit work, reports
and observations of the Court of Auditors and, where relevant, the results
of Member States’ controls.

As already mentioned under the replies to paragraphs 2.3 and 2.5, the
Commission considers that the reservations made by the Directors-
General in their 2007 annual activity reports or the absence of reserva-
tions were in line with the materiality criteria established and covered all
systems where there were material deficiencies, and that the potential
impact of reservations was adequately assessed.

(4) Directorates-General AGRI, REGIO, EMPL, RTD, INFSO, ENTR, TREN,

ENV, JLS, ECFIN, ELARG, COMM and DIGIT.

(5) The overall amount of payments relating to the systems at risk is
10 200 million euro (approximately 28 % of cohesion expenditure).
The Directorates-General quantified the impact of these reservations at
726 million euro (2006-140 million euro) on the basis of an estimated
5 or 10 % flat-rate correction.

Before signing their declarations the Directors-General consider the effec-
tiveness of the control framework as a whole, not just its effectiveness in
preventing errors.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.13. As regards the policy area Education and Citizenship, the
assurance provided by the Directors-General is not compatible in
some significant respects with the Court’s findings. The Court
found significant weaknesses in the ex-ante declaration procedures
under the responsibility of Directorate-General for Education and
Culture (see paragraphs 9.17 and 9.25), however these weak-
nesses are not shown as a reservation of the Director–General. For
the Directorate-General for Communication there is a reservation
on the lack of structured ex-post controls, but the Court also finds
that there are significant weaknesses in ex-ante controls (see para-
graphs 9.23 and 9.25).

2.14.
In the policy area External Aid, Development and Enlarge-
ment the Court finds that underlying transactions are affected by
a material level of error of legality and/or regularity mostly within
transactions managed by implementing organisations (see para-
graph 8.31) and that the supervisory and control systems are par-
tially effective (see paragraph 8.32). These findings are not
adequately reflected by the Directors-General in their reservations.

2.13. The Directorate-General for Education and Culture (DG EAC)
has based its assurance on a comprehensive set of controls and not only
on the procedure of assessing the ex-ante declaration.

The management and control system provided for in the legal basis of
the Lifelong Learning Programme 2007-2013 improves the 2000-
2006 system taking account of the Court’s recommendation. The Com-
mission controls in earlier years contributed,
together with those
undertaken in 2007, to DG EAC’s conclusion that control systems pro-
vide reasonable assurance, though significant improvements are needed
in the application of the control system at the level of checks by the
national authorities.

Furthermore, the results of the ex-post controls carried out by DG EAC,
as presented in its annual activity report 2007, do not identify a mate-
rial level of error.

In relation to the system as a whole, the Directorate-General for Com-
munication had already entered a reservation in its annual activity report
because of the lack of supervision, and had adopted the necessary mea-
sures to improve matters, starting with the establishment on 1 Novem-
ber 2007 of a monitoring unit which now incorporates the second level
ex-ante control.

See also replies to paragraphs 9.17, 9.20, 9.23 and 9.24.

2.14. The Court concludes on materiality against a sample of trans-
actions which cuts across several Directorates-General. Yet each Director-
General can conclude and report on materiality only for his own area.

Having examined the errors detected by the Court and taking into
account future possible corrections, notably as a result of mandatory
audits, the Commission considers that the residual risk of error is not
material.

The errors detected by the Court mostly concern expenditure made by the
organisations implementing the projects on advance payments made by
the Commission. Mandatory financial audits foreseen under the Com-
mission’s control system before the final payments should allow the Com-
mission to detect and correct such errors. The Commission considers the
residual risk of error to be sufficiently mitigated.

The Commission is however committed to further improving its systems
and additional measures to further reinforce controls at the level of imple-
menting organisations were taken in 2007, including revised terms of
reference for audits of projects.

See also the reply to paragraph 8.31.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Legality and regularity indicators

2.15. The Commission has placed particular emphasis on pro-
viding regularity indicators in the 2007 Annual Activity
Reports (6). Most Directors-General have used the indicative inter-
nal control templates to show how relevant legal, regulatory and
contractual provisions have been complied with and how these
could be connected with reasonable assurance (7). For one
Directorate-General, however, the basic data used is not reliable
and/or the link with legality and regularity is not clearly estab-
lished (8). Almost all Directors-General have not included com-
parable indicators for previous years nor set legality or regularity
targets (9).

2.15. The Commission developed several internal control templates
aimed at presenting the control strategies in a harmonised way, but
adapted to different management issues or modes. Legality and regular-
ity indicators, aimed at facilitating the monitoring and reporting on
legality and regularity of transactions, became mandatory for the 2007
annual activity reports. The Commission considers that this constitutes
an important first step but recognises that some improvement will have
to be made in terms of reliability and clarity of the indicators. They need
to be fully and easily used for follow-up and monitoring purposes.

Assurance drawn from Annual Summaries

2.16. Article 53b(3) of the revised financial regulation (10) pro-
vides that: ‘Member States shall produce an annual summary at the
appropriate national level of the available audits and declaration’ (11).
According to the instructions of the Commission’s Central ser-
vices, the Directors-General should present a preliminary assess-
ment of the assurance gained from the annual summaries in the
2007 annual activity reports (12).

(6) See the Annual Report concerning the financial year 2006, para-

graph 2.37(a).

(7) SEC(2007) 1645 of 12.12.2007. The use of such templates is obliga-
tory although may be adapted to the specific situation of the
DG/Service establishing the AAR.

(8) For example, in DG TRADE, indicators on commitment rates for
operational and administrative appropriations are given without a
clear interpretation of their relevance.

(9) Nor do they always indicate in their Annual Management Plans legal-
ity and regularity targets to be met in the future and demonstrated by
indicators in the Annual Activity Reports for 2008.

(10) Council Regulation (EC, Euratom) No 1995/2006 of 13 December
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).

(11) Applicable for the first time in 2008 and covering certified expendi-

ture and audit activity for 2007.

(12) SEC(2007) 1645 of 12.12.2007, p. 12.

10.11.2008

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Official Journal of the European Union

49

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

2.17. The Court has previously recognised that annual summa-
ries are an additional element of internal control and has encour-
aged the Commission to add value to the process by identifying
common problems, possible solutions and best practices and
using this information in its supervisory role (13).

2.18. The Court’s audit showed that as at 31 March 2008, 25
of the 27 Member States had submitted an annual summary. Of
this 25, a total of eight Member States did not comply with the
minimum requirements of the Financial Regulation and the
Implementing Rules (14) and a further 12 Member States only
partially. In addition, only 15 of these 25 Member States provided
a statement on the completeness and accuracy of the information
provided of which two related to the 2007-2013 programming
period for which only advances had been paid with little atten-
dant risk.

2.18. The Commission welcomes the Court’s conclusion that the Com-
mission adequately supervised the annual summary process by issuing
clear guidelines and pursuing non-compliance promptly.

The Commission has taken appropriate steps to follow up all cases of
non-compliance with the minimum requirements and issues concerning
the quality of the submissions.

An infringement procedure has been launched against the Member State
which failed to submit an annual declaration in line with the require-
ments of the regulation.

2.19. The disparity of presentation and the frequent absence of
a statement on the completeness and accuracy of the underlying
data have meant that the annual summaries do not yet provide a
reliable assessment of the functioning and effectiveness of the
supervisory and control systems.

2.19. Overall the outcome of the first round of annual summaries has
been positive in that almost all Member States finally complied with the
requirements and the Commission considers this provides a good basis
for improving the quality of the summaries for the next round. The Com-
mission will present a revised guidance note to Member States with rec-
ommendations aimed at obtaining a higher quality of their annual
summaries for 2008.

2.20. The Court considers that, for this first year of annual sum-
maries, the Commission has adequately supervised the process
both by issuing clear guidelines and by pursuing the reasons for
non-compliance with deadlines and criteria for scope or quality.

(13) Opinion of the Court No 6/2007 on the annual summaries of Mem-
ber States; ‘national declarations’ of Member States; and audit work on
EU funds of national audit bodies (OJ C 216, 14.9.2007, p. 3).

(14) In terms of scope or appropriateness of administrative level.

50

EN

Official Journal of the European Union

10.11.2008

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Materiality criteria and criteria for defining
reservations

2.21. Most Directorates-General have established materiality
criteria (15) in line with Commission guidelines and have adapted
them to their particular management modes, their internal con-
trol environment and control systems in Member States (16).

2.22.
Following a recommendation of the Court in its Annual
Report 2006 (17) the four main Directorates-General responsible
for the implementation of the EU budget under shared manage-
ment arrangements (18) have reviewed the method for assessing
the functioning of the management and control systems for struc-
tural actions in Member States. The Directors-General now con-
sider all programmes or systems for which an adverse audit
opinion has been issued by an appropriate body as containing,
‘significant deficiencies’, unless there is reliable audit evidence,
from a different source, to the contrary (19).

2.23. One Directorate-General applied materiality thresholds
which are not compatible with the other information and assur-
ance given elsewhere in its Annual Activity Report (20).

2.23. The central services of the Commission have committed them-
selves in the Synthesis Report to providing further guidance to the
Directorates-General to address more clearly the link between the error
rates, materiality and reservations.

However, for the case evoked in footnote 20, the expenditure concerned
was particularly immaterial to the Commission’s operations as a whole,
and the approach taken is consistent with the principle that Directorates-
General must find a balance between costs and benefits when setting up
their control systems. This is compatible with other statements as to the
high level of assurance.

(15) Defines the circumstances the non-respect of which means that a
weakness or series of weaknesses is considered significant enough to
warrant a reservation.

(16) Communication from the Commission — The 2002 review of the
implementation of activity-based management in the Commission,
including clarification of the methodology for the establishment of
annual activity reports (COM(2003) 28 final of 21.1.2003) et seq.

(17) See paragraphs 2.35 and 2.37(a).
(18) DGs AGRI (for EAGGF Guidance expenditure), EMPL, REGIO and

MARE.

(19) In the area of agriculture (EAGF and EAFRD) the materiality criteria
used was the level of errors detected at the level of final beneficiaries
and as a complementary criterion, the estimated financial risk of sig-
nificant deficiencies in management and control systems.

(20) DG DGT set a materiality level of 5 %. This is in spite of a budget for
2007 of non-differentiated appropriations of around 17 million euro
spent entirely by direct central management and the Director Gener-
al’s opinion that the internal control system in place provides reason-
able assurance regarding the legality and regularity of transactions
and
in
preventing/detecting/correcting errors.’ (Annual activity report 2007,
DG DGT, p. 25).

is moreover,

‘sufficiently

effective

robust

and

10.11.2008

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Official Journal of the European Union

51

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

COMMISSION’S INTERNAL CONTROL STANDARDS

2.24. The Court examined the application of selected internal
control standards (ICS) by a number of the Commission’s services.
The examination aimed to assess not only the degree of imple-
mentation of the minimum requirements (baselines), but also to
evaluate the effectiveness of the systems ensuring the legality and
regularity of underlying transactions. The latter is particularly
important for 2007 as it enables conclusions to be drawn about
the success of the Commission’s efforts in this field before the
general revision of the standards effective as from 2008.

Compliance with baseline requirements

2.24. The Commission is aiming to show that the implementation of
the standards is effectively contributing to management assurance. This
principle underlies the 2007 revision of the internal control standards
(effective from 2008).

2.25. The Court’s assessment of the implementation of the
internal control standards for the 2007 financial year shows that
the Directorates-General comply on average with 96 % (2006,
95 %) of the baseline requirements (see Table 2.2). The Commis-
sion has thus implemented ICSs to a consistently high degree
since 2004.

2.25. The Commission adopted its internal control standards in the
year 2000 as part of the reform launched that year. The standards and
their associated minimum requirements were intended to enable the
maturity of the Commission’s internal control systems to be measured.
The success of this approach is demonstrated by the consistently high
level of compliance reported both by the services and by the Court in
recent years.

Effectiveness at the end of 2007

2.26. Despite this achievement the Commission has been
unable to comprehensively demonstrate for 2007 that supervi-
sory and control systems are sufficiently effective in mitigating
the risk of error in certain policy areas such as Agriculture and
(para-
Natural Resources
5.51), Cohesion
(paragraph
graph 6.32) (21), Research, Energy and Transport
(para-
graph 7.41), External Aid, Development and Enlargement
(paragraph 8.32) and Education and Citizenship (paragraph 9.25).

2.26. The Commission acknowledges that measures have to be taken
in order to increase the effectiveness of the internal control and supervi-
sory systems for certain policy areas. This is a continuing process and
involves the further improvement of control systems including all control
levels.

See also replies to paragraphs 5.51, 6.33, 7.42, 8.31 and 9.25.

(21) A finding echoed by the Commission’s Internal Audit Service report
on ‘Preventing and Detection of fraud in the Structural Funds’,
19 December 2007. The Court also notes, however, the potential
mitigating effect of the actions outlined in the Communication from
the Commission to the European Parliament, the Council and the
Court of Auditors, ‘An action plan to strengthen the Commission’s
supervisory role under shared management of structural actions’,
COM(2008) 97 final of 19.2.2008.

Table 2.2 — The Court’s analysis of the implementation of internal control standards (with a direct link to the legality and regularity of underlying transactions) for selected
Directorates-General (Situation as at 31.12.2007)

5
2

Directorate-General or Service

General Services

Publications Office

Policies

Agriculture and Rural Development

Economic and Financial Affairs

Employment, Social Affairs and Equal Opportunities

Energy and Transport

Maritime Affairs and Fisheries

Information Society and Media

Regional Policy

Research

External Relations

Enlargement

EuropeAid

External Relations

Humanitarian Aid

Internal Relations

Budget

Office for Administration and Payment of Individual
Entitlements

Office for Infrastructures and Logistics in Brussels

Office for Infrastructures and Logistics in Luxembourg

Standard 11
‘Risk analysis and
management’

Standard 12
‘Adequate
management
information’

Standard 14
‘Reporting
improprieties’

Standard 17
‘Supervision’

Standard 18
‘Recording
exceptions’

Standard 20
‘Recording and
correction of
internal control
weaknesses’

Standard 21
‘Audit Reports’

Standard 22
‘Internal audit
capability’

2006

2007

2006

2007

2006

2007

2006

2007

2006

2007

2006

2007

2006

2007

2006

2007

A

A

B

A

A

B

A

A

B

A

A

A

A

A

B

A

B

A

A

A

A

A

A

A

A

A

A

A

A

A

A

B

A

B

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

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

B

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

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

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

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

Partial compliance was also noted for 2007 for the following: ICS 11 for Europe Aid, DGs EAC, DEV and ENTR, ICS 12 for DG TAXUD and BEPA and ICS 18 DGs ENV and SANCO.

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

.

1
0
1
1
2
0
0
8

.

10.11.2008

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Official Journal of the European Union

53

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Effectiveness and the transition to the revised
standards

2.27.
In 2007 the Commission decided to replace the current
ICS structure by basic principles and by more detailed related
requirements corresponding essentially to the former ICS and
baseline requirements (22). An analysis of the eight ICS relevant
for the Court’s assessment in 2007 reveals no material changes in
their new format.

2.27. The aim of the revision of the standards was to clarify and sim-
plify their implementation: the new standards cover the same areas but
use a language more accessible to all staff. The new framework also
removed overlaps between the previous standards and emphasises the
effectiveness of the control systems.

2.28. One of the components of the revised ICSs is the Internal
Control Effectiveness Assessment whereby Commission services
are required to judge and demonstrate the effectiveness of their
internal control systems in practice. This will be based on a pri-
oritisation of certain standards and an annual risk assessment by
management. However, as the ICSs are interdependent and
together form a control framework, the Commission must also be
in a position to demonstrate each year the effectiveness of the
internal control system as a whole.

ACTION PLAN

General assessment

2.29. December 2007 marked the end of the two year period
set by the Commission for the implementation of its Action Plan
towards an Integrated Internal Control Framework (23). The Com-
mission’s summary report for 2007 (24) provides a confident
assessment of progress made in the implementation of the actions
at this date, whilst indicating that the evidence of the effective-
ness of the actions in terms of reducing the level of error in the
underlying transactions may still be some way off.

See also reply to paragraph 2.28.

2.28. The requirement to report on effectiveness operates at two levels:

— showing that the standards themselves (covering financial and non-
financial issues) are effectively implemented within Commission ser-
vices; and

— showing that the systems in place within the Commission are effec-
tively managing the risk of error in the underlying transactions,
which is subject of this observation.

The implementation of selected priority standards within each service will
be reported in the 2008 annual activity reports, as the requirement goes
beyond pure compliance. The effectiveness of the internal control system
as a whole to guarantee the legality and regularity of underlying trans-
actions is the subject of the Delegated Authorising Officers’ declarations,
introduced with the annual activity reports in the year 2001.

2.29. The Action Plan aims to addressing specific gaps in the internal
control framework. The 16 actions were intended to be implemented over
a two year period to 31 December 2007. This objective was largely
achieved (the remaining actions are planned to be completed by the end
of 2008).

The implementation of the actions should be distinguished from the
impact these will have (see Commission Communication of 27 February
2008 (1): ‘…Reduction of errors and increase in assurance will only
build over time as the actions taken begin to have an impact on under-
lying control systems’). The Commission has committed itself to pub-
lishing an annual impact report covering the different actions.

(22) Communication to the Commission, ‘Revision of the Internal Con-
trol Standards and Underlying Framework — Strengthening Control
Effectiveness’, SEC (2007) 1341 of 16.10.2007.

(23) COM(2007) 86 final, p. 11.
(24) Communication from the Commission to the European Parliament,
the Council and the European Court of Auditors. Report on the Com-
mission Action Plan towards an Integrated Internal Control Frame-
work, COM(2008) 110 final, {SEC(2008) 259}, of 27.2.2008.

(1) COM(2008) 110 final: Report on the Commission Action Plan towards an

Integrated Internal Control Framework.

54

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Official Journal of the European Union

10.11.2008

THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

Assessment by action

Implementation of actions has progressed …

2.30. On the basis of the Court’s analysis (see Table 2.3), the
Commission has made progress in the implementation of its
Action Plan in 2007. Overall, at the end of 2007 a total of
21 (2006-2007) sub-actions have been implemented and 14
(2006-2019) remain in various stages of progress.

2.30. The Court’s analysis largely confirms the Commission’s own
analysis in its progress report of 27 February 2008 (COM(2008) 110
final). The implementation of the actions is a continuing process and is
being pursued vigorously. The impact of the actions is necessarily poste-
rior to their implementation over the years 2006 and 2007. A first
impact report will be made in early 2009.

Action 1 must necessarily be treated as completed, as the 2007-2013
rules are now largely adopted. Some simplification was achieved, nota-
bly in the areas of structural fund programming and in the acceptance of
lump-sum reimbursements in several policy areas.

On action 7c (Extend criteria for certification audits, focusing on the use
of ‘agreed-upon procedures’, to other management modes), the Commis-
sion underlines that this is in progress. Agreed upon procedures are used
in external aid and their use is being considered for education and cul-
ture.

For action 8N (contact with the Supreme Audit Institutions (SAIs) to
determine how their work can be used to provide assurance and the
launch of a case study on the key issues faced by SAIs in examining
Community expenditure) the work planned under the action plan is
almost completed as reported by the Commission. Contact with several
SAIs has been pursued, including with those Member States providing a
national declaration. A case study with the Slovenian SAI has led to con-
siderable improvements in the financial reports provided by the Commis-
sion to all national SAIs.

On Action 12 (Put in place steps to close gaps in the internal control
framework via the annual management plans and annual activity
reports) the Commission considers this implemented as Directorates-
General are required to analyse their risks as part of the annual man-
agement plan process and report on the effectiveness of their internal
control systems via the annual activity reports. While such analysis and
reporting is an ongoing responsibility of management, the Commission
considers that the gaps identified in the action plan are being addressed
through the standard reporting processes.

Table 2.3 — 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 as at
31.12.2007

Court’s assessment of the
stage of implementation as
at 31.12.2007

Commission’s assessment
of the impact achieved
(February 2008) (1)

Court’s preliminary
assessment of the impact
achieved as at
31.12.2007 (2)

Simplification and common control principles (Actions 1-4)

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

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

Completed

Completed

Not measurable

Withdrawn

Not implemented

—

—

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 struc-
tures for shared management and internal policies, taking the developed templates and con-
trol 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).

Completed

Implemented

Not measurable

Demonstrate how Directorates-General will gain assurance on the internal control struc-
tures 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).

Completed

Implemented

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

Completed

Implemented

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 suspen-
sions of payments (31.12.2007).

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

Completed

Implemented

Not measurable

Withdrawn

Not implemented

—

—

Management declarations and audit assurance (Actions 5-8)

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 coordinating 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

Not measurable

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

Combined with
action 7

—

—

—

1

2

3a

3b

3c

3d

3e

3N

4

5

6a

.

1
0
1
1
2
0
0
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

5
5

Reference

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

Assessment of the
completion by the
Commission as at
31.12.2007

Court’s assessment of the
stage of implementation as
at 31.12.2007

Commission’s assessment
of the impact achieved
(February 2008) (1)

Court’s preliminary
assessment of the impact
achieved as at
31.12.2007 (2)

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

Withdrawn

Withdrawn

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

Completed

Implemented

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

Withdrawn

Withdrawn

—

—

—

Not measurable

—

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

In progress

Being implemented

Not measurable

6b

7a

7b

7c

8

8N

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

Completed

Implemented

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 EU expenditure (31.12.2007).

Almost completed

Being implemented

Single audit approach: sharing of results and prioritising cost-benefit (Actions 9-11)

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

9a.1N

To oversee the initial stages of data-sharing in ABAC, the Commission will, for the Sixth
Framework 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).

Completed

Being implemented

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 2007-2013 (31.5.2007).

Almost completed

Being implemented

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).

See under sub-action
9b

See under sub-action
9b

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

implement a tool

Completed

Implemented

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

Completed

Implemented

5
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
0
1
1
2
0
0
8

.

Not measurable

Not measurable

Reference

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

Assessment of the
completion by the
Commission as at
31.12.2007

Court’s assessment of the
stage of implementation as
at 31.12.2007

Commission’s assessment
of the impact achieved
(February 2008) (1)

Court’s preliminary
assessment of the impact
achieved as at
31.12.2007 (2)

10a.1

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

Completed

Implemented

10a.2

10a.3

10a.4

10b

10N

11

11N

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

Completed

Implemented

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

Almost completed

Being implemented

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

Almost completed

Being implemented

Not measurable

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

Completed

Implemented

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).

Mostly completed

Being implemented

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

Almost completed

Being implemented

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).

Mostly completed

Being implemented

Not measurable

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).

Completed

In progress of imple-
mentation

Sector specific gaps (Actions 12-16)

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 receiving 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).

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).

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

12N

13.1

13.2

Completed

Implemented

Completed

Implemented

Completed

Being implemented

Not measurable

Not measurable

.

1
0
1
1
2
0
0
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

5
7

Reference

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

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).

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

Conclude for structural funds ‘contracts of confidence’ with eight 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).

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).

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

14a

14b

15

16a

16b

16c

Assessment of the
completion by the
Commission as at
31.12.2007

Court’s assessment of the
stage of implementation as
at 31.12.2007

Commission’s assessment
of the impact achieved
(February 2008) (1)

5
8

Court’s preliminary
assessment of the impact
achieved as at
31.12.2007 (2)

Completed

Implemented

Almost completed

Being implemented

Not measurable

E
N

Almost completed

Being implemented

Not measurable

Completed

Implemented

Completed

Implemented

Not measurable

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

Almost completed

Being implemented

(1) Based on a Commission grading system of 1 to 5 filled boxes.
(2) The Commission also states that the impact of the various (sub-)measures on the reduction of errors or the increase in assurance will only build over time as they begin to have an impact on the underlying control systems.
Source: Court of Auditors.

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
0
1
1
2
0
0
8

.

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… with one notable exception

2.31.
In March 2007 sub-action 11N was introduced aiming at
assessing whether recovery and off-setting systems were working
effectively, by identifying amounts recovered in both 2005
and 2006 and their coherence with errors identified during con-
trols.

2.32. Despite considerable efforts, the Commission was not
able to present complete and reliable figures for 2005 and 2006.
Moreover, the Commission was not able to demonstrate that the
figures eventually presented related to the years in question, took
into account all recoveries initiated by Member States and could
be reconciled transparently to published financial statements.

2.32. Chapter 6 of the notes to the annual accounts for 2007 gives
the best estimate of recoveries (see also reply to paragraph 3.29). In the
area of cohesion policy, the Commission publishes figures for financial
corrections which result from its own control activity. Improvements have
already been achieved as regards the reliability of this data. It is taking
steps to improve the reporting by Member States of the corrections fol-
lowing their control activity to ensure its future completeness.

2.33. The Commission’s initiative to record in the central finan-
cial and accounting system complete data on recoveries by the
Commission as from 2008 is a positive development. The Court
notes, however, that this opportunity has been lost for 2007.

2.33. The cost of retroactively updating all credit note records and
recovery order records for 2007 was considered prohibitive.

First assessment of the impact of the Action Plan

2.34. The Commission has made a first assessment of the
impact of the action plan as at February 2008 (25). Overall, it rates
the actions as beginning to show an impact with smaller varia-
tions noticeable between individual sub-actions (see Table 2.3).
To increase transparency the Commission should clarify the basis
for its impact assessment.

2.34.
From 2009, the emphasis of reporting will shift from imple-
mentation towards impact measurement. The Commission will provide
more information on the assessed impact of each action in its first impact
report in early 2009 with reference to specific impact indicators for each
action. The Commission can however already demonstrate real impact on
some actions, for example:

— (for action 3) the internal control templates and the enhanced peer
review process, along with clearer guidelines to Directorates-
General, has led to a measurable improvement in the annual activ-
ity reports, as shown in the Court’s Table 2.1;

— (for action 8N) the case study has led to improvements in the
reports provided to Supreme Audit Institutions which has in turn
led to more SAIs making use of these in their work;

— (for action 12) the audit strategy for Research Framework Pro-
gramme 6 has been recognised by the Court as ‘likely to contribute
to more effective operation of this [ex post] control’.

(25) COM(2008) 110 final, p. 2.

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2.35. Whilst the Court recognises that a large part of the Action
Plan has been implemented it does not find evidence for an
improvement which is directly and measurably linked to the
actions especially those related to the legality and regularity of
transactions. To the extent that the impact can be objectively
measurable, the Court considers that this can only be assessed
over a longer time frame.

2.35. Any simplification of the rules, and all improvement to the
Commission’s controls, will take time to have an effect on the prevention
of errors. Furthermore, many measures concern ex-post controls, and the
recovery of errors in years after they have occurred. The Commission
agrees with the Court’s view that impact can only be assessed over a
longer time frame as set out in the Commission’s February 2008 report
on the Action Plan (COM(2008) 110 final); see also response to para-
graph 2.29.

Certain of the actions within the action plan will also be taken further as
part of the Commission Action Plan to improve its supervision of the
Member States with regard to the Structural Funds.

2.36. The Court notes that the Commission intends to present
a first annual report in early 2009 on the impact of the Action
Plan.

OVERALL CONCLUSIONS AND RECOMMENDATIONS

Conclusions

2.37.
For 2007, the Court has identified further progress in the
Commission’s supervisory and control systems, in particular, the
improvement of the process of preparation of the annual activity
reports and declarations (paragraph 2.8), the impact of the rel-
evant reservations on the assurance given in the Directors-General
declarations (paragraphs 2.10 to 2.11) and a move towards
greater consistency with the conclusions of the DAS specific
assessments (paragraph 2.12).

2.37. The Commission welcomes the progress identified by the Court
and is committed to continuing its efforts. For example, the internal pro-
cess of ‘peer review’ examination before the finalisation of the annual
activity reports helped ensure the consistency and robustness of the
reports. This process will be further enhanced for the 2008 annual activ-
ity reports, as announced in the Synthesis Report.

2.38. The Court’s audits however identified for some annual
activity reports and declarations continuing weaknesses in the
scope and scale of reservation and in the assessment and func-
tioning of the supervisory and control systems (paragraphs 2.13
to 2.14).

2.38. The Commission has instructed its services to take vigorous
action to address the causes of reservations in the 2007 Annual Activity
Reports and will closely monitor progress, with special attention to recur-
ring reservations. During 2008, further guidance will be provided to ser-
vices to promote consistency in the treatment of reputational risks and
the link between error rates, materiality and reservations.

The Directors-General assess the functioning of the control framework as
a whole, not just its effectiveness in preventing errors. They take into
account the measures aimed at detecting and correcting errors, and pay
due regard to the costs and benefits of controls, in particular regarding
on-the-spot checks. Several measures were taken by the Commission so

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that the 2007 annual activity reports better demonstrate the link between
the effectiveness of internal control systems and the basis of assurance.
For example, Directors-General were invited to describe the ‘building
blocks’ on which they based their assurance and to explain the reasons
for any differences of opinion between the Court and themselves. These
differences will be addressed during 2008 and Directorates-General will
then report on these issues in their 2008 annual activity report.

The reservations made by the Directorates-General in their 2007 annual
activity reports were in the Commission’s view in line with the material-
ity criteria established and covered all systems where there were material
deficiencies and that the potential impact of reservations was adequately
assessed.

2.39. The Commission has been able to demonstrate a consis-
tently high degree of implementation of internal control stan-
dards since 2004 (see paragraph 2.25) and by the end of 2007,
had implemented more than two thirds of the sub-actions in its
action plan towards an integrated internal control framework
(paragraph 2.30).

2.40. However, the Court notes that the Commission is not able
to demonstrate that its actions to improve supervisory and con-
trol systems have been effective in mitigating the risk of error in
large areas of the budget. The Court does not yet find evidence to
support the impact of the action plan claimed by the Commis-
sion.

2.40. Over recent years, the improvements made in the legislative
frameworks for Community funding programmes, the improvement of
control conditions, the simplification of financial rules and the addition
of the annual summaries in shared and centralised indirect management
have been initiatives designed to improve the internal control framework
and to mitigate the risk of error in underlying transactions.

It is difficult to asses the impact of each action taken in 2006 and 2007
on the risk of errors. Any simplification of the rules, and all improve-
ment to the Commission’s controls, will take time to have an effect on
the prevention of errors. Furthermore, many measures concern ex-post
controls, and the recovery of errors in years after they have occurred. The
Commission agrees with the Court’s view that impact can only be assessed
over a longer time frame. The Commission is fully aware of the need to
demonstrate the impact of its action plan: the Synthesis Reports con-
cludes that the Commission will make all efforts to demonstrate the effec-
tiveness of its controls. The Synthesis Report also underlines that
addressing the causes of error is vital and that its services will issue guid-
ance on this subject.

The action plan was designed to meet specific gaps and the Commission
is taking many other measures to further improve its internal control sys-
tems. The Court’s own assessment indicates that improvements are being
made in internal control systems (notably the appreciation of annual
activity reports has risen in some cases).

The Commission can demonstrate the impact of some of the actions even
at this early stage and will present its first annual impact report in early
2009. See also replies to paragraphs 2.26 and 2.35, and to para-
graphs 5.51, 6.33, 7.42, 8.31 and 8.32, and 9.25.

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Recommendations

2.41. The Court recommends that the Commission continues
its efforts to ensure and demonstrate the effectiveness of the
supervisory and control systems of its Directorates-General by
focusing on the following areas:

2.41.

(a)

ensuring that annual activity reports and declarations present
a consistent assessment of supervisory and control systems
which is compatible with the reservations (paragraphs 2.12
to 2.14);

(a) While the Director-General remains solely responsible for the
annual activity report and for any reservation(s) made, the ‘peer
review’ of draft annual activity reports exercise was reinforced for the
2007 exercise. The annual activity reports and declarations do now
largely present a consistent assessment of supervisory and control
systems, taken as a whole, and not only their effectiveness in pre-
venting errors. This is compatible with the reservations. Further-
more, the Commission is improving the annual activity reports
process in certain areas, notably to ensure full consistency between
services and it will continue its efforts in this respect.

See also replies to paragraphs 2.12 to 2.14.

(b) collaborating with Member States to improve the informa-
tion provided in Annual Summaries and demonstrate how
this information has been used to gain assurance or add value
to the assurance provided in Annual Activity Reports (para-
graph 2.19);

(b) The Commission will present a revised guidance note to Member
States with recommendations to improve the quality of their annual
summaries for 2008.

See also reply to paragraph 2.19.

(c)

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 (paragraph 2.35), in particu-
lar in relation to sub-action 1 (simplification), sub-actions
10a and 10b (cost-effectiveness) and sub-action 11N (recov-
ery systems) (paragraph 2.31).

(c) A report on the impact of the Action Plan as at end-December
2008 will be presented in early 2009. The Commission will also
follow-up on the results of actions 4, 10 and 11 in a Communi-
cation in November 2008 which aims to re-launch the discussion
on tolerable risk.

For the cohesion policy, the Commission has made substantial
efforts to improve the quality of data provided by Member States
and is currently carrying out work to verify the completeness and
accuracy of this data.

See also reply to paragraphs 2.31 and 2.35.

2.42. The Court recommends that the legislative authorities and
the Commission be prepared to reconsider the design of future
expenditure programmes by giving due consideration to the fol-
lowing:

2.42.

(a)

simplifying the basis of calculation of eligible costs and mak-
ing greater use of lump sum or flat rate payments instead of
reimbursement of ‘real costs’;

(a) The Commission agrees that extra simplification is needed with

regard to cost eligibility issues.

The Commission has already committed under its Action Plan
towards an Integrated Internal Control Framework to make pro-
posals for simplified rules in future legislative rounds. It does not
however act alone and would also need the Legislative Authority to
ensure that simplification measures are included in future legisla-
tion.

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The Commission has undertaken to ensure that future legislative
proposals include clear and straightforward rules as concerns
extended use of lump sum or flat rate payments.

The current rules for Cohesion Policy already allow flat-rates in
some circumstances and the Commission will explore the scope for
extending this practice, which is presently applicable to only a lim-
ited number of cost categories. For capital projects, they are inap-
propriate because of
tendering rules and value-for-money
considerations.

As regards research, the Commission agrees that further simplifi-
cation is needed with regard to cost eligibility issues, particularly for
personnel and indirect costs. It draws attention to the legal limita-
tions of the 7th Framework Programme (FP7) and to the difficul-
ties to define lump sums and flat-rates which are representative.

Furthermore, the ex ante certification of cost calculation methodol-
ogy introduced in FP7 is a major step towards simplification. The
Commission refers to the issues discussed in its reply to para-
graphs 7.20-7.21.

(b)

re-defining control systems in terms of their output (the risk
objective and the resulting acceptable level of error) rather
than input as is currently the case (the number of checks to
be undertaken);

(b) The Commission accepts this recommendation, and will examine

how to implement it in practice.

(c) making progress in taking forward the concept of tolerable

risk.

(c) The Commission will make a Communication on this issue in
Autumn 2008 aimed at re-launching the interinstitutional discus-
sion on tolerable risk.

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CHAPTER 3

Budgetary Management

TABLE OF CONTENTS

Introduction

Observations

Underspending managed by amending budgets

Outstanding budgetary commitments 5,2 % higher than in the previous year

Year n + 2 rule accelerates payments

Commission report on budgetary and financial management

Financial corrections/recoveries as part of the budget process: better information on and
management of financial corrections required

Legal and organisational framework

Lack of complete and reliable information from Member States

Conclusions and recommendations

Paragraph

3.1-3.2

3.3-3.29

3.3-3.6

3.7-3.11

3.12-3.17

3.18-3.20

3.21-3.29

3.21-3.24

3.25-3.29

3.30-3.33

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INTRODUCTION

3.1. This chapter analyses issues arising from the implementa-
tion of the EU general budget in 2007, the first year of the mul-
tiannual financial framework 2007 to 2013. It covers in particular
the rate of budgetary implementation and the level of outstand-
ing budgetary commitments with a special focus on the applica-
tion of the n + 2 rule. This chapter also discusses financial
corrections and recoveries in respect of system weaknesses or
incorrect payments in previous years, which have to be taken into
account in the budget process.

3.2. A central task in the Commission’s budgetary management
is to ensure that the funds that the Council and Parliament have
allocated according to the EU’s political priorities are spent in
accordance with rules and following the principles of sound
financial management. The analysis of the implementation of the
budget is only one aspect of correct budget implementation. The
budget should also adhere to the principles of economy, effi-
ciency and effectiveness, which are more the subject matter of the
Special Reports issued by the Court than of this Annual Report.

OBSERVATIONS

Underspending managed by amending budgets

3.3. The budgetary appropriations adopted for 2007 (voted
budget and amending budgets) totalled 126,4 billion euro in
commitments and 113,8 billion euro in payments, an increase of
respectively 5 % and 6 % compared to the final budget 2006.
Overall, the total budgetary commitment appropriations of the
year were 2,5 billion euro below the financial framework ceiling,
while payment appropriations remained below by 10 billion euro
(see Diagrams III and IV in Annex I).

3.4. The seven amending budgets voted during the year resulted
in an overall 0,167 billion euro decrease in appropriations for
commitments and a 1,65 billion euro decrease in appropriations
for payments. The latter is mostly a reaction to lower than
expected spending in the areas of Competitiveness (0,5 billion
euro), Cohesion Policies (0,7 billion euro) and Agriculture and
Natural Resources (0,5 billion euro). Reducing appropriations for
payments in this way reflects good budgetary management as it
demonstrates the ability to react to changes and reduces the bud-
getary surplus (1) (allowing own resources to be returned to Mem-
ber States).

(1) The budgetary surplus (budget outturn) is the result of the implemen-
tation of the budget. It is not a reserve and it cannot be accumulated
and used in future years to finance expenditure. The unused revenue
that the surplus represents is offset against the own resources to be
collected for the following year.

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3.5. Diagrams III and IV in Annex I give detailed information
on appropriations for commitments and payment appropriations
for payments as well as their respective actuals in 2007 per head-
ing in the financial framework as well as by ABB policy area.

3.6. The Commission produces a series of documents (in part
overlapping) containing inter alia the following information on
the implementation of the budget of the European Communi-
ties (2):

3.6. The documents to which the Court refers are produced for differ-
ent purposes (see reply to paragraph 3.20).

— the budgetary surplus decreased from 1,9 billion euro in

2006 to 1,5 billion euro in 2007;

— utilisation rates for both commitments and payments, at
96 % and 98 % respectively, remain at a similar high level as
in 2006 (99 % and 96 %);

— 1,2 billion euro of unused payment appropriations (exclud-
ing assigned revenue) were not cancelled but carried over
from 2007 to 2008 or reprogrammed, a similar level to last
year;

— for the area of ‘Cohesion’ (included in the Titles 04, 05,
11 and 13 (3)) the 0,745 billion euro reduction in payment
appropriations resulted in a final utilisation rate of almost
100 %, (it would have been 97 % had the amending budget
not been adopted). Member States’ payment forecasts have
improved in recent years. The overall over-estimation was
reduced from 33 % in 2006 to 18 % in 2007.

— While Member States continue to improve the accuracy of the fore-
casts, they remain too inconsistent to be used for budgeting pur-
poses. However, with further improvement, they could become a
useful tool to help ensure continued high utilisation rates.

(2) Detailed information on budgetary implementation for 2007 can be
obtained from Part II of the Annual Accounts of the European Com-
munities, Financial Year 2007, the EC’s (DG Budget) documents
‘Report on budgetary and financial management — financial
year 2007’ as well as from the Report on the ‘Analysis of the budget-
ary implementation of the Structural and Cohesion Funds in 2007’,
pp. 57-58. It must be noted, however, that figures mentioned in the
different documents are not fully consistent and vary slightly.

(3) The titles cover policy areas 04-Employment and Social Affairs;
05-Agriculture and Rural Development; 11-Fisheries and Maritime
Affairs; 13-Regional Policy.

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3.7-3.9. Commitments are consistently budgeted higher than pay-
ments on account of a longer period for payments than commitments.
Commitments therefore generally increase year on year.

The n + 2/n + 3 rule in Cohesion Policy ensures that commitments are
largely used up within 2-3 years.

Outstanding budgetary commitments 5,2 % higher
than in the previous year

3.7. Outstanding budgetary commitments arise as a direct con-
sequence of differentiated expenditure, where expenditure pro-
grammes take a number of years to be completed and
commitments are made in earlier years before the corresponding
payments. One-off increases in commitments (for example, fol-
lowing enlargements) and underspending (failure to use all bud-
geted payment credits) can lead to an increase in the level of
outstanding commitments. As commitments are liquidated by
payments, the long-term effect of commitments significantly
exceeding payments is a structural build up of outstanding com-
mitments, with the situation being rolled forward each year (4).

3.8. Outstanding budgetary commitments (i.e. unused commit-
ments carried forward to meet future spending), mainly on mul-
tiannual programmes, increased by 6,855 billion euro (5,2 %)
to 138,6 billion euro. Referring exclusively to policy areas
financed through differentiated appropriations, the amount of
outstanding commitments totals 136 billion euro, which is
1,9 years worth of commitments or 2,1 years of payments at the
2007 spending rate in the respective policy areas.

3.9.
Structural Funds represent the biggest share of the out-
standing commitments. In this area, outstanding commitments
amounted to 84 billion euro (5)
(around 66 % of the total
representing 1,9 years worth of commitments
amount),
or 2,3 years worth of payments at the 2007 spending rate. How-
ever, 2007 was the first year of the new programming period.
Therefore, advance payments represent a share of around 20 % of
the overall amount of payments. Due to this, a comparison with
the reference values of last year of two possible indicators (the
year end outstanding commitments compared to the commit-
ments appropriations or the payments implemented in the year)
is not as meaningful as in preceding years.

(4) See also paragraphs 3.9 to 3.11 of the Annual Report concerning the

financial year 2006.

(5) For Cohesion see EC’s (DG Budget) report ‘Analysis of the budgetary
implementation of the Structural and Cohesion Funds in 2007’, p. 35.

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3.10. The closing date for many Cohesion Fund projects to incur
expenditure is in 2010. For the new programming period, the Cohesion
Fund is subject to the n + 2/n + 3 rule.

3.11. The Commission will make every effort to avoid any delay in the
closure of 2000-2006 programmes, which will essentially take place in
2010/2011. To prepare for closure, the Commission issued guidelines
in 2006 and has been holding closure seminars with Member States. It
is also carrying out audits of Member States’ preparations for closure (see
action 3.1 of the Commission’s Action Plan of 19 February 2008 to
strengthen its supervisory role in the shared management of structural
actions (COM(2008) 97 final). If the closing date for expenditure is not
met, the Commission will decommit the unspent funds when it closes the
programmes.

3.10. 13 % of the unused commitments (18,1 billion euro) con-
cerned the Cohesion Fund, despite the fact that it represents only
around 5 % of total authorised commitment appropriations for
2007. This is an increase of 2,7 billion euro or about 15 % com-
pared to 2006. The high level of outstanding budgetary commit-
ments regarding the Cohesion Fund represents 2,5 years worth of
commitments or 4,2 years worth of payment at the 2007 spend-
ing rate and reflects also the fact that this fund is not subject to
the n + 2 rule (see paragraphs 3.12 to 3.17). The spending rate
for the Cohesion Fund was less than expected, especially for
projects in Spain, the Czech Republic and Slovenia. An amending
budget reduced the payment appropriations by 0,67 billion euro
(14 %).

3.11. Concerning the outstanding commitments for Structural
Funds for the old programming period 2000 to 2006, a decrease
by 41 % from 78 billion euro (2,4 years worth of payments at the
2007 spending rate) to 46 billion euro (1,5 years worth of pay-
ments at the 2007 spending rate (6)) can be noted (7). However,
beneficiaries of the funds have only until the end of 2008 to make
payments in order to enable the Commission to liquidate the
remaining amount. In this context, the Commission has to ensure
that the closure of the old programming period 2000 to 2006
will not be delayed and therefore impacts negatively on the imple-
mentation of the approved new programmes for 2007 to 2013.
The Court notes a considerable improvement for the new pro-
gramming period as, due to the timely adoption of the pro-
grammes, over 98 % of appropriations for 2007 have been
committed in this policy area (8) as compared to around 50 % in
2000 for the old programming period.

(6) See EC’s (DG Budget) report ‘Analysis of the budgetary implementa-
tion of the Structural and Cohesion Funds in 2007’, table 5 and 6,
p. 13.

(7) See EC’s (DG Budget) report ‘Analysis of the budgetary implementa-
tion of the Structural and Cohesion Funds in 2007’, table 10, p. 37.
(8) Due to late submissions of Operational Programmes and/or lengthy
negotiations with Member States concerned, commitment appropria-
tions amounting to 130 million euro have been carried forward
to 2008, relating to one Convergence Operational Programme, nine
Territorial Cooperation Programmes and six IPA Cross Border Coop-
eration Programmes. Some related technical assistance actions were
also postponed to 2008 and 2009. See EC’s (DG Budget) Report on
budgetary and financial management; Financial year 2007 and Analy-
sis of the budgetary implementation of the Structural and Cohesion
Funds in 2007 (table 3, p. 12).

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Year n + 2 rule accelerates payments

3.12.
For structural actions, typically implemented over a mul-
tiannual period, a system of automatic decommitments was intro-
duced by Article 31 of Council Regulation (EC) No 1260/1999 of
21 June 1999 laying down general provisions on the Structural
Funds (9) for the period 2000 to 2006 in order to avoid an
increasing build-up of potentially abnormal outstanding commit-
ments being rolled forward each year. This mechanism is also
known as the year n + 2 rule.

3.13. An analysis of the outstanding commitments (‘RAL’ (10))
by the year of origin as published in the annual accounts (11)
shows the impact in the area of Structural Funds of efforts to
settle outstanding commitments by payments prior to the appli-
cation of the automatic decommitment rule. In the annual
accounts the outstanding commitments for the last three years of
the 2000 to 2006 period represent about 95 % of their total
amount. Conversely, only 5 % of outstanding commitments
which are not yet settled in the area of Structural Funds, refer to
earlier years.

3.14. While an accelerated payment process has been fostered
by the n + 2 mechanism (see paragraph 3.15), a steady increase
of the cumulative amount of outstanding commitments can be
noted in the area of Structural Funds (see Graph 3.1) reaching
79 billion euro at the end of 2007 (see also paragraph 3.7).

(9) OJ L 161, 26.6.1999, p. 1.
(10) For outstanding commitments the French acronym ‘RAL’ for reste à

liquider is often used.

(11) See Annual Accounts of the European Communities, Financial

Year 2007, table 13b.

3.14. As noted in the Commission’s replies to the 2006 annual report
(paragraphs 3.9-3.10), the build-up of outstanding commitments over
the period since 1994 has also been partly due to the changeover in the
commitments and payments system in the 2000-2006 period and to
enlargement. The effect of the different programming periods is clearly
illustrated in Chart 21 on page 38 of the Commission’s report ‘Analysis
of the budgetary implementation of the Structural and Cohesion Funds
in 2007’, May 2008, which shows the natural decline of the outstand-
ing commitments (RAL) over time.

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Graph 3.1 — Development of cumulated outstanding commitments in Structural Funds 2000-2007

Source: Annual Accounts of the European Communities, Part II: Consolidated Reports on the Implementation of the Budget of the Euro-

pean Communities.

3.15. The Commission takes account of the risk referred to in its audit
work and takes appropriate action when it finds that Member States
have adopted unacceptable measures to avoid de-commitments under
n + 2.

3.15.
In only a small proportion of cases has the n + 2 rule led
to automatic decommitments (an average of about 200 million
euro during the last three years). In other words, the n + 2 system
of potentially impending automatic decommitments has had the
intended effect of encouraging the timely liquidation of commit-
ments. However, there is the danger of an undesirable side-effect
if the accelerated payment process to reduce outstanding com-
mitments were to be achieved by applying less strict internal con-
trol procedures, thereby increasing the risk concerning the legality
and regularity of underlying transactions (12).

(12) See also paragraph 2.25 of the Annual Report concerning the finan-

cial year 2004.

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3.16. The loosening of the automatic decommitment mecha-
nism in the new programming period 2007 to 2013, by intro-
ducing a year n + 3 rule for certain Member States, might partially
reverse this trend in coming years (13). Commitments related to
Member States subject to the n + 3 rule under the new Financial
Framework account for 61 % of all commitments between 2007
and 2010.

3.16. As noted in the Court’s report for 2006 (paragraph 3.17), this
effect is likely to be mitigated by the application of the n + 2/n + 3 rule
to Cohesion Fund projects in the 2007-2013 period. For the new rural
development fund, the n + 2 rule continues to be applied.

3.17.
In other policy areas dealing with multiannual projects
where there is no rule analogous to n + 2 (for example in
Information Society and
Directorates-General
Media, Energy and Transport) outstanding commitments do not
show the tendency to be settled as quickly as in Structural
Funds (11).

for Research,

3.17.
In EU funded research actions, each specific commitment has its
own ‘final date for implementation’ (FDI) depending on the project dura-
tion. Project duration varies from a few months to several years depend-
ing on the nature of the action. According to Article 77 of the Financial
Regulation any outstanding amount 6 months after the FDI should be
decommitted. Amounts decommitted correspond to project underspend-
ing and in very exceptional cases to abnormal termination of projects
because of scientific or financial problems.

Commission report on budgetary and financial
management

3.18. As remarked in previous years, the Commission’s report
on budgetary and financial management provides considerable
information on detailed budget implementation, outstanding
budgetary commitments and reasons for lower than forecast
spending. However, further improvement is possible, especially as
regards the analysis of the data referring to outstanding commit-
ments (‘RAL’).

3.18. The Commission agrees that further improvement is possible.

Furthermore, information provided should better distin-

3.19.
guish between the different programming periods.

Information is provided in the report on the ‘Analysis of the
3.19.
budgetary implementation of the Structural and Cohesion Funds in
2007’.

3.20. Other documents such as the Annual Accounts contain
also relevant information on the implementation of the budget
which is missing in the report on budgetary and financial man-
agement (e.g. on budget outturn). The consistency of the data as
presented in these different documents needs to be given addi-
tional attention (14).

3.20. The Commission does not consider that the budget outturn
should also be presented in the report on budgetary and financial man-
agement as the definition of appropriations of the year is logically dif-
ferent in this accounting calculation (whose objective is to calculate the
amounts to be returned to the Member States) than in traditional imple-
mentation analysis. Furthermore, on the revenue side, the report is lim-
ited to own resources.

(13) Article 93(2) of Council Regulation (EC) No 1083/2006 (OJ L 210,

31.7.2006, p. 25).

(14) For instance, the amounts regarding the implementation of the bud-
get differ between the Annual Accounts and the ‘Report on budget-
ary and financial management’.

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The Commission endeavours to ensure a high degree of consistency of the
data published in different Commission documents. However, these docu-
ments are produced for different purposes. A meaningful analysis of
implementation and budgetary adjustments as part of the budgetary
management has to be based on the financial framework, with the pri-
ority to the voted and the carryover appropriations. This structure is fol-
lowed neither by the annual accounts (focus on implementation reporting
on use, cancellation, and carryover of all authorised appropriations) nor
the budget (nomenclature by policy areas which include both adminis-
trative and operational expenditure). This means that implementation
data has to be structured in different ways in Commission documents and
some figures, which may seem to cover the same area, are in reality based
on (slightly) different definitions.

Financial corrections/recoveries as part of the
budget process: better information on and
management of financial corrections required

Legal and organisational framework

3.21.
First subparagraph of Article 274 of the EC Treaty stipu-
lates that ‘the Commission shall implement the budget, […] on its
own responsibility … [and] … Member States shall cooperate
with the Commission to ensure that the appropriations are used
in accordance with the principles of sound financial manage-
ment.’ Thus, the Commission bears the ultimate responsibility for
the correct implementation of the budget.

3.22. The Financial Regulation distinguishes different manage-
ment modes for implementing the budget, each requiring appro-
priate supervisory and control systems to prevent or detect and
correct errors in payments.

3.23. Because of the way the legal requirements of the Treaty,
Financial Regulation and sectoral regulations as regards financial
management and control
interlink, the resulting structure of
responsibilities and different instruments for financial corrections
is extremely complex. Diagram 3.2 provides a simplified over-
view of the different legal components and how they interact.

Diagram 3.2 — Legal framework and resulting mechanisms to carry out financial corrections

7
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
0
1
1
2
0
0
8

.

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3.24.
For direct centralised management (budget execution by
Commission departments, e.g. administrative expenditure and
parts of research, energy and transport) and indirect centralised
management (budget execution by delegated entities, e.g. execu-
tive agencies) the Commission has sole responsibility for imple-
mentation, including the application of appropriate corrective
measures. For expenditure under shared management — in par-
ticular agriculture and cohesion — the responsibility for the cor-
rect
including recovery of
the budget,
incorrect payments, lies in the first instance with the Member
States (15). However, where Member States fail to correct irregu-
lar expenditure or to put in place effective supervisory and con-
trol systems to prevent the reimbursement of such expenditure or
make corrections, the Commission applies financial corrections
through clearance-of-accounts or similar procedures (16).

implementation of

Lack of complete and reliable information from
Member States

3.25. As in previous years, the Court’s audit has found evidence
of material error in substantial areas of EU spending under shared
management and that most errors occur at the level of final ben-
eficiaries. The recovery mechanisms, and level of recoveries made,
should reflect the type and extent of the risks involved. While the
complex and diverse nature of EU aid schemes make it difficult to
make an overall assessment of the effective functioning of the cor-
rection mechanisms at Member State level, the Court found insuf-
ficient evidence that multiannual correction mechanisms of
certain EU actions (e.g. employment and social affairs, regional
policy) are commensurate with the risk involved.

3.25. A recovery can only be effected after the audit findings have been
confirmed in a contradictory procedure with the auditee, which in some
cases leads to the finding being dropped or modified. Therefore, it is
inevitable that recoveries will be less than the risks identified by audits.

The Commission has made substantial efforts to improve the quality of
data on recoveries provided by Member States and is currently carrying
out work to verify the completeness and accuracy of this data. There has
therefore been progress in producing reliable evidence of the operation of
the multiannual corrective mechanisms.

(15) For the EAGF all corrections are credited to the Fund. In the Struc-
tural Funds, Member States withdraw irregular expenditure found in
their control and audit work from the expenditure declared for the
programme or project concerned. They do so either immediately the
irregular expenditure is detected or after the undue payment has been
recovered from the beneficiary. The resources from the Structural
Funds released in this way may be reused.

(16) Analogous rules as for shared management are applicable in cases of
decentralised or joint management where the Commission imple-
ments the budget together with international organisations or other
independent bodies.

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3.26. At present,
the information provided on correction
mechanisms applied at Member State level is incomplete and
unreliable as regards cohesion policies. Concerning agriculture
the Court has doubts on the reliability of the information pro-
vided (see paragraph 5.44). The Commission does not yet have
complete and/or fully reliable information on the consequences
for recipients of EU spending, the EU budget and national budgets.

3.26. The Commission has included in the notes to the annual
accounts of the European Communities for the financial year 2007 a
new chapter about the recovery of undue payments. The objective of this
chapter is to give an overview of the procedure in place for the recovery of
undue payments and to present a best estimate of the total amount
recovered.

Financial corrections at Member State level in the Cohesion Policy area
are reported to the Commission annually and the data are published in
the Annual Report on the Structural Funds. As noted in the reply to
paragraph 3.25, the Commission is taking action to improve the reli-
ability and completeness of this information. Information on the recov-
eries made from beneficiaries in individual cases is provided by the
obligatory reporting procedures under Regulation (EC) No 1681/94, as
well as being available in the Member States’ monitoring systems. The
Commission focuses on having complete and reliable information to
demonstrate that the EU budget has been safeguarded by the exclusion
of funding which is irregular.

As regards agriculture expenditure, the Commission considers the infor-
mation which it has received from Member States to be complete and
sufficiently reliable since no discrepancy with a material impact has been
found. However, the Commission recognises that there is scope for
improvement and has revised the relevant Guidelines for the financial
year 2008 accordingly. It will also continue to closely monitor the situ-
ation (see reply to paragraph 5.44).

3.27-3.28. Member States are required to recover overpaid amounts
from beneficiaries wherever this is appropriate, and there is evidence that
generally they do so. Where errors are attributable to deficiencies in man-
agement and control systems, it may not be appropriate to recover from
the beneficiary who was not at fault. Where flat rate or extrapolated cor-
rections are applied, the national authorities will only be able to take
recovery action against individual beneficiaries for whom there is evidence
of irregularity. The main purpose of the correction mechanism is to
exclude expenditure from Community financing which has not been
effected in compliance with Community rules, thus shielding the Com-
munity budget from expenditure that should not be charged to it. When
the Member State’s administration bears the cost, flat rate or extrapo-
lated corrections protect the Community budget, and encourage the
authorities to prevent a recurrence of such deficiencies. Flat rate or
extrapolated corrections are therefore an important means to improve the
Member States’ management and control systems and thus to prevent
irregular payments to final beneficiaries or ensure the detection and cor-
rection of such payments.

3.27. Correction mechanisms do not necessarily involve recov-
ery of overpaid amounts from individual beneficiaries. For
example, if the overpaid amounts are of low value it may not be
cost effective to recover them, or individual overclaiming benefi-
ciaries may not have been identified by the control procedures
(such as when extrapolated error rates from sample-based
approaches are used as a basis for correction). Furthermore, when
financial corrections are imposed on Member States for weak-
nesses in their supervisory and control systems, amounts are, in
general, not recovered from beneficiaries.

3.28.
In the cases mentioned in paragraph 3.27 corrections end
up being financed by national taxpayers, rather than by the over-
claiming beneficiaries. The direct deterrent effect of the control
and sanction systems is thus reduced so that errors may reoccur.
However, the effectiveness of the recovery procedures should also
be judged by their impact on stimulating improvements in super-
visory and control systems (and thereby reducing the risk of error
in the future).

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3.29. Based on its review of the systems and procedures for
obtaining and reporting on recoveries, the Court concludes that
the Commission should (17):

3.29. The Commission confirms its commitment to continue improv-
ing the information available on recoveries and financial corrections
made either by itself or by Member States.

— list and describe all the procedures used to recover amounts
by both Member States and Commission in order to increase
transparency concerning existing correction mechanisms;

— Information in the Commission accounts:

— make a clear link between errors detected by controls and the
resulting recovery or adjustment (off-setting) to amounts
claimed by beneficiaries, and to ensure adequate monitoring
and reporting of the process;

— link recoveries and adjustments to claimed amounts with the
year in which the errors or irregularities occurred, thus pro-
viding a basis to assess the effectiveness of the multiannual
correction mechanisms;

The notes to the Annual Accounts for the financial year 2007
includes a chapter on recovery of undue payments, which provides
an overview of the procedures in place for the recovery of undue
payments.

The chapter also presents a best estimate of the total amount for
recoveries, based on the information currently available. This infor-
mation does not yet include all recoveries made by deduction from a
subsequent payment managed directly by the Commission. It
includes only provisional data on recoveries by Member States in the
Cohesion Policy area.

In order to further improve the information on errors corrected at
Commission level, the Commission has in 2008 introduced modi-
fications in the financial accounting system ‘ABAC’ so that a clear
link between errors or irregularities detected by controls and the
resulting recovery or adjustment to amounts claimed by beneficia-
ries can be made. The modification will also make it possible to link
recoveries and adjustments to claimed amounts with the year in
which errors or irregularities were committed, thus permitting the
Commission to monitor the effectiveness of the multiannual recov-
ery systems as recommended by the Court.

— quantify the amounts recovered from overclaiming final
recipients and financial corrections paid by the national bud-
get, i.e. the tax payers;

— Information obtained from the Member States:

— ensure that Member States deliver timely, complete and reli-
able information on withdrawals, recoveries and pending
recoveries particularly in respect of Structural Funds;

— assess the extent to which financial corrections are effective
in stimulating improved supervisory and control systems in
Member States; and

(17) Some of these points were mentioned in the reply from Vice-President
Kallas to written question No 21 from the European Parliament
(Cocobu) within the discharge procedure for the financial year 2006.

In agriculture, the amounts recovered from final recipients are
declared to the Commission, and included in the 2007 accounts as
well as in the notes to the 2007 accounts together with the finan-
cial corrections charged to Member States. All decisions concerning
financial corrections are published in the Official Journal of the
European Union and the Annual Activity Report of the DG Agri-
culture and Rural Development contains complete information as
regards financial relations between the Commission and the Mem-
ber States and the Member States’ recovery of undue payments from
the final beneficiaries.

For Structural Actions expenditure too, financial corrections decided
by the Commission are reported in the accounts. For corrections
made at national level, Member States are required to submit
annual reports to the Commission on the corrections they have
made through withdrawals and recoveries of grants and on the
recoveries that are pending at the end of the year. The Commission
presented the information it obtained from the Member States for
2006 in an annex to the 2006 Annual Report on the Structural

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Funds (SEC(2007) 1456) and will publish the data for 2007 in
the 2007 report. Specific actions in the Action Plan to strengthen
the Commission in structural actions
the supervisory role of
(COM(2008) 97 final) address the need to further improve this
reporting. These include on-the-spot checks to assess the reliability
and completeness of the information submitted.

in particular.

The Commission continuously assesses the effectiveness of supervi-
sory and control systems in Member States and reports its conclu-
sions,
the
Directorates General concerned. When serious deficiencies are found,
the Commission will, as in the past, suspend payments and impose
financial corrections if the Member State does not take the agreed
action to improve the systems.

in the Annual Activity Reports of

For agricultural expenditure, the Court has acknowledged in the
past that Member States’ supervisory and control systems have
improved (see e.g. the Court’s Annual Report for 2006). The Com-
mission considers these improvements to be, at least partially, a
consequence of its recommendations being implemented by Mem-
ber States and of the financial corrections imposed on Mem-
ber States.

— Costs of control:

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

— assess the appropriateness of the type of correction mecha-
nisms to be used by the Commission and the Member State
respectively, and the intensity of their application, in the light
of cost effectiveness (18).

CONCLUSIONS AND RECOMMENDATIONS

3.30.
In comparison to the beginning of the preceding pro-
gramming period a considerable improvement can be stated for
2007 as regards the implementation of commitment appropria-
tions for the first year of the new programming period. The
spending rates in 2007 remained at a high level. In the case of the
cohesion policy area initial payments appropriations were
reduced by 0,745 billion euro by amending budgets.

(18) See Opinion No 2/2004 of the Court of Auditors of the European
Communities on the ‘single audit model’ (and a proposal for a Com-
munity internal control framework) (OJ C 107, 30.4.2004, p. 1).

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3.31. Member States improved their expenditure forecast in the
area of Structural Funds reducing the over-estimation rate from
33 % in 2006 to 18 % in 2007 (19).

3.31. While Member States continue to improve the accuracy of the
forecasts, they remain too inconsistent to be used for budgeting purposes.
However, with further improvement, they could become a useful tool to
help ensure continued high utilisation rates.

3.32. Outstanding budgetary commitments on differentiated
expenditure remain at a very high level exceeding the total bud-
getary commitment appropriations for 2007. The system of auto-
matic decommitments has led to a relative improvement in this
respect in the area of structural actions. However, there is a risk
that accelerated payments may lead to less strict internal control
procedures concerning the legality and regularity of the underly-
ing transactions. The Commission needs to keep this aspect in
mind whilst reflecting on an introduction of similar rules in other
areas with multiannual activities, such as research, energy and
transport, information society and media.

3.33. The information on the management of corrective actions
and their impact needs to be significantly improved in order to
allow the assessment of the effectiveness of multiannual correc-
tion mechanisms for EU spending.

3.32. The Commission takes account of the risk referred to in its audit
work and takes appropriate action when it finds that Member States
have adopted unacceptable measures to avoid de-commitments under
n + 2.

3.33. The Commission has improved and is further improving the
information available (see paragraph 6.5 of the 2007 accounts).

For the Structural Funds, complete information on corrections applied by
the Commission is provided in the 2007 accounts. Extensive informa-
tion was also presented in the annex to the 2006 Annual Report on the
Structural Funds. This will be further improved in the 2007 report, in
particular concerning corrections effected by Member States.

In agriculture, all the relevant information is already published and can
be scrutinised and verified. This includes the corrections charged by the
Commission to the Member States and the Member States’ recovery of
undue payments from the final beneficiaries.

(19) Whereas for the Cohesion Fund the over-estimation rate increased

from 32 % in 2006 to 54 % in 2007.

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CHAPTER 4

Revenue

TABLE OF CONTENTS

Introduction

Specific characteristics of Revenue

Specific assessment in the context of the Statement of Assurance

Audit scope

Traditional own resources

VAT and GNI own resources

Legality and Regularity of underlying transactions

Traditional own resources

VAT and GNI own resources

Assessment of supervisory and control systems

Traditional own resources

VAT own resources

GNI own resources

Overall conclusions and recommendations

Traditional own resources

VAT own resources

GNI own resources

Follow-up of previous observations

Paragraph

4.1-4.3

4.1-4.3

4.4-4.45

4.4-4.10

4.4-4.7

4.8-4.10

4.11-4.15

4.11-4.14

4.15

4.16-4.39

4.16-4.19

4.20-4.25

4.26-4.39

4.40-4.45

4.42

4.43

4.44-4.45

4.46

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INTRODUCTION

Specific characteristics of Revenue

4.1. The revenue in the budget of the European Union consists
of own resources and other revenue. The principal difference
compared to 2006 is that in 2007 corrections and recoveries in
the context of the European Agricultural Guarantee Fund and the
European Agricultural Fund for Rural Development as well as the
Temporary Restructuring Amount are recorded as assigned rev-
enue rather than being netted off against expenditure (2 448 mil-
lion euro or 2,1 % of revenue) (1).

4.2. As shown in Table 4.1, Graph 4.1 and Graph 4.2 own
resources are by far the main source of financing of budgetary
expenditure (93,5 %).

Table 4.1 — Revenue for the financial years 2006 and 2007

Type of revenue and corresponding budget heading

Actual revenue
in 2006

Development of the 2007 budget

Initial budget

Final budget

Actual revenue
in 2007

% change
(2006 to 2007)

(million euro)

(c)

(d)

16 532,9

16 573,0

1

Traditional own resources (net of 25 % collection costs)

— Agricultural duties (Chapter 1 0)

— Sugar and isoglucose levies (Chapter 1 1)

— Customs duties (Chapter 1 2)

2 VAT resource

— VAT resource from the current financial year

(Chapter 1 3)

— Balances from previous years (Chapter 3 1)

3 GNI resource

— GNI resource from the current financial year

(Chapter 1 4)

— Balances from previous years (Chapter 3 2)

4

Balances and adjustments

— UK correction (Chapter 1 5)

— Final calculation of UK correction (Chapter 3 5)

— Intermediate calculation of UK correction

(Chapter 3 6)

5 Other revenue

— Surpluses, balances and adjustments

(Chapter 3 0)

— Miscellaneous revenues (Titles 4 to 9)

(a)

15 028,3

1 291,8

151,6

13 584,9

17 206,2

17 219,8

– 13,6

70 132,1

68 602,1

1 530,0

– 15,3

– 6,0

– 4,0

– 5,3

6 071,7

2 502,8

3 568,9

(b)

17 307,7

1 486,7

533,1

15 287,9

17 827,4

17 827,4

0,0

79 152,8

79 152,8

0,0

0,0

0,0

0,0

0,0

1 486,8

– 37,7

15 083,8

19 478,5

18 517,2

961,3

74 022,0

71 153,1

2 868,9

0,0

0,0

0,0

0,0

1 209,3

3 812,3

0,0

1 209,3

2 108,5

1 703,8

1 404,0

– 31,0

15 200,0

19 441,0

18 468,0

973,0

73 914,0

71 057,0

2 857,0

59,0

61,0

– 2,0

0,0

7 576,0

2 109,0

5 467,0

Source: Budgets and amending budgets for 2007; Annual Accounts of the European Communities, 2007.

Grand Total

108 423,0

115 497,2

113 845,7

117 563,0

(1) Article 34 of Council Regulation (EC) No 1290/2005 of 21 June
2005 on the financing of the common agricultural policy (OJ L 209,
11.8.2005, p. 1).

(e)

10,3

8,7

– 120,4

11,9

13,0

7,2

7 254,4

5,4

3,6

86,7

485,6

1 116,7

50,0

100,0

24,8

– 15,7

53,2

8,4

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Graph 4.1 — Breakdown of actual revenue in 2007

Source: Annual Accounts of the European Communities, 2007.

Graph 4.2 — Evolution of sources of actual revenue 1991 to 2007

(1) Contains surplus from previous financial year and miscellaneous revenue.
Source: Annual Accounts of the European Communities, 2007.

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4.3. There are three categories of own resources: traditional
own resources (2) (customs duties, agricultural duties and sugar
levies, 14,1 %), own resources calculated on the basis of value
added tax (VAT) collected by Member States (16,5 %) and own
resources based on the Member States’ gross national income
(GNI, 62,9 %) (3).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

Traditional own resources

4.4. The main risks to the receipt of traditional own resources
are evasion of duty by taxpayers, miscalculation or failure to
establish duty because of undetected errors and errors in Member
States’ accounting for the duty established which reduce or delay
the amounts made available to the Commission. The Court’s audit
of the transactions underlying the accounts cannot cover unde-
clared imports or those that have escaped customs surveillance.

4.5. The Court audited a random sample of 30 import declara-
tions in each of six Member States (4). It also carried out an assess-
ment of supervisory and control systems in those Member States
as well as at the Commission.

4.6. This audit work included a review of the organisation of
customs supervision and of the national accounting systems for
traditional own resources as well as an evaluation of the supervi-
sory role of the ACOR (5). The audit also included an examina-
tion of the Commission’s accounts for traditional own resources
and an analysis of the flow of duties in order to gain reasonable
assurance that the amounts recorded were complete and correct.

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

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

(3) 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 in accor-
dance with Community rules.

(4) The Court selects Member States for detailed audit on a cyclical basis,
with the largest contributors being examined more frequently. For
2007 the countries audited were Bulgaria, Denmark, Germany, Spain,
Romania and Portugal.

(5) 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). 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.

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4.7.
Furthermore, a specific examination on customs warehous-
ing was performed both at the Commission and in seven Mem-
ber States (6).

VAT and GNI own resources

4.8. The main risks for these two resources occur because
national accounts are drawn up on the basis of statistical data and
estimates, and because of the complexity of the legislative frame-
work.

4.9. VAT and GNI own resources are based on 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 and then assessed the Commission’s
systems for processing the data until they are included in the final
accounts. The audit thus covered the drawing up of the annual
budget and the correctness of the contributions by Member
States. The audit also covered the Commission supervisory and
control systems which are intended to provide reasonable assur-
ance that these resources are correctly established and collected,
as well as the roles of the ACOR (7) and GNI (8) Committees.

4.10. On 7 June 2007 the Council adopted a new Decision on
the system of
the European Communities’ own resources
(2007/436/EC, Euratom) (9), which will come, retroactively, into
effect from 1 January 2007. This Decision introduced a uniform
rate of call for the VAT-based own resource (0,30 %) and brought
about additional reductions in the VAT- and GNI-based contri-
butions of certain Member States for the period 2007-2013 (10).
Accordingly, the 2007 Member States’ VAT and GNI-based con-
tributions will be recalculated retroactively upon completion of
the ratification procedure, which is expected to occur in
early 2009.

(6) Belgium, Czech Republic, France, Italy, Slovakia, Sweden and United

Kingdom.
(7) See footnote 5.
(8) The GNI Committee is referred to in Article 4 of Council Regulation
(EC, Euratom) No 1287/2003: the GNI Regulation (OJ L 181,
19.7.2003, p. 1). The Committee 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, comparability and exhaustiveness.

(9) OJ L 163, 23.6.2007, p. 17.
(10) Reduced VAT rates of call for Austria, Germany, the Netherlands and
Sweden and gross reductions in the GNI-based contributions of the
Netherlands and Sweden.

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Legality and Regularity of underlying transactions

Traditional own resources

4.11. Traditional own resources are collected by the Member
States who enter them in the accounting system kept by their
national Treasury (‘the A account’) and thereafter 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, Member States
may suspend making these resources available by entering them
in a separate account (‘the B account’).

4.12. The Court found that the Member States’ declarations to
the Commission were free from material error of legality and
regularity. However weaknesses were noted which, while not suf-
ficiently material to affect the overall conclusion, should be cor-
rected.

4.13. Concerning the A account, in Denmark the data input in
the electronic clearance system by the economic operators fre-
quently did not reflect the reality of the import and therefore were
not reliable. This has led to a net underpayment to the Commis-
sion. In Portugal the duties collected under enforced recovery are
accounted for and made available to the Commission with sys-
tematic delay.

4.14. As in previous years, the Court’s audit detected problems
relating to the B accounts, in particular:

4.13. The Commission is following up these findings with the authori-
ties concerned. Action will be taken to recover any own resources not
made available and any interest due as a result of delays.

4.14. B accounts are often maintained locally by individual customs
offices and as such can be subject to a high-risk of one-off errors. There-
fore examining the accuracy of B accounts is a regular theme of Com-
mission inspections. Additionally in 2007 the Commission provided
Member States with specific guidance on the correct use of the accounts.

— there were cases where goods had been released for free cir-
culation without the customs debt being paid or secured;

— The Commission will take up this finding with the Member State

concerned.

— unchallenged customs debts at least partly covered by secu-
rities were recorded in the B accounts, even though those
parts covered by the security should have been made avail-
able;

— The Commission was already pursuing this issue with the one
Member State where the finding was systematic as a result of an
inspection in 2007. The remaining three individual cases to which
the Court refers will be addressed with the Member States con-
cerned.

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— a comprehensive security provided by a warehouse keeper
was not considered as such, leading to post-clearance recov-
ery debts being systematically and erroneously entered in the
B account.

— The Commission will follow up this point with the Member State
concerned but considers it possible that this is a local error. Its own
2005 inspection of Customs warehousing not only did not disclose
similar errors but confirmed the national instructions complied with
Community legislation on this point.

VAT and GNI own resources

4.15. The Court’s audit found the calculation of Member States’
contributions and their payment to be free from material error.

Assessment of supervisory and control systems

Traditional own resources

4.16. 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 well. The
Court also reviewed the inspections carried out by the Commis-
sion, which found that the own resources collection systems were
generally satisfactory. The management of B accounts continued
to be an area where the Commission reported weaknesses.

Customs warehousing

4.17. The customs warehousing suspensive regime permits the
storage of non-community goods without them being subject to
import duties or commercial policy measures while they are
stored in premises or under an inventory system authorised as a
customs warehouse (11).

4.18. Based on information received from the Member States,
the Court estimates that 20 % of traditional own resources are
collected on goods which have previously been stored in a cus-
toms warehouse in the Community. The principal risk is that
goods may be removed from customs supervision and diverted to
the internal market without the duties due being paid or without
being subject to other import-related measures. To limit this risk
only reliable traders should be authorised to operate a customs
warehouse (12) and its operation must be supervised by Member
States’ customs. However Community legal provisions do not
define a minimum level of verification to be carried out to ensure
compliance with Customs legislation.

(11) Articles 84 to 90 and 98 to 113 of the Community Customs Code
(Council Regulation (EEC) No 2913/92 (OJ L 302, 19.10.1992, p. 1))
together with Articles 496 to 535 of the Community Customs Code
Implementing Provisions (Commission Regulation (EEC) No 2454/93
(OJ L 253, 11.10.1993, p. 1)).

(12) Article 86 of the Community Customs Code.

4.18. The risk is further limited because customs authorities may
require a guarantee (Article 88 of the Community Customs Code). If a
Member State does not choose to do so and subsequently proves unable
to recover a customs debt then the Commission will hold the Member
State liable for the own resources.

Furthermore, it is for Member States to arrange the methods and fre-
quency of customs controls. Community legal provisions only define
minimum levels of verification in a small number of cases where par-
ticular risks are considered to apply.

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4.19. The Court examined the systems in place to authorise and
supervise customs warehouses. Overall the Court found that these
systems were working well. The following weaknesses were how-
ever detected:

4.19.

— in a third of the authorisation files checked there was no evi-
dence that the stock record systems met the Community
requirements (13). The Court found stock record deficiencies
and discrepancies between stock records and the actual stock
in customs warehouses;

— The Commission will take up this finding with the Member States
concerned. Where applicable, the relevant Member States will be
requested to take remedial action where stock discrepancies are not
resolved.

— in four of the seven Member States visited the audit found
that the selection of goods to be examined by customs was
not risk-based (14) by incorporating risk profiles into the
computerised customs declaration system;

— the following failures in the internal control systems were
found, with a risk of unauthorised release onto the internal
market and a loss of revenue. Two customs warehouses had
erroneously used the same warehousing licence number,
allowing imported goods to be placed in a customs ware-
house other than the one declared to customs. In another
case a warehouse keeper, who should have presented the
goods for each exit to the customs, was using unauthorised
simplified exit procedures, thereby circumventing checks;

— This finding will be addressed with the Member States concerned.

— The duplication of the authorisation number has been corrected by
the Member State and their audit has traced all the goods, finding
that any duties due were all properly accounted for. The Member
State is also improving its internal control systems to prevent a
recurrence of the error. As regards the use of unauthorised simpli-
fied procedures, the relevant Member State has been requested to
take remedial measures.

— the Court found that the frequency of post-clearance audits
in customs warehouses was so low as to increase the risk of
loss of revenue due to time-barring (15). Moreover there was
little evidence of risk-based selection of warehouses to be
subjected to such audits.

— The Commission has already raised this issue with one of the Mem-
bers States concerned as a result of a 2006 inspection, and
follow-up is continuing. It will take up this finding with the
remaining three Member States.

VAT own resources

Reservations

4.20. Reservations are a device to keep doubtful elements in
the VAT statements submitted by Member States open for cor-
rection after the statutory time limit of four years. Of the 35 res-
ervations lifted in 2007 (16), nine related to 1997 or earlier.

4.20. Two further reservations pre-dating 1998 are expected to be
lifted soon while a special visit will be made in 2008 specifically focused
on devising, with the Member State concerned, a strategy which will clear
the reservation placed in 1989.

(13) Articles 515 to 516 of the Community Customs Code Implementing
last amended by Commission Regulation (EC)

Provisions as
No 1875/2006 (OJ L 360, 19.12.2006, p. 64).

(14) Article 4(f) of the Community Customs Code Implementing Provi-

sions.

(15) In accordance with Article 221(3) of the Community Customs Code,
communication to the debtor shall not take place after the expiry of
a period of three years from the date on which the customs debt was
incurred.

(16) In addition there were six cases, three in Germany and three in Italy,

where a reservation was partially lifted.

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21 reservations in respect of 1997 or earlier (including two
relating to 1989 and 1993) remained open as at 31 Decem-
ber 2007 (see Table 4.2).

Table 4.2 — VAT reservations as at 31 December 2007

Member States

Number of reservations
outstanding at
31.12.2006

Reservations
set in 2007

Reservations
lifted in 2007

Number of reservations
outstanding at
31.12.2007

Oldest year to which
reservations apply

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

Cyprus

Czech Republic

Estonia

Latvia

Lithunia

Hungary

Malta

Poland

Slovakia

Slovenia

Bulgaria

Romania

8

1

17

16

5

3

12

13

1

1

8

10

6

11

4

0

0

0

0

0

0

0

0

3

0

0

0

4

0

9

3

1

1

0

3

0

1

1

2

1

1

3

3

1

0

1

2

5

6

3

2

0

0

0

4

1

8

9

0

0

0

2

0

0

1

5

0

3

2

0

0

0

0

0

0

0

0

0

0

0

0

1989

1999

1998

1999

1993

1998

1995

1997

2002

1995

1996

1995

1995

1998

2004

2004

2004

2004

2004

2004

2004

2004

8

0

18

10

6

4

12

14

1

2

8

7

7

9

5

3

1

0

1

2

5

6

3

5

0

0

0

Total

119

53

35

137

Source: European Commission.

4.21. There is no effective instrument for ensuring that Mem-
ber States provide adequate information within clearly defined
deadlines, so enabling the Commission to decide on the lifting of
outstanding reservations. In its recommendation on the discharge
in respect of 2006, the Council repeated its call for the Commis-
sion, in co-operation with the Member States, to continue its
efforts to ensure that reservations are lifted within reasonable
timescales.

4.21. The present legal arrangements represent a balance reflecting the
cooperative approach that needs to exist between the Commission and
Member States. However, the Commission is overhauling its arrange-
ments for managing reservations, making them more proactive. Reser-
vations will be categorised making it easier to identify those most
requiring action. Management visits focusing solely on strategies to
deliver progress leading to the lifting of reservations are in the process of
introduction. The Commission will also be more proactive in considering
whether instituting infringement proceedings would bring benefits in
particular cases.

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4.22. During 2007 the changes to the EU-27 VAT base follow-
ing the Commission’s control work in Member States resulted in
an increase in the aggregate VAT resource of about 50 million
euro. In addition the upward revisions to the GNI of Greece (see
paragraph 4.28), which in turn had an impact on capping (17),
resulted in an increase in that Member State’s VAT contribution
of around 300 million euro.

4.23. The Court examined the evidence supporting the lifting of
the 35 reservations in 2007. The Commission’s work on lifting
reservations was generally satisfactory. However the following
problem was identified: when the Commission accepts the revised
data of a Member State and then lifts the associated reservation,
it should immediately input this revised data into its financial
database and adjust the amount of own resources due. The cor-
rections in respect of four lifted reservations were not input in
this database and the VAT-based own resource has thus not been
correctly calculated.

Monitoring of the application of the VAT directive

4.24. DG TAXUD is responsible for ensuring the correct appli-
cation of the VAT Directive. When the Commission considers
that a Member State fails to fulfil its obligations under this Direc-
tive, the former may bring the matter before the Court of Justice
after having gone through a pre-contentious phase (infringement
procedure — Article 226 of the Treaty establishing the European
Community). In 2007 there were five such cases, three of which
had a negative effect on VAT own resources. For the two cases
actually submitted to the Court of Justice in 2007, the average
time taken from registration until the sending of the letter of
referral was 29 months. The three other cases, dating back
to 2003-2005, had not been brought before the Court by the end
of 2007 despite the decision to do so being taken in June 2007.

(17) In accordance with Article 2(1)(c) of Decision 2000/597/EC, Euratom
(OJ L 253, 7.10.2000, p. 42) the VAT bases to be taken into account
for calculating the Member States VAT contributions shall not exceed
50 % of GNI/GNP for each Member State.

4.23. The database changes have now been made, the total financial
impact is just under EUR 12 million over the five years of the reserva-
tions. Additionally new procedures extending inter-service consultation
on the contents of control reports have been introduced. These should
provide a safeguard against any future occurrence.

4.24. The legal context in Member States is often detailed and com-
plex, requiring substantial analysis. The Commission pays particular
attention to the preparation of cases on the interpretation of indirect
taxation legislation because of the ‘own resources’ involved and the una-
nimity requirement to change the legislation. At the same time the Com-
mission succeeds in ensuring a broadly equivalent rate of progress of cases
affecting the own resources as for other complex detailed cases of mis-
application of Community law. Although this does not influence its case-
management, the Commission claims due amounts, plus interest for the
time elapsed, in correcting infringements.

More generally, the Commission has recently changed its procedures, to
allow for more frequent decision-taking in order to reduce the delays
which occurred when Member State notifications were received shortly
before the next procedural step was due to be taken, allowing for cases to
progress as soon as the analysis of the new information has been com-
pleted. The Commission risks losing a case on procedural grounds if it
does not take full account of the input by Member States. In addition,
the preparation of the application to be lodged with the Court of Justice
may sometimes prove to be difficult owing to the complexity of the facts,
of the applicable legislation or of the legal questions raised.

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4.25. During these periods the VAT Directive was not being
applied correctly. This may well have reduced the amount of VAT
received by Member States and thereby potentially had an impact
on VAT-based own resources.

4.25. Any possible effect on the VAT-based resource will be taken into
account retroactively when the Court of Justice rules on the cases.

GNI own resources

Annual GNI data

4.26. Before 22 September each year, Member States shall pro-
vide 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 are required to trans-
mit a report on the quality of GNI data (the GNI Quality Report)
setting out how the aggregate was reached, describing any signifi-
cant changes in the procedures and basic statistics used, and
explaining the revisions made to earlier GNI data (18). The annual
GNI figures supplied by Member States can give rise to adjust-
ments to the GNI balances established for previous years (19).

4.27. At its meeting of 25 October 2007, the GNI Committee
considered that, taking due account of the existing reservations,
the data of EU-15 Member States were adequate for use for own
resource purposes. As regards the EU-12 Member States, the GNI
Committee was not able to form an opinion on the data because
the analysis of the GNI inventories (20) had just started (see para-
graph 4.38).

4.28. The data included in the GNP (21)/GNI Questionnaire
2007 of Greece showed a retroactive increase of between 8,5 %
and 9,9 % for the years 1995 to 2005. In the GNP/GNI Question-
naire 2006 Greece had transmitted revised data showing increases
of between 13 % and 26 %, representing an exceptionally signifi-
cant revision. As it considered that it did not have sufficient infor-
mation on the revised data and the underlying methodological
changes reported by Greece, the GNI Committee had taken the
view that the existing unrevised GNP/GNI series should be used
for own resources purposes, until the Commission had fully veri-
fied the new data and reported the results of its verification to the
GNI Committee (22).

(18) Article 2(2) and 2(3) of the GNI Regulation.
(19) Article 10(8) of the Regulation (EC, Euratom) No 1150/2000 states
that any changes to the GNP/GNI of previous financial years shall give
rise for each Member State concerned to an adjustment to the bal-
ance established. It also states that, after 30 September of the fourth
year following a given financial year, any changes to GNP/GNI shall
no longer be taken into account, except on points notified within this
time limit either by the Commission or by the Member State.

(20) Article 3 of the GNI Regulation: ‘Member States shall provide the
Commission (Eurostat) […] with an inventory of the procedures and
basis statistics used to calculate GNI and its components according to
ESA 95. […]’.

(21) Gross national product.
(22) See paragraphs 4.24 to 4.26 of the Court’s Annual Report concern-

ing the financial year 2006.

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4.29 to 4.32. The main corrections to the Greek GDP figures pro-
posed by the Commission derived from its mission in Greece and were
presented in full details (in particular in document GNIC/094) and dis-
cussed at the GNI Committee meeting of 6 September 2007. The Mem-
ber States’ national accounts experts in the GNI Committee supported
the proposed corrections. The GNP/GNI figures for 1995-2006 noti-
fied by Greece in October 2007 are in line with these corrections. At
their meeting on 25 October 2007, the GNI Committee expressed its
support for the process as well as the results of the verification work car-
ried out by Eurostat in cooperation with Member States’ GNI experts and
in close consultation with the GNI Committee. The Commission is fol-
lowing up the action plan carried out in order to finalise the calculation
of the Greek national accounts components. The Greek NSI sent to Euro-
stat the ESA 95 transmission programme data on 14 December 2007;
Eurostat checked the data and made comments, following which the
Greek NSI sent revised data, taking account of Eurostat comments and
including data for the year 2007, on 4 March 2008. Eurostat will
report the results of the outstanding matters in its verifications to the
GNI Committee and the Court of Auditors. Further to the request of the
GNI Committee, the Commission has continued its cooperation with the
National Statistical Service of Greece on some more detailed calculations,
and expects that most of the reservations can be lifted soon. The Com-
mission will continue to keep the GNI Committee and the Court of Audi-
tors informed about developments on this issue.

4.29.
In 2007 Greece transmitted only a summarised GNP/GNI
Questionnaire with no GNP/GNI components and a short
explanatory note instead of a Quality Report. Although the GNI
Committee considered that, taking due account of the existing
reservations, the new Greek GNP/GNI data notified in 2007 were
adequate for own resources purposes (see paragraph 4.27), it
invited the Greek National Statistical Institute (NSI) and Eurostat
to continue their cooperation on outstanding issues, including on
some more detailed calculations.

4.30. The Commission had carried out beforehand on-the-spot
visits in June and September 2007 to verify the Greek inventory
and calculated estimates of revised GDP (23) figures for the refer-
ence year 2000. The total increase was consistent with the revi-
sion included in the GNP/GNI Questionnaire 2007.

4.31. The Commission and the Greek NSI set up an action plan
for further work to be carried out in order to finalise the calcula-
tion of national accounts components. In November 2007 the
Commission stressed the importance of checking the reconcilia-
tion between total revisions and changes linked to specific reser-
vations as well as the need for the Greek NSI to provide full
documentation on them. The action plan also required the Greek
NSI to send the official detailed figures in accordance with
ESA95’s transmission of national accounts data (24) by 10 Decem-
ber 2007.

In the absence of the complete information on GNP/GNI
4.32.
required by the GNI Regulation (see paragraph 4.29) and as the
details on GNP/GNI components and documentation on reserva-
tions required by the action plan (see paragraph 4.31) were not
available by February 2008, the Court was not able to review the
calculation of the GNP/GNI for the years 1995-2006 nor to check
whether GNP components revised by Greece are covered by spe-
cific reservations set for the period 1995-2001. As a conse-
quence, the Court could not assess the accuracy of the adjustments
to the GNI balances for these previous years.

(23) Gross domestic product.
(24) Regulation (EC) No 1392/2007 of the European Parliament and of the
Council of 13 November 2007 amending Council Regulation (EC)
No 2223/96 with respect to the transmission of national accounts
data (OJ L 324, 10.12.2007, p. 1).

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Reservations

4.33. At the beginning of 2007, there were 43 open specific
GNP/GNI reservations (25) relating to the period 1995 to 2001.
During 2007, the Commission lifted 18 reservations leaving a
balance of 25 at the year end (see Table 4.3). These open reser-
vations relate either to out-of-date sources underlying certain esti-
to methodological and compilation aspects (26).
mates or
Excluding the case of Greece (see paragraph 4.29), most of the
issues underlying reservations have already been addressed by
Member States through the transmission of the annual GNI data
in 2007 or previous years.

Table 4.3 — GNP/GNI specific reservations as at 31 December 2007

Member States

Number of specific
reservations outstanding at
31.12.2006

Specific reservations
set in 2007

Specific reservations
lifted in 2007

Number of specific
reservations outstanding at
31.12.2007

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

3

0

0

5

3

4

0

0

0

0

0

3

0

0

0

0

0

7

0

0

0

4

8

0

0

0

0

0

6

18

25

In June 2008 the Commission set general reservations on the
4.34.
10 new EU Member States’ GNI data covering reference years 2004-
2006.

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United kingdom

0

3

0

7

5

3

4

4

8

0

0

0

3

0

6

Source: European Commission.

Total

43

4.34. As regards the period 2002 to 2004, general reservations
exist on GNI data of EU-15 Member States pending the analysis
of the updated GNI inventories. No general reservations for EU-10
Member States had been set by the end of 2007 as their GNI data
in respect of 2004 will remain open for own resource purposes
until September 2008.

(25) Reservations in respect of the GNI own resource make it possible to
adjust GNI data after the 4-year time limit. A general reservation cov-
ers all the Member State’s data, whereas a specific reservation covers
discrete elements of the GNI Inventory.

(26) For example, non-compliance with the European System of Accounts
(ESA) 95 (for years 2002 onwards) or ESA 79 (for years 1995-2001),
issues concerning the transition from ESA 95 to ESA 79 and weak
methods for estimating certain components.

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4.35. The Court examined a sample of 10 specific reservations
lifted in 2007, relating to Spain, Denmark and France. It found
that the Commission’s work to enable the lifting of reservations
involved neither desk checks to corroborate the reliability of the
information provided by Member States through comparison
with external sources, nor on-the-spot control visits to perform
direct verification of national accounts’ aggregates. For these rea-
sons, the Court considers that these checks were not sufficient to
provide reasonable assurance of the accuracy of the underlying
data amended.

4.35. The Commission carried out desk checks that provided sufficient
information for lifting the specific reservations mentioned. These desk
checks did not demonstrate the necessity of on-the-spot missions, or the
need for a comparison with external sources.

4.36. The Commission was in many cases slow to request addi-
tional information or data from Member States and then to anal-
yse the information received.

4.36. The slow progress on lifting specific GNI reservations referred to
by the Court was due to resource constraints. Work on reservations has
since accelerated and those remaining are expected to be lifted soon.

Eurostat’s procedure for the management of GNI reserva-
4.37.
tions does not provide specific rules on materiality criteria for set-
ting specific reservations in order to consistently take into account
the principle of cost-benefit (27).

4.37. The Commission sets reservations on specific issues on the basis
of its expert assessment which is made taking into account all available
qualitative and quantitative information. The Commission considers that
this approach is prudent and fully in line with the cost-benefit principle
as mentioned in Council Regulation (EC, Euratom) No 1287/2003. In
the examples mentioned by the Court in footnote 27, the impact could
be quantified only at the end of the Member States’ work on the reser-
vations and not before.

Verification of GNI inventories in the Member States

4.38.
Some Member States (28) did not provide the Commission
with the complete version (including process tables) of updated
or new GNI inventories by the end of 2007, even though the
deadline was 31 December 2006 (29). This delay had an impact
on the planning of the Commission’s on-the-spot verification
missions foreseen for the period 2007 to 2009. Visits were car-
ried out in three Member States (Greece, Malta and Estonia) in
2007.

4.38. The Commission had to adapt its GNI verification plan due to
the delayed delivery of the GNI inventory by some Member States. The
Commission has constantly urged the Member States, in particular in the
GNI Committee, to transmit their GNI inventories and process tables
within the agreed deadlines. The fact that the plan of GNI missions had
to be adapted had no impact on the quality of GNI nor on their use in
the budgetary procedures given the GNI reservations in place.

(27) For example the potential impact of reservations in respect of build-
ing caretakers and commissions paid to estate agents was not mate-
rial. After the Member State’s work, the impact was estimated to be
around 0,01-0,02 % of GNP. Such cases do not respect the principle
of avoiding committing disproportionate resources to calculate insig-
nificant items, as set out in article 5(2)(b) of the GNI Regulation.
(28) Luxembourg did not send its inventory and process tables; Austria,
Cyprus, France, Malta and United Kingdom did not send the process
tables.

(29) 31.12.2007 for Sweden (which sent its inventory and process tables
at the end of January 2008) and 31.12.2009 for Romania and
Bulgaria.

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4.39.
In 2007 direct verification on GNI aggregates was only
performed in the particular case of Greece. The objective of the
visits to Malta and Estonia was principally to obtain clarification
on the sources and methods used for the calculation of GNI. The
Court has in the past urged the Commission to undertake direct
verification in order to obtain assurance that Member States really
do use the procedures they describe in their GNI inventories (30).

4.39. The Commission’s chosen method of validation is mainly based
on the verification and improvement of the reliability and suitability of
the sources and methods used for the compilation of GNI and their con-
formity with the European system of accounts (ESA95). During 2008
and 2009, the Commission will continue to carry out direct verification
in the sense indicated by the Court.

Overall conclusions and recommendations

4.40. Based on its audit work, and with due consideration to its
scope (see paragraphs 4.4 and 4.9), the Court concludes that:

— the Member States’ declarations and payments of traditional

own resources,

— the Commission’s calculation of the Member States’ contri-
butions on the basis of the VAT and GNI data received from
the Member States, as well as

— other types of revenue

are free from material error.

4.41.
Its assessment of the related supervisory and control sys-
tems is that they are effective (see Annex 4.1). However the Court
draws attention to the weaknesses set out in this chapter which,
while not being material to the effectiveness of the systems as a
whole, merit further attention.

(30) See Annex 4.1 of the Court’s Annual Report concerning the financial

year 2006.

4.41. Notwithstanding the Court’s evaluation that overall the systems
are satisfactory, it has assessed, in Annex 4.1, the management of VAT
reservations as only partly effective. Its reasons for this qualification
mainly relates to the management of long outstanding reservations. The
Commission, in close cooperation with those Member States concerned,
is taking measures to address this point. It nevertheless considers the
Court’s assessment severe.

Even though the Court assesses the overall GNI systems as effective, the
Court considers, in the summary table in Annex 4.1, that more direct
verification should be applied during the checks of Member States’ GNI.
The Commission considers that its action to lift Member States’ GNI res-
ervations is based on a thorough verification of the supporting data and
information (see reply to paragraph 4.35). However, the Commission
started direct verification in 2007 in the sense indicated by the Court, as
part of its new three-year cycle of GNI verification, and will continue to
also apply this approach during 2008 and 2009.

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Traditional own resources

4.42. The Commission should continue its efforts to ensure that
the B accounts are utilised appropriately (paragraphs 4.14
and 4.16). The audit of the customs warehousing procedure dem-
onstrated that the underlying controls need to be strengthened
(paragraph 4.19).

4.42. The Commission regularly inspects Member States’ systems of
customs control and their management of the B accounts. It will address
the weaknesses found by the Court with the relevant Member States and
will, where appropriate, take measures to recover any amounts of own
resources or interest due.

VAT own resources

4.43. The Commission still 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. The Commission should fur-
ther examine what steps are open to it to bring pressure to bear
on those Member States with very long outstanding reservations
(paragraph 4.21).

4.43. The present legal arrangements represent a balance reflecting the
cooperative approach that needs to exist between the Commission and
Member States. The Commission will be categorising reserves; making
management visits focused solely on securing strategies leading to the
lifting of reservations; and will be more proactive in considering whether
instituting infringement proceedings would bring benefits in particular
cases.

GNI own resources

4.44. The updated figures for Greece did not include the detail
necessary for the Court to verify the accuracy of the adjustments
to the GNI balances, in particular for the period 1995-2001
(paragraph 4.32).

4.44. The Commission carried out a mission to Greece in June 2007.
Experts from other Member States participated. The detailed corrections
to the Greek GDP figures were fully explained at the GNI Committee
meeting of 6 September 2007. The Member States’ national accounts
experts in the GNI Committee supported the proposed corrections (see
full reply to paragraphs 4.29 to 4.32).

4.45. 18 reservations have been lifted in 2007 without either
desk checks on the reliability of the information sent by Member
States through comparison with external sources or on-the-spot
control visits to carry out direct verification (paragraph 4.35). The
Commission should apply this control approach in its on-the-
spot visits for the verification of inventories in 2008 to obtain a
better view of the comparability, reliability and exhaustiveness of
GNI data of Member States (paragraph 4.39).

4.45. The Commission carried out desk checks which provided suffi-
cient information for lifting the specific reservations mentioned in para-
graph 4.35. The results of these desk checks did not show the need for
on-the-spot control visits or comparison with external sources.

The Commission’s validation of Member States’ GNI data is mainly
based on the verification and improvement of the reliability and suitabil-
ity of the sources and methods used for the compilation of GNI and their
conformity with the European system of accounts (ESA 95). During
2008 and 2009 the Commission will continue to carry out direct veri-
fication in the sense indicated by the Court.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

4.46. The results of the Court’s follow-up of previous observa-
tions in recent annual reports can be found in Annex 4.2.

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ANNEX 4.1

Assessment of supervisory and control systems (1)

Key Internal Control

Revenue type

Commission checks
in Member States (2)

Commission desk
checks

Revenue
management

Management of
Reservations (3)

TOR

VAT

GNI

N/A

Overall assessment

National customs
supervision in
Member States
audited

N/A

N/A

(1) See scope limitation referred to in paragraphs 4.4 and 4.9.
(2)

In respect of the Commission checks on GNI in Member States, the review of sources and methods set out in the inventories is assessed as effective, whereas direct verifi-
cation is insufficiently used and thus only partially effective.
Improvements are required in respect of the management of VAT reservations, notably to be able to lift long-outstanding reservations.

(3)

Legend:

Effective

Partially effective

Not effective

Not applicable

N/A

ANNEX 4.2

Follow-up of the Court’s previous observations

Court observation

Action taken

Court analysis

Commission reply

Traditional Own Resources: Agricultural tariff quotas

In paragraph 4.13 of the Annual Report concerning the financial year
2006, the Court noted that the securities lodged with a view to imports
or exports of agricultural products under the Tariff Quota System man-
aged by an import or export licence and subsequently forfeited become
a resource of the Member State concerned. The Court considers that
such a security should form part of the Communities’ own resources
and the amounts involved should be made available to the Commis-
sion. The Commission was invited to clarify this issue.

The Commission provided the Court with
detailed data concerning securities lodged with a
view to imports or exports of agricultural prod-
ucts by an import or export licence subsequently
forfeited in the last seven years. Based on this
information the Court estimates the annual aver-
age to be some 16 million euro of which 3 mil-
lion euro are under the Tariff Rate Quota (TRQ)
System

Traditional Own Resources: Potential duties under discussion between the Commission and Germany

In paragraph 3.23 of 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. This
was still the situation in 2006.

The balance of 22,7 million euro was still under
discussion in 2007. The Commission has asked
Germany to provide the split between guaran-
teed and non guaranteed debts in the B-account
and use this data to evaluate the assurance on
the amounts likely to be eventually recovered.

GNI own resource: revision policy (including the follow-up of the Greek revision)

The Commission, as stated in its reply to para-
graph 4.13, should raise the Court’s consider-
ation in the appropriate forum in order to clarify
the question. This is now planned for 2008.

This issue has been placed on the agenda of the July 2008 Advisory Commit-
tee on Own Resources in order to further discuss the matter with the Member
States.

The definitive amount to be recovered should be
established in order to finally close this issue.

As indicated by the Court, Germany has been requested to supply the ratio
between guaranteed and unguaranteed debts in the B account in order to gain
assurance that there are no additional amounts due.

In the Annual Report concerning the financial year 2006, the Court
made some observations on the Greek revision (paragraphs 4.24-4.26)
and recommended in paragraph 4.32 that the Commission:

(a)

(b)

sets rules on communication and is forewarned, together with
the GNI Committee, of major revisions;

implements a coordinated policy for national accounts data revi-
sions, including the requirement for a regular bench-marking;

(a) (b) Despite the progress made in the setting
of rules on communication of major revi-
sions, a common revision policy in the
European Union is not yet implemented.
Eurostat should continue to discuss the
issue with Member States.

(a) (b) The Commission will monitor the application of the guidelines pro-
posed by the Committee on Monetary, Financial and Balance Pay-
ments Statistics (CMFB) on communication of major revisions by
Member States. The Commission is continuing discussions with Mem-
ber States on a common revision policy. Eurostat submitted another
document to the meeting of the National Accounts Working Group
(NAWG) in May 2008. The NAWG welcomed the principles pre-
sented in the document, which will also be presented at the CMFB
meeting of June 2008.

(a) (b) On 26 April 2007 the GNI Committee
expressed an overall positive opinion on
the guidelines proposed by the Commit-
tee on Monetary, Financial and Balance
of Payments Statistics (CMFB), particu-
larly on coordination and communica-
tion on major revisions due to changes
in concepts, definitions or classifications
in the European Union (including com-
mon benchmarking every five years).
Nevertheless some Member States wish
to retain the right to carry out revisions
outside
timetable. On
13 November 2007, Ecofin Council wel-
comed the guidelines on the communi-
cation of major statistical revisions as set
by the CMFB and invited Member States
to follow these guidelines.

agreed

the

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Court observation

Action taken

Court analysis

Commission reply

(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.

(c)

See paragraphs 4.28-4.32 in the text
above.

(c)

(c)

Further to the request of the GNI Committee of October 2007, Euro-
stat has continued its cooperation with the National Statistical Service
of Greece and expects that most of the reservations can be lifted in
2008. The Commission will continue to keep the GNI Committee and
the Court of Auditors informed about developments on this issue.

Even though the new Greek GNP/GNI data
notified in 2007 were considered adequate
for use for own resources purposes by the
GNI Committee, the figures are not yet
final (there are specific reservations for the
period 1995-2001, general reservations
for the years 2002-2004 and 4-year rule
applies for the following years). Eurostat’s
work should be continued, in cooperation
with Greece, in 2008 in order to complete
the verification of the Greek GNI inven-
tory and data as well as to lift the specific
reservations.

.

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CHAPTER 5

Agriculture and Natural Resources

TABLE OF CONTENTS

Introduction

Specific characteristics of policy group Agriculture and Natural Resources

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and regularity of underlying transactions

Assessment of supervisory and control systems

Policy area Agriculture and Rural Development

Policy areas Environment, Fisheries, Health and Consumer Protection

Overall conclusions and recommendations

Follow-up of previous observations

The common organisation of the market in raw tobacco

The Commission’s management and supervision of the measures to control foot-and-
mouth disease

Measurement of farm incomes by the Commission

Paragraph

5.1-5.7

5.3-5.7

5.8-5.58

5.8-5.11

5.12-5.16

5.17-5.49

5.17-5.48

5.49

5.50-5.58

5.59-5.67

5.59-5.60

5.61-5.65

5.66-5.67

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INTRODUCTION

and Maritime Affairs;

5.1. This chapter covers the Court’s findings on policy group
Agriculture and Natural Resources, which comprises the follow-
ing policy areas: 05-Agriculture and Rural Development;
07-Environment; 11-Fisheries
and
17-Health and Consumer Protection. In 2007 commitments
totalled 53 253 million euro and payments totalled 51 044 mil-
lion euro (1). The distribution of payments by policy area is given
in Graph 5.1. More detailed information on spending for the year
is provided in Annex I of this report. This expenditure falls mainly
under the heading Preservation and Management of Natural
Resources (2) of the financial framework. The audit results of
EAGGF-Guidance expenditure incurred during the year 2007 in
respect of the 2000-2006 programming period (3 449 million
euro), are reported under chapter 6 — Cohesion Policy.

Graph 5.1 — Agriculture and Natural Resources (excluding Administrative Expenditure)
— breakdown of payments by policy area

Source: Annual accounts of the European Communities financial year 2007, Volume II, Annex B.

(1) Source: Annual accounts of the European Communities financial

year 2007, volume II, Annex B.

(2) Policy area Health and Consumer Protection also includes expendi-

ture under heading 2 and 3b of the financial framework.

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5.2. Under the Treaty, the Commission has overall responsibil-
ity for implementing the EU budget. Virtually all agricultural and
rural development expenditure is carried out under shared man-
agement. For the other areas, budgetary appropriations are spent
under direct or indirect centralised management with the excep-
tion of the European Fisheries Fund which is under shared man-
agement on the basis of multi-annual programmes.

5.2. Community legislation provides for a comprehensive system for
the management and control of agricultural expenditure which relies on
four complementary levels:

(a) a compulsory administrative structure at the level of Member States,
centred around the establishment of accredited paying agencies;

(b) detailed systems for controls and dissuasive sanctions;

(c)

ex-post controls by independent audit bodies on the paying agen-
cies’ annual accounts and the functioning of their internal control
procedures and by special departments on aid measures other than
direct payments covered by the Integrated Administration and Con-
trol System (IACS);

(d) clearance of accounts through the Commission (both annual finan-

cial clearance and multi-annual conformity clearance).

Taken together, these four levels are the basis for the Commission
to gain reasonable assurance as to the effective management of the
risk of error in the legality and regularity of the underlying trans-
actions in agriculture.

Specific characteristics of policy group Agriculture
and Natural Resources

5.3. The Single Payment Scheme (SPS) financed by EAGF: the SPS
was introduced in order to break the link between agricultural
production and the payments made to farmers (‘decoupling’). In
order to qualify under the SPS farmers must first obtain ‘entitle-
ments’. The number and value of each farmer’s entitlements was
calculated by the national authorities according to one of the
models provided for under EU legislation (3). Every entitlement,
together with one hectare of eligible land declared by the farmer
and kept in good agricultural and environmental condition
(GAEC), gives rise to an SPS payment at least until 2013. SPS
has been growing in importance and now constitutes 55 %
of expenditure (28 199 million euro) compared to 12 %

(3) Under the historical model each farmer is granted entitlements based on
the average amount of aid received and area farmed during the refer-
ence period 2000 to 2002. Under the regional model all entitlements 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 appli-
cation. The hybrid model combines the historical element with a flat
rate amount and, if it is dynamic, the historical component decreases
each year until it becomes a predominantly flat rate-system.

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(6 260 million euro) paid for direct coupled payments and 10 %
(4 869 million euro) for intervention measures in agricultural
markets. It is applied in 17 Member States with the remain-
ing 10 (4) scheduled to apply the scheme from 2010 onwards.

5.4. The Direct Coupled Payments financed by EAGF: with the
introduction of the SPS most farmers are paid independently of
the volume of actual production. Nevertheless some aid schemes
remain (5) or may be (6) coupled to output in order to avoid aban-
donment of production. The amounts involved are declining as
the SPS is extended to additional products and Member States.

5.5.
Intervention measures in agricultural markets financed by
EAGF: the principal measures are intervention storage and export
refunds. Expenditure has declined sharply in recent years due to
policy choices made in the context of the recent CAP reforms and
also because demand and market prices for agricultural products
have increased.

5.6. Rural Development expenditure is funded under EAFRD and
covers 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.

Environment, Fisheries and Maritime Affairs as well as Health
5.7.
and Consumer Protection are managed by the Commission under
specific control systems. They cover protection measures for the
environment and consumers, animal welfare measures, as well as
international fishery agreements and the European Fisheries Fund.

(4) The Member States which joined the EU in 2004 and 2007 except for
Slovenia and Malta, currently apply a simplified version of SPS called
the Single Area Payments Scheme (SAPS) as the farmers did not receive
EU subsidies during the reference period.

(5) The specific quality premium for durum wheat, protein crop premium,
crop specific payment for rice, area payment for nuts and aid for
energy crops remain coupled. Aid for cotton and for starch potato
remain partially coupled.

(6) The schemes concerned are in particular arable crops, sheep and goats,
beef and veal, hops and seed aid. Aid for tobacco can remain partially
coupled and a specific aid for the maintenance of olive groves can be
granted if the Member State decides so.

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SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

5.8.
In order to obtain assurance as to the legality and regular-
ity of the transactions underlying the EU accounts, the Court
tested a single representative statistical sample of 196 transac-
tions covering the whole of the expenditure dealt with in this
chapter (see paragraph 5.1).

5.9. As regards its assessment of supervisory and control sys-
tems, the Court has conducted an extensive audit of the establish-
ment of SPS entitlements and the related payments in all Member
States applying SPS, with the exception of Slovenia and Malta.
During 2007 it examined the reliability of the supervisory and
control systems applicable to Single Payment Scheme claims in
selected paying agencies in Finland, France, Greece, the Nether-
lands, Italy, Portugal, Sweden, Spain (Andalucia) and the United
Kingdom (England) (7).

5.10. The Court has also tested the supervisory and control sys-
tems for direct coupled payments in six Member States (8). The
audit covered an assessment of the functioning of the adminis-
trative controls of all claims and the selection and execution by
the paying agencies of on-farm inspections for a sample of a
minimum of 5 % of the claims, depending on the scheme. In addi-
tion, the Court’s auditors conducted a number of re-performances
of controls on the spot.

5.11. The Court also reviewed the certifying bodies’ certificates
and reports as well as the paying agency directors’ statements of
assurance and the related certifying bodies’ opinions for 34 pay-
ing agencies. For another five paying agencies, with qualified cer-
tificates, the grounds for the qualification were examined. Four
certifying bodies were visited in order to evaluate the scope and
quality of their work. The Court further audited the three confor-
mity clearance decisions taken in 2007 (9).

(7) The 10 Member States which first applied SPS were audited in 2006.
See the Annual Report concerning the financial year 2006, para-
graphs 5.15 to 5.38.

(8) Germany (Bayern), Italy (AGEA) and Portugal which have introduced
SPS in 2005; France, Greece and Spain (Castilla y Leon) which have
introduced SPS in 2006.

(9) Commission Decision 2007/243/EC (OJ L 106, 24.4.2007, p. 55),
Commission Decision 2007/647/EC (OJ L 261, 6.10.2007, p. 28) and
Commission Decision 2008/68/EC (OJ L 18, 23.1.2008, p. 12).

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Legality and regularity of underlying transactions

5.12. Based on the results of its audit work, the Court concludes
that the transactions underlying the policy group taken as a
whole, are affected by a material level of error of legality and/or
regularity. The Court’s audit found that the intensity and the
impact of errors in payments was not distributed evenly across all
the policy areas. The Court reiterates that Rural Development
expenditure is particularly prone to errors and notes that, in rec-
ognition of this, the Annual Activity Report of the Director Gen-
eral for Agriculture contains a global reservation in respect of that
expenditure.

5.13. Out of 196 transactions examined, 61 were affected by
error. Some two-thirds of the errors (40) were classified as ‘seri-
ous’. There was a material incidence of error affecting eligibility,
accuracy or occurrence, such that the estimated value of the over-
all error rate falls into the range from 2 % to 5 %. This estimate is
not significantly different from the value obtained last year but
does not take account of certain serious errors which could not
be quantified. Errors were significantly more frequent among
rural development transactions examined by the Court than
among transactions financed by the EAGF and examined by the
Court. Rural development accounts for a disproportionately large
part of the overall error rate: for EAGF expenditure the Court esti-
mates the value of the error rate to be slightly below 2 %. The
examples below illustrate the nature of the main errors found.

5.12-5.13. The Commission aims to ensure that supervisory and con-
trol systems are effective in detecting and correcting errors, with due
regard to the costs and benefits of the checks which have to be made on
the spot.

As regards agriculture and rural development, the Commission under-
lines the Court’s finding that the most likely overall error rate is not sig-
nificantly different from last year’s, as reported in its 2006 statement of
assurance. Control statistics received from Member States, indicate as
well that the error rate found at the level of final beneficiaries under the
EAGF, which accounts for about 85 % of total agriculture and rural
development expenditure, is below the materiality threshold.

The Commission shares the Court’s view that rural development expen-
diture, in particular because of agri-environmental measures, is prone to
a higher incidence of errors compared to EAGF expenditure. While the
Member States have, at the explicit request of the Commission, provided
detailed control statistics for the first time, these data are incomplete and
have not yet been verified and validated by the certification bodies. The
Director General of DG AGRI made a reservation for rural development
in its Annual Activity Report 2007 (AAR 2007) for this reason and
awaits future discussions on the level of the tolerable error with different
institutions.

The 2007 agriculture and rural development expenditure likely to be
excluded from Community financing by future conformity decisions,
amounts to an estimated sum of 439 million euro, together with the
152 million euro of recoveries from final beneficiaries (1).

As described in its AAR 2007 the Directorate-General for Health and
Consumers (DG SANCO) is confident that its transactions are not
affected by a material level of error of legality and regularity given that
the residual error rate is 1,6 % and thus below the materiality threshold
of 2 %.

As described in its AAR 2007 of the Directorate-General for Environ-
ment (DG ENV), the control systems and the shortcomings identifica-
tion mechanisms have continuously matured and are complemented
where appropriate. These alert mechanisms have not revealed any short-
comings, error or risk that could be qualified as significant and lead to
reservations, according to the materiality criteria guidelines provided in
the AAR circular, except in the area of the ex-post audits where the level
of recovery orders recommended by the ex-post auditors and its regular
increase over the last years lead to the expression of a reservation con-
cerning the expenditures declared by the beneficiaries of action grants as
the materiality level was exceeded by 0,6 %.

(1) In 2007, 607 million euro was

correction
and 247 million euro recovered from final beneficiaries by Member States (see
chapter 6 of the notes to the annual accounts 2007).

recovered by

financial

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In the EAGF, the following errors were identified by the

5.14.
Court’s sample:

5.14. While the transactions audited are designed to be representative
of the policy group as a whole, the errors found do not necessarily permit
conclusions to be drawn on the functioning of the individual aid. The
errors observed by the Court listed below are only partly agreed by the
Commission and the Member States concerned.

(a) SPS:

farmers overclaimed and/or the entitlements were

wrongly calculated, resulting in incorrect payments.

(a) The audits carried out by the Commission services showed that in
general the calculation of entitlements was performed in accordance
with the applicable legislation and that administrative and on-the-
spot checks are generally operating well. Problems are followed up
in the conformity clearance.

(b) SPS: overpayments to certain olive oil claimants as a result of
being allocated extra entitlements from the national reserve
when they were not eligible to receive them (Spain); the ben-
eficiary audited was paid an amount considerably in excess
of the average payment over the reference period (1999-
2002) but did not meet the investment criteria of the pro-
gramme under which the extra entitlements were awarded.

(c) SPS: in its Annual Report concerning the financial year
2006 (10), the Court pointed out that in Greece, Spain and
Italy the olive cultivation GIS data, was neither complete nor
reliable, and could have an impact on the integration of the
olive oil production aid scheme into the system. These weak-
nesses persist in Italy and Greece where four out of five trans-
actions audited contained errors, some of which led to
significant overpayments.

On payments coming from erroneous attributions of entitlements,
the applicable regulation provides that the farmer shall not repay
the amount in question if an error in the attribution of entitlements
stemmed from the national administration and if it could not rea-
sonably have been detected by the farmer. The Commission consid-
ers that the conformity clearance is a good instrument to cover the
risk for the Fund while respecting the farmers’ legitimate expecta-
tions.

(b) The Court’s findings in this respect were known to the Commission
on the basis of its own audit missions and are already the subject of
a conformity clearance.

(c) On the basis of its own audit findings, the Commission has already
started a conformity clearance in respect of the systemic deficiencies
of the Greek control system, including the calculation of entitle-
ments (2).

The olive cultivation geographic information system (GIS) data are
only used as a consistency check before payment of olive oil produc-
tion. As the entitlements delivered are based on the olive oil pro-
duction payments, there is no direct link between GIS and the value
of the entitlements allocated. Entitlements are regular and legal if
they have been calculated on the basis of the amount paid during
the reference period (3). The Court’s system audit on the establish-
ment of entitlements in Greece concluded that those coming from
the olive oil sector were systematically underestimated.

(10) Paragraphs 5.82 to 5.84.

(2) Letters of June 2006 and April 2007.
(3) Council Regulation (EC) No 1782/2003.

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(d) Direct Coupled Payments: significant overpayments were
found as a result of area discrepancies for nuts and dried
grapes (Spain and Greece) and, in one case, large unexplained
differences were noted between the number of sheep
recorded in the farmer’s register, upon which EU aid was
paid, and the actual number identified (Spain).

(e) Other schemes (non-IACS): errors relate to illegal deductions
from payments to farmers (11) and failure to charge interest
on debts (various Member States), weaknesses in export
refund controls (Portugal) and missing quantities of rice from
public storage (Greece).

(d) The implementation of the dried grapes aid scheme in Greece is sub-
ject to repeated and continuing conformity clearance procedures.

(e) The Commission and the Member State concerned do not share the
Court’s view that the deductions from payments to farmers were
illegal.

As regards the export refund case, the Commission notes that the
transaction was not affected by a quantifiable error.

5.15. With regard to rural development operations, the Court
found the following types of error:

5.15.

(a) agri-environmental schemes: in nine out of 13 cases audited
the farmers had not met all the eligibility conditions (France
and Ireland);

(b)

interest rate subsidies: the procedures in place do not ensure
an adequate audit trail with the result that the regularity of
the payment of the EU subsidies to the final beneficiaries can-
not be verified (France); additionally, irregularities detected
through Member State inspections were not taken into
account in the computation of the payment claims to the
Commission resulting in the declaration of unjustified expen-
diture which was charged to the EU accounts.

(a) Many of those errors having an important financial impact con-
cern the keeping of records about nitrate reduction at farm level
instead of at plot level and the non-presence of permanent fences to
protect water courses. On the latter issue of fences, the Commission
considers that the objective of the measure to prevent animal move-
ments can also be achieved by movable fences.

(b) The Commission is aware of the issue referred to by the Court and
recognises the importance of sound financial management of inter-
est rate subsidy schemes and the existence of an adequate audit trail.
It is following this issue up with the French authorities, including,
if appropriate, in the framework of clearance of accounts procedure.

5.16. As regards environment, fisheries, and health and con-
sumer protection, the payments audited revealed the following
errors:

5.16.

(a) projects financed through the LIFE instrument included ineli-

(a) Such ineligible expenditure can only be detected at the time of the

gible expenditure;

final payment or by an ex-post audit.

(b)

inadequate documentation was presented to demonstrate
that the invoiced work had actually been performed (Spain);

(b) Such errors can only be detected by ex-post audits.

(11) Article 23 of Commission Regulation (EC) No 1227/2000 (OJ L 143,
16.6.2000, p. 1), according to which the payments due shall be made
in full to the beneficiaries.

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(c) a disease eradication programme payment was made with-
out adequate supporting documentation; in addition, there
was a non-respect of ceilings per test for eligible costs and
failure to undertake recommended technical checks (Ger-
many).

(c) A Commission decision (4) has recently been adopted which
strengthens the financial reporting requirements (5). The Commis-
sion considers that the ceiling referred to is a ceiling applied to
Elisa (6) testing, implemented at a Member State level. The Com-
mission does not share the Courts interpretation that this should be
applied per individual test. Although the Member State involved
was entitled to 50 % funding for the programme in question, the
actual amount of funding was capped by Commission Decision at
a level substantially below the estimated claim. The recommended
check (to avoid double payment of test costs between eradication and
emergency programmes) was carried out and immediately revealed
that such costs were ineligible under the emergency programme.
Consequently, more in-depth checks were not necessary.

5.17.

See reply to paragraph 5.2.

Assessment of supervisory and control systems

Policy area Agriculture and Rural Development

5.17. The agriculture and rural development expenditure is car-
ried out under shared management and is subject to the follow-
ing main control systems:

(a)

checks on claims and payments under the Integrated Admin-
istration and Control System (IACS) (12);

(b)

sector-specific controls, e.g. for rural development;

(c) physical checks of agricultural products exported under an

EU subsidised exports scheme (13);

(d) post-payment scrutiny of commercial documents on the pre-
mises of traders and processors of agricultural goods (14);

(e)

the clearance of accounts procedure, carried out ex-post
the Commission (see para-
under the responsibility of
graph 5.39).

(12) 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.

(13) Council Regulation (EEC) No 386/90 (OJ L 42, 16.2.1990, p. 6).
(14) 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.

(4) Sanco 1182/2008 rev.3.
(5) Currently set out in Commission Decision 2002/677/EC.
(6) Enzyme Linked Immuno Sorbent Assay testing (ELISA testing) enables to

diagnose classical swine fever.

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5.18.
IACS covers the two main schemes audited at Member
State level — SPS and Direct Coupled Payments. Certain elements
are specific to each scheme while others are common to both.
The specific provisions applying to areas such as Rural Develop-
ment (some elements of which are also controlled by IACS),
export refunds and ex-post scrutiny of payments are also the
responsibility of the Member States. The clearance of accounts
procedures are the responsibility of the Commission in order to
establish the amounts to be definitively charged to the EU
accounts. The Court’s assessment of each of these control systems
is outlined in paragraphs 5.19 to 5.49.

The Integrated Administration and Control System (IACS)

5.19.
IACS consists, in each Member State, of a database of
holdings and applications, systems for identifying agricultural
parcels and registering animals in case of coupled premium as
well as a register of entitlements in those Member States imple-
menting the SPS which constitutes a new component of IACS.
The system provides for several eligibility controls: an adminis-
trative check of all claims, cross-checks with databases to prevent
the same land/animals from being claimed twice and a minimum
rate of 5 % for on-farm inspections to be carried out by the pay-
ing agencies.

IACS is effective in limiting the risk of irregular expendi-
5.20.
ture, where accurate and reliable data is introduced and the sys-
tem is properly implemented. The IACS is thus the key
management and control tool for:

— the Single Payment Scheme (SPS)

(see paragraphs 5.21

to 5.26),

— direct coupled payments (see paragraphs 5.27 and 5.28),

— common elements (see paragraphs 5.29 and 5.30).

It now covers almost 85 % of the EAGF as a result of the inclu-
sion in SPS of new aid schemes. This extension of IACS is
intended to improve the financial management of high risk areas.
In the case of EAFRD, and especially for agri-environment and
less-favoured areas, certain basic elements such as surface, num-
ber of animals are covered by IACS and others by specifically
designed controls.

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The Single Payment Scheme (SPS)

5.21. Correct calculation and allocation of entitlements by
national authorities is a prerequisite for correct SPS payments to
individual beneficiaries in the first year and all subsequent years.
Member States are also required to respect their overall national
ceilings. The Court again found (15) that various Member States
have failed to correctly apply certain key elements of the system
related to the establishment and management of the entitlements
which are incorporated into IACS. Hence the Court considers that
the systems for calculating the entitlements were only partially
effective and that they do not yet provide reasonable assurance
that the annual SPS payments based upon the allocated entitle-
ments are correct.

5.21. Where wrong calculations of entitlements have led to a risk for
the Fund, the Commission will follow this up in the conformity clear-
ance. Due to the existence of legitimate expectations at operators’ level,
it might not always be possible to correct wrongful attributions of entitle-
ments. Furthermore, the trade in entitlements and further reforms require
legal certainty as to the entitlements attributed. This issue is therefore
addressed in the Health Check.

5.22. As an illustration, the following significant shortcomings,
whose financial impact is difficult to estimate, were identified in
the calculation of the entitlements:

5.22.

(a)

in the United Kingdom (England) the four entitlements
audited were erroneously calculated mainly due to failure to
take account of changes in land parcels; while these errors
did not have a significant impact on the 2007 payments,
since England applies the ‘dynamic’ model (16), these initial
entitlements, unless corrected, will result
in significant
over/underpayments in future years;

(a) The problem was already known to the Commission on the basis of
its own audit missions and is already the subject of a conformity
clearance started in 2006.

The remedial action of the UK authorities to minimise or avoid the
consequences indicated by the Court is part of this procedure.

(b)

the Netherlands initially allocated entitlements in excess of
the national ceiling of 4,9 million euro and have carried out
individual payments on this basis. Although the total pay-
ments made were less than the national ceiling, individual
farmers were overpaid. At the time of the Court’s visit (Janu-
ary 2008) no formal recovery action had been taken;

(b) According to the information available to the Commission, the total
amount of payments made to farmers was 294 million euro, thus
not exceeding the national ceiling of 312 million euro. As regards
individual overpayments, the Dutch authorities have committed
themselves to recover the undue amounts from the beneficiaries.

(15) Annual Report concerning the financial year 2006, paragraph 5.66.
(16) Under this model the payment for each entitlement consists of two
elements: (i) an amount based on an historic reference period for each
farmer, and (ii) a flat rate amount which is the same for all farmers. In
2005 the ratio was 90:10 but each year the flat rate increases and will
reach 100 % in 2012. If too many entitlements have been given to the
farmer he will receive more and more money under the flat rate com-
ponent which outweighs the loss on the individual component.

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(c) when calculating the farmer’s reference amounts, the Dutch
and Greek authorities included bovine animals which were
not eligible for premium in the reference period; furthermore
the Greek authorities allocated reference amounts to farmers
of arable land without taking into account the reductions
that had been made during the reference period;

(d) when calculating the number of entitlements, the Greek and
Spanish authorities systematically disregarded forage area
requirements for farmers that benefited during the reference
period exclusively from premia that did not require any land
and allocated special entitlements (17) to them instead of the
entitlements based on areas (18), thereby generating much
higher payments per hectare, and a consequent reduction in
areas required to be subject to GAEC;

(c) As to the Single Payment Scheme in Greece and The Netherlands,
the conformity clearance has been launched in April 2007 and
May 2008 respectively.

(d) The Court’s findings in this respect were known to the Commission
on the basis of its own audit missions and are already the subject of
a conformity clearance which commenced, as far as Greece is con-
cerned, in April 2007 and for Spain in July 2007.

(e) unjustified withdrawal of entitlements, thereby depriving

(e) The problem is already the subject of a conformity clearance proce-

potential beneficiaries of aid (Greece).

dure which commenced in April 2007.

5.23. Member States are required to establish a national
reserve (19), from which they allocate entitlements to new farmers,
those in special situations or those affected by restructuring or
development programmes.

5.24. The audit found several weaknesses in the use of the
national reserve:

5.24.

(a) various instances of misuse of the national reserve (France):
two ineligible programmes (totalling 42,4 million euro), fail-
ure to respect the statutory deadline for four other pro-
grammes, acceptance of investments based on short-term
rented equipment, failure to systematically apply mandatory
provisions to new farmers who commenced farming during
the reference period leading to an overallocation of 20,8 mil-
lion euro;

(a) The Commission, on the basis of its own audit findings, already
started, by means of a letter of April 2008, a conformity clearance
in respect of the same findings.

(17) Payment entitlements subject

to special conditions are set by
Articles 47 and 48 of Regulation (EC) No 1782/2003 mainly for
cases when the farmer was granted livestock premiums but had no
hectares or the entitlement per hectare results in an amount higher
than 5 000 euro.

(18) Regulation (EC) No 1782/2003, Chapter 3, section 1.
(19) Article 42 of Regulation (EC) No 1782/2003.

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(b)

irregular allocations of entitlements for new olive oil trees
planted after the stipulated deadline and not covered by a
specific programme (Italy).

(b) The Commission will follow up this matter in the conformity clear-

ance procedure.

5.25. When allocating entitlements to olive producers, the Ital-
ian authorities accepted 153 000 hardship cases on the sole rec-
ognition by the region or province that the territory concerned
had been affected The available information does not permit an
estimation of the total value of irregular payments.

5.25. The Commission, on the basis of its own audit findings, already
started, by means of a letter of August 2006, a conformity clearance
procedure in respect of the same findings.

5.26. As regards the management and monitoring of SPS entitle-
ments, the following weaknesses were noted:

5.26.

(a)

incorrect application of late claim penalties (Netherlands,
Portugal and the United Kingdom (England);

(a) For Portugal, the penalties applied were too severe: this is not a risk

for the Fund.

(b) The Commission, on the basis of its own audit findings, already
started, by means of letters of July 2007 and April 2008, a con-
formity clearance in respect of the same findings.

As regards the issue of ‘new beneficiaries’, following the Court’s
Annual Report 2006, the Commission has launched special enqui-
ries with regard to those Member States that have chosen regional
models and that may therefore be affected by the issue raised by the
Court. These audits are still ongoing and risks to the Fund will be
covered by financial corrections. Moreover, the issue of excluding
certain beneficiaries from direct payments is also addressed in the
Commission’s proposals for the Health Check.

(c) As regards Portugal, the Commission follows up this issue in the
conformity clearance procedure. Regarding Italy the Commission,
on the basis of its own audit findings, already started a conformity
clearance in respect of the same findings.

(b)

in the United Kingdom (England) the same parcel can be
claimed by two ‘farmers’ under different area related EU aid
schemes. In nine out of 12 on-the-spot visits to ‘new benefi-
ciaries’ of EU direct aid that the Court had highlighted in its
Annual Report concerning the financial year 2006 (20), the
area declared for SPS was not eligible in whole or in part
either because it was not in good agricultural condition, its
main use was not agricultural or the beneficiary was not eli-
gible because he did not carry out any agricultural activity on
the land;

(c) Portugal has allocated entitlements and paid SPS aid to farm-
ers who declared areas on ‘baldio’ land. This land is usually
public land of very poor pasture and mostly covered by
bushes and trees. There are no limits as regards the number
of trees allowed on such land and there is no obligation for
farmers to respect GAEC on this land. In 2007 Portugal paid
3,5 million euro for ‘Baldio’ land. In Italy it was found that
the areas accepted as permanent pasture for SPS payments
were bigger than the eligible part actually covered by grass or
herbaceous forage;

(20) Paragraphs 5.25 to 5.27.

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(d) payments were made to 275 farmers in France and 33 farm-
ers in Spain (Andalucia) who did not hold payment entitle-
ments; no recovery action has been taken.

(d) According to information available to the Commission, the differ-
ences found by the Court in relation to France are due to differences
in parameters of extraction of the two files compared by the Court
and no payment has been made to farmers not holding entitle-
ments. For Spain, no payment was made to farmers without entitle-
ments. For almost all the cases, these farmers had previously made
a request for rectification which was still pending at the date of the
payment. In case of withdrawal of entitlements, the paying agency
asked for reimbursement.

The direct coupled payments

5.27. The direct coupled payments managed under IACS
totalled some 5 500 million euro in 2007. For the animal-based
schemes the systems are generally functioning satisfactorily,
reflecting the reliability of the IACS for this purpose. However,
the Court found a number of systems weaknesses in administra-
tive and on-the-spot controls of the area aids (see Annex 5.1.1):

5.27. As concerns table 5, the Commission disagrees with the Court’s
evaluation of the systems in Italy.

As the Court has acknowledged, most of the system weaknesses identi-
fied were also identified by the Commission’s clearance of accounts and
appropriate follow-up action has been taken.

(a) administrative controls weaknesses, leading to errors such as:
wrong input of application data (Greece), payment for mul-
tiple incompatible aid schemes on the same parcel (Italy), and
a failure to correctly apply penalties and sanctions, which
lead to overpayments (Greece, Italy, Spain and Portugal);

(b)

lack of documentation of the reasons why certain criteria of
the risk analysis have been selected, and absence of yearly
reassessment of the risk parameters by the paying agencies,
for the selection of the 5 % on-farm inspections (Portugal,
Spain).

5.28. The re-performances of controls carried out by the Court
found a number of specific weaknesses in the quality of the
on-the-spot controls and identified ineligible areas or parcels that
should have been excluded by the national inspectors. (Greece,
Italy, Spain, Portugal). In Italy, a farmer had received aid for a par-
cel of pistachio nut trees. While the parcel had been subject to an
on-the-spot control by the Italian authorities in 2005, the Court’s
audit found the parcel to be long established general forest land
and, thus, not eligible for aid.

(a)

In respect of the incorrect application of sanctions in Italy, Spain
and Portugal, the Commission, on the basis of its own audit find-
ings, already started a conformity clearance.

(b) The need for an annual evaluation has been laid down in Regula-
tion (EC) No 796/2004. As part of its audits, the Commission
reviews the improvement of the risk analysis both over the years and
its effectiveness for the year concerned. Where it is found that there
is a continued dysfunctional risk analysis posing a risk to the Fund,
the Member State is asked to take remedial action and the confor-
mity clearance is applied.

In addition, the Commission simplified the Regulation and risk fac-
tors are no longer determined in the Commission Regulation as
from 2008.

5.28. The Commission audits the control systems of the Member
States and deficiencies that create a risk for the Fund are followed up
under the conformity clearance. This is the case for the Member States
referred to by the Court.

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Supervisory and Control Systems in IACS

5.29. As indicated at paragraph 5.19, the effectiveness of the
supervisory and control systems incorporated in IACS forms a
key element of the overall effectiveness of the system. This applies
to each of the main aid schemes covered by IACS. A general
assessment of the reliability of the system in the Member States
visited for (the two main schemes SPS and direct coupled pay-
ments respectively) is shown in Annex 5.1.2. and in Annex 5.1.1.

5.29. The Commission does not share the overall evaluation regard-
ing the effectiveness of IACS referred to in Table 5 as regards France, The
Netherlands and the United Kingdom.

5.30. Administrative controls to establish eligibility of surfaces: the
effectiveness of the administrative controls depends on the qual-
ity of the information recorded in the Land Parcel Identification
System (LPIS (21)), the use of computerised geographical informa-
tion techniques for the graphical layer of the LPIS which is the
Geographic Information System (GIS) and the use of up-to-date
aerial or spatial orthoimagery:

5.30. The quality of the Land Parcel Identification System (LPIS) is
indeed crucial. The Commission is constantly working with the Joint
Research Center (JRC) to use the best technical resources to update the
LPIS system in the Member States and consequently to optimise the
effectiveness of administrative checks.

(a)

the administrative controls in the United Kingdom (England)
do not provide assurance that EU aid is paid out correctly.
The United Kingdom (England) do not avail of the option to
use aerial or spatial orthoimagery in support of the GIS. The
English LPIS does not always contain information on eligible
area of the reference parcel;

(a) The use of ortho-imagery is not legally required. As to the other
deficiencies in the LPIS-GIS in England referred to by the Court, the
Commission, on the basis of its own audit findings, already started
a conformity clearance.

(b)

in Greece the administrative controls are also deficient; the
LPIS is incomplete and contains important errors in the ref-
erencing of parcels;

(b) The deficiencies of the LPIS in Greece are the regular subject of con-
formity decisions. At the request of the Commission, the Greek
authorities have adopted an action plan that foresees, inter alia, the
implementation of a new LPIS-GIS by 31 December 2008.

(c)

in France and the Netherlands the paying agencies do not suf-
ficiently deduct ineligible features visible on orthoimages
from the eligible area recorded in the LPIS and do not update
their LPIS with the results of on-the-spot inspections. In Por-
tugal the update is carried out with significant delays. France
and Sweden use orthophotos some of which are more than
5 years old;

(c) The findings referred to by the Court have also been identified by
the Commission audits. Member States are asked to take remedial
action and conformity clearance are started to cover the financial
risk resulting from these deficiencies.

(d)

in France, Portugal and Sweden the eligibility of land declared
for activation of set aside entitlements (22) is not reliably veri-
fied.

(d) The Commission will provide for an adequate follow-up in the con-
text of the conformity clearance once the Court has transmitted to it
all the relevant information.

(21) LPIS is a database in which all the agricultural area of the Member

State is recorded with a unique identification number.

(22) Determination of set aside entitlements is set by Article 53 of Regu-

lation (EC) No 1782/2003.

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Member State controls under IACS and inspection results

5.31. The IACS inspection results reported to the Commission
by paying agencies assess the legality and regularity of claims sub-
mitted by farmers and have been verified by the certifying bodies
for the first time in 2007. However, the certifying bodies do not
extend their work to final beneficiaries for the verification and
validation of IACS statistics. Neither has the Commission verified
the reliability of these statistics. Furthermore, the Court’s analysis
of the work of 28 certifying bodies for the purposes of such veri-
fications, showed that two certifying bodies’ assessment was nega-
tive and one was unable to assess the situation. The Court further
found that reconciliations provided for by the relevant Commis-
sion guideline had either not been done, not been done in the way
foreseen or that the information provided did not allow a con-
clusion to be drawn upon the adequacy of the work.

5.31.
From financial year 2007 onwards, the certification bodies are
required by Commission’s guidelines to analyse the effectiveness of the
paying agencies internal control systems including on-the-spot checks
more systematically and to verify and validate these statistics. The Com-
mission thus implemented the Court’s recommendation made in its
Annual Report concerning the financial year 2005 (paragraph 5.46)
that the certification bodies were to do more work to verify and validate
the statistics.

As regards the extension of the work to the final beneficiaries, the certi-
fication bodies review a sample of field inspection reports and check that
any claim adjustments required (as a result of the check) are made to the
final beneficiary’s data in the IACS.

In roughly 90 % of the cases, the certification bodies made an assess-
ment and concluded positively for approximately 85 % of them which
must be considered as an acceptable result for the first year of applica-
tion of this new control obligation. The Commission recognises that there
is scope for improvement in this area, and has revised its Guidelines
accordingly for financial year 2008.

The Commission systematically analyses the IACS statistics for consis-
tency and compliance with regulatory requirements. The data’s reliabil-
ity is verified by the Commission’s conformity audits.

Rural Development

5.32. The imprecise definitions in national legislation of some
eligibility conditions and the often complex rules, particularly
those related to agri-environmental measures, adversely affect the
quality of the controls carried out to verify the farmers’ compli-
ance with the relevant requirements. These controls have once
again, been found deficient. The principal weaknesses detected
were:

5.32. As regards the definition of eligibility conditions in national leg-
islation and their complexity, the Commission shares the view of the
Court that they should be as simple as possible to reduce the risk of errors
and to limit control costs. However in particular agri-environmental
measures are complex by nature and there is very limited scope for sim-
plification without jeopardising the purpose of these measures.

As regards the control system, measures have been taken to reinforce and
strengthen the control rules in this area and all eligibility criteria must
now be controllable according to a set of verifiable indicators to be estab-
lished by the Member States (7). Moreover, guidelines have been pro-
duced by the Commission on the verifiability of the agri-environmental
measures.

(a)

insufficient checks on the validity of the bids submitted in the
context of private procurement. The checks carried out do
not provide reasonable assurance as to the legality of the
required tendering procedure which may consequently affect
the eligibility of the project as a whole (Romania);

(a) The findings referred to by the Court in its observation will be
followed-up by the Commission in the context of the conformity
clearance.

(7) Article 5 of Regulation (EC) No 1975/2006.

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(c) The findings referred to by the Court in (c), (d) and (e) will be fol-

lowed up in the conformity procedure.

(b)

(c)

lack of cross-checks with the specific animal databases (rare
breeds) to validate the number of animals declared by the
farmer which is the basis for the agri-environment payments
(France);

inadequate verification of
the eligible area under agri-
environment measures in cases where this area did not cor-
respond to the data in the IACS database. As a consequence,
not all the conditions for granting the support could be
checked (Ireland);

(d)

lack of systematic verifications as to whether detailed agri-
environment commitments tailored to the farm fulfil the
overall requirements of the measure (e.g. the maximum per-
mitted level of chemicals);

(e)

inconclusive and poorly documented administrative and
on-the-spot controls with an over reliance on beneficiaries’
declarations before approving final payments (Ireland);

(f)

inadequate consideration of the risk factors stipulated in EU
legislation for the selection of a sample of farmers to be con-
trolled on the spot (France and Ireland);

(f) As to the risk parameters, the Commission simplified legislation

and risk factors are no longer determined as from 2008.

(g)

(h)

the

verification of

inadequate
existence of private
co-financing. Projects were often approved without the
required certificate from a financial institution, increasing the
risk that EU funds are paid to beneficiaries who are unable to
pay their share of the investment (Romania);

(g) The risk is mitigated by the fact that for each project which foresees
self-financing, a bank statement not older than 5 working days
before the submission of the payment claim is annexed to the claim.

the inadequate audit trail for projects receiving interest rate
subsidies made it impossible to trace the final beneficiaries
who benefited from EU funding. Consequently, the auditors
could not verify whether the amounts declared were correct
or if beneficiaries respected all eligibility requirements (see
also paragraph 5.15(b) — France).

(h) The Commission is aware of the issue referred to by the Court and
recognises the importance of sound financial management of inter-
est rate subsidy schemes and the existence of an adequate audit trail.
It is following this issue up with the French authorities, including,
if appropriate, in the framework of clearance of accounts procedure.

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Ex-post scrutiny of payments to traders and processors

5.33. 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 take steps to recover sums lost as a result of irregu-
larity or negligence. These checks are carried out under Regula-
tion (EEC) No 4045/1989. The Commission plays a supervisory
and coordination role.

5.34. The timely execution of the scrutiny programme has
improved in 2007. However, there is a limited number of scruti-
nies not completed from each of the preceding scrutiny periods
dating back as far as 2000/2001 (23). These bear the risk of not
being properly executed given that beneficiaries only have a legal
obligation to keep the relevant documentation for a limited
period and that the payments examined during a scrutiny period
normally relate to payments from 2 years earlier. That is to say,
the outstanding scrutinies from period 2000/2001 relate to pay-
ments made as far back as 1998/1999. Furthermore, the results
of the scrutinies carried out on payments made in the year
2006/2007 will not be available to the Commission until the
31 December 2009.

5.34. At Community level (based on the 2006/2007 scrutiny reports)
the required minimum number of scrutinies had been reached for each of
the preceding scrutiny periods, with the exception of 2002/2003
and 2004/2005. This was mainly due to a backlog in Italy.

According to information received from the Italian authorities on
29 May 2008 the minimum number of scrutinies at Community level
has been reached for each of the preceding scrutiny periods. However, the
Member States’ obligation to eliminate the backlog remains.

5.35. The Court noted a limited coverage of rural development
measures both at Commission and Member States level, despite Rural
Development representing, for the scrutiny period 2006/2007,
11 % of the expenditure covered by the Regulation and 57 % of
all the potential irregularities reported.

5.35.
In 2007, the rural development unit mainly carried out audits
of measures not covered by Regulation (EEC) No 4045/89, such as
agri-environment. However, the unit with horizontal responsibility for
Regulation (EC) No 4045/89 carried out two missions in early 2008
covering rural development together with the rural development unit in
the framework of the 2007 work programme.

More importantly, at Member State level about 18 % of the total num-
ber of scrutinies in scrutiny year 2006/2007 concerned rural develop-
ment measures, and this is considered to be an appropriate level of
coverage.

5.36. The Court’s analysis of the certifying bodies’ reports has
also shown a need for improvements in the verification and
reporting by the paying agencies on the follow up of the poten-
tial irregularities reported.

5.36.
For the paying agencies concerned the certification bodies made
an assessment in 90 % of the cases and in 80 % of them the statement
on the follow-up given by the paying agencies is a positive one.

(23) A total of 916 of the almost 20 000 planned scrutinies were, as at the

end of 2007, incomplete.

The revised Guidelines presented to the Member States for the financial
year 2008 address the Court’s observation.

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Export refunds

5.37.
Export refunds are paid to exporters of EU agricultural
products to cover the difference between EU internal and world
market prices. In 2007, 1 445 million euro was paid, 42 % less
than the previous year due to policy choices made in the context
of the recent CAP reforms and also to increases in world market
prices. Regulation (EEC) No 386/90 requires Member States to
physically check 5 % of exports to ensure that they are correctly
described and qualify for export refunds. They are also required
to carry out substitution checks at the point of exit from the EU
where this is different from the place at which they were pre-
sented for a physical check. The Commission is required to moni-
tor the quality and the number of those checks.

5.37. The quality and number of both physical and substitution checks
are verified by means of on-the-spot audit enquiries and analysis of the
detailed annual returns furnished by all Member States.

5.38.
In its Special Report No 4/2007 (24), the Court pointed
out shortcomings in respect of the system of physical and substi-
tution checks on export refund consignments. The Council and
Commission acted promptly on the recommendations made by
amending the relevant legislation (25). However, the particular
weakness concerning the reintroduction of exported goods into
EU territory following transportation on a non regular shipping
line, has not yet been addressed.

5.38. The Commission takes the view that, when it is established that
the refund products have left the Customs territory within 60 days, the
rest of the journey to the third country of destination continues over inter-
national or third country territory which may include transhipment under
Articles 9 or 10 of Regulation (EC) No 800/1999 with the related
transit through parts of the Community customs territory under customs
supervision, which by the EU enlargements since 2004 is more likely to
happen. It is legally not possible that the goods or products in question
remain on customs territory under a different customs regime although
having received refunds.

The Commission’s clearance of accounts procedures

5.39. As the 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
Commission. These reimbursements are considered as advances,
although they are reported as payments in the financial state-
ments submitted by the Commission. The final recognition of
expenditure is determined through a two-stage procedure called
the clearance of accounts. The two stages consist of an annual
financial decision and multi-annual conformity decisions taken
by the Commission.

(24) Adopted on 21 June 2007 by the Court (OJ C 252, 26.10.2007, p. 1).
(25) Council Regulation (EC) No 14/2008 (OJ L 8, 11.1.2008, p. 1) and
Commission Regulation (EC) No 159/2008 (OJ L 48, 22.2.2008,
p. 19).

5.39. The reimbursements by the Commission to Member States are,
according to the legal rules, defined as monthly payments and not as
advances (8).

(8) The

first

subparagraph of article 5(1) of Council Regulation (EC)
No 1258/1999 stated that ‘The financial resources required to cover the
expenditure… shall be made available to the Member States by the Commis-
sion by means of advances …’. However Council Regulation (EC)
No 1290/2005 of 21 June 2005 on the financing of the common agricul-
tural policy has repealed Regulation (EC) No 1258/1999 and article 14(1),
replacing Article 5(1), first subparagraph, stipulates that ‘The appropriations
necessary to finance the expenditure… shall be made available to Member
States by the Commission in the form of monthly reimbursements, hereinafter
referred to as “monthly payments”, on the basis of the expenditure effected by
the accredited paying agencies during a reference period.’

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Financial clearance

5.40. On 30 April 2008 the Commission took three financial
clearance decisions for the expenditure made under EAGF, EAFRD
and TRDI and cleared all paying agencies accounts, except those
shown in Annex 5.3. These decisions are based on certificates
provided by independent auditors (certifying bodies). The Court’s
audit did not detect expenditure cleared by the Commission
which should have been refused (disjoined) in the financial clear-
ance decisions.

5.41. The financial decisions are however limited to the verac-
ity, completeness and accuracy of the paying agencies’ accounts.
Legality and regularity of underlying payments (‘conformity
issues’) are outside the scope of the certifying bodies’ substantive
testing and claims for EU aid are not usually checked on the spot
by the certifying bodies. Financial decisions do not therefore
mean that the expenditure ‘cleared’ is free of irregular payments.

5.41. The audit assurance given is not limited solely to accounting
matters. Each certificate also provides an opinion on whether the paying
agency’s internal control system has functioned satisfactorily for the
financial year in question and in this context on-the-spot checks are also
assessed.

In addition, certification bodies provide a separate opinion on the State-
ment of Assurance (the DAS) provided by each paying agency’s director,
as well as an analysis of the effectiveness of the on-the-spot controls and
the accuracy of the inspection statistics.

5.42.
In 2007 the certifying bodies work was extended. In addi-
tion to the new verification and validation of IACS statistics (see
paragraph 5.31), opinions on the paying agencies Directors State-
ments of Assurance and on internal control procedures were
required. The Court’s audit showed that the added value of these
new elements has so far been limited. Furthermore, in three cases
there was an unresolved contradiction between the paying agency
Directors’ Statement of Assurance and the qualified audit certifi-
cate issued by the certifying body.

5.42. Together with the other elements referred to by the Court in its
observation, the verification and validation work by the certification bod-
ies introduced following recommendations of the Court in its Annual
Report concerning the financial years 2005 (paragraph 5.46) and 2006
(paragraph 5.8) are a positive step towards a further improved account-
ability of paying agencies and lead to greater transparency and owner-
ship of the control results. This is also recognised by the conference of the
directors of the paying agencies and by independent certification bodies.

Each certification body analyses, and reports on, how well each paying
agency complies with the accreditation criteria as laid down in Regula-
tion (EC) No 885/2006, and gives an opinion accordingly. The differ-
ence of view between the DAS and the certification body’s opinion proves
the added value of the opinion on the DAS, in that the certification body
has appraised the DAS in the light of its own audit work, as foreseen.
The 3 paying agencies concerned are now all under probation. For the
remaining 79 paying agencies, the two documents were consistent.

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5.43. Despite the Spanish paying agencies making payments for
the first time under the SPS during the year, the Spanish certify-
ing bodies did not include the required verification of entitle-
ments in their work.

5.43. The certification bodies checked the data provided by the autono-
mous communities for the calculation of entitlements, but not the cal-
culation carried out at overall national level. The Commission has revised
its Guidelines for financial year 2008 to clarify that if the system is
managed centrally at national level, but the central paying agency does
not manage SPS (as is the case in Spain), the certification body of the
central paying agency would still have to cover this part in its report.

the certifying bodies
5.44. Based on the examination of
work (26) the Court reiterates (27) its doubts as regards accuracy of
the debtors accounts: two certifying bodies include qualifications
in their certificates and 15 highlight shortcomings in the paying
agencies’ debt management procedures; 12 certifying bodies
failed to provide enough information on the work carried out and
two did not adequately test the accounts. Whilst the Commission
has initiated the procedure to apply corrective measures (28) for
the reported shortcomings, the financial impact of these actions
is not yet known. Further the Court notes that the different poli-
cies applied to the date of recognition of debts by the paying
agencies result in an inconsistent presentation of the global value
of debts.

5.44. The Commission considers that for at least one of these two
cases sufficient work was in fact carried out. The Commission also con-
siders that it obtained enough information on debtors for clearance and
accounting purposes. In no case was the financial impact found to be
material at the overall account level (and thus as regards the Decision).

However, the Commission recognises that there is scope for improvement
in this area, and has revised its Guidelines for financial year 2008
accordingly. It will also continue to closely monitor the situation (via 7
audit missions to paying agencies and 6 audit missions to certification
bodies in 2008).

5.45. The Commission in its response to the Court’s Annual
Report concerning the financial year 2006 (29), has committed
itself to follow up the amounts, charged from the debtors’ tables
to the EU budget under the first financial clearance decision for
2006 taken on 27 April 2007. The three Commission audits car-
ried out in 2007 covered some 7 % of the amounts included in
this financial clearance decision.

In 2007, two audits covering debts were carried out to the Ital-
5.45.
ian paying agency AGEA. The Decision clearing AGEA’s accounts
which were disjoined for the financial year 2006 was taken on 30 April
2008. This means that the audits carried out in 2007 covered some
41 % of the amounts included in the first and second clearance decisions
for financial year 2006 (the latter taken after the Court’s audit).

Conformity clearance

5.46. Conformity decisions are taken following additional veri-
fications by the Commission of the expenditure declared by the
Members States. They cover a number of years and have the
objective of excluding expenditure from EU financing where the
Commission has found that it ‘has been incurred in a way that has
infringed EU rules (30)’.

(26) Annex III to Commission Regulation (EC) No 885/2006 (OJ L 171,

23.6.2006, p. 90).

(27) Annual Report concerning the financial year 2006, paragraph 5.61.
(28) Article 11 of Regulation (EC) No 885/2006.
(29) Paragraph 5.61.
(30) Article 31 of Council Regulation (EC) No 1290/2005 (OJ L 209,

11.8.2005, p. 1).

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5.47. The Court in its 2006 and previous annual reports indi-
cated the limitations which are partly inherent in the clearance
system such as the retroactive and multi-annual nature of the
conformity clearance and the fact that the Member States, and not
the final beneficiaries, are effectively charged with the financial
corrections. In addition, the Commission’s method of calculating
the conformity adjustments, largely based on the use of a flat-rate
corrections, means that no valid link can be made between the
amounts thus recovered and the real amount of irregular pay-
ments (31). These limitations were found to persist in 2007.

5.47. What the Court describes as limitations are inherent to the sys-
tem laid down in Community legislation and was not objected to by the
Court in the context of the adoption of Council Regulation (EC)
No 1290/2005.

While financial consequences are only determined at the end of the pro-
cedures, the preliminary findings of the Commission’s audits carried out
in a given year are already known by the end of that year. Since the
audits cover the Member States’ management and control systems, they
do not only provide information on the expenditure audited but indirectly
also on future expenditure. Furthermore, normally the corrections take
into account expenditure effected after the date of the audit and are there-
fore not only retro-active.

The conformity clearance is designed to exclude expenditure from Com-
munity financing which has not been effected in compliance with Com-
munity rules. 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.

Where undue payments to beneficiaries can be identified as a result of the
conformity clearance, Member States are required to follow them up by
recovery actions against these beneficiaries. However, even where recov-
eries from beneficiaries are not needed because the financial correction
only relates to deficiencies in the Member States’ management and con-
trol system and not to undue payments, these corrections are an impor-
tant means to improve the Member States’ systems and thus to prevent
or detect and recover irregular payments to beneficiaries.

Flat-rates take account of the severity of the deficiencies in the national
control systems in order to reflect the financial risk for the Community.
Therefore the Commission considers there to be a valid link between this
type of correction and the amount of irregular payments to final benefi-
ciaries.

5.48. The Court’s audit of the conformity decisions taken in
2007 found that:

5.48.

(a)

expenditure was not excluded from EU financing when in
fact it should have been and expenditure had not been cov-
ered by a conformity audit in time to allow recovery of the
full amount of the possible irregularities found;

(a) The Commission considers that the expenditure which it has
excluded from Community financing as a result of its conformity
audits is sufficient to cover the risk for the Funds.

The legal rule which limits the possibility of financial corrections in
time (24 months rule) is a deliberate choice of the Community leg-
islator with a view to ensuring legal certainty for 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. The Commission has repeatedly proposed an exten-
sion of this time limit, but these proposals were turned down by
both the Council and the European Parliament.

(31) Annual Report concerning the financial year 2006, paragraph 5.63.

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(b)

for two of the corrections examined, six years have elapsed
between the initial audit and the clearance decision, with the
result that ineligible expenditure was only excluded from the
accounts at the end of this procedure.

(b) The two cases referred to by the Court were very complex and are
not representative of the Commission’s conformity clearance work.

Policy areas Environment, Fisheries, Health and
Consumer Protection

5.49.
Environment, Fisheries and Maritime Affairs as well as
Health and Consumer Protection are managed by the Commis-
sion under specific control systems. The Court’s audit of these
policy areas detected the following system weaknesses:

5.49.

(a)

(b)

for environmental measures, projects financed by the main
fund (LIFE projects) included ineligible expenditure. Impor-
tant delays in concluding audits still remained. However the
situation improved in 2007. The Annual Activity Report of
the Directorate-General for the Environment (DG ENV) rec-
ognises these weaknesses by establishing a specific reserva-
tion;

in the fisheries policy area, the lack of appropriate legal rules
and poor documentation of expenditure relating to data col-
lection for fisheries management increase the risk that irregu-
lar payments are made. On the other hand liabilities arising
from particular cases of renewed bilateral fisheries agree-
ments have not been covered in a timely manner by the com-
mitment of the corresponding appropriations;

(b) The legal rules that the Court is referring to as regards data collec-
tion for fisheries management have been changed in 2008 (9). The
corresponding implementing Commission Regulation and Decision
will be adopted in the course of 2008. The new legal basis contains
clear rules and should address the concerns of the Court. As regards
the current situation, procedures have been put in place to address
the weaknesses identified by the Court with regard to documenta-
tion.

Budgetary commitments covering the fisheries agreements can be
made only after the legal basis (Council decision and/or regulation)
has been adopted. This explains why, when it has not been possible
to adopt the legal basis before the provisional entry into force of the
new protocol (which is often the case, even though the lengthy peri-
ods required for negotiation and adoption have been built in), the
budgetary commitment post-dates the legal commitment (provi-
sional application of the new protocol). The Commission will con-
tinue to examine alternative procedures in order to take into account
the remarks of the Court while bearing in mind the specific con-
straints linked to the fisheries agreements.

(9) Council Regulation (EC) No 199/2008.

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(c)

in the health and consumer protection area payments were
made for veterinary measures in the absence of all the nec-
essary supporting documentation.

The Council reached a political agreement on 24 June on the Com-
mission’s proposal on fishing authorisations for Community vessels
outside Community waters. The new regulation foresees the conti-
nuity of fishing operations on a transitional basis before the formal
adoption of the new protocol by the Council.

(c) The Court’s statement refers to the reception of vaccines and tests for
which no written confirmation of delivery has been requested by the
Commission. Nevertheless, the Commission considers that, based on
its contacts with the Member States and its internal control proce-
dures (including the signing of the ‘Conforme aux faits’ by two staff
members), this lack of formal documentation relating to the recep-
tion of these goods and tests, does not put at risks its payments.

A Commission decision (10) has recently been adopted which
strengthens the financial reporting requirements set out in Commis-
sion Decision 2002/677/EC.

Overall conclusions and recommendations

5.50. Based on its audit work, the Court concludes that the
transactions underlying the expenditure declared for the policy
group taken as a whole are affected by a material level of error of
legality and/or regularity (see paragraphs 5.12 and 5.13).

5.50-5.51. The Commission aims to ensure that supervisory and con-
trol systems are effective in detecting and correcting errors, with due
regard to the costs and benefits of the checks which have to be made on
the spot.

As regards agriculture and rural development, the Commission under-
lines the Court’s finding that the most likely overall error rate is not sig-
nificantly different from last year’s, as reported in its 2006 statement of
assurance. Control statistics received from Member States, indicate as
well that the error rate found at the level of final beneficiaries under the
EAGF, which accounts for about 85 % of total agriculture and rural
development expenditure, is below the materiality threshold.

The Integrated Administrative Control System (IACS) covering most of
agricultural expenditure is effective in limiting the risk of irregular expen-
diture, where accurate and reliable data is introduced and the system is
properly implemented.

The 2007 agriculture and rural development expenditure likely to be
excluded from Community financing by future conformity decisions,
amounts to an estimated sum of 439 million euro, together with the
152 million euro of recoveries from final beneficiaries.

(10) Sanco 1182/2008 rev.3.

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As described in the Annual Activity Report
(AAR) 2007 the
Directorate-General for Health and Consumers is confident that its
transactions are not affected by a material level of error of legality and
regularity. Furthermore, as explained in the AAR 2007 the residual
error rate is 1,6 % which is below the materiality threshold of 2 %.

As stated in the AAR 2007 of the Directorate General for Fisheries and
Maritime Affairs, a reasonable assurance on the regularity and legality
of DG Fisheries and Maritime Affairs expenditure can be given and
weaknesses detected are not material enough to justify a reservation.

DG ENV made a specific reservation in the Annual Activity Report on
the eligibility of expenditure declared by the beneficiaries of action grants.

5.51. As stated in the Annual Activity Report (AAR) 2007 of the
Directorate General for Fisheries and Maritime Affairs under the con-
clusion on the effectiveness of internal control system, there is a reason-
able assurance that the internal control systems in the DG function
effectively.

In its AAR 2007, the Management of the Directorate-General for Envi-
ronment ‘feels confident about the overall state of internal control and
financial and operational management in DG ENV’. This conclusion is
also confirmed by the results of the analysis of the subdelegated autho-
rising officers and management reports to the Director General which
were requested from all of them in January 2008. The Internal Audit
Capability of DG ENV has not discovered material weaknesses in the
financial control systems or serious flaws in the management systems
during its 2007 audits. The weaknesses flagged by the Management in
2007 were due to specific circumstances and will be further addressed in
2008.

5.52-5.53. The audits carried out by the Commission services showed
that in general the calculation of entitlements was performed in accor-
dance with the legislation and administrative and on-the-spot checks are
generally operating well. Where problems were noted these are followed
up in the conformity clearance.

As regards frequency and impact of errors, the IACS statistics received
from the Member States (except Greece) and verified and validated by the
certification bodies show that the frequency of errors including financial
year 2007 is steadily decreasing and the financial impact of the errors is
limited to only 0,83 % of the expenditure concerned.

5.51. The Court’s overall assessment of the supervisory and
control systems for the policy areas covered by this chapter is that
they are partially effective.

5.52. The Court concludes, however, that IACS continues to be
effective in limiting the risk of irregular expenditure where prop-
erly implemented and if accurate and reliable data is introduced
as regards SPS payments based upon allocated entitlements (see
paragraphs 5.20 and 5.21). The recent introduction in SPS of sup-
port schemes, such as those related to olive oil
(see para-
graph 5.14), is a positive development although in the short term
might lead to a higher frequency of errors.

Some 20 percent of payments audited at final beneficiary
5.53.
level again revealed incorrect payments, a limited number of
which had a high financial impact. Furthermore, the Court iden-
tified errors in interpreting the provisions of the regulations. If
not corrected, there will be significant cumulative effects of all
such errors over a number of years.

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5.54. Although the clearance of accounts systems (as well as
post-payment checks) have the objective of excluding expenditure
which does not comply with EU rules, at present they fail to do
so at the level of payments to final beneficiaries; rather they are
borne by Member States so that no valid link can be made
between the amounts excluded and the real amount of irregular
payments.

5.54. The conformity clearance is designed to exclude expenditure from
Community financing which has not been effected in compliance with
Community rules. 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.

Where undue payments to beneficiaries can be identified as a result of the
conformity clearance, Member States are required to follow them up by
recovery actions against these beneficiaries. However, even where recov-
eries from beneficiaries are not needed because the financial correction
only relates to deficiencies in the Member States’ management and con-
trol system and not to undue payments, these corrections are an impor-
tant means to improve the Member States’ systems and thus to prevent
or detect and recover irregular payments to beneficiaries.

The Commission considers there to be a valid link between its financial
corrections and the level of irregular payments to final beneficiaries.

5.55. The Commission’s conformity decisions are not complete
for any year later than 2000. Since the decisions in respect of
2007 have yet to be taken, the expenditure is subject to possible
corrections in subsequent years following verifications made by
the Commission. Globally, however, the corrections made in sub-
sequent years do not normally change the order of magnitude of
the payments reported by the Member States.

5.55. At the end of 2007, only 24 out of around 1 400 audits car-
ried out in the years 2003 and before, allowing financial corrections of
expenditure from the period prior to 2002, had not been closed. The
financial corrections related to these audits as regards expenditure from
the period prior to 2002 are estimated to be around 6 million euro. This
means that the conformity work on expenditure incurred in the years
2001 and before had largely been completed.

As regards the magnitude of the financial corrections, the 2007 agri-
culture and rural development expenditure likely to be excluded from
Community financing by future conformity decisions, amounts to an
estimated sum of 439 million euro, together with the 152 million euro
of recoveries from final beneficiaries (11).

5.56. The Court recommends that the systems weaknesses lead-
ing to such errors are resolved. In this regard, the most urgent
issues to address concerning the reliability of payments made
under the SPS are:

5.56. Most of the weaknesses referred to by the Court are known and
followed up in the conformity clearance. Weaknesses are not due to
unclear legal provisions but to the weaknesses in implementing them.

(a)

improving the identification, registration and management of
the entitlements;

(a) Member States are encouraged to improve their systems and to work
closely together with the Commission services and JRC on the issues
mentioned.

(11) In 2007, 607 million euro was recovered by financial correction and
247 million euro recovered from final beneficiaries by Member States (see
chapter 6 of the notes to the annual accounts 2007).

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(b) eliminating from the database ineligible areas and beneficia-
ries and ensuring up-to-date information on land parcels
(e. g. orthophotos);

(b) Guidelines on recording of eligible areas and ensuring up-to-date
information have been established by the Commission services (DG
AGRI and JRC) already in 2002. These guidelines have been dis-
cussed with the Member States at different occasions. Where it is
found that the non respect of these Guidelines can lead to irregular
payments, action is taken under the conformity clearance and Mem-
ber States are requested to detail an action plan to resolve the issues.
In this, the Commission services (DG AGRI and JRC) are provid-
ing the necessary assistance.

(c)

clarifying and simplifying the rules underpinning the mea-
sures — in particular the use of the national reserve.

(c) Simplification is proposed in the Health Check proposal: by further
decoupling some partial payments and by allowing Member States
to gradually shift towards flatter payment rates per entitlement, SPS
will become more effective, efficient and simple.

5.57.
Further significant efforts are also required to ensure that
beneficiaries respect their obligations in the area of rural devel-
opment which is particularly prone to errors because of the often
complex rules and eligibility conditions.

5.57. The Commission has given in its audit programme 2008 pri-
ority to the audit of agri-environmental measures.

The Commission shares the view of the Court that rural development
measures,
in particular due to the inherent complexity of agri-
environmental measures, are prone to a higher incidence of errors than
EAGF payments. Agri-environmental measures are complex by nature
and that there is only very limited scope for simplification of these mea-
sures without jeopardising their objectives.

The Commission, therefore, considers that due to the added value of these
measures and their high complexity, the tolerable risk of errors should be
higher.

Despite these considerations, important improvements of the rural devel-
opment control framework have been introduced for the EAFRD pro-
gramming period 2007-2013. As an example, Member States shall
now ensure that all the eligibility criteria established by Community leg-
islation or by the rural development programmes can be controlled
according to a set of verifiable indicators to be established by them. As
eligibility criteria are often complex, different rules and guidelines have
been produced by the Commission services to assist Member States in
their interpretation.

Moreover, the application of the IACS has been further reinforced for
area and animal related rural development measures under Axis 2 that
constitute 44 % of the total expenditure programmed.

5.58.
Finally, it is necessary to overcome the system’s weak-
nesses identified as affecting the policy areas of environment, fish-
eries, health and consumer protection.

5.58. The Directorate-General for Health and Consumers refers to its
statement in paragraph 5.51.

See reply in 5.51 for fisheries.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

FOLLOW-UP OF PREVIOUS OBSERVATIONS

The common organisation of the market in raw
tobacco

5.59.
In its Special Report No 7/2004 (32) the Court identified
a number of shortcomings, notably unreliable data, inadequate
analysis of the market situation, as well as a failure to meet objec-
tives set, such as encouraging the conversion of production to
other sectors. The Court made a number of recommendations
which were supported by the Parliament and the Council.

5.60. The CMO for raw tobacco has since been reformed in the
context of the 2003 general reform of the CAP. The Commission
has largely taken into account the Court’s recommendations,
namely regarding the collection and use of more complete and
reliable data. Furthermore, full decoupling of the aid from pro-
duction is gradually being introduced. This, together with the
financing of reconversion measures, will when fully implemented,
address the weaknesses of the market measures and are them-
selves an incentive for producers to voluntarily give up tobacco
production.

The Commission’s management and supervision of
the measures to control foot-and-mouth disease

5.61.
In it Special Report No 8/2004 (33), the Court noted that
the Commission and the Council had already remedied many of
the legislative weaknesses highlighted by the Court’s audit. How-
ever, it recommended further measures, notably:

5.61.

(a) outside crisis periods, regular evaluation of the prevention
and control arrangements and increased supervision of their
implementation;

(b) a study of ways of involving farmers more closely in rapid
notification of the disease and compliance with movement
restrictions;

(32) OJ C 41, 17.2.2005, p. 1.
(33) OJ C 54, 3.3.2005, p. 1.

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THE COMMISSION’S REPLIES

(c)

clarification of the financial framework applicable to epidem-
ics of animal disease, combined with maximum reduction of
the financial risks to the EU budget.

(c)

In the Communication from the Commission to the Council, the
European Parliament, the European Economic and Social Commit-
tee and the Committee of the Regions ‘A new Animal Health Strat-
egy for the European Union (2007-2013) where “Prevention is
better than cure” (COM(2007) 539 final)’ it expected to develop a
harmonised EU framework of the criteria for responsibility and cost-
sharing. This is to be achieved by a revision of the EU financial
financing (Council Decision
instrument
90/424/EEC) in the framework of the action plan of the new ani-
mal health strategy. Preparatory work has already started. Further
actions, including a feasibility study that will include a consulta-
tion process are planned.

for animal disease

5.62. The Commission undertook a major evaluation of the
prevention and control measures in 2006 and took a series of ini-
tiatives which partially address the Court’s recommendations.

5.63. Nevertheless, the Court considers that further efforts are
needed to:

In December 2004, the Commission launched an external
5.62.
evaluation to thoroughly review the outcomes of EU action on animal
health and the direction it may wish to take in the future. Based on the
evaluation’s results and a wide stakeholder consultation, the Commis-
sion presented its proposal for a new animal health strategy in Septem-
ber 2007 (12). It was the first time that the Commission set out its
strategic aims and objectives for animal health.

5.63. The Council (in December 2007), the European Economic and
Social Committee (January 2008) and the European Parliament (May
2008) have welcomed the development of a strategic approach to EU
animal health policy and support the overall aims, objectives and prin-
ciples set out in the Animal Health Strategy, which covers the period
2007-2013. Based on the results of discussions in these EU inter-
institutional forums, the Commission will adopt in the near future its
Action Plan on Animal Health to deliver the strategy’s vision over the
next five years and beyond.

(a)

simplify legislation concerning the health and welfare of ani-
mals (34);

(a)

In the framework of the Better Regulation policy, major actions
have already been undertaken to simplify the existing legal frame-
work, including for example the new Directive 2006/88/EC on
aquaculture animals (13) and the proposal for a Council Directive
simplifying procedures of listing and publishing information in

(34) Communication on a new Animal Health Strategy (2007-2013)

COM(2007) 539/F, 19.9.2007.

(12) COM(2007) 539 adopted on 19 September 2007 http://ec.europa.eu/

food/animal/diseases/strategy/docs/animal_health_strategy_en.pdf

(13) Council Directive 2006/88/EC of 24 October 2006 on animal health
requirements for aquaculture animals and products thereof, and on the pre-
vention and control of certain diseases in aquatic animals (OJ L 328,
24.11.2006, p. 14).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

the veterinary and zootechnical fields and amending 22 existing
Council Directives (14), which is currently at the final stage of pro-
cedure for adoption by the Council. However, as explained in its
Communication on the new Animal Health Policy Strategy, the
Commission also intends to bring forward a proposal for a new ani-
mal health law that would simplify considerably existing legislation.

(b)

increase the human resources dedicated to the control of the
application of EU legislation taking into account the enlarge-
ment of the Union;

(b)

In the food safety and animal health area, the Commission’s Food
and Veterinary Office (FVO) works to assure effective control sys-
tems and to evaluate compliance with EU standards within the EU,
and in third countries in relation to their exports to the EU. The
FVO does this mainly by carrying out inspections in Member States
and in third countries exporting to the EU.

The FVO carries out a total of about 250 to 270 missions per year.

Recruitment is ongoing according to the requirements for recruiting
preferentially experts from the recently acceded Member States.

(c)

remedy the persistent weaknesses in the contingency plans,
as highlighted namely in Food and Veterinary Office reports;

(c) This point will be followed up.

(d)

improve the organisation and follow-up of real time alert
exercises;

(d) The Commission is currently gathering updated information from
the Member States to ensure a proper follow-up to this recommen-
dation.

(e)

reduce the frequent delays in the notification of bovine
movements and their registration in the central database and
improve the identification and movement legislation for pigs;

(e) The shortcomings reported by the FVO are related with the imple-
mentation of the relevant Community Acts on identification of ani-
mals, registration of holdings and movement records; they do not
question the provisions in the respective Regulations and the
Directive.

(14) Proposal for a Council Directive simplifying procedures of listing and pub-
lishing information in the veterinary and zootechnical fields and amending
Directives 64/432/EEC, 77/504/EEC, 88/407/EEC, 88/661/EEC,
89/361/EEC,
90/428/EEC,
90/429/EEC, 90/539/EEC, 91/68/EEC, 92/35/EEC, 92/65/EEC,
2000/75/EC, Decision
92/66/EEC,
2000/258/EC
2002/60/EC,
and 2005/94/EC. (COM(2008) 120 final — 2008/0046 (CNS)).

90/4para27/EEC,

2001/89/EC,

89/556/EEC,

92/119/EEC,

94/28/EC,

Directives

and

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

(f)

incorporate the food hygiene requirements adopted in 2004
in the provisions for imported meat.

5.64. As regards the greater involvement of farmers in the rapid
notification of the disease, limited progress has been achieved to
date.

5.65.
Finally, as regards the clarification of the financial frame-
work, the Commission adopted measures in 2005 fixing limits on
compensation, based on market prices. However, further mea-
sures are necessary, given that payment of national aid varies
greatly among the Member States.

(f) The Commission prepared an appropriate proposal already in the
second half of 2007 (SANCO/10018/2007) and received a
favourable opinion of Member States at the SCoFCAH (15) meet-
ing of 10 September 2007. The document is now in the legislative
procedure for formal adoption by the Commission and subsequent
publication in the Official Journal.

5.64. All outbreaks of major contagious animal diseases (classical
swine fever, foot and mouth disease, avian influenza) that have occurred
in the EU in the last 5 years have led to very limited costs for the Com-
munity budget and have been successfully eradicated. One of the reasons
for these results is that — in general — notification of disease has been
done in a timely manner. Member States have often not (fully) compen-
sated those farmers that have not fully co-operated with the authorities
or not reported the disease in a timely manner in order to discourage such
behaviour.

5.65. The ceilings specified in the legislation provide an overall idea
of the compensation granted by the Member States.

However, the basic rule remains that the compensation should never
exceed the market value of the animal. Correct application of the legis-
lation prevents over- and undervaluations.

The legislation concerning compensation and state aid is harmonised and
is identical for all EU Member States. The difference observed in this case
stems from the different made of the instruments available.

Measurement of farm incomes by the Commission

5.66.
In its Special Report No 14/2003 (35) on the evaluation of
farmers’ income by the Commission, the Court concluded that
the EU statistics did not provide sufficiently exhaustive informa-
tion on the disposable incomes of agricultural households and did
not allow an assessment to be made of the living standard of the
agricultural community. This was notwithstanding the fact that
three separate instruments were available, all intended to deter-
mine agricultural income, but which were not designed for the
same purpose. The Court recommended that the Commission
evaluate the statistics available concerning the situation of hold-
ings and agricultural households and define precisely the statisti-
cal framework to monitor the achievements of the objectives of
the common agricultural policy, notably that concerning a rea-
sonable standard of living for farmers. The European Parliament
and the Council supported the Court’s recommendations.

(35) OJ C 45, 20.2.2004, p. 1.

(15) SCoFCAH: Standing Committee of the Food Chain and Animal Health.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

5.67. The evaluation of the feasibility study has been included in the
community statistical programme 2008-2012. A first discussion in the
Permanent Committee for Agricultural Statistics has shown that Mem-
ber States are cautious due to the existing conceptual, technical and
financial difficulties. It was decided to maintain the FADN and EAA as
primary sources of information on agricultural income.

5.67.
In the meantime, the Commission has taken a number of
initiatives, inter alia, to harmonise the statistical methods adopted
by the Member States, notably concerning the Farm Accountancy
Data Network (FADN). In addition, the Commission took a series
of initiatives to improve the reliability of the other instruments
available, namely the EAA and the IAHS. Furthermore, the Com-
mission undertook feasibility studies to establish a more compre-
hensive European statistical framework. However, progress to
date has been slow, largely through a lack of consensus between
Member States as to the priority to be accorded to the project,
given the apparently prohibitive costs of collecting more com-
plete information on agricultural incomes, including those aris-
ing from off-farm activities. The Court reiterates that more
complete statistics and indicators are indispensible in order to fol-
low more closely the performance of the common agricultural
policy of which approximately two-thirds of the budgetary
resources are devoted to revenue support for farmers.

Assessment of supervisory and control systems — Direct coupled payments — managed under IACS

Area Aid

Animal Premiums

ANNEX 5.1.1

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

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

Overall assessment

1

5

1/11

2

n/v

n/v

8

3

3

6

12

13

n/a

n/a

n/v

n/a

n/a

14

n/a

9

n/a

n/a

4

n/a

7

10

n/a

n/a

n/a

n/a

Member State

Germany (Bavaria)

Spain (Castilla y Leon)

Italy (AGEA)

Portugal

France

Greece

Legend

n/a
n/v

Effective
Partially effective
Not effective
Not applicable
Not verified

The result of transaction testing

Sample estimate of pro-
portion of transactions
affected by an error

31 %

error rate

Between 2 % and 5 %

1
2
3

4
5

6
7
8
9
10
11
12
13
14

The geographic information system (GIS) on which the management of EU aid schemes is based does not always contain complete and reliable information about eligible/non-eligible areas by reference parcel.
The Spanish authorities have not provided evidence that any evaluation of the well-foundedness of the risk criteria and their specific weightings was carried out for the 2006 year.
The results of the national on-the-spot checks and their incorporation into the GIS are not reliable (permanent ineligible features or different types of land use were not identified by the inspectors, GIS was then not updated and this results
in overpayments to farmers).
Certain weaknesses were found in the administrative applications relating to the on-the-spot animal checks such as the format of the control reports and the registers for holdings.
The nature of AGEA’s monitoring does not ensure that it is in command of the sound operation of the delegated responsibilities for the control and management. Amendments accepted after the deadline, payments issued before the final
results of the on-the-spot control were found.
Some weaknesses in the on-the-spot control procedures have been identified (ineligible areas not identified, eligibility criteria not checked).
Some weaknesses in the on-the-spot control procedures have been identified (control work on animal registers not properly carried out or not documented).
The risk parameters were not evaluated for traditional on-the-spot checks. These checks represent 20 % of on-the-spot controls, the rest being carried out by remote sensing, in respect of which there is an evaluation.
No evaluation of the effectiveness of the parameters for the risk analysis used in previous years.
The control procedures provide for marking the animals present on an extract from the national computerised database (NCDB) and not for a separate count of all the animals present.
Input errors of claim data identified, claim data modified after submission date.
Measurement methods, results and tolerances applied are not documented in the control reports.
As at 1 April 2008 control statistics for 2006 had not been submitted to the Commission (the deadline was July 2007).
The evaluation in respect of animal aid schemes only covered the specific weighting of risk factors and not the nature of these factors.

.

1
0
1
1
2
0
0
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
3
3

ANNEX 5.1.2

IACS Monitoring elements — Single Payment Scheme (SPS) (*)

Administrative procedures
and controls to ensure correct
payment

4/13/15/21

2/4/6/7/[11]/12/13/15/17

2/5/6/8/10/13/14/15/16

3/5/6/14/15/17

11/15

2/7/9/13/17

1/6/13/14/15/17/18/19/20

Member State

Finland

France

Netherlands

Portugal

Spain (Andalusia)

Sweden

UK (England)

Effective
Partially effective
Not effective

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

Overall assessment

25

23

22/23

24

22/23

22

22

24

26

26

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

No orthophotos available for administrative cross-checks, which although not compulsory, significantly increases the reliability of data used for cross-checks.
Ineligible features visible on air-born photos or declared by the farmer are not eliminated from the eligible area recorded in the LPIS.
Forest parcels are not systematically excluded from the eligible area.
Eligibility of new parcels not systematically checked.
Minimum size for the eligibility of agricultural parcels not defined.
The Land Parcel Identification System is not adequately updated by on-the-spot inspection results and/or data held in topographical database.
Administrative cross-checks patially based on outdated orthophotos.
IACS database of entitlements not reliable, no reliable figures provided as regards the up to date numbers and values of entitlements recorded in the database for 2006 and 2007, entitlements that failed to respect minimum activation
requirements not withdrawn.
No final administrative cross-check at national level before payments were authorised.
The Netherlands initially allocated entitlements in excess of the national ceiling of 4,9 million euro. Payments were made on this basis to individual farmers.
SPS payments were authorised to farmers who did not have payment entitlements.
Payments are not systematically blocked until all anomalies are cleared or necessary documents are available.
Claim registration procedures do not provide sufficient proof of the actual date of receipt and/or are not adequately controlled.
Incorrect application of late claim penalties.
Systematic incorrect calculation of payments where area determined is not sufficient for all entitlements declared.
Non-application of EU provisions on sanctions in cases of over declaration of areas.
No or insufficient administrative cross-checks whether area declared for set-aside meets the legal conditions.
Insufficient management control on changes made to the database.
The same parcel can be claimed by different farmers under different EU aid schemes.
The reference parcel area can be overshot by a tolerance of up to 2 %.
Vegetable gardens were paid up to maximum of 0,3 ha per claim without entitlements (719,62 ha, 134 535,85 euro).
Selection of inspections partially based on outdated application data and/or based on an incomplete population of applications.
Inspection rate was not increased during the year.
Inspections chosen on the basis of the risk analysis showed a lower incidence of error than randomly selected inspections.
Application of measurement methods with insufficient precision.
Significant differences between statistics reported to the Commission and the underlying data transmitted to the auditors.

(*) Aspects relevant to cross-compliance are not included.

1
3
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
0
1
1
2
0
0
8

.

ANNEX 5.2

Follow-up of key Statement of Assurance observations

Court obsevation in the Annual Report 2006

Action taken

Court analysis

Commission reply

.

1
0
1
1
2
0
0
8

.

IACS

For the fifth consecutive year the Director General’s dec-
laration 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 (*)).

According to its replies, the Commission continues with an inten-
sive audit programme and as long as necessary will impose finan-
cial corrections on Greece.

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

Weaknesses in administrative controls in the direct coupled pay-
ments have been identified in DAS 2007 audit in Greece, Italy,
Spain and Portugal: wrong input of application data, payment for
multiple incompatible aid schemes on the same parcel and a fail-
ure to correctly apply penalties and sanctions, leading to over-
payments (5.27(a) (**)).

The issues named in the Annual
Report 2007 are
generally
already followed up through
conformity procedures.

E
N

The LPIS in Greece is incomplete and contains errors in the ref-
erencing of parcels. Furthermore, in some countries the graphi-
cal layer of the LPIS (GIS) contains only aerial photos that are
more than five (France, and Sweden) years old. In Portugal the
update is carried out with significant delays (5.30(b), 5.30(c) (**)).

The 2007 Annual Activity Report of the Director General for
Agriculture contains again a reservation in respect of insufficient
implementation of the IACS in Greece.

SPS

The United Kingdom allocated entitlements to landlords
who let out their land for most of the year (5.20 (*)).

According to the Commisison’s reply, the issues named in the
Annual Report concerning the financial year 2006 will be fol-
lowed up through conformity procedures.

The audit found systematic shortcomings in calculation of the
entitlements due to:

See reply to paragraph 5.22(b).

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 (5.24 (*)).

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 (5.30 (*)); inappropriate investment crite-
ria have led to questionable allocation of extra entitle-
ments (5.34 (*)).

— allocation of the entitlements in excess of the national ceiling

(Netherlands) (5.22(b) (**)),

— allocation of entitlements for non-eligible production, land or

investment (5.26(b), 5.22(c), (d) (**)),

The issues named in the Annual
Report 2007 are
generally
already followed up through
conformity procedures.

— non-respect or incorrect application of regulations/special

rules (5.22(e), 5.24(b), 5.25 (**)).

The re-performances of controls carried out by the Court found a
number of specific weaknesses in the quality of the on-the-spot
controls and identified ineligible areas or parcels that should have
been excluded by the national inspectors. (Greece, Italy, Spain,
Portugal) 5.28 (**)).

The Court concludes, however, that IACS continues to be effec-
tive in limiting the risk of irregular expenditure where properly
implemented and if accurate and reliable data is introduced as
regards SPS payments based upon allocated entitlements The
recent introduction in SPS of support schemes, such as those
related to olive oil, is a positive development although in the
short term might lead to a higher frequency of errors (see para-
graph 5.52 (**)).

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
3
5

Court obsevation in the Annual Report 2006

Action taken

Court analysis

Commission reply

1
3
6

Olive oil

The on-the-spot visits in the main producer Member
States revealed general problems which affect the reliabil-
ity and accuracy of GIS and consequently the correct cal-
culation of entitlements under the SPS (5.84 (*)).

According to the Commission’s reply in the Annual Report con-
cerning the financial year 2006, some 180 million euro of finan-
cial corrections have already been applied by the Commission
since financial year 2000 and more significant corrections are in
the pipeline.

The impact of the accuracy of the olive oil GIS on the integration
of the production aid scheme into the SPS has been confirmed in
Greece and Italiy where four out of five olive oil SPS transactions
audited contained errors, some of which led to significant over
payments (5.14c (**)).

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).

Ex-post scrutiny

The conformity unit responsible for rural development
did not carry out any audits covering Regulation (EEC)
No 4045/89 issues (5.50 (*)).

N/A

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 (*)).

Backlogs in completing post-payment checks persist in
Germany, Italy and Spain (5.53 (*)).

The Commission has introduced the obligation for the certifying
bodies to verify and report on the Paying Agencies’ follow up of
the potential irregularities reported. (5.40-5.45 (**)).

There is still a limited number of scrutinies not completed from
each of the precedent scrutiny periods dating back as far as
2000/2001 (5.34 (**)).

The Court noted (again) a limited coverage of rural development
measures both at the Commission and Member States level
(5.35 (**)).

The Court’s analysis of the certifying bodies’ reports has shown a
need for improvements in the verification and reporting by the
Paying Agencies on the follow up of the potential irregularities
reported (5.36 (**)).

The timely execution of the scrutiny programme has improved in
2007 (5.34 (**)).

Further financial corrections on
olive oil production aid have
2007
been
and 2008.

applied

in

See
also
graph 5.14(c).

reply

to

para-

E
N

See reply to paragraph 5.35.

See reply to paragraph 5.36.

Clearance of the
accounts

Although the clearance of accounts 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 beneficiaries. (5.76 (*)).

N/A

The Court reiterates its opinion from the previous Annual Report
on the clearance of the accounts system.

The Commission disagrees and
refers
reply to para-
to its
graph 5.47.

Export refund:

The Court’s own audit of physical and substitution checks
(export refunds) led to Special Report No 4/2007 of
21 June 2007.

The Council and Commission acted promptly on the recommen-
dations made in the Special Report by amending the relevant leg-
islation. (5.38 (**)).

The particular weakness concerning the reintroduction of
exported goods into Community territory following transporta-
tion on a non regular shipping line, has not yet been addressed
(5.38 (**)).

See reply to paragraph 5.38.

Rural develop-
ment

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 (*)).

paragraph number in the ECA Annual Report 2006.
(*)
(**) paragraph number in the ECA Annual Report 2007.

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

The Court reiterates that Rural Development expenditure is par-
ticularly prone to errors and notes that, in recognition of this, the
2007 Annual Activity Report of the Director General for Agri-
culture contains a global reservation in respect of that expendi-
ture (5.12 (**)).

See reply to paragraph 5.12.

See reply to paragraph 5.57.

Further significant efforts are required to ensure that beneficia-
ries respect their obligations in the area of rural development
which is particularly prone to errors because of the often com-
plex rules and eligibility conditions (5.57 (**)).

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
0
1
1
2
0
0
8

.

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ANNEX 5.3

Paying agency accounts disjoined for 2007

Member State

Paying agency

Accounts disjoined (1)

EAGF
(million euro)

EAFRD
(million euro)

TRDI
(million euro)

Austria

Belgium

Belgium

Germany

Germany

Estonia

Greece

Finland

Italy

Malta

Netherlands

Portugal

Portugal

Portugal

AMA

ALV

Région Wallone

Baden-Württemberg

Bayern

PRIA

OPEKEPE

MAVI

ARBEA

MRAE

Dienst Regelingen

IFADAP

INGA

IFAP

38,00

2 378,00

580,00

101,00

2,00

1 050,00

6,00

528,00

197,00

Total

4 868,00

79,00

25,00

14,00

52,00

159,00

194,00

217,00

90,00

830,00

41,00

4,00

45,00

(1) Accounts which the Commission considered not to be able to clear in its decisions of 30 April 2008. This due to reasons attributable to the Member States concerned which

require additional inquiries.

Source: Commission Decisions 2008/395/EC, 2008/396/EC and 2008/397/EC (OJ L 139, 29.5.2008).

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CHAPTER 6

Cohesion

TABLE OF CONTENTS

Introduction

Specific characteristics of Cohesion Policies

Policy objectives and instruments: 2000-2006

How the money is spent

Supervisory and control systems

Financial Corrections

Types of error in Cohesion Policies projects

2007-2013 Period

Specific assessment in the context of the Statement of ssurance

Audit Scope

Audit Findings

Legality and regularity of underlying transactions

Assessment of supervisory and control systems

Overall conclusion and recommedations

Overall conclusion

Recommendations

Follow-up of previous observations

Paragraph

6.1-6.20

6.2-6.20

6.4-6.6

6.7-6.8

6.9-6.14

6.15

6.16-6.17

6.18-6.20

6.21-6.36

6.21

6.22-6.31

6.22-6.27

6.28-6.31

6.32-6.36

6.32

6.33-6.36

6.37

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INTRODUCTION

6.1. This chapter presents the Court’s findings on two policy
areas which promote economic and social cohesion: 4 — Employ-
ment and Social Affairs and 13 — Regional Policy. It also reports
on 2000-2006 expenditure on rural development and fisheries
(parts of policy areas 5 — agriculture and rural development,
and 11 — fisheries). In 2007 commitments totalled 45 575 mil-
lion euro and payments totalled 42 015 million euro. The distri-
bution of payments by policy area is given in Graph 6.1.

Graph 6.1 — Cohesion — breakdown of payments by policy area

Source: 2007 annual accounts.

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Specific characteristics of Cohesion Policies

6.2.
EU spending on cohesion is planned in multiannual ‘pro-
gramming periods’; payments relating to each programming
period continue for some years beyond the end of the program-
ming period. This chapter relates to payments in respect of the
2000-2006 programming period as they comprise the bulk of the
expenditure (84 %) (1). Matters related to the 2007-2013 period
are covered in paragraphs 6.18 to 6.20.

6.3.
EU funding of cohesion policies takes the form of
co-financing: Member States must also contribute to the cost of
the projects supported. The Community’s support comes from a
series of ‘funds’ in the budget: the structural funds (see para-
graph 6.5) and the Cohesion Fund (see paragraph 6.6).

Policy objectives and instruments: 2000-2006

In the programming period 2000-2006, Cohesion Policies

6.4.
expenditure was directed to three objectives:

(a)

structural adjustment of regions whose development was lag-
ging behind (Objective 1);

(b) economic and social conversion of areas facing structural dif-

ficulties (Objective 2);

(c) modernisation of systems of education and employment

(Objective 3);

and to a series of more specific ‘Community Initiatives’ covering,
for example interregional cooperation in the EU and urban regen-
eration.

6.5.

Funding is provided by four Structural Funds:

(a)

the European Regional Development Fund (ERDF) supports
Objectives 1 and 2 by co-financing investment in infrastruc-
ture, the creation or maintenance of jobs, local development
initiatives and the activities of small and medium-sized enter-
prises;

(1) Payments related to the period 2007-2013 consisted of advances only

and they comprised 16 % of the expenditure.

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(b)

the European Social Fund (ESF) supports Objectives 1, 2
and 3 by granting financial assistance to combat unemploy-
ment, develop human resources and promote integration
into the labour market;

(c)

the European Agricultural Guidance and Guarantee Fund —
Guidance section (EAGGF-Guidance), co-finances
rural
development projects; and

(d)

Instrument

the Financial
for Fisheries Guidance (FIFG)
co-finances measures towards a sustainable balance between
fishery resources and their exploitation and strengthening
the competitiveness and the development of the fisheries
sector.

6.6.
In addition the Cohesion Fund supports the improvement
of environment and transport infrastructure in Member States
whose gross national product per capita is below 90 % of the
European Union average (2).

How the money is spent

varying

in size

6.7. The Structural Funds co-finance projects within the frame-
work of operational programmes. For 2000-2006 there were 545
operational programmes,
from under
500 000 euro to over 8 billion euro. Project expenditure within
these programmes varied from a few hundred euro to an indi-
vidual beneficiary, up to hundreds of millions of euro for a major
infrastructure project. Under the Cohesion Fund there are no
operational programmes, only projects for the 2000-2006 pro-
gramming period. For this period there were 1 094 Cohesion
Fund projects. They ranged from 50 000 euro to over 1 billion
euro.

6.8. The co-financing of a project by a Structural Fund or the
Cohesion Fund generally takes the form of the reimbursement of
costs (3) based on an expenditure declaration by the project pro-
moter (4). A project promoter usually submits several interim
expenditure declarations and a final one at the end of the project.

(2) Council Regulation (EC) No 1164/94 (OJ L 130, 25.5.1994, p. 1).
(3) Depending on the type and complexity of the project there can be
many items and types of costs supporting a reimbursement request.
(4) Project promoters are final beneficiaries and final recipients which
range from private individuals to associations, private or public com-
panies to local, regional or national bodies.

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6.9. Member States are responsible under the sectoral regulations for
ensuring that expenditure declared to the Commission for co-financing
is regular. The Commission under shared management arrangements,
has a supervisory role to verify the effective functioning of Member States’
control systems, and to take corrective measures where it concludes that
this is not the case, in order to assume its responsibility for the imple-
mentation of the budget (Article 53b(4) of the Financial Regulation).
The Commission performs its supervisory role through its audit activity
but also through programme negotiations, monitoring committees,
annual meetings with managing and audit authorities, guidance and
seminars. Further strengthening of the Commission’s supervision is intro-
duced through the Action Plan adopted by the Commission on 19 Feb-
ruary 2008.

Supervisory and control systems

6.9. Responsibility for the regularity of spending on Cohesion
Policies starts in a Member State, but the Commission bears the
ultimate responsibility for correct implementation of the budget.

6.10. There are two levels of control over Cohesion Policies
projects. The first is the control system in the Member State. It is
intended to prevent or detect and correct the incorrect reimburse-
ments of project costs and other irregularities. The second level is
the Commission’s supervision. It is intended to ensure that Mem-
ber State control systems are established and operating as required
and mitigate the risk of control failures in the Member States.

6.11.
For the programming period 2000-2006, the control sys-
tem in the Member State comprises four key control functions.
They must be clearly defined and assigned to bodies which, except
for the audit body and winding up body, must be independent of
each other. See Figure 6.2.

6.12. Arrangements vary between the Member States. In some
Member States the control functions are centralised at the national
level. In others 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).

6.13. The Commission’s supervision comprises mainly ex-post
audits, and the imposition of financial corrections when serious
control weaknesses are detected.

6.13. The Commission refers to its reply under paragraph 6.9.

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Figure 6.2 — Key controls in Member State

6.14. A Commission audit can be an effective supervisory
instrument:

6.14.

(a)

if it is based on an assessment of the risk of failures in a Mem-
ber State’s control system;

(b)

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

(c)

if there is appropriate and timely corrective action based on
the audit result.

(c) Corrective action resulting from Commission audits may be the
effective implementation of remedial actions by the national
authorities and/or the application of a financial correction by the
national authorities, as well as a financial correction applied by the
Commission during programme implementation or at closure.

The Court assesses these audits based on the abovementioned
criteria.

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6.15. The Commission has made substantial efforts to improve the
quality of data provided by Member States and is currently carrying out
work to verify the completeness and accuracy of this data. As indicated
in the Commission’s reply to paragraph 3.25, there has therefore been
progress in producing reliable evidence of the operation of the multi-
annual corrective mechanisms.

Payments under the Cohesion Policies are subject to a high
6.16.
inherent risk because of the number of bodies involved in implementa-
tion at different levels and the high number of beneficiaries and
co-financed operations linked to the overall volume of funds. If the first
level management verifications and the certification function are work-
ing properly, this risk can be adequately addressed.

Financial Corrections

6.15. The Commission has maintained the position that most
of the errors detected and reported by the Court in its annual
reports are likely to be detected and corrected by the multi-annual
corrective system (5). However, the Commission is not in a posi-
tion to provide sufficient evidence for corrections by the Member
States. The systems for applying the financial corrections are
discussed in Chapter 3 (see paragraphs 3.21 to 3.29 and Dia-
gram 3.2) and the actual financial corrections made in Chapter 1
(see paragraphs 1.36 and 1.38).

Types of error in Cohesion Policies projects

6.16. There is a high risk that the costs of Cohesion 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:

(a) an eligibility error — the expenditure reimbursed does not
comply with an eligibility rule defined in the specific regula-
tions governing the expenditure;

(b) an occurrence error — the expenditure reimbursed includes
a cost which is not actually incurred or which is not docu-
mented;

(c) an accuracy error — when a cost is incorrectly calculated; or

(d) a multiple error — when the expenditure reimbursed is

affected by more than one of the above type.

6.17. A project may also be affected by compliance errors. They
are mainly errors in public procurement procedures and failures
to meet publicity requirements. These are classified as non quan-
tifiable errors. However, serious cases of non respect of public
procurement procedures affecting the conditions of payments are
classified as eligibility errors (see paragraphs 1.9 to 1.11).

(5) See for example Annual Report concerning the financial year 2006,

paragraph 6.39, the Commission’s reply.

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2007-2013 period

6.18.
For the 2007-2013 programming period, there are three
objectives (the Convergence objective, the Regional competitive-
ness and employment objective and the European territorial
cooperation objective). There are three funds: regional develop-
ment, social and cohesion. The programmes are designed to rein-
force the attractiveness of the Member States and their regions
and cities; promote innovation, entrepreneurship, employment
and the knowledge-based economy; develop regional economies
and create new and better jobs.

6.19. 2007, the first year of the new programming period, was
basically a preparatory phase,
in which no expenditure was
declared for reimbursement. Payments for the year were 6,8 bil-
lion euro, representing prefinancing payments of 2 % on
approved programmes (2,5 % for Cohesion Fund projects in the
new Member States). As there were no reimbursements for the
2007 financial year, the Court’s detailed audit work covered
2000-2006 projects and programmes only.

6.20.
In the Regulations relating to the 2007-2013 program-
ming period (6), control provisions are further refined and
strengthened and the respective responsibilities of Commission
and Member States further clarified. The audit provisions are con-
siderably amplified for the new programming period. The Mem-
ber States are required to submit an audit strategy paper (7) and a
compliance statement with each operational programme’s sys-
tems description for acceptance to the Commission. Annual con-
trol
reports based on systems audit and the audit of a
representative sample of transactions resulting in an annual audit
opinion are also required.

(6) Notably Council Regulation (EC) No 1083/2006 (OJ L 210, 31.7.2006,
p. 25) and Commission Regulation (EC) No 1828/2006 (OJ L 371,
27.12.2006, p. 1).

(7) Although for smaller programmes (less than 750 million euro

and 40 % EU financing) this is not required.

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SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit Scope

6.21. The Court audited 180 interim reimbursements (8) made
in the year 2007 (for the 2000-2006 programming period)
to 176 Structural Funds projects (99 ERDF, 56 ESF, 21 EAGGF)
and 4 Cohesion Fund projects. The 176 Structural Funds projects
were carried out within 16 operational programmes from 10
Member States. For each operational programme the respective
Member State has set up at least one control system as illustrated
in Figure 6.2. The Court assessed those control systems in terms
of compliance with regulations and their effectiveness for man-
aging the risk of legality and regularity. The Court also assessed
part of the Commission’s supervisory activity, analysing 20 audits
undertaken by the Commission.

Audit Findings

Legality and regularity of underlying transactions

6.22. A summary of findings on the legality and regularity
of EU funding of Cohesion Policies projects is presented in
Tables 6.1 and 6.2.

6.23. Table 6.1 shows that only 46 % of projects in the Court’s
representative statistical sample were found to be free from error
of legality and regularity (31 % in 2006).

6.24. Table 6.2 analyses the errors affecting reimbursement by
their type. The distribution is broadly similar to year 2006.

(8) The audit of each reimbursement includes the checking of a large

number of underlying invoices and other documents.

6.23. The application of certain rules relating to the eligibility of
expenditure can give rise to differing interpretations. Of the 97 projects
cited by the Court in Table 6.1 as affected by error, the Commission con-
siders that there are seven projects for which the circumstances of the
errors identified by the Court do not provide a basis for applying finan-
cial corrections, or other follow-up actions.

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Table 6.1 — Cross-tabulation of compliance by correctness of reimbursement (1)

Projects where compliance errors were

Total

incorrectly reimbursed

correctly reimbursed

Projects which were

29 cases

27 cases

56 cases

present

not present

41 cases

70 cases

Total

16 %

23 %

39 %

83 cases

110 cases

15 %

46 %

61 %

124 cases

180 cases

31 %

69 %

100 %

(1) Compliance errors are non-quantifiable errors (see paragraphs 1.9 to 1.11).

Table 6.2 — Analysis of errors affecting reimbursement by type

Correctness of reimbursements

Total

ERDF

ESF

EAGGF

Cohesion Fund

Fund

Eligibility error

Occurrence error

Accuracy error

Multiple error

18 cases

7 cases

3 cases

2 cases

30 cases

18 %

13 %

14 %

50 %

17 %

5 cases

0 cases

3 cases

0 cases

8 cases

8 cases

5 cases

5 %

8 %

5 %

4 cases

0 %

7 %

14 %

0 cases

0 cases

15 cases

0 cases

27 %

0 %

0 %

0 cases

0 %

0 %

0 %

12 cases

20 cases

Correct reimbursement

63 cases

30 cases

15 cases

2 cases

110 cases

64 %

54 %

72 %

50 %

99 cases

56 cases

21 cases

4 cases

180 cases

Total

100 %

100 %

100 %

100 %

100 %

6.25.
In the Court’s audit sample the most frequent causes of
incorrect reimbursements from the ERDF were eligibility errors:

6.25. The Commission is following up the findings in order to ensure
that appropriate measures are taken.

(a)

inclusion of costs which should not have been reimbursed
due to their nature, and

(b)

serious failure to respect rules of procurement.

(b) The Commission also notes breaches of public procurement rules as
a major source of irregularities, which is why it has targeted its own
audit work on this risk area and taken other actions such as the
issuing of guidance to Member States on the financial correction
levels to apply.

4 %

7 %

11 %

61 %

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Example:

A university situated in an Objective 1 area had work on a
robotics project carried out in a laboratory outside the
Objective 1 area. This was not allowed under the national
legislation on state aid for research under which the ERDF
co-financed the project, rendering the expenditure ineligible.

The owners of a holiday village failed to hold a public ten-
der for renovation work for which they were receiving sub-
sidies totalling 63 % of the costs, including a 33 % tax rebate
and a 25 % grant from ERDF. As the EU public procurement
rules apply to projects of private firms as from 50 % of
financing with public funds, the breach made the project
ineligible for EU support.

6.26.

For ESF the most common errors were:

6.26. The Commission is following up the findings in order to ensure
that appropriate measures are taken.

(a)

lack of evidence that the overheads or staff costs were in fact
relevant to the project;

(b) overestimation of the staff cost or overheads;

(a) and (b) The Commission often encounters this type of error. The
regulatory framework for the 2007/2013 period foresees
a simplification in this respect, whereby overheads may be
declared on a flat-rate basis, as a proportion of direct costs,
without further detailed justification.

(c)

inclusion of ineligible costs (eligibility errors).

(c)

The Commission has already recommended that Member
States step up their information activities directed at ben-
eficiaries. This, together with improved day-to-day man-
agement checks, should help reduce the frequency of this
type of error.

Example:

In one project, there was insufficient evidence that the exter-
nal staff costs were relevant to the project: there were
monthly records showing the daily presence of the staff con-
cerned but no daily time sheets describing their concrete
daily activities. In the absence of detailed time recording to
justify the working days charged, the costs in question may
not be charged to the project. The expenditure was therefore
considered ineligible.

In another project the staff costs were overestimated: costs
relating to several members of staff were charged entirely to
the co-financed ESF project but the staff in question were
also involved in other activities outside the co-financed
project.

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6.27. A material level of error was found in the reimbursement
to Cohesion Policies projects for the programming period 2000-
2006 in budget year 2007. The proportion of projects in the
sample affected by quantifiable and/or non-quantifiable errors
(see paragraphs 1.9 to 1.11) is 54 % (9). The Court estimates that
at least 11 % of the total amount reimbursed should not have
been reimbursed.

6.27. Many of the non-quantifiable errors, even if they had been
detected beforehand, would have had no impact on the reimbursement.
Examples include delays in publication of contract award notices, and
weaknesses in the documentation of tender evaluation committees.

The estimation given by the Court for the amount which should not have
been reimbursed includes cases where the Commission does not consider
that the circumstances identified by the Court provide a basis for the
application of financial corrections, or at least not at the level proposed.

Assessment of supervisory and control systems

6.28. The Court’s findings on the management and supervisory
systems in the Member States for the 16 operational programmes
which it assessed are set out in Annex 6.1. In 11 cases, the Court
rated management systems as ‘partially effective’, in three cases as
‘not effective’ and in two cases as ‘effective’. The continued high
level of error identified by the Court’s substantive testing of
underlying transactions similarly suggests that systems in general
in the Member States were only partially effective in managing the
risk of illegality and irregularity in reimbursements.

6.28. The Court’s findings represent a significant improvement from
2006 when the Court assessed 13 out of 19 systems as ineffective. Last
year the Court said that its sample gave a general picture of the effec-
tiveness of the control systems in the Member States which it presented
as generally ineffective or only moderately effective. The general picture
for 2007 from the Court’s sample is better, and indicates that not all
systems are ineffective, but that there is a clear gradation in their effec-
tiveness.

For three programmes the Annual Activity Reports by Commission’s
DGs gave a more positive assessment than that of the Court in
Annex 6.1.

6.29. The main weaknesses identified by the Court were:

6.29.

(a) managing authorities — insufficient day-to-day checks of the
reality of expenditure, failure to identify expenditure decla-
rations not supported by appropriate evidence and failure to
identify weaknesses in tender procedures;

(b) paying authorities — failure to identify when Managing
Authorities had not carried out adequate day-to-day checks;

(c) audit bodies — failure to carry out sufficient checks to obtain
assurance on the effective functioning of the control systems.

(c) The work of the winding up bodies is assessed as ‘effective’ by the

Court in 14 programmes out of the 16 audited.

(9) See Annex 6.2. In 2006, the corresponding figure was 69 %.

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6.30. The Court assessed 20 audits carried out by the Structural
Actions Directorates-General (Directorate-General for Regional
Policy (DG REGIO), Directorate-General for Employment, Social
Affairs and Equal Opportunities (DG EMPL), Directorate-General
for Agriculture and Rural Development
(DG AGRI) and
Directorate-General
for Maritime Affairs and Fisheries (DG
MARE)). In the majority of cases the audits have been adequately
planned and carried out, but in six of the cases appropriate cor-
rective action had been taken late. In three cases the weaknesses
in audit documentation made assessment of the audit result dif-
ficult. This reduces the effectiveness of this key supervision pro-
cedure.

6.31. The main objective of Commission supervision is to
ensure that Member States establish and operate control systems
in compliance with the underlying regulations. The findings set
out above indicate that this objective is not fully achieved.

Overall conclusion and recommendations

Overall conclusion

6.32. Based on its audit work (see paragraph 6.21) the Court
concludes that the reimbursement of expenditure to Cohesion
Policies projects is affected by a material level of error of legality
and/or regularity. The Court’s assessment of the supervisory and
control systems in the Member States is that they are ‘partially
effective’ and that the Commission’s supervisory systems are also
‘partially effective’ in ensuring the legality and regularity of reim-
bursements of expenditure.

6.30. The Commission considers that in most cases appropriate cor-
rective measures to follow up the audit results were taken in a reasonable
time period, that the audit documentation was adequate, and that there
were therefore operationally useful results from the audits. Under the
Action Plan for the structural actions the Commission has committed
itself to taking measures to increase the impact of its audit work by
speeding up the application of suspensions and financial corrections.

6.31. The Court’s findings show that the Commission’s actions have
not yet had the desired impact on preventing errors in reimbursements.
The findings do not relate to the effectiveness of the Commission’s actions
in mitigating the risks arising from weak control systems in Member
States. The Commission verifies whether or not the control systems set
up by Member States function effectively. Where it finds evidence of defi-
ciencies it takes measures to mitigate the risk. The measures include
requiring Member States to implement remedial action plans, suspen-
sion of payments and the application of financial corrections. The
responsible DGs have in their Annual Activity Reports (AAR) categor-
ised in detail the assessment of all systems and have indicated the cor-
rective actions under way for all of the programmes affected by material
deficiencies.

6.32. At this closing stage of the 2000-2006 programme implemen-
tation, there are limited possibilities for the Commission to take actions
to prevent errors and it is focusing on actions to mitigate the risks from
weak national management and control systems.

The Directorates-General responsible for Structural Policies have set out
the results of their assessments of the effective functioning of the systems
in 545 national programmes in their respective AARs, which show a
marked gradation as follows: about 37 % of systems work well, about
51 % of systems work but need improvement and about 12 % of sys-
tems are ineffective. The Commission has invested substantial resources
in order to achieve a high audit coverage, it has brought about substan-
tial improvements in national systems through the application of ‘action
plan’ procedures, it has suspended payments and applied financial cor-
rections. Implementing the Action Plan adopted in February 2008 is
further strengthening the Commission’s supervisory role.

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Recommendations

6.33. As last year, the need persists 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, meaning the following:

6.33. The guidance document on management verifications issued by
the Commission in June 2008 in line with the Action Plan of February
2008 underlines the importance of preventive measures by the manag-
ing authorities through an effective communication strategy with ben-
eficiaries, as well as by giving detailed guidance and good practice on the
administrative and on-the-spot verifications to be carried out to obtain
reasonable assurance on the regularity of expenditure declared.

(a) managing authorities/intermediate bodies should make early
contact with project promoters in order to familiarise them
with the requirements, help them in setting up their systems
and make them aware of the risks of error;

(a) and (b) These recommendations are covered in the guidance docu-
ment and their implementation is being followed up by the
Commission.

(b) managing authorities/intermediate bodies should select and
train staff capable of detecting the errors in the project cost
declarations and in the beneficiaries’ procedures and should
equip them with checklists covering all the risks;

(c)

(d)

the Commission should effectively supervise primary con-
trols in the Member States, on the basis of a risk analysis fol-
lowing an assessment of the control effectiveness of the
various managing authorities/intermediate bodies;

the Commission and the Member States should give special
attention for the effective functioning of the feedback mecha-
nisms (managing authority/intermediate body to beneficia-
ries, paying authority to managing authority, audit body to
managing and paying authority) aiming at eliminating the
systemic causes of errors found.

(c)

(d)

The Commission is, and will continue to do this, in line
with point 1.1 of the Action Plan.

This is built into the requirements of the regulations for the
2007-2013 period through the work of the audit author-
ity, as well as being subject of specific reference in the guid-
ance documents on management verifications and on the
functions of the certifying authority.

6.34. The Court also repeats the recommendation to the Com-
mission to use the simplifications provided for in the regulations
and rules governing expenditure where possible, without under-
mining the effectiveness of the spending. This would reduce the
risk of errors and reduce the administrative burden of project pro-
moters.

6.34. This recommendation has been incorporated as point 4.3 in the
Commission’s Action Plan and implementation is under way.

6.35.
In addition, in preparing and implementing the 2007-
2013 period, the Commission should make maximum use of the
work of the audit authorities in the Member States, but at the
same time monitor this work in order to ensure that it is up to
standard, by both reviewing and reperforming the concrete audit
work at the basis of the reports sent to the Commission. This will
require a considerable effort and corresponding resources.

6.35. After conclusion of the compliance assessment procedure which
will give assurance on the set-up of the 2007-2013 systems, the Com-
mission audit approach for the period is to review the work of the audit
authorities in order to conclude whether it can rely on their work, and
thus on their annual audit opinions in line with Article 73 of Council
Regulation (EC) No 1083/2006.

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6.36. The Commission should make effective use of the correc-
tive instruments at its disposal in order to ensure the correct use
of EU funds:

6.36.
In line with point 8 of the Action Plan, the Commission has
taken steps to increase the impact of its audit work through speeding up
the procedures for the application of suspension of payments and finan-
cial corrections. For the period 2007-2013 it will make use of the addi-
tional procedure available for interruption of payments for a six-month
period.

(b) The Commission’s strategy for the 2007-2013 period is to audit
the work of the audit authorities in the Member States in order to
be able to conclude whether it can rely on their work. Where it has
a positive conclusion it will not need to duplicate their work by car-
rying out its own audits at the level of beneficiaries (in accordance
with the single audit principle).

(a) by ensuring a systematic application of the legal provisions
in respect of error correction and systems compliance;

(b) by making full use of all the instruments foreseen to that
effect, like payment suspension, financial corrections and
recoveries.

This will require a significant increase in the amount of field work
in the Member States and therefore cannot be done without fac-
ing the resource implications.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

6.37. A summary of the results of the Court’s follow-up of key
observations in recent Annual Reports can be found in Annex 6.3.

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ANNEX 6.1

Assessment of supervisory and control systems

Programme

Key internal control

Managing
authority

Paying
authority

Audit body

Winding-up
body

Overall
assessment

EAGGF — Portugal

EAGGF — Spain

ESF — Denmark — obj. 3

ESF — Greece — Health

ESF — Italy — Campania

ESF — Portugal — Norte

ESF — Spain — Entrepreneurial initiative

ERDF — Spain — Competitivity

ERDF — Czech Republic — Industry and enterprise

ERDF — Germany — Mecklenburg Vorpommern — obj. 1

ERDF — Greece — Information society

ERDF — France — Martinique

ERDF — UK/Ireland — Peace II

ERDF — Italy — Research

ERDF — Czech Republic — Infrastructure

ERDF — Slovakia — Basic infrastructure

Legend

Effective

Partially effective

Not effective

ANNEX 6.2

Results of transaction testing

Sample estimate of the proportion of transactions affected by error

Error rate

54 %

Above 5 %

ANNEX 6.3

Follow up of key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

1. The Commission’s actions to improve the management of Cohesion projects

Over the past few years the Court have repeatedly detected a mate-
rial level of error in Cohesion projects. The Court has assessed
the control systems in the Member States as ineffective or moder-
ately effective and identified that the Commission’s own supervision
is not effective at preventing errors at Member State level.

In early 2008 the Commission adopted an
action plan to strengthen its supervisory role
shared management of
under
structural
(COM(2008) 97 final, published
actions
19.2.2008).

The Court welcomes the Commission’s initiative, and
takes note of the actions already launched. However, the
Court considers that it is premature to assess the impact
of the Commission’s actions. The Court will report on
these issues in the Annual Report concerning the finan-
cial year 2008.

(See e.g. the Annual Reports concerning the financial year 2006,
paragraphs 6.37 to 6.45, financial year 2005, paragraphs 6.38
to 6.45, financial year 2004, paragraph 5.47 to 5.54, and financial
year 2003, paragraphs 5.55, 5.56 and 5.66 to 5.69).

2.

Statement of Assurance 2005: Follow-up by the Commission to the Court’s observations

In 2005, the Court identified a material level of errors in the project
expenditure declarations across all audited programmes. Of the
95 projects audited from the 2000 to 2006 programming period,
60 were affected by material error. Similarly for the programmes
of the 1994 to 1999 period, of the 65 projects examined 33 con-
tained material errors.

(Annual Report concerning the financial year 2005 paragraphs 6.13
to 6.15 and 6.26 to 6.28).

The Commission had in its reply committed
itself to follow up the Court’s findings and to
ensure that required corrections are applied.

(Annual Report concerning the financial year
2005 paragraphs 6.13 and 6.26, the Commis-
sion’s replies)

(1) ERDF and Cohesion Fund are managed by DG REGIO and ESF by DG EMPL.

The Commission ensures that appropriate corrective measures are taken in
all cases arising from the Court’s audits. Whilst accepting that delays in
follow-up have in a few instances occurred, the Commission does not agree
with the Court’s analysis in a number of cases. For example, the Commis-
sion cannot impose corrections on Member States with regard to individual
errors identified by the Court in its 2005 audits, in cases where the Mem-
ber State has presented sufficient post-audit evidence or arguments.

The Court examined the follow-up by the Commission
to the observations following from 15 audits carried out
by the Court and reported upon in the Statement of
Assurance concerning the financial year 2005. Eight of
these concerned ERDF, one Cohesion Fund and six
ESF (1).

The Court’s analysis shows that eight cases received a
timely and satisfactory follow-up, six were partially sat-
isfactory and one case was unsatisfactory

Rating:
follow-up was

Satisfactory

Partially satisfactory

Unsatisfactory

Total

DG REGIO

DG EMPL

5

4

0

9

3

2

1

6

The main problems detected by the court were:

(a)

significant delays in follow-up;

(b)

observations on systems and formal errors were
not followed up.

.

1
0
1
1
2
0
0
8

.

E
N

O

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o
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E
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o
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a
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U
n
o
n

i

1
5
5

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CHAPTER 7

Research, Energy and Transport

TABLE OF CONTENTS

Introduction

Specific characteristics of Research, Energy and Transport

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and Regularity of underlying transactions

Sanctions

Assessment of supervisory and control systems

Desk reviews of cost statements before reimbursement of expenditure

Audit certification of cost statements

The Commission’s ex-post financial audits

Overall conclusions and recommendations

Follow-up of previous observations

Follow-up of key Statement of Assurance observations

Paragraph

7.1-7.11

7.2-7.11

7.12-7.43

7.12-7.13

7.14-7.23

7.23

7.24-7.39

7.26-7.30

7.31-7.33

7.34-7.39

7.40-7.43

7.44-7.49

7.44

Follow-up of Special Report No 6/2005 on the trans-European network for transport
(TEN-T)

7.45-7.49

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INTRODUCTION

7.1. This chapter covers the Court’s findings on policy areas:
06-Energy and Transport; 08-Research; 09-Information Society
and Media; and 10-Direct Research. In 2007, commitments
totalled 6 795 million euro (7 340 million in 2006) and pay-
ments totalled 4 484 million euro (6 493 million in 2006).
The distribution of payments by policy area is given in Graph 7.1.
More detailed information on spending for the year is provided
in Annex I of this report.

Graph 7.1 — Research, Transport and Energy — breakdown of payments by policy area

Source: 2007 annual accounts.

Specific characteristics of Research, Energy and
Transport

7.2. Research policy is directed towards the achievement of the
European Research Area, contributing to the implementation of
the Lisbon strategy for employment, international competitive-
ness and economic and social cohesion, by promoting the EU as
an area of education, training, research and innovation.

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7.3.
Energy and transport policies aim, within environmental
constraints, to support economic growth, safety and security of
supply by focusing on the completion of the EU internal market,
shifting the balance towards sustainable modes of transport and
developing the integrated trans-European network.

7.4.
Information society and media policies are focused on the
EU’s i2010 strategic initiative (1), supporting innovation and
competitiveness through research and development of informa-
tion and communication technologies, and contributing to a
stronger European audiovisual sector.

7.5. The bulk of the expenditure is for research and technologi-
cal development projects in all the policy areas (2). Research fund-
ing is provided in multiannual Framework Programmes (FPs),
which have multiple funding schemes, supporting various the-
matic areas and types of projects.

7.6. The funding is under direct, centralised management (3):
the Commission generally makes payments to beneficiaries with-
out the involvement of national, regional or local authorities in
the Member States. Beneficiaries may be research institutes, uni-
versities, public administrations, companies or individuals.

7.7. Research projects usually involve the beneficiaries or par-
ticipants (4) working on a project as a consortium across a num-
ber of Member States. Each project partner signs a grant
agreement with the Commission. One partner in each project is
nominated as ‘project coordinator’, to maintain contact with the
Commission and oversee the financial and administrative aspects
of the contract.

(1) The i2010 strategy brings together all EU policies, initiatives and
actions that aim to boost the development and use of digital technolo-
gies. i2010 is part of the Lisbon strategy to make Europe a more com-
petitive and dynamic knowledge-driven economy. Most of the funding
is provided by the research Framework Programmes.

(2) Direct research expenditure supports the EU Joint Research Centre
(JRC: 2 % of total payments in 2007), which is a Directorate-General
of the Commission. It has seven research institutes and provides sci-
entific and technical support for the conception, development, imple-
mentation and monitoring of EU policies.

(3) Four Directorates-General in the Commission are principally respon-
sible for managing research funding: Directorate-General for Research
(DG RTD) and Directorate-General for Information Society and Media
(DG INFSO) are the main departments concerned; Directorate-General
for Energy and Transport (DG TREN) and Directorate-General Enter-
prise (DG ENTR) are also involved. Under the Seventh Framework Pro-
gramme the Research DGs intend to implement a part of their budget
by indirect centralised management.

(4) Projects have on average around 20 participants, although the num-

ber of participants may reach up to 95.

7.5-7.10. The internal control system used to manage the Research
Framework Programmes can be divided in four distinct stages:

Evaluation of proposals

The overall control objective is to select only those proposals that portray
scientific excellence and that clearly address the operational objectives
set out in the specific work programmes adopted by Parliament and
Council.

Proposal selection and contract negotiation

The objective of the negotiation phase is to agree a contract for each of
the retained scientific research proposals. Such contracts are the legally
binding instrument for ensuring both the scientific and financial man-
agement of the project.

Project and contract management

The purpose of this stage is to ensure that — prior to any payment —
all applicable contractual and regulatory requirements, both of an opera-
tional and financial nature, have been respected.

Financial audits and other ex-post controls

The purpose of this stage is to ensure the detection and correction of the
main systemic errors on a multi-annual basis, which would not have oth-
erwise been detected by ex-ante controls. Ex-post controls substantially
contribute to ensuring the legality and regularity of transactions on a
multi-annual basis, and aim to keep the residual error rate below the
materiality threshold level.

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7.11. The risk that beneficiaries make cost overstatements largely
stems from the inherent complexity of the funding mechanisms provided
by the applicable regulatory framework, which are based on the reim-
bursement of actual costs. Resulting errors can mainly be detected by car-
rying out on-the-spot audits and desk controls. Therefore the Commission
has adapted its internal control system to increase assurance on the legal-
ity and regularity of the expenditure on a multi-annual basis through a
higher number of audits and significantly increased coverage in terms of
budget (see also replies to paragraphs 7.15, 7.16, 7.20, 7.21, 7.26
and 7.29).

The impact of the multi-annual audit programme will gradually increase
over the four-year implementation period.

7.8. Grants to research projects range from about 20 000 euro
paid in support of individual researchers up to 30 million euro
for major integrated projects involving large consortia of part-
ners. Although there are more than 15 000 beneficiaries, the
200 largest receive around 40 % of total payments.

7.9.
Expenditure on the Trans-European Networks (TEN)
Energy and Transport programme supports major energy and
transport projects (67 in 2007 with an average grant of 2,4 mil-
lion euro). The beneficiaries are usually Member State authorities
but may also be public or private companies.

7.10.
For both research and TEN projects, the grants are usu-
ally paid in instalments: an advance upon signature of the grant
agreement or contract, followed by interim and final payments
which reimburse eligible expenditure reported by the beneficia-
ries in periodic cost statements.

7.11. The principal risk to legality and regularity is that benefi-
ciaries overstate eligible costs in their cost statements, and that
this is not prevented, or subsequently detected and corrected, by
the supervisory and control systems of the Commission (audit
certification of cost statements, desk checks before reimburse-
ment, ex-post audits).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

7.12. The specific assessment (5) is based on:

(a)

substantive testing (6) of underlying transactions on a repre-
sentative statistical sample of 180 payments (7) made by the
Commission in 2007;

(5) Chapter 10 of this report covers research expenditure in policy area

Enterprise.

(6) Checks of invoices and other supporting evidence. Cost statements
submitted to the Commission for reimbursement consist mainly of
personnel and indirect costs, together with travel, consumables and
other direct costs.

(7) These consist of 59 advances (39 FP6, 13 FP7, 1 TEN-T, 6 other) paid
to beneficiaries by the Commission upon conclusion of the grant
agreement; 12 payments other than to projects, such as invoices for
services provided by external experts evaluating project proposals;
109 interim and final reimbursements (85 FP6, 11 FP5, 6 TEN-T, 1
TEN-E, 6 other).

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(b) assessment of the operation of selected aspects of the super-

visory and control systems:

(i)

desk checks of cost statements before reimbursement of
expenditure by DG TREN;

(ii) audit certification of cost statements;

(iii) ex-post audits of cost statements.

7.13. The Court also followed up previous observations:

(a)

the principal errors reported in the Statement of Assurance
for 2005;

(b) weaknesses in the audit certification system;

(c) persistent late payments to beneficiaries by the Commission.

Legality and Regularity of underlying transactions

7.14. The Court found a material level of error of legality and/or
regularity in its sample of audited payments. The results of the
Court’s substantive testing are summarised in Table 7.1 and
Annex 7.1.

Table 7.1 —The results of substantive testing

Payment type

Payments
with
quantifiable
error

Payments
with non-
quantifiable
error only

Payments with
correct amount
reimbursed but
procedural
weaknesses

Total
payments
with errors

Payments
without errors

Advances

Interim and final reim-
bursements

Other

Total

0

61

0

61

0

6

0

6

8

10

1

19

8

77

1

86

51

32

11

94

Total

59

109

12

180

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7.15. The table shows that 86 payments (48 %) in the Court’s
sample were affected by error. Most errors concern the reim-
bursement by the Commission of overstated eligible costs
declared by beneficiaries in their cost statements.

7.15 and 7.16. The Commission’s own audits confirm the persistence
of a material level of error, mainly related to the overstatement of eli-
gible costs by beneficiaries, as reported in detail in the Annual Activity
Reports of the Research Directorates General.

7.16. The main types of error were:

(a) overstatement of eligible personnel and indirect costs (45 %

of error cases);

(b) declaration of other ineligible costs (20 % of error cases);

(c)

inadequate supporting evidence to justify costs claimed (16 %
of error cases);

(d) declaration of budgeted amounts rather than actual costs

(6 % of error cases); and

(e) declaration of costs not attributable to the project (13 % of

error cases).

7.17. The cases of non-quantifiable error concern the non-
observance of a condition for payment having a direct financial
impact, the exact amount of which could not be determined due
to a lack of supporting evidence for the expenditure declared. As
an example, in one case the audited beneficiary failed to provide
adequate evidence to substantiate the claimed costs, in breach of
the terms of the grant agreement. In the absence of essential sup-
porting documentation, the impact of the error cannot be quan-
tified.

7.18. The cases of procedural weakness mainly concern obser-
vations related to problems in the audit certification of cost state-
ments (see paragraphs 7.31 to 7.33) and delays in payments by
the Commission to the beneficiaries (see also Annex 7.2).

7.19. The errors occur in the context of a complex legal frame-
work with a large number of eligibility criteria. A key contractual
obligation for beneficiaries is the requirement to claim for reim-
bursement only the actual, eligible costs necessary for the imple-
mentation of the project. Failure to do so is a common factor in
most of the errors found by the Court.

In order to address this problem the Commission has significantly rein-
forced its ex-post controls, in the framework of its common audit strat-
egy (see also reply to paragraph 7.11).

7.18. The Commission concurs with the Court concerning weaknesses
detected in audit certificates. The Commission has launched a series of
corrective actions (see replies to paragraphs 7.32 and 7.33).

Audit certificates have however already shown a preventive effect, mak-
ing a major contribution to the reduction of the error rate for FP6 com-
pared to FP5, when audit certificates were not requested.

All Research DGs have increased the percentage of payments made on
time. The issue is monitored closely and receives the highest attention to
ensure further improvement.

7.19. The Commission concurs with the Court over the complexity of
the applicable legal framework and eligibility criteria. This complexity is
also the main source of errors found by the Commission’s own controls.

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7.20. The Court’s sample of payments included several major
beneficiaries, each of which participates in a large number of EU
projects. Such beneficiaries generally have complex accounting
and administrative systems. In view of this, the rules allow a cer-
tain flexibility, such as the use of average rates for the calculation
of personnel costs attributable to a project, provided this does not
lead to figures which are significantly higher than the actual costs.

7.20 and 7.21. Beneficiaries may use average rates for personnel costs
if this is in accordance with their usual accounting practices.

To effectively address the risks highlighted by the Court in para-
graph 7.21, the common audit strategy for FP6 covers all of the
200 biggest participants of FP6, who together receive 40 % of the total
FP6 budget.

7.21. As these beneficiaries may apply the same average cost-
ing methodology to all their cost statements, evidence of errors
at these beneficiaries implies a risk that significant amounts of
ineligible costs have been unduly reimbursed by the Commission.

In addition, extrapolation to non-audited contracts should limit the risk
of having significant amounts of ineligible costs unduly paid not recu-
perated by the Commission.

In those cases where the beneficiaries use average rates, the costs declared
may, by their nature, deviate from actual costs. The Commission must
examine both upwards and downwards deviations over a sufficiently
large sample to obtain a fair assessment of the accuracy of average rates.
This issue of transaction testing in average cost systems is being discussed
between the Commission and the Court.

For FP7 the Commission has initiated a system of optional ex-ante cer-
tification of a beneficiary’s average cost calculation methodology, which
will concern mainly big beneficiaries. The practical implementation mea-
sures of this ex-ante certification system are currently being finalised.

7.22.
In the case of the second beneficiary mentioned by the Court
these problems had been separately detected by the Commission’s control
system. Both cases are now being closely followed up.

7.22.
For example, for one large beneficiary, (accounting for
five transactions in the Court’s sample), the Court found that the
methodology applied for the calculation of personnel and indi-
rect costs led to the overstatement of eligible costs in the order of
10 %. In the case of another large beneficiary for which the Court
audited two projects, the average costing methodology used to
draw up the cost declarations led to the overstatement of eligible
costs, in the order of 5-6 %.

Sanctions

7.23. An extended system of sanctions was one of the main
corrective measures introduced at the start of FP6 in 2002 (8). The
Commission has not applied any sanctions during the course of
FP6. In effect, beneficiaries may submit cost statements in the
knowledge that, in practice, the maximum risk they face when
overstating expenditure is the repayment of the part of the funds
overclaimed, with no interest charges or additional financial
penalty.

(8) In addition to the recovery of funds, the Commission is entitled to
claim compensation (liquidated damages) from a beneficiary who is
found to have overstated eligible costs and consequently received an
unjustified contribution from the EU. Any beneficiary found to be per-
sistently in breach of its contractual obligations may also be liable to
flat-rate financial penalties.

7.23. The Commission distinguishes different types of sanctions:

The main contractual sanction, which already existed in previous Frame-
work Programmes, is the termination of contracts in cases of breach of
the contractual obligations.

The Commission introduced under FP6 the possibility to apply liquidated
damages. The pursuit of liquidated damages is part of the audit strategy
which foresees their application in all cases where follow-up audits would
reveal that contractors had failed to correct errors following previous
audits. The implementation of the FP6 audit strategy started in 2007
and the first follow-up audits are being organised in the course of 2008.
Depending on the results, liquidated damages will be applied accord-
ingly.

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Assessment of supervisory and control systems

7.24. The Commission implements various controls at each
stage of the project cycle, in order to mitigate the risk of irregular
payments (Graph 7.2):

(a)

controls over selection procedures which ensure that grants
are awarded to eligible beneficiaries, based on the merit of
the proposals; and

(b) checks on payments to beneficiaries designed to minimise

the risk of making undue payments.

7.25. The Court assessed the desk reviews of cost statements
before reimbursement of expenditure by DG Energy and Trans-
port (DG TREN) and the Commission’s ex-post audits of reim-
bursed expenditure. The Court also assessed the reliability of the
audit certification system in providing assurance on the legality
and regularity of expenditure. A summary of the results may be
found in Annex 7.1.

Desk reviews of cost statements before reimbursement
of expenditure

7.26. The Commission makes accounting and arithmetical
checks to ensure that cost statements and audit certificates have
been submitted in accordance with the grant agreement. In some
cases, the Commission may extend the checks to include verifi-
cation of individual cost items based on supplementary informa-
tion, such as invoices or payslips, requested from the beneficiary.

7.26. The inherent complexity of the funding mechanisms provided by
the applicable regulatory framework limits the scope of the desk reviews
that can reasonably be made before reimbursement of expenditure.
Therefore the Commission has significantly reinforced its ex-post con-
trols and put in place a common audit strategy (see also reply to para-
graph 7.11).

7.27. The Court examined guidelines and procedures, and the
reporting and monitoring arrangements for the checks in
DG TREN. The Court tested the operation of the checks for the
15 DG TREN reimbursements (9) included in its substantive test-
ing sample.

(9) 8 research, 7 TEN.

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7.28. DG TREN has extensive guidelines covering issues such as
the sampling approach and the methodology for extended checks.
The DG also has detailed written procedures and makes use of
standard checklists.

7.29. The reporting and monitoring arrangements for desk
reviews in DG TREN remain as observed by the Court in 2006.
They are restricted to the production of aggregate information on
costs accepted or rejected, with no detailed information about the
types and rates of errors which would contribute to a more
focused approach.

7.29. The current control strategy has significantly reduced the reli-
ance on ex-ante desk reviews. The control systems have been significantly
strengthened with the introduction of audit certificates as from FP6 as
well as the intensification of ex-post controls with the introduction of
the FP6 audit strategy. The thorough analysis of the results of ex-post
audits yields adequate information on the types of error and error rates.
This is reported by all Research DGs in their respective Annual Activity
Reports.

7.30. The Court found one case (a reimbursement to a research
beneficiary) where the checks failed to operate satisfactorily. The
beneficiary’s cost statement used budgeted rates for personnel
costs rather than actual figures, leading to an overstatement of
16 %. This could have been detected through plausibility checks
before the authorisation of the payment.

7.30. The Commission will correct the error by issuing a recovery
order.

Audit certification of cost statements

7.31.
For the 62 transactions audited at the beneficiary where a
certificate had been provided, the Court compared the results of
its own testing with the certificate.

7.32.
In 32 (52 %) of cases, the certifying auditor had issued an
unqualified opinion, whereas the Court found serious errors in
the cost statements. This confirms the previous finding of the
Court that this control does not always provide sufficient assur-
ance of the legality and regularity of the expenditure.

7.32 and 7.33. The Commission agrees that the reliability of FP6
audit certification is not fully satisfactory, considering the remaining level
of errors noted in audits. Nevertheless, the overall level of errors in FP6
is lower than the errors noted in uncertified cost claims related to FP5.
This indicates that audit certificates do contribute to improving the accu-
racy of cost claims.

7.33. The scope for varied interpretation of the complex fund-
ing rules of FP6 creates uncertainty among beneficiaries and cer-
tifying auditors on eligibility issues (particularly for personnel and
indirect costs). This, together with the lack of a mandatory model
audit certificate for FP6 continue to reduce the effectiveness of
this key element of the supervisory and control systems. The mea-
sures taken by the Commission to improve the quality of audit
certification for FP7, such as a compulsory set of procedures and
a mandatory report, are in the early stages of implementation.

As regards FP6, there is no compulsory certificate model. Nevertheless
the proposed model has been followed in most of the audit certificates
submitted.

For FP7 the Commission has further improved the reliability of audit cer-
tificates by using ‘agreed upon procedures’, setting out in detail the audit
work to be performed by the certifying auditors and encouraging optional
certification of the cost methodology.

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THE COMMISSION’S REPLIES

The Commission’s ex-post financial audits

7.34.
In 2007, the coverage of expenditure by ex-post audits has
increased (Table 7.2), responding to previous criticisms of the
Court. However, efforts are still needed to reduce the number of
open audit files and recover outstanding amounts overclaimed
without excessive delays.

7.34. The Research DGs have significantly increased their audit efforts
in 2007 and have met their annual targets.

Following an increased audit effort in 2007, attention is now turned
towards the correction of the detected errors. The Research DGs are
actively striving to improve the monitoring tools and are issuing more
precise administrative and financial guidelines. These are expected to
improve the efficiency and completeness of the recovery process (includ-
ing extrapolation and follow-up of the Court’s findings).

Shortcomings remain in the sharing of audit results
7.35.
between the research DGs, which continue to maintain local IT
tools with no automatic input to the Commission’s central audit
tracking facility.

Substantial efforts are being made to share information regard-
7.35.
ing audit results in an effective manner. A common repository of audit
results for sharing information amongst the Research DGs has been
operational since May 2008.

Data on FP5 and FP6 audits have now been transferred to the Com-
mission’s central audit tracking facility, and work is in progress to ensure
the automatic transfer of new audit data from all local IT tools used by
the Research DGs.

7.36.
In 2007, the research DGs began to implement a com-
mon ex-post audit strategy for FP6, designed to increase assurance
on the legality and regularity of the expenditure.

7.37. The strategy includes several initiatives which are likely to
contribute to more effective operation of this control. These
include the use of common risk criteria and sample selection
methods, focusing on large beneficiaries. The strategy also incor-
porates enhanced quality control procedures, the introduction of
a working group for the sharing of audit results, the development
of a common audit manual, joint audit teams and monthly coor-
dination meetings to discuss cases and adopt common positions.

Table 7.2 — Ex-post financial audits on Research Framework Programmes completed 2005 to 2007

Number of completed
audits

Number of audited
participations

Number of open contracts

Value of audited
participations
(million euro)

Value of open contracts
(million euro)

Adjustments of ineligible costs in favour of the Commission
as a result of the audits

value of audited
participations/value of
open contracts
(%)

Directorate-General

2005

2006

2007

2005

2006

2007

2005

2006

2007

2005

2006

2007

2005

2006

2007

2005

2006

2007

Value
(mio
euro)

value
audited
con-
tracts
(%)

Value
(mio
euro)

value
audited
con-
tracts
(%)

Value
(mio
euro)

value
audited
con-
tracts
(%)

2005

2006

2007

Energy and Transport (1)

16

69

126

20

100

188

1 099

1 166

294

21,49

66,48

73,08

899,46

929,55 1 063,30

0,85

3,9

5,47

8,2

3,70

5,1

2,4

7,2

6,9

Information Society and Media (2)

30

80

143

72

192

339

1 520

1 415

1 281

32,61

79,45 167,67 1 809,00

1 889,00 2 022,00

2,57

7,9

3,59

4,5

6,86

4,1

1,8

4,2

8,3

Enterprise and Industry (3)

1

44

108

8

69

127

1 672

2 369

224

22,28

28,66

29,67

305,75

1 179,00

332,11

1,38

6,2

0,64

2,2

0,78

2,6

7,3

2,4

8,9

Research (2)

23

151

305

35

198

565

8 906 12 070

9 441

38,25

58,68 293,40 5 032,43

6 663,85 4 713,16

0,72

1,9

3,47

5,9

4,81

1,6

0,8

0,9

6,2

Total

70

344

682

135

559

1 219 13 197 17 020 11 240 114,63 233,26 563,82 8 046,64 10 661,41 8 130,57

5,52

4,8

13,18

5,6

16,15

2,9

1,4

2,2

6,9

(1) Excluding Trans-European Network (Transport) projects. For 2005 and 2006 the figures include all programmes (research and non-research) audited by the Directorate-General.
(2) The value of audited participations includes all costs (EU and participant).
(3) For 2005 and 2006 the figures include all programmes (research and non-research) audited by the Directorate-General.
Source:

Data provided by the Commission.

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THE COMMISSION’S REPLIES

7.38.
In addition, the strategy aims to reinforce the audit certi-
fication process by continuing support to beneficiaries and certi-
fying auditors and by the development of ex-ante certification of
costing methodologies in FP7.

7.39. Although the new strategy represents a sound basis for
addressing the problems identified by the Court, potential ben-
efits depend on its full and effective implementation from 2008
onwards.

7.39. The implementation of the common audit strategy for FP6 is
fully on track. The first results were already visible in 2007 (see also
replies to paragraphs 7.15, 7.16, 7.20, 7.21, 7.26 and 7.29).

Overall conclusions and recommendations

7.40. Based on its audit work, the Court concludes that pay-
ments in 2007 for the policy group Research, Energy and Trans-
port are affected by a material level of error of legality and/or
regularity.

7.40 and 7.41. The control strategy of the Commission aims to detect
and correct errors, so that, when fully implemented over a period of four
years, it will ensure that the residual error rate (errors that remain uncor-
rected) is below the materiality threshold, as described in detail in the
Annual Activity Reports of the Research DGs.

7.41. The Court’s assessment of the supervisory and control
systems for the policy group Research, Energy and Transport is
that they are partially effective.

7.42. The Court reiterates its recommendation to simplify and
clarify the rules for the calculation and reporting of costs by ben-
eficiaries, where possible making more extensive use of lump sum
financing and introducing a results-based, rather than input-
based, financing system.

7.42. The Commission agrees that further simplification is needed
with regard to cost eligibility issues, particularly for personnel and indi-
rect costs. It draws attention to the legal limitations of FP7 and to the
difficulties to define lump sums and flat rates which are representative.

Furthermore the ex-ante certification of cost calculation methodology
introduced in FP7 is a major step towards simplification. The Commis-
sion refers to the issues discussed in its reply to paragraphs 7.20
and 7.21.

As regards the development of alternative funding mechanisms for the
future (such as lump sums and results-based financing), the Commis-
sion is open to discussions with the Court and other stakeholders.

7.43. Within the current framework of a funding system based
on the reimbursement of costs claimed by beneficiaries, the Com-
mission should:

7.43.

(a) address the persistent errors in payments, making effective
use of the sanction mechanisms available under FP6 rules
(paragraphs 7.14 to 7.23);

(a) The FP6 audit strategy is designed to address persistent errors in
payments. Sanctions, and in particular liquidated damages, are part
of the audit strategy implemented since 2007.

(b) ensure that desk checks before payments to beneficiaries are
rigorously applied and enhance its analysis of errors found
(paragraphs 7.26 to 7.30);

(b) With the introduction of audit certificates in FP6, ex-ante verifi-
cation is significantly strengthened compared to previous framework
programmes.

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THE COMMISSION’S REPLIES

On the spot verification of cost statements by means of audits
remains a corner-stone of the assurance strategy, and provides sub-
stantive information on the errors made. The Commission has
therefore stepped up its ex-post controls with the introduction of
the FP6 audit strategy. The strategy includes a significant increase
in the audit effort and measures to correct the errors found. These
measures are an effective alternative to those recommended by the
Court.

(c)

continue to provide support to beneficiaries and certifying
auditors for the audit certification process and ensure the
effective implementation of the measures introduced to
improve the certification of cost statements for FP7 (para-
graphs 7.31 to 7.33);

(c) A number of actions have been taken to improve the quality of audit
certificates for FP6, such as the issuing of guidance notes for the
beneficiaries and certifying auditors, the creation of a task force for
the handling of audit certificates, and by certifying auditors’ par-
ticipation in workshops and training courses.

For FP7 the Commission has improved the reliability of audit cer-
tificates by using ‘agreed-upon procedures’, setting out in detail the
audit work to be performed by the certifying auditors.

The Commission is also encouraging the optional certification of the
cost methodology on the basis of implementing measures, which are
currently being finalised.

(d) pursue its common ex-post audit strategy for FP6, in particu-
lar through the development of common management infor-
mation systems and the timely and effective implementation
of audit results (paragraphs 7.34 to 7.39).

(d) Efforts will be pursued to implement audit results effectively and in
a timely manner. Use will be made of the ABAC facilities to track
audits, as well as recovery orders and compensations.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Follow-up of key Statement of Assurance
observations

7.44. A summary of the results of the Court’s follow-up of key
observations in recent Statements of Assurance may be found in
Annex 7.2.

7.44.

See the Commission’s replies in Annex 7.2.

Follow-up of Special Report No 6/2005 on the
trans-European network for transport (TEN-T)

7.45.
Special Report No 6/2005 on the trans-European net-
work for transport (TEN-T) (10) identified weaknesses, notably in

(10) OJ C 94, 21.4.2006.

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the targeting of the funding and in the selection and monitoring
of projects. The Court recommended the Commission to:

(a)

concentrate funding on project sections with highest Euro-
pean added value by giving priority to cross-border projects
and increasing funding rates;

(b) apply a more efficient, transparent and strict evaluation pro-

cedure for the selection of projects for funding;

(c) perform more rigorous project monitoring.

7.46. The action taken by the Commission has partly addressed
the Court’s recommendations.

7.47. The maximum rate of financial aid for cross-border
projects has increased to 30 % under the new regulation and the
minimum funding threshold has been increased from 1 million
to 1,5 million euro.

7.48. The evaluation procedure for the selection of projects has
been improved by increasing the use of external experts and
introducing a guide for applicants.

7.49. Monitoring has been enhanced by the introduction of sys-
tematic on-site inspections and of a single database of projects.
The Commission has clarified the respective definitions of ‘stud-
ies’ and ‘works’ as suggested by the Court, but has not harmon-
ised the structure for the description of works, nor standardised
the technical and financial monitoring.

7.49. When preparing together the new model financial decision for
the new programming period 2007-2013, the Commission and the
TEN-T Executive Agency paid particular attention to improving all the
elements that will allow a better technical and financial monitoring of
the actions funded under the TEN-T programme. As a result, modifica-
tions were introduced to the model financial decision itself and a more
robust monitoring system was devised, based on a new detailed strategic
action plan for the implementation of the project that is to be submitted
by the beneficiary at the latest six months after the notification of the
decision. The introduction of this new requirement, and a streamlined
yearly reporting system, are expected to improve the monitoring of the
projects, and to support the beneficiaries during the implementation
phase by detecting problems at an early stage.

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ANNEX 7.1

Assessment of the supervisory and control systems

Key internal control

System concerned

Desk checks before
payment

Audit certification

Ex-post financial audits

Overall assessment

Sixth Framework Programme (FP6)

Legend

Effective

Partially effective

Not effective

Result of transaction testing

Sample estimate of the proportion of transactions
affected by an error

Error rate

48 %

Between 2 %
and 5 %

ANNEX 7.2

Follow-up of key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

1.

Statement of Assurance 2005: a material level of error in costs declared by beneficiaries

In 2005, the Court detected a material level of error in 17 of
the 22 underlying transactions audited at the beneficiaries.
The most frequent types of errors were: lack of supporting
evidence, in particular for working time charged, or double
charging of costs; use of average rates for personnel costs
which deviate significantly from actual costs; unjustified allo-
cation of indirect costs to the action; claims of costs which did
not meet the eligibility criteria.

(Annual Report concerning the financial year 2005, para-
graphs 7.6 to 7.8).

In three cases, the Commission did not
agree with the Court’s findings and has
taken no corrective action.

In 10 cases, the Commission has made
financial corrections, either by issuing a
recovery order or by adjusting payments
to the beneficiaries in subsequent periods.

In four cases, the Commission has initi-
ated corrective action which remains to be
completed.

2. Weaknesses in the audit certification system for FP6

Late issue of guidelines by the Commission, together with the
complexity of the financial provisions of FP6 have adversely
affected the audit certification system. Improved guidelines
are needed to address uncertainties on eligibility issues and on
the independence of the certifying auditors.

The audits carried out by the Court at beneficiaries have con-
sistently detected significant amounts of
ineligible costs
included in cost statements for which the certifying auditor
has issued an unqualified opinion. The problems most com-
monly relate to ineligible personnel expenditure and the use
of costing systems which are not in line with contractual pro-
visions.

(Annual Report concerning the financial year 2004, para-
graph 6.11; Annual Report concerning the financial year
2005, paragraphs 7.15 to 7.17; Annual Report concerning
the financial year 2006, paragraphs 7.14 to 7.17).

The Commission has improved support to
certifying auditors and beneficiaries, and
to its own operational departments.

The ex-post audit strategy for FP6 is
intended to contribute to the assessment
of the effectiveness of the system of audit
certification. Issues related to audit certifi-
cates are discussed regularly by the
Research DGs in meetings of the Coordi-
nation Group for external audit in the
Research family.

For FP7, the Commission has introduced
further measures to improve the quality of
audit certificates:
‘agreed upon proce-
dures’, compulsory certification of the cal-
culation methodology
average
personnel costs and optional certification
of personnel cost and indirect cost meth-
odologies.

for

Although the Commission has taken cor-
rective action for the majority of the
Court’s findings, in several cases the finan-
cial corrections have taken a considerable
time (up to 20 months), or are not com-
pleted. Delays in the correction of undue
payments are detrimental to the sound
financial management of the expenditure.

On the one hand, the Commission agrees that financial corrections
made through compensation in the following payment may result in
some delays. The Commission considers however that it is an appro-
priate system for ongoing projects.

On the other hand the Commission continues to improve the
follow-up of its audits in order to limit/avoid unjustified delays.

The Court continues to find that, in most
cases for which it has identified significant
errors in cost statements, the certifying
auditor has given an unqualified opinion.
It remains the case for FP6 that audit cer-
tificates do not yet function as a reliable
control.

The Commission agrees with the Court that the reliability of FP6
audit certification is not fully satisfactory, considering the remaining
level of errors found in audits. Nevertheless, the overall level of errors
in FP6 is lower than the errors noted in uncertified cost claims related
to FP5. This indicates that audit certificates contribute to the
improvement of the accuracy of cost claims.

Furthermore for FP7 the Commission has improved the reliability of
audit certificates by using ‘agreed upon procedures’, setting out in
detail the audit work to be performed by the certifying auditors.

.

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Court observation

Action taken

Court analysis

Commission reply

3.

Persistence of delays in payments by the Commission

In a significant proportion of cases, the Commission has
incurred undue delays in making payments to beneficiaries,
thus failing to comply with the time limits for expenditure
operations set out in the Financial Regulation.

The Commission has improved the moni-
toring of delays, which are the subject of
regular management meetings.

Although steps have been taken to address
the problem, the Commission has made
little discernible progress in reducing pay-
ment delays during the course of FP6.

All Research DGs have increased the percentage of payments made
on time. The issue is monitored closely and receives the highest atten-
tion to ensure further improvement.

In 2005, 11 out of 69 payments audited by the Court were
made late (i.e. 16 %). For 2006, the Court identified late pay-
ments in 21 out of 113 cases (i.e. 18,6 %).

In 2007, the Court found late payments in 30 out of 180
cases audited (i.e. 17 %).

(Annual Report concerning the financial year 2003, para-
graph 6.22; Annual Report concerning the financial year
2004, paragraph 6.27; Annual Report concerning the finan-
cial year 2005, paragraph 7.10; Annual Report concerning
the financial year 2006, paragraph 7.29 and Annex 7.1).

The Commission has analysed the reasons
for delays. Training sessions have been
organised and additional instructions on
the payment process have been issued to
financial officers.

financial

As also pointed out by the Commission’s
internal audit services, the persistence of
delays increases the risks to the legality
and regularity of expenditure. Apart from
risk (beneficiaries may
the
demand interest) and the operational risks
(evaluation experts may be unwilling to
participate in future evaluations and
projects may face cashflow difficulties),
the Commission also exposes itself to
unnecessary reputation risk.

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CHAPTER 8

External aid, Development and Enlargement

TABLE OF CONTENTS

Introduction

Specific characteristics of External aid, Development and Enlargement

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and Regularity of underlying transactions

Assessment of supervisory and control systems

Ex-ante checks

Monitoring of implementing organisations

External audits of project claims

Internal audit

Overall conclusions and recommendations

Conclusions

Recommendations

Follow-up of previous observations

Follow-up of key Statement of Assurance observations

Follow-up review of Special Report No 2/2006 on the performance of projects financed
under TACIS in the Russian Federation

Introduction

The Court’s observations

Conclusions and recommendations

Paragraph

8.1-8.6

8.1-8.6

8.7-8.33

8.7-8.8

8.9-8.10

8.11-8.30

8.11-8.16

8.17-8.22

8.23-8.28

8.29-8.30

8.31-8.33

8.31-8.32

8.33

8.34-8.52

8.34

8.35-8.52

8.35-8.38

8.39-8.50

8.51-8.52

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

INTRODUCTION

Specific characteristics of External aid, Development
and Enlargement

8.1. This chapter covers the Court’s findings on policy group
External aid, Development and Enlargement, which comprises the
following policy areas: 19-External relations; 21-Development
and Relations with African, Caribbean and Pacific (ACP) States (1);
22-Enlargement; and 23-Humanitarian aid. In 2007, commit-
ments totalled 6 090 million euro (7 153 million in 2006) and
payments totalled 6 199 million euro (6 292 million euro in
2006). The distribution of payments by policy area is given in
Graph 8.1. More detailed information on spending for the year is
provided in Annex I of this report.

Graph 8.1 — External aid, development and enlargement — breakdown of payments
by policy area

Source: 2007 annual accounts.

(1) Aid provided through the European Development Funds is reported

separately as it is not financed from the General Budget.

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THE COMMISSION’S REPLIES

8.2.
External relations and Development expenditure, imple-
mented mainly by the EuropeAid Co-operation Office (Europe-
Aid), includes:

(a)

financial and technical assistance to, and economic coopera-
tion with, countries in Asia and Latin America;

(b) European neighbourhood policy including the strategic part-

nership with Russia;

(c)

thematic programmes including food security, non-state
actors and local authorities, environment, health and educa-
tion, democracy and human rights.

8.3. The majority of the expenditure is subject to direct centra-
lised management by Commission services either at headquarters
or, for approximately 80 % of the spending, at the Commission’s
Delegations in the third countries concerned. Joint management
applies to aid delivered through international organisations.

of

the

large

payments

proportion

8.4. A
are
advances/prefinancing made to the organisations implementing
development projects, including government institutions, NGOs,
and international organisations. The projects supported are dis-
persed through more than 150 countries, and the implementing
organisations vary greatly both in size and competence. Within
each of the projects there are a large number of individual pay-
ments, which are subject to complex rules, in particular concern-
ing tendering and the origin of supplies.

8.4. Given the multi-annual nature of many projects and control sys-
tems, errors detected during the course of a project and any associated
undue payments can be remedied in a later year than the one under
examination. Indeed, the control system is shaped to ensure that con-
trols on payment claims by the beneficiaries are carried out at key stages
of
thus allowing errors on advance
payments/pre-financing to be detected and remedied by subsequent pay-
ments in a later year that the one under examination.

implementation,

the project

Final payments are made upon completion of the project and approval
by the Commission of the final project reports.

8.5. Two other modes are used for potential candidates. In Albania,
and Bosnia and Herzegovina, assistance is managed by the EC Delega-
tions (centralised direct management in deconcentrated mode). In Mon-
tenegro, the former Yugoslav Republic of Macedonia, Serbia and Kosovo,
the European Agency for Reconstruction manages the assistance in cen-
tralised indirect mode.

The centralised management is used for multi-beneficiary programmes
and for assistance to the Turkish Cypriot Community.

8.5. The Directorate-General for Enlargement manages expen-
diture on transition and institution-building assistance under the
instrument for pre-accession assistance, the Phare programme,
CARDS (2), and cooperation with Turkey. The payments are in
general made either on the basis of a decentralised implementa-
tion system (DIS) or the extended decentralised implementation
system (EDIS). In the case of DIS, ex-ante controls of contract
award decisions are carried out by the Commission Delegation
whereas under EDIS the ex-ante control is waived.

(2) Phare was the main financial instrument of the pre-accession strategy
for Central and Eastern European countries. The CARDS programme
is Community Assistance for Reconstruction, Development and Sta-
bility in the Balkans.

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THE COMMISSION’S REPLIES

8.6. Humanitarian aid, including food aid, is implemented by
the Directorate-General for Humanitarian Aid (ECHO). Expendi-
ture is managed at headquarters level. Approximately one half of
the appropriations committed are related to NGOs (direct centra-
lised management) and one half to UN or other international
organisations (joint management).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

8.7. The objective of the audit was to provide a conclusion as
to the legality and regularity of the underlying transactions in
external aid, development and enlargement. The audit was based
on two main components:

(a)

substantive testing of underlying transactions made by the
Commission or its Delegations in 2007 by means of a rep-
resentative statistical sample of 145 items. The sample con-
sisted of payments to implementing organisations, budget
support payments and payments to trust funds, and other
payments made directly by the Commission/Delegation on
the basis of e.g. works, service or supply contracts. Where
necessary the implementing organisations were visited on
the spot in order to verify underlying payments declared in
financial or audit reports;

(b) an evaluation of the Commission’s supervisory and control
systems at Headquarters as well as in Delegations, including:

(i)

ex-ante checks on contracts and payments;

(ii) monitoring of implementing organisations;

(iii) external audits;

(iv)

internal audit.

8.8.
In the context of the audit, eight countries were visited on
the spot in order to undertake detailed audit of the transactions:
Indonesia, Nicaragua, Costa Rica, Egypt and the Philippines for
External relations expenditure and Bulgaria, Turkey and Croatia
for Enlargement.

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Legality and Regularity of underlying transactions

8.9. The substantive testing for the policy group as a whole
revealed a material level of error of legality and/or regularity. The
estimated error rate and proportion of transactions affected by
errors — mostly at the level of implementing organisations — are
shown in Annex 8.1. The following types of errors were noted:

8.9. These errors mostly concern expenditure made by implementing
organisations on advances/prefinancing payments. The mandatory
financial audits before final payments foreseen under the Commission’s
control system would allow the Commission to detect and correct the
errors.

(a)

errors of eligibility, resulting from, for example, contracting
procedures which were not applied properly, expenditure
outside the specified implementation period or cost catego-
ries of the project, or payments made by the beneficiary
country without a legal basis or before the respective services
had been provided;

(a)

In one example the Commission’s appreciation differs from the
Court’s finding.

The errors found concern contracts concluded by the beneficiary
countries under a scheme for which the beneficiary country is entitled
to receiving advances payments from the Commission (pre-
financing). The Commission carefully checks the eligibility of expen-
diture once it receives the final declaration and the supporting
documents from countries benefitting from pre-accession aid; it
withholds or withdraws final payment for expenditure which is not
in conformity with the rules.

(b) errors of occurrence: for some payments the supporting evi-
dence (e.g. invoices, receipts and bank statements) necessary
to validate the payments was missing.

Furthermore,

for three payments to United Nations
8.10.
organisations some of the documents needed could not be pro-
vided in good time by the organisations concerned.

8.10. The Commission has provided all information in its possession
and fully supports the Court’s request for obtaining from UN organisa-
tions further supporting evidence.

As soon as the Commission was informed by the Court of difficulties
encountered in this respect, it approached its counterparts at the UN in
order to find a solution and to ensure that the Court received the infor-
mation requested.

Assessment of supervisory and control systems

Ex-ante checks

8.11. Although some specific errors were found, the Commis-
sion’s system of ex-ante checks on payments and contracts pro-
vided a generally effective check on transactions deriving directly
from the work of the Commission’s own services.

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8.12. However, in Bulgaria it was found that in spite of EDIS
accreditation having been given (thus waiving the Delegation’s
ex-ante control) the systems in question contain significant weak-
nesses. In two implementing agencies that had received EDIS
accreditation in June 2007 there were weaknesses concerning
respect of the applicable tendering and contract award proce-
dures, as well as the fulfilment of contractual implementation
conditions. This has been confirmed by the Commission services
and has given rise to a reservation in DG Enlargement’s Director
General’s Annual Declaration.

8.12. The payments to two implementing agencies were suspended in
February 2008. Unless adequate measures are taken very quickly, the
Commission will withdraw their accreditation so that they will no longer
be entitled to manage pre- and post-accession funds.

The Commission will continue to closely monitor the beneficiary coun-
tries systems. An action plan has been set up to ensure that improve-
ments take place. Some progress has already been made, but the national
authorities need to take further action.

8.13. Regarding budget support, seven payments were exam-
ined together with the supervisory and control systems operated
in the Delegations concerned.

8.14. Budget support can be granted if the partner country’s
management of public spending is sufficiently transparent, reli-
able and effective, and where it has put in place properly formu-
lated sectoral or macroeconomic policies approved by its
principal donors,
including where relevant the international
financial institutions (3). On that basis the Commission developed
specific guidelines establishing the conditions for disbursement of
funds, the payment of successive tranches being conditional on
satisfactory progress towards achieving the objectives (4). How-
ever, the performance indicators used to provide the assessments
and to measure the progress achieved were not in all the cases
examined time-bound, clear and unambiguous, and achievable.

8.14. As in these cases, the tranches to be released were denominated
as floating, the disbursement is effected when the condition(s) is/are met.
Performance indicators, and conditions at large, could therefore not be
time bound. This modality is in use by different donors. For instance, in
the case of HIPC, the conditions are floating and the different stages are
not time bound. The Commission shares the general comment of the
Court that in specific cases a time-frame is required in order to provide a
more predictable fulfilment of the condition. The Commission considers
that in all cases it seeks to be clear and unambiguous and to ensure that
performance indicators are achievable.

8.15. As previously stated, time-boundness is not required as such.
The Commmission can agree that there is always room for improvement
and that some indicators and conditions may be more clearly defined and
gearded towards a more results oriented approach. Sectoral reforms
should, however, be seen as a process, and therefore, previous steps tar-
geting preparations phases are, in some cases, necessary in order to
accompany the whole process.

8.15.
In the case of two of the payments, more than half of the
indicators (in one case, six out of nine) were not time-bound,
thereby making it impossible to draw useful conclusions from the
non-fulfilment of the condition at a particular date. In addition
more than 40 % of the indicators were not measurable or not spe-
cific, for example the percentage of forest cover achieved with no
specification of the measurement criteria, and improvement of
government staff performance with no explanation of what
should be assessed. In one case more than 70 % of the indicators
were assessed with documentation provided in Arabic, even
though English was specifically required by the Financing Agree-
ment, reducing significantly the number of actors in a position
fully to understand the information.

(3) Regulation (EC) No 1638/2006 of the European Parliament and of the
Council of 24 October 2006 laying down general provisions estab-
lishing a European Neighbourhood and Partnership Instrument
(OJ L 310, 9.11.2006, p. 1) (Article 15(2)(e)), and Regulation (EC)
No 1905/2006 of the European Parliament and of the Council of
18 December 2006 establishing a financing instrument for develop-
ment cooperation (OJ L 378, 27.12.2006, p. 41) (Article 25(1)(b)).
(4) Guidelines on the Programming, Design & Management of General

Budget Support, January 2007.

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8.16. The Commission’s General Budget Support Guidelines in
practice leave room for interpretation, and even if according to
the performance measures programme outcomes did not reach
100 % the beneficiary countries may still receive 100 % of the
funds contracted.

8.16. While seeking the most precise conditions for payments, there
must be a certain degree of judgement as far as the indicators are evalu-
ated. This is in particular due to some external effects for which govern-
ments cannot be made responsible. However, in any case a rigorous
assessment needs to be carried out.

8.17-8.20.
Implementing organisations are not part of the Commis-
sion Internal Control System but are linked by a contractual relation to
implement specific actions. The Commission, as a priority, monitors
compliance of the terms of the contract, including, where necessary, key
aspects of the internal control systems of the implementing organisations.
The fact that a weakness is identified at implementing organisation level
implies neither a weakness of the Commission control system nor that
this weakness will go undetected by the Commission.

Monitoring of implementing organisations

8.17.
Errors at the level of implementing organisations are fre-
quently due to weaknesses in their financial procedures. As
regards the External relations and Development policy area, the
Court detected weaknesses in five out of the nine implementing
organisations visited.

8.18. The main weaknesses detected were inadequate proce-
dures concerning supporting documents and filing, and account-
ing systems that are not adequate to ensure that the expenditure
is correctly reported, even taking the often small size of the
organisations into account. In addition inadequate procedures for
recording expenditure were noted, which led to the systematic
entering of advances as actual expenditure in the accounting sys-
tem and inconsistent use of exchange rates. The Court considers
that there is scope for preventing such weaknesses by means of
enhanced targeting of monitoring and support by Delegations.

8.19.
In the cases where the action was carried out by imple-
menting organisations in cooperation with their local partners,
the Court also noted in three instances that the systems in place
did not ensure that the provisions in the contract between the
implementing organisation and the Commission were known and
applied by the local partners.

8.20. A major part of EuropeAid and DG ECHO expenditure
(payments of 820 million euro in 2007) is channelled through
United Nations organisations. The Financial and Administrative
Framework Agreement between the European Community and
the United Nations (FAFA), signed on 29 April 2003, specifies the
conditions for verification of the resulting expenditure.

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8.21.
In 2007 the Commission initiated or carried out 57 veri-
fication missions under FAFA, compared with only 22 between
2004 and 2006. The results of these verifications are an impor-
tant component in the Commission’s assurance as to the legality
and regularity of the underlying transactions. However, only four
of the missions (covering seven projects) had resulted in a final
report at the date of the Court’s audit. The Court is therefore
unable to assess the total contribution to the Commission’s super-
vision and control.

8.22. Concerning the Enlargement policy area, weaknesses were
noted at an implementing agency in Turkey, namely a lack of
adequate segregation of duties and staffing issues. In this case the
EC Delegation’s ex-ante control of tendering and awarding of con-
tracts under decentralised management (DIS) was sufficient to
ensure the legality and regularity of the underlying transactions.

8.22. The verification missions follow a cycle that does not always fit
the annual calendar, and most of the missions were performed in the sec-
ond part of 2007.

The complex and complementing controls, of which verification missions
are but a part, form the basis of assurance of the Directors-general in the
Annual Activity Report. Indeed other sources of information are also
available, such as the four pillar review (completed for more than 97 %
of contributions made to FAFA signatories), respect of the reporting
requirements and checks made by the Commission services.

External audits of project claims

8.23.
EuropeAid makes use of a system of audits to gain assur-
ance that claims made by projects are eligible. The first layer of
assurance is provided by audits at project level which support the
requests for further financing. Audit reports are required in most
cases before payments are made to project implementing organi-
sations. The quality of these reports and of the audit work under-
lying them is therefore of major importance in approving related
payments.

8.23. At the request of the Commission, the Turkish authorities took
actions which averted the considered suspension of DIS including adopt-
ing legislation designed to strengthen the CFCU’s role. As a result, the
segregation of duties has meanwhile been implemented and staffing lev-
els increased substantially. Constant monitoring and further follow-up
remain key priorities.

8.24. Concerning these project audits improvements were
noted in 2007. However, the quality of such audits is still not
always sufficient. The main weaknesses found were:

8.24.
External audits are one of the components of EuropeAid’s inter-
nal control system as part of a set of checks on the legality and regularity
of operations.

— in three out of the 11 reports selected for review on the spot
at Delegations, the Court detected ineligible expenditure,
non-compliance with tendering procedures, and in two cases
weaknesses in the internal control system which had not
been detected by the external auditors;

The Commission welcomes the Court’s appreciation of the improvements
observed.

These audit reports are linked to contracts signed before February 2006.
As a consequence, the new terms of reference set up by EuropeAid for
external audits and put into force for new contracts signed as from this
date were not applicable in the present cases. The aim of these new terms
of reference is precisely to prevent the occurrence of weaknesses such as
the ones mentioned by the Court.

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— for two out of these three, the quality was not ensured as the

selection of the auditors was not transparent;

— in another case the scope of the audit was inappropriate as
only the audit report on the organisation was provided,
which did not contain any information on the project in
question.

Both contracts were signed in 2005 and, according to the general con-
ditions put into force for grant contracts signed as from February 2003,
an external auditor has to certify the final financial report of an action
before being submitted to the Commission. This auditor is selected by the
beneficiary and must be approved by the Commission. His name is men-
tioned in the Specific Conditions of the contract. He must be ‘member of
an internationally recognised supervisory body for statutory auditing’.

For expenditure verifications launched by beneficiaries new terms
of reference have been in force for contracts signed as from Feb-
ruary 2006. However these do not affect contracts existing prior
to this date and so it will be some time before the benefits are
fully apparent. For audits launched by the Commission, revised
terms of reference have been obligatory since October 2007.

EuropeAid commissions

8.25.
audits,
selected on a risk-analysis basis, in order to provide a further layer
of assurance. However complete procedures have not yet been
developed so as to draw full benefit from these audits:

additional project

(a)

the coverage of expenditure by the additional audits planned
varied across the main geographical directorates from 8 %
to 43 %. Technical divergences from the guidelines prevent
consolidation of the data at the level of EuropeAid as a whole,
and it is therefore not clear whether additional assurance is
achieved to a consistent minimum level;

This contract was signed by the Commission in 2002. At that time the
beneficiaries were allowed to send, together with the financial and nar-
rative reports, an audit report on their yearly accounts only. Since 2003,
rules applicable to Grant contracts have been changed and a specific
audit report on the action is now required before making the final pay-
ment.

The Commission expects that the improvements introduced become more
and more visible.

8.25.

(a) The majority of the Annual Audit Plan (AAP) audits take place
during the implementation of the action and depend, to a great
extent, on the pace of implementation.

This implies that: according to the financial volume managed by a
Delegation, the composition of its projects’ portfolio (number
and type) and the status of their implementation, audit activities
may vary from Delegation to Delegation and from one year to
another. Setting a target audit ratio as a percentage of the financial
volume managed would not impede fluctuations in the audit activ-
ity from one year to another and would also be largely affected by
the type and value of projects audited.

In EuropeAid’s system, assurance is not gathered by ensuring a cer-
tain pre-determined audit coverage ratio but, simply, by ensuring
that the audit coverage encompasses all relevant ‘audit subject’,
identified in relation to the risks perceived.

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(b)

the audit plan, which originally foresaw 373 audits, was
changed substantially during the year (109 audits were with-
drawn and 99 added, leaving 363 audits). This degree of
change shortly after approval of the plan puts the systematic
and risk-based nature of the audit planning in question. The
CRIS-Audit computer application that provides for monitor-
ing of progress and results did not come into full use in
2007. The final report does not refer to planning criteria,
such as target population and coverage ratio, and in conse-
quence the results cannot be compared against
those
planned;

(c) by the end of the year audit reports had been received for
only 121 of the planned audits. This low level of implemen-
tation reduces the quality of the assurance that is provided by
the external audit activity for the year in question;

(d)

reporting on progress and analysis of the external audit
results were not fully developed in 2007. The central unit
responsible for audit methodology produced a synthesis
report, but its coverage was not complete. For example,
audits done by local firms under contract to individual Del-
egations, where the quality risk may be higher than under
central framework contracts, were not reviewed.

Ex-post controls (closure audits) are carried out by con-
8.26.
tracted external auditors on selected recently-closed programmes
in the Enlargement policy area. Following a change of methodol-
ogy, the number of reports was exceptionally high in 2007, and
some have not received timely follow-up. DG Enlargement
received 99 final audit reports in 2007, for 66 of which the
follow-up had not yet been finalised at the time of the Court’s
audit in April 2008, and six reports that had not been finalised in
2006 remained open. In some cases it takes more than a year
from the final report to receive a final reply from the beneficiary
country.

(b) The audit plan contains a number of mandatory audits, on projects
whose maturity varies considerably. Some foreseen in the year will
be postponed to subsequent years and others brought forward
according to project maturity.

Since 1 January 2008 CRIS-Audit provides for the monitoring of
the progress and results of audits, including the AAP 2007.

Meanwhile, the Commission regularly monitors the implementa-
tion of the AAP during the year, including through regular reports
and updates from the Delegations.

(c) At the end of the year 2007, two-thirds of the audits of the 2007
audit plan had been commissioned and one-third of the reports
received. This is in line with previous years. By the same date almost
all the reports of the audits foreseen in the Annual Audit Plan
2006 had been received (171 out of 177 planned audits), confirm-
ing the normal life-cycle of an Annual Audit Plan, which -is fina-
lised in year n + 1.

(d) The synthesis report produced annually covers audits financed under
the Audit Framework Contract (FWC). These include audits man-
aged by EuropeAid Headquarters as well as by Delegations, and
this provides a representative view of the problems identified by the
auditors and possible solutions.

In spite of the exceptionally high number of reports, the Com-
8.26.
mission has been able to absorb the workload: the number of reports
dealt with rose by 70 % when compared to 2006.

Many of the reports could not be closed at the year end since before the
Commission can adopt a final position, the auditee has to reply to the
Commission’s observations, and any irregularities examined. This takes
an average of 3 to 4 months.

Longer processing delays have to be occasionally accepted due to the com-
plexity of the findings and as a consequence of the need of accuracy in
the application of possible financial corrections.

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8.27. DG ECHO commissions audits at its NGO implementing
partners’ headquarters offices, and field audits of projects on the
spot. In 2007 DG ECHO significantly increased the number of
field audits, although, as in 2006, the majority of audits were
done at partners’ headquarters where the reality of expenditure
cannot be completely checked.

8.27. As indicated in the Commission’s reply to the Court’s 2006
annual report, the audits have to be seen in the context of an overall con-
trol strategy (see paragraph 8.18 of the Commission’s replies to the
Court’s 2006 Annual Report). The Commission puts emphasis on
monitoring operations through close follow-up performed by both experts
in the field and the Commission staff at headquarters. Furthermore, the
Commission analyses in detail the information provided by partners in
the various reports.

The information resulting from the checks described above are used by
the external auditors in headquarters audits, and this enables them to
assess the reality and legality of project expenditure.

8.28. These headquarters audits include samples of payments
from about one-third of projects. In 2007 2,6 % of the amount
audited was reported as potentially ineligible although after expla-
nations have been received from the NGOs only part of this is
likely finally to be recovered. There is no provision to extrapolate
the results, and the audit system thus does not provide a means
to assess the scale of potentially ineligible expenditure as a whole.
Concerning two NGO headquarters audited on the spot by the
Court, the audit reports commissioned by DG ECHO had failed
to draw attention to weaknesses in tender procedures and to ineli-
gible expenditure.

8.28. Through various control procedures, such as the assessment of
the partner before the signature of an FPA, the annual evaluation per-
formed by DG ECHO of its partners, and the assessment — during HQ
audits — of the control systems put in place, DG ECHO verifies whether
its partners have established systems of control. These procedures offer
equivalent guarantees for payments in accordance with Article 117 of the
Financial Regulation and article 180 of its IR which allow the autho-
rising officer responsible to waive, depending on his risk assessment, the
obligation to provide a certificate on the financial statements and under-
lying accounts in certain circumstances.

Internal audit

8.29. The Internal Audit Capability (IAC) serving both Europe-
Aid and DG ECHO expects to provide an annual overall assess-
ment of the state of internal control in EuropeAid in 2010, after
completion of a multiannual audit plan, based on an IAC internal
risk analysis, that covers the period 2007-2009. The internal IAC
risk analysis is not completely in line with EuropeAid’s own risk
analysis, and audits are not planned during the period 2007-2009
for certain of the areas identified as high risk.

8.29. The IAC risk anaysis is made independently of EuropeAid’s own
risk analysis. However, the latter is considered as an element when the
IAC risk register is drawn up. While the IAC risk register might con-
sider an area to be high risk, that area might not appear in the audit
plan for a particular year because the business process is not yet within
the working practice of the DG or the management cycle for certain pro-
grammes. In addition, since the IAC’s audit plan is coordinated with the
IAS for the 2007-2009 period, some auditable items will be found on
the audit plan for the IAS rather than for the IAC.

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8.30. Very little resource (one professional audit staff member)
was allocated to audit of DG ECHO in 2007, and no comprehen-
sive audit plan was approved or implemented. At the end of 2007
a new separate IAC was established to carry out the internal audit
work for DG ECHO.

8.30. The Commission allocated two staff to support the internal audit
effort directed for DG ECHO. The IAC’s audit plan was risk based and
took into consideration the considerable audit work on humanitarian
activities undertaken by both the Internal Audit Service and the Court of
Auditors. The residual risk to be covered showed that the IAC’s 2007
work plan to be appropriated.

Overall conclusions and recommendations

Conclusions

8.31. Based on its audit work the Court concludes that transac-
tions underlying the expenditure in the policy group External aid,
Development and Enlargement are affected by a material level of
error of legality and/or regularity (see paragraph 8.9).

8.31. These errors mostly concern expenditure on advances/prefinancing
payments made by implementing organisations. The mandatory financial
audits before final payments foreseen under the Commission’s control sys-
tem would allow the Commission to detect and correct the errors.

The Commission carefully checks the eligibility of expenditure once it
receives the final declaration and the supporting documents from coun-
tries benefitting from pre-accession aid; it withholds or withdraws final
payment for expenditure which is not in conformity with the rules.

8.32. The Court’s assessment of the supervisory and control
systems for External relations, Development, Enlargement and
Humanitarian aid is that they are partially effective (see Annex 8.1
and paragraphs 8.11 to 8.30).

Recommendations

In order to mitigate these weaknesses, the Court recom-

8.33.
mends that:

8.33.

(a) EuropeAid should give more training and support to project
finance staff, and increase the active monitoring of their work
by Delegation finance and contracts sections;

(a) During the life of an operation, the Commission’s services monitor
its implementation, through dialogue with local authorities, tech-
nical meetings with beneficiaries, and missions on the ground. A
results-oriented monitoring (ROM) carried out annually by inde-
pendent experts, complements these activities and monitors the
progress, outcome impact and potential problems of on-going
projects. Additional project audits, both operational and financial,
may also be carried out following a risk assessment.

(b) EuropeAid should ensure that plans for risk-based audits are
realistic and are implemented promptly, and should also col-
lect and analyse the results of the whole programme of audits
both to control quality and in order to make best use of les-
sons learned;

(b) The methodology for the AAP is fine-tuned each year, with a view
to making the identification of risk-based audits as realistic as pos-
sible. The implementation of the AAP will be monitored closely
throughout 2008, and the use of the results of the audits will be
optimised

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(c)

the Commission’s management of budget support pro-
grammes should be based on measurable, achievable,
timed and relevant indicators and require reliable and cor-
roborative evidence to assess them as well as providing a
clear link between funding and performance;

(d)

further steps should be taken urgently to correct the weak-
nesses in the management of EU funds in Bulgaria, and the
necessary monitoring maintained in Turkey;

(c) Community funds under budget support operations are provided
against performance. In this context, the Commission seeks to uti-
lise indicators that are measurable, achievable and relevant over
time or at a specific point in time. In many cases assessments of per-
formance based on reliable evidence are carried out by the donor
community in line with the Paris Declaration. Within this frame-
work the Commission is making considerable efforts to introduce
more output and outcome oriented performance indicators.

(d) Concerning Bulgaria, the Commission will continue to closely
monitor the management systems. An action plan has been set up
to ensure that improvements take place. The national authorities
need to take urgent action to redress the situation; the proposed
measures will be closely monitored and audited to verify that they
lead to the desired improvements.

Concerning Turkey, further to a request from the Commission, the
national authorities took action. The segregation of functions has
meanwhile been implemented and staffing levels increased substan-
tially. Constant monitoring and further follow-up remain key
priorities.

(e)

the delays in obtaining final replies on closure audits should
be reduced;

(e)

In spite of the exceptionally high number of reports received in
2007, the Commission has been able to absorb the workload: the
number of reports dealt with rose by 70 % when compared to 2006.

Many of the reports could not be closed at the year end since before
the Commission can adopt a final position, the auditee has to reply
to the Commission’s observations, and any irregularities need to be
examined. This takes an average of 3 to 4 months. Longer process-
ing delays have to be occasionally accepted due to the complexity of
the findings and as a consequence of the need of accuracy in the
application of possible financial corrections.

(f) DG ECHO should enhance its audit strategy by ensuring a
better coverage of operations at implementing organisation
level and more specifically at field level for all types of
partners.

(f) The Commission will give consideration to the Court’s recommen-
field audits

dation and has already increased the number of
in 2007.

Any increase in audit coverage above the current optimum would
give rise to increased costs to the detriment of policy implementa-
tion. This in turn could lead to further discontent among Commis-
sion partners who are called to implement humanitarian aid on the
ground.

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FOLLOW-UP OF PREVIOUS OBSERVATIONS

Follow-up of key Statement of Assurance
observations

8.34. A summary of the results of the Court’s follow-up of key
observations in recent Statements of Assurance may be found in
Annex 8.2.

Follow-up review of Special Report No 2/2006 on
the performance of projects financed under TACIS
in the Russian Federation

Introduction

8.35.
In April 2006 the Court published Special Report
No 2/2006 concerning the performance of TACIS Projects in the
Russian Federation (5). The main conclusion was that too many
projects had not achieved their objectives partly due to shortcom-
ings in Commission’s management:

(a)

lack of dialogue with the Russian authorities and beneficia-
ries to establish real needs;

(b) project objectives were imprecise and not measurable, and
underlying assumptions unrealistic (including time aspect);

(c)

co-financing to strengthen ownership was practically not
used;

(d)

the aspects of project evaluation, dissemination of project
results and sustainability were not given sufficient consider-
ation.

8.36. The Court’s recommendations accordingly aimed at
regarding these
improving the Commission’s management
aspects. The European Parliament (6) and the European Coun-
cil (7) also asked for a deeper dialogue between the Commission
and the relevant Russian authorities to identify the national needs,
priorities and direction accurately. The discharge authority also
called for a financing of only those projects which had clear and
mutually shared objectives and furthermore recommended more
co-financing, a more realistic appraisal of sustainability and to
ensure that evaluations were carried out and project results were
disseminated.

(5) OJ C 119, 19.5.2006.
(6) Working document No PE 374.332 of the Committee on Budgetary

Control.

(7) Draft Council Conclusions of 6 July 2006 No 196/06 Rev 1.

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8.37.
In its replies to the Special Report the Commission rec-
ognised that the weaknesses reported by the Court were, to a
large extent, valid but emphasised that it had already introduced
improvements to the management of its external assistance pro-
grammes. The Commission claimed that most of the shortcom-
ings had been resolved as a result of the reform of the EC external
assistance, which has taken place over the period 2002 to 2005,
in particular the devolution of responsibilities to Delegations.

8.38. The objective of this limited follow-up review, conducted
in the second half of 2007, was to examine how far the main rec-
ommendations had really been addressed by the Commission. For
this purpose relevant documentation was analysed and interviews
held with the Commission services. Furthermore a representative
statistical sample of 10 TACIS projects (out of 13) with a total
value of 27,3 million euro, finalised between December 2006 and
June 2007, was reviewed on the spot.

The Court’s observations

More productive dialogue

8.39. The devolution of management responsibilities from
Commission headquarters to its Delegation in Moscow has indeed
had a positive impact on the quality of the project identification
and preparation processes. There are signs that the dialogue with
the Russian authorities has improved ensuring a greater involve-
ment of the partner country. A higher number of beneficiaries
have been involved in the deliberations between the Commission
and the Russian central governmental authorities concerning the
identification of needs and prioritisation of topics. As a result pro-
gramming, project identification and preparation have improved
overall, and have taken into account more effectively the Russian
and EU partnership priorities.

8.39. The Commission welcomes the Court’s acknowledgement of the
progress made as a result of the process of devolution and of its positive
impact.

8.40. However cooperation with the Russian counterparts
could be developed further. The late signature by Russia of action
programmes still reduces the time available for effective project
implementation. Russian regional authorities benefiting from the
projects are still insufficiently involved in project preparation.
This is particularly regrettable as Russian authorities at the
regional level have shown more ownership and have made more
human resources available for project purposes than the imple-
menting partners at the central level.

8.40. The introduction of the Reform of External assistance (RELEX
Reform), notably by means of the devolution of EC external aid man-
agement to the EC Delegations, between 2002 and 2005, ensures a bet-
ter dialogue with, and greater involvement of, the partner country from
the preparatory phase to the final implementation. Although the volume
of financial assistance to the Russian Federation has been decreasing in
the past years the key objective of most projects is to contribute to the
development of laws, policies and/or practises in certain sectors in Russia.
In such projects, the natural partners are the central (federal) authorities.

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Improved objective setting but still long planning schedules

8.41. The new quality support review process at Commission
headquarters (‘QSG’) (8), which, since 2005, has also covered the
assistance programmes for Russia, has had a positive impact on
overall planning and objective setting. Project objectives were bet-
ter formulated and relevant to the ongoing Russian reforms. Con-
tractors have made use of logical frameworks when establishing
and executing their action plans. In general the projects audited
showed a higher success rate than was found in the initial audit.

8.41. The Commission acknowledges the Court’s comments on the
improvement of project planning and objective setting as a result of the
introduction of new quality control mechanisms.

8.42. However, due to the exhaustive programming procedures
to be applied by the Commission, lengthy planning schedules
have in the main persisted. For two projects reviewed the objec-
tives had been overtaken by events or had become, at least partly,
irrelevant.

8.42. The Commission acknowledges the length of programming and
consultation procedures as laid down in the regulation. The Commission
involves stakeholders from the beginning of the formulation process in
order to significantly reduce the risk of making projects obsolete. This
tendency is evidenced by the monitoring reports for Russia which have
demonstrated that the relevance and quality of project design ratings have
been steadily improving over the years since the introduction of the
RELEX reform.

8.43. The Common Spaces Facility has been designed by the Com-
mission in a way to provide rapid response to Russian requests for small
scale assistance.

8.44. The Commission and Russia are currently exploring possibili-
ties for creating a framework for the co-financing of projects. A large
number of co-financed projects are already being undertaken; this
includes the European Studies Institute and the NDEP and also grant
programmes such as the IBPP and the neighbourhood programmes. As
regards
contribute
EUR 122 million for the ENPI cross-border cooperation programmes
(which would be in addition to the funds of the Commission for the same
programmes).

the Russian government will

future,

the

8.43. The Court shares some beneficiary organisations’ criticism
of the EU’s procedures for not being capable of responding rap-
idly and in an ‘unbureaucratic’ manner to Russian requests for
assistance. This Russian demand for rapid, small-scale assistance
for necessary reforms could potentially be met through a new
‘Common Spaces Facility’, details of which were being negotiated
in 2007 to enable a rapid reaction to requests for short and
medium-term assistance to facilitate joint action under the four
‘common spaces’ (9).

Co-financing remains problematic

8.44. At the time of this follow-up the Commission and the
Russian Government were jointly considering technical solutions
for introducing national co-financing for all future assistance
measures under the European Neighbourhood and Partnership
Instrument (ENPI) (10).

(8) The ‘iQSG’ (inter-service Quality Support Group) was set up to
improve the quality of the main strategic and programming docu-
ments such as country strategy papers and national indicative pro-
grammes. The ‘oQSG’ (office Quality Support Group) were established
by EuropeAid to improve the quality of the preparation and formu-
lation stages of projects, mainly through performing peer reviews of
relevant documents.

(9) At the St. Petersburg Summit in May 2003, the EU and Russia agreed
to reinforce their cooperation by creating in the long term four ‘com-
mon spaces’ in the framework of the Partnership and Cooperation
Agreement. These are as follows: The Common Economic Space, cov-
ering economic issues and environment; the Common Space of Free-
dom, Security and Justice; the Common Space of External Security;
and the Common Space of Research and Education including cultural
aspects.

(10) Regulation (EC) No 1638/2006 of the European Parliament and of the

Council (OJ L 310, 9.11.2006, p. 1).

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8.45.
So far, apart from ‘in-kind’ contributions, there have been
no signs of a higher financial involvement of central, regional or
local players. Even the requirement for office accommodation to
be provided by the beneficiaries has become rare since the earlier
audit.

8.45. Co-financing was not a legal Tacis requirement in the period
2000-2001 (when project identification took place for the projects
reviewed by the Court in its Special report No 2/2006). The co-financing
possibilities of the Russian Federation at the time of the programming
were limited and the necessary mechanisms were not in place.

The Commission is facing the task of accomodating project requirements
with a law preventing foreign citizens from working on the premises of
the Russian Government.

8.46. As in the past, without increased national co-financing of
projects from the Russian Federation,
it remains difficult to
strengthen commitment and ownership.

8.46. The new financial instrument, the European Neighbourhood
and Partnership Instrument (ENPI), adopted in 2006, stipulates that
assistance shall normally be co-financed by the partner country to ensure
commitment and the sense of ownership of the different actions being
implemented.

Improved evaluation, however dissemination of project results
and sustainability still weak

8.47. While the projects audited have not been evaluated indi-
vidually by the Commission, the Court recognises an overall
improved situation: since 2006 the Delegation has initiated sev-
eral sectoral ex-post evaluations such as an impact study concern-
ing public administration and civil service reform and also
assessments of EU support in some other areas.

8.47. The Commission has opted in these cases for sectoral evalua-
tions to gain a fuller picture of the impact of EC assistance in such spe-
cific sectors.

8.48. However, dissemination of valuable results was still not
sufficiently ensured in the country. The primary project partners
at the central governmental level have been particularly weak in
this respect. Occasionally dissemination activities took place
within the projects but very few after the projects had ended.
Almost all websites created to bolster dissemination were aban-
doned after the projects ceased.

8.48. The Commission applies strict visibility and dissemination
guidelines as per the Communication and Visibility Manual for EC
External Actions on all its projects.

The responsibility for continued information availability and dissemina-
tion work after project finalisation lies with project beneficiaries.

8.49. The Commission decided in 2007 that the external project
monitors should not only supervise the projects during their life-
time but also produce ex-post monitoring reports. In the future
this should enable the monitors to report, at least indicatively,
also on sustainability aspects.

8.49. The Commission is examining the standard use of ex post
monitoring following the assessment of its pilot phase.

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8.50.
So far, the sustainability of project results has continued
to be problematic. There were no signs that the Commission had
undertaken specific measures to improve this aspect at the plan-
ning stage. Shortcomings were encountered in most projects
reviewed. This was, for example, due to a lack of action by the
central level recipients to draw up and pass the necessary laws,
regulations and rules to set up durable administrative structures.
In addition, there was often a lack of local finance for follow-up
activities.

8.50. The Commission considers that the projects reviewed have
mostly met their objectives. Concerning the sustainability the Commis-
sion has taken measures at the planning stage through its quality review
system. The quality review carried out by the Quality Support Groups at
identification and formulation stages, mechanism which the Court rec-
ognised has had a positive impact on overall project planning, is tasked
also to assess demonstrated ownership and commitment of the partner
government regarding the actions proposed. Thus since 2005 greater
assurances of project sustainability are already included at planning
stage.

Conclusions and recommendations

8.51. The Commission has, indeed, taken steps to improve the
effectiveness of its aid for Russia. As a result the quality of the
planning documentation is clearly better and the relevance of
projects to Russian reforms and the level of achievement of
immediate results have improved since the original audit. How-
ever, the remedial actions by the Commission are not yet suffi-
cient to strengthen ownership and to ensure a better sustainability
of project results.

8.51. Regarding the sense of ownership, in the case of Russia, the
Commission has built upon the Common Space political dialogue as a
basis for the cooperation and support initiatives emanating from the road
Maps of 2005. Thus, financial cooperation after 2005 focuses on policy
objectives already agreed between the two sides. The findings of the
results-oriented monitoring (ROM) reports of the past five years already
identify an increased quality of programming and implementation of
projects in the ENPI East region. The average ROM score for Russia in
2007 was 2,94 out of 4,00, making projects in this country among the
best performing in the ENPI East Region.

8.52. The Court recommends that the Commission:

8.52. The Commission agrees with the Court’s recommendations and:

(a) Ensures that, in principle, measures financed under the ENPI
are co-financed and adequately resourced by the Russian
recipients;

(b) Ensures that, in principle, measures financed under the ENPI
contain provisions for sustaining the projects’ results and for
guaranteeing the widest possible dissemination of results and
best practice in Russia;

(c) Shorten the projects’ planning process to allow the maxi-
mum time for their execution and ensure the availability of
rapid assistance when required in the context of the on-going
Russian reforms.

(a) The new European Neighbourhood and Partnership Instrument
stipulates that assistance shall normally be co-financed by the part-
ner country. As stated above, the RF government has already made
a significant commitment of funds for the programmes for which
there is already agreement.

(See paragraphs 8.44, 8.45 and 8.46.)

(b) The Commission pays particular attention to wide dissemination of
project outputs and results. The efforts taken to ensure greater own-
ership by project partners (consultation with stakeholders at pro-
gramming and planning stage, new quality assurance mechanisms)
will also warrant greater commitment to dissemination of projects’
results by the partners after the projects are over.

(c) Through the involvement of stakeholders at the planning stage, tim-
ing requirements for effective execution are better assessed and inte-
grated into the overall planning parameters. The Delegation’s
initiative for the Common Spaces facility can provide a flexible
mechanism to react more promptly to Russian requests for
assistance.
(See paragraphs 8.41, 8.42 and 8.43.)

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ANNEX 8.1

Assessment of the supervisory and control systems

Key internal controls (Commission services)

Ex-ante checks
on contracts and
payments

Monitoring of
project imple-
menting organi-
sations

External audits/
closure audits of
project claims

Internal audit

Key internal
controls in
national admin-
istrations

Overall
assessment

N/A

N/A

N/A

N/A

System concerned

EuropeAid Co-operation office

Enlargement

DG Humanitarian Aid (ECHO)

Legend:

Effective

Partially effective

Not effective

N/A

Not applicable: does not apply or not assessed

Note:

In relation to controls shown as ‘Partially effective’, this table should be read in conjunction with Annex 8.2, which indicates where progress has been made.

Result of transaction testing

Sample estimate of the proportion of transactions affected
by an error

11 %

Error rate

Between 2 % and 5 %

Court observation

Action taken

Court analysis

Commission reply

ANNEX 8.2

Follow-up of key Statement of Assurance observations

External relations and development

Weaknesses concerning implementing organisations

As in previous years the Court noted a material incidence of
error in the sample of payments tested at implementing
organisation level.

(Annual Report concerning the financial year 2006, para-
graphs 8.9 and 8.10)

Information on audits and their results

Neither External Assistance Management Reports (EAMRs)
nor the computerised management information system
CRIS (Common Relex Information System) contain com-
plete and systematic information on audits of projects and
their results.

(Annual Report concerning the financial year 2006, para-
graphs 8.22 and 8.23)

Enlargement

Extended Decentralised Implementation System (EDIS)

Weaknesses were noted at the level of the national admin-
istration supervisory systems in Romania and Bulgaria, con-
firmed by the delay in the EDIS accreditation for Phare in
Bulgaria.

(Annual Report concerning the financial year 2006, para-
graph 9.19)

Humanitarian aid

External audits

The majority of audits are done at the partners’ headquar-
ters. As the reality of expenditure can be more effectively
checked at field level, there should be more emphasis on
on-the-spot audits.

(Annual Report concerning the financial year 2006, para-
graph 8.18)

Terms of reference for financial audits to be launched by
beneficiaries have been revised.

Some of the effects of the new Terms of Reference were
already noticed in 2007 However, as they only became
compulsory from October 2007 onwards, the full benefits
will only be seen in the future.

The Commission welcomes the Court’s observation as regard the
improvement in the quality of the audit reports. However, it should
be pointed out that:

— the new terms of reference for financial audits launched by ben-
eficiaries are in force for all new contracts signed as from Feb-
ruary 2006,

— the new terms of reference for financial audits launched by the
Commission are available since July 2007 and have been made
compulsory since October 2007. However, the Commission
claims that the previous version of terms of reference used up
to 2007 were already of sufficient quality so as to allow the
Authorising Officers to take the appropriate decisions.

The reporting format used by Delegations on the imple-
mentation of the Annual Audit Plan 2007 has been modi-
fied. Further improvements have been made concerning
CRIS-Audit.

Improvements have been made. However, CRIS-Audit did
not come into full use during 2007 and audits managed by
project implementing organisations are still not included
in the reporting.

All the audits of the Annual Audit Plan 2007, as well as the
audits of the current year, have been entered in CRIS-Audit.

The Commission implemented close monitoring of the
progress made in the national management systems.

Despite the actions taken in this respect in the case of Bul-
garia the audit work carried out revealed that there is still
room for improvement at the level of the national super-
visory and control systems.

The Commission will continue to closely monitor the management
systems in tight cooperation with the Bulgarian authorities. The
proposed measures will be closely monitored and audited to verify
that they lead to the desired improvements.

A new Framework Contract was concluded in August
2006.

In spite of the new Framework Contract, in 2007 the
majority of audits were done at partners’ headquarters.

The Commission has doubled the number of field audits as com-
pared to the number undertaken in 2006. A further increase of
field audits is considered not to be cost-effective.

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CHAPTER 9

Education and Citizenship

TABLE OF CONTENTS

Introduction

Specific characteristics of Education and Citizenship

Specific assessment in the context of the Statement of Assurance

Audit scope

Legality and regularity of underlying transactions

Assessment of supervisory and control systems

The Lifelong Learning Programme

European Refugee Fund II and External Borders Fund

Ex-ante checks for Communication expenditure

Conclusion on Supervisory and Control Systems

Overall conclusion and recommendations

Follow-up of previous observations

Paragraph

9.1-9.4

9.1-9.4

9.5-9.26

9.5-9.6

9.7-9.11

9.12-9.24

9.13-9.18

9.19-9.21

9.22-9.23

9.24

9.25-9.26

9.27

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INTRODUCTION

Specific characteristics of Education and Citizenship

9.1. This chapter covers the Court’s findings on policy group
Education and Citizenship, which comprises the following policy
areas: 15-Education and Culture, 16-Communication; and
18-Freedom, Security and Justice. In 2007, commitments totalled
1 888 million euro (1 649 million euro in 2006) and payments
totalled 1 453 million euro (1 569 million euro in 2006). The
distribution of payments by policy area is given in Graph 9.1.
Budget implementation for the year 2007 was characterised by
the introduction of new multiannual programmes in the context
of the 2007-2013 Financial Framework (1).

9.1. As far as policy areas 15 and 18 are concerned, most of the legal
acts were adopted at the end of 2007 which resulted in specific con-
straints in terms of budget execution and launching of new financial
instruments.

Graph 9.1 — Education and Citizenship — breakdown of payments (*) by policy area

(*) Excludes administrative expenditure.
Source: 2007 annual accounts.

(1) Except for expenditure under policy area 16.

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9.2.
In policy area 15 — Education and Culture, the Commission
implements the budget through indirect centralised management by the
national agencies (68 %) and by an executive agency (22 %), the rest
being implemented directly by the Commission (7 %) and regulatory
agencies (3 %).

9.3. The implementation of the new multiannual programme in the
field of education was accompanied by the introduction of the single
audit approach in line with the roadmap to the internal control frame-
work adopted by the Commission. This has implied the development of
a common control framework as well as a renewed supervisory strategy
by the Commission.

The regulatory and contractual framework defines the types of controls,
minimum standards for internal control, common procedural require-
ments as well as classification and minimum number of checks made by
the National agencies. Moreover, DG EAC has also enhanced simplifi-
cation, notably on the basis of calculation of eligible expenditure (exten-
sive use of lump sum financing).

9.2. The Commission manages most of the expenditure in an
indirect centralised way or through shared management, with the
implementation of actions in the form of multiannual pro-
grammes delegated to National Agencies or similar management
structures in Member States (2). The responsible entities in Mem-
ber States allocate grants and contracts to projects or measures
carried out by private and public beneficiaries. The grants are usu-
ally paid in instalments: an advance upon signature of the grant
agreement, followed by interim and/or final payments which
reimburse eligible expenditure reported by the beneficiaries in
periodic cost statements.

9.3. The implementation of the programmes under the new
Financial Framework was accompanied by a change in the inter-
nal control structure with an increased level of responsibility for
the Member States (3). A National Authority thus has to give a
declaration of assurance in respect of the financial management
of expenditure in the Member State in question. The relationship
between Commission, National Agency and National Authority
has now become clearer than in previous years in each Member
State.

9.4.
EU support in the domains of Education and Citizenship is
characterised by a multiplicity of funding schemes for various
thematic areas and types of projects such as grants to actions in
favour of Citizenship or for mobility in the education and train-
ing sectors. Projects are carried out not only by teaching organi-
sations, but also by private firms and public administrations. Final
beneficiaries are individuals, mostly EU citizens.

(2) Management of some programmes such as the European Refugee Fund
and the External Borders Fund is, however, shared with Member States.
(3) In particular in relation to the Lifelong Learning Programme (LLP)
managed by the Directorate-General for Education and Culture (DG
EAC).

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SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

9.5. The specific assessment is based on:

9.5.

(a)

the substantive testing of a representative statistical sample of
150 (4) payments;

(b) an assessment of the operation of supervisory and control
systems for Communication policy area as well as of those
laid down in the respective EU decisions for the Lifelong
Learning Programme (LLP) (5), which relate to policy area
Education and Culture expenditure, and for the External Bor-
ders Fund (EBF) and European Refugee Fund (ERF) II (6),
which relate to policy area Freedom, Security and Justice
expenditure. The following elements of the supervisory and
control systems were assessed:

(b)

(i)

the Commission’s supervisory checks on the ex-ante cer-
tification or assessment of management structures car-
ried out by Member State authorities;

(ii)

the control systems in place for Education and Culture
and for Communication expenditure;

(ii) The ex-post control systems for lifelong learning (LLP) 2007-
2013 could not be assessed because no final payments were
made in 2007.

(c) a follow-up of the principal observations by the Court in

recent Statements of Assurance.

(4) The sample comprised 104 Education and Culture, 24 Freedom, Secu-
rity and Justice and 22 Communication payments. The sample com-
prised 95 advances and 55 interim and final payments (of which 19
for Communication); the latter represent a significantly higher risk.
(5) This programme, based on Decision No 1720/2006/EC of the Euro-
pean Parliament and of the Council (OJ L 327, 24.11.2006, p. 45) and
Commission Decision C(2007) 1807 final, accounted for 84 % of the
commitment appropriations for Education and Culture for the finan-
cial year 2007.

(6) These

on

two

programmes,

respectively Decision
based
No 574/2007/EC of the European Parliament and of the Council
(OJ L 144, 6.6.2007, p. 22), Council Decision 2004/904/EC (OJ L 381,
28.12.2004, p. 52) and Commission Decision 2006/401/EC
(OJ L 162, 14.6.2006, p. 20), accounted for 42 % of the commitment
appropriations for Freedom, Security and Justice for the financial year
2007.

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9.6.
In line with the expected expenditure pattern for the finan-
cial year 2007, the Court’s sample of payments for substantive
testing included 95 advances (7), 43 of which were subject to
straightforward conditions, typically the signing of a contract. For
the remaining 52 advances additional conditions applied (8). An
example of such additional conditions concerns the assessment
by the Commission of an ex-ante declaration of assurance by
Member States accompanied by a description of the management
system for the National Agencies in charge of the management of
the LLP.

Legality and regularity of underlying transactions

9.7. An important element of the legality and regularity of
underlying transactions in the policy group Education and Citi-
zenship, is the correctness of the declared cost. Overstatement of
expenditure by beneficiaries may be the result of errors concern-
ing:

(a)

eligibility: costs which are not allowed under the rules;

(b) occurrence: costs for which there is inadequate supporting

evidence; or

(c) accuracy: incorrectly calculated costs.

9.8. The Court found a material level of error of legality and/or
regularity in 21 % of the payments, of which 7 percentage points
were quantifiable errors and 14 percentage points were non-
quantifiable errors. Some payments were affected by more than
one error. Table 9.1 shows how many of the errors were found
in different types of payment and Table 9.2 how many in each
policy area.

9.8. Two of the errors identified at DG COMM reflect situations of
which the Directorate-General’s management was aware in advance.
They were obliged to accept these errors in order to be able to continue
the actions already undertaken. One of these two cases is an ‘exception’
and was the subject of a prior notification under internal standard 18.

Table 9.1 — How many advances and interim/final payments were affected by errors and how many were free from
errors?

Payments by regularity

Payments affected by serious errors

Payments affected by limited errors

Payments free from significant errors

Payments by type

Advances

9

2

84

95

Total

Interim/
final

16 (*)

4

35

55

Total

25

6

119

150

(*) One of these payments was managed by DG Employment.

(7) The financial year 2007 saw the start-up of major new programmes

under the 2007-2013 Financial Framework.

(8) These concern advance payments to National Agencies in Member
States that are in charge of the management of the Lifelong Learning
and Youth in Action Programmes.

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Table 9.2 — How many payments affected by errors or free from errors were in each of the three policy areas?

Payments by regularity

Payments affected by serious errors

Payments affected by limited errors

Payments free from significant errors

Legend:
EAC — Education and Culture
FSJ — Freedom, Security and Justice
COMM — Communication

Payments by policy area

EAC

13

4

87

Total

104

FSJ

7

0

17

24

COMM

Total

5

2

15

22

25

6

119

150

9.9.

Errors found included:

(a) unjustified allocation of indirect costs to the project (eligibil-

ity);

(b)

ineligible costs (eligibility);

(c)

inadequate supporting evidence to justify the costs claimed
(occurrence);

(d) commitments made by two Directorates-General (Justice,
Freedom and Security DG and Education and Culture DG)
before establishment of the related financing decision (the
annual work programme for five community agencies).

9.10. The errors occur in the context of a complicated legal
framework with multiple (sometimes unclear) eligibility criteria.
As in previous years, the Court found that beneficiaries are often
unable to properly justify personnel costs. As appears from the
tables above, interim and final payments are more affected by
errors than advance payments (almost one out of four interim or
final payments tested was affected by serious errors). This also
explains why relatively more errors were found in payments
authorised within the policy area Communication, where most of
the sampled payments were interim or final payments.

9.10. The errors concerning DG EAC are related to final payments of
actions under the former legal framework (1).

The design of the new programmes 2007-2013 has taken into account
the Court of Auditors’ recommendations of previous years to simplify the
rules and to make extensive use of lump sum financing. This should
reduce the error rate in the future.

9.11. Based on its audit work the Court concludes that pay-
ments made in the policy group Education and Citizenship are
affected by a material level of error of legality and/or regularity.
The error rate has been assessed by the Court as lying between
2 % and 5 % (see Annex 9.1).

(1) The results of the ex-post controls carried out by DG EAC, as presented in its

annual activity report 2007, do not identify a material level of error.

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9.12. The current DG EAC supervisory strategy is based on a range
of controls, including on-the-spot checks.

Furthermore, in recent years DG EAC carried out systems audits of all
national agencies as well as a number of monitoring visits. These on-the-
spot visits have allowed the Commission to have a clear picture of the
functioning of national agencies in 2007, at the beginning of the LLP.

9.13. The Commission has taken into account the recommendations
of the Court of Auditors from previous years and its own experience from
the systems audits and monitoring visits when designing the new super-
visory and control system and when assessing the management struc-
tures presented by the national authorities.

Assessment of supervisory and control systems

9.12. The Commission has delegated an important part of the
management of projects financed from its grants, to entities in
Member States. Many errors of legality and regularity can only be
detected (and thereby corrected) by performing on-the-spot
checks. However, undertaking such checks on each project each
year would result in prohibitive costs. The supervisory and con-
trol system for Education and Culture expenditure relating to the
2000-2006 programming period was largely based on ex-post,
on-the-spot checks. Ex-post controls carried out in 2007 under
this system, examined by the Court, did not reveal any significant
weaknesses. For the Financial Framework period 2007-2013, the
Commission seeks to obtain for its supervisory and control sys-
tem, in particular for Education and Culture expenditure, more
reliance from supervision and checks carried out by the Member
States. Important elements in this process are the ex-ante and
annual ex-post declarations of assurance given by the National
Authorities in respect of EU expenditure managed by the Mem-
ber States.

The Lifelong Learning Programme

9.13. The current system for the LLP is based, amongst other
things (9), upon an ex-ante and annual ex-post declaration of assur-
ance to be given by the National Authority in Member States in
respect of the quality of the management by National Agencies
and on related monitoring visits by the Commission in Member
States. It provides for the Commission to accept, conditionally
accept (i.e. with qualifications) or reject ex-ante declarations. In
case of conditional acceptance, the Commission may decide to
take precautionary measures applying to its contractual relation-
ship with the National Agency.

9.14.
In 2007 the Commission carried out an assessment of
ex-ante declarations of assurance submitted by Member States.
The completion of this assessment procedure was required before
entering into a contractual relationship with the National Agen-
cies.

(9) The control system principally comprises the primary controls carried
out by the National Agencies, the secondary controls carried out by
the National Authorities and the Commission supervision.

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9.15. The Court audited the assessment process for ex-ante dec-
larations. It concluded that the application in 2007 of the ex-ante
declaration procedure provided little assurance for the quality of
the management of the expenditure concerned in 2007 (see para-
graph 9.16). However, the Court considers the design of the sys-
tem — if properly applied — could provide an adequate basis for
assurance in the future.

9.15. The DG EAC supervisory system consists of: (a) monitoring vis-
its starting in 2007, (b) review of yearly declarations of assurance
including activity and financial reports due by April 2008, (c) on-the-
spot checks of methods of national controls and (d) financial audits.

The system provided for in the legal basis LLP 2007-2013 represents
an evolution of the 2000-2006 system taking into account the Court’s
recommendations. The Commission’s controls in earlier years contrib-
uted with those undertaken in 2007 to DG EAC’s conclusion that con-
trol
though significant
improvements are needed in the application of the control system at the
level of checks by national authorities.

systems provide

reasonable

assurance,

9.16. The Court noted the following weaknesses in the ex-ante
declaration procedure:

9.16.

(a) varying approaches taken by the National Authorities to
obtain a basis for the ex-ante declaration of assurance and dif-
ferences in the degree of disclosure of the procedures carried
out by these authorities. This has led to differences in the
scope of reliance placed by the Commission on the declara-
tions;

(a) The regulatory framework does not prevent the Commission from
accepting the different control systems put in place by the Member
States provided that certain objectives are met. Consequently, the
Commission has not imposed a ‘one size fits all’ model. However,
based on the first experience of declarations, the Commission has
further defined the control objectives for the checks by the national
authorities in guidelines provided to the Member States in Febru-
ary 2008.

(b)

(c)

the Commission’’s assessment was limited to a desk review of
systems and controls; therefore the effective operation of
these systems and controls was not verified by the Commis-
sion;

(b) DG EAC started on-the-spot visits in October 2007 and they con-
tinue in 2008 and following years. The first results of the on-the-
spot checks indicate the effectiveness of the overall desk review carried
out.

for all Member States, the Commission approved the decla-
rations with various qualifications to be remedied by the end
of 2007. The number of qualifications relevant to the 39
Agencies was 329 and varied between 3 and 13 per Agency.
Amongst these qualifications were some relating to key inter-
nal control features such as the segregation of duties, the
establishment of an internal audit function and the operation
of the financial systems. For these qualifications the Commis-
sion did not include a precautionary measure in its contrac-
tual relationship with the agencies concerned, as provided for
in the relevant Commission Decision. There was no rigorous
follow-up of corrective actions, deadlines were frequently not
respected and an important number (240) of qualifications
had not yet been lifted at the end of 2007;

(c) According to DG EAC classification (2), internal audit is a new
requirement and the absence of this control is not considered crucial
at the beginning of the operations for the new programmes. As
regard segregation of duties and operation of financial systems, the
qualifications are being followed up and will be reported on in due
course (see below). DG EAC has taken a proactive approach, and
when ‘blocking issues’ have been spotted they have been explained,
discussed and solved with the national authorities before the accep-
tance of the national agency and the signature of the legal commit-
ment, instead of issuing a formal report of non-acceptance.

In some cases, preventive measures have been taken, preventing the
first pre-financing to be paid until the actual implementation of the
remedial action agreed with the national authority.

(2) The classification of the qualifications was based on the compliance with the
Guide for National Agencies and the key elements of controls mentioned in
Article 18(7) of the EC/NA agreement.

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Due to the very tight time schedule (adoption of the legal basis in
December 2006 and by consequence adoption of the derived regu-
latory and contractual framework in 2007), most ex-ante decla-
rations were assessed in the second half of 2007. Therefore, DG
EAC considers that it is an achievement that more than a third of
the qualifications could be closed by end 2007. Qualifications will
be followed up in the exercise of the assessment of the yearly decla-
ration of assurance.

(d) certain criteria used by the Commission within the assess-
ment procedure were not adequately defined, leaving uncer-
tainty as to what is meant by completion of the assessment
process and what are the precautionary measures that could
be taken.

(d) DG EAC considers that the monitoring of the quality of the man-
agement systems is an ongoing activity and has put in place
adequate supervisory activities in order to do so. The acceptance of
a national agency is formalised in a letter signed by the Director-
General.

When the Commission identifies risks in starting a programme
while certain qualifications are still outstanding, it has the discre-
tionary power to take precautionary measures, such as the blocking
of the first prefinancing to national agencies.

DG EAC aims to adapt, on the basis of the results of its controls
and a risk based approach, the contractual and financial manage-
ment tools and procedures in order to minimise the risks identified
by the Court.

EAC is confident that the measures put in place to enhance
9.17.
national controls will be fully effective in the context of the yearly decla-
ration. Moreover, a system of financial corrections is anchored in the
legal instruments.

9.17. These weaknesses reduce the value of the ex-ante declara-
tion procedure as an element of the supervisory and control sys-
tem. In particular deficiencies in the internal control systems
identified in the qualifications mentioned above under para-
graph 9.16(c), represent a risk for the legality and regularity of
payments made to final beneficiaries and for future payments to
the National Agencies. A systematic follow-up of qualifications,
in the form of monitoring visits, and a close supervision by the
Commission of the annual ex-post declaration procedure is needed
to provide assurance for the coming years that National Agencies
meet the minimum requirements in respect of management and
control of expenditure.

9.18. The annual ex-post declarations of assurance (10) for 2007
were to be provided by the National Authorities of the Member
States by 30 April 2008 and therefore will be assessed by the
Court as part of the 2008 DAS audit.

9.18. By the end of June 2008 DG EAC had received for LLP 85 %
of the yearly reports and 50 % of the yearly declarations due, and DG
EAC had started assessing them. Formal reminder letters were sent by the
Director-General to the national authorities and the national agencies
that did not comply with their obligations. These measures have been
accompanied by the suspension of payments of the operating grant in the
cases where the final reports are missing.

(10) This declaration shall give assurance as to the reliability of financial
systems and procedures of the National Agency and the probity of
their accounts; it shall also give assurance that resources were used for
the intended purpose and that control systems guarantee the legality
and regularity of the underlying transactions.

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European Refugee Fund II and External Borders Fund

9.19. The Court examined the Commission’s preliminary
assessment of supervisory and control systems set up by Member
States for the European Refugee Fund (ERF) II which was estab-
lished in 2005 and which was still in operation in the year 2007.

9.20. The assessment by the Commission is based on informa-
tion sent by Member States and is still ongoing in the form of
monitoring visits to Member States. Its value as an instrument to
ensure that Member States supervisory and control systems are in
line with the regulatory framework is reduced by:

9.20.

(a)

shortcomings in the descriptions of management and con-
trol procedures provided by Member States;

(b)

the limited number of monitoring visits to Member States
(10 Member States out of the 26 (11) had been visited by the
end of 2007) and the fact that most of them were not per-
formed within the 12-month period following submission of
the systems’ descriptions as required by EU rules;

(c)

the fact that the follow-up procedure to monitor the progress
made by the Member States in implementing the corrective
measures should be more systematic.

(a) The Commission has improved the format of the description of
management and control systems for the Funds under the 2007-
2013 financial perspective. This was accompanied by the introduc-
tion of reinforced guidelines for Member States and by the
establishment of a team which will concentrate on analysing the
compliance of Member States’ systems.

(b) An action plan (3) is currently being carried out in order to finalise
by September 2008 those visits not carried out in 2007. Partial
coverage of the on-the-spot visits must also be assessed with respect
to the constraints linked to the introduction of the new 2007-2013
shared management funds and the preparation of the clearance of
the accounts under the Schengen Facility, a financial instrument
regarded as a major risk between 2004 and 2008. Furthermore,
partial coverage of the on the spot visits is partly offset by famil-
iarity with the systems implemented by Member States under ERF
I as a result of on-the-spot visits and/or audits carried out between
2005 and 2007.

(11) Denmark does not participate in the ERF II.

Delegation.

(3) See the Annual Activity Report 2007 of DG JLS’s Authorising Officer by

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9.21. As descriptions of the Member States supervisory and
control systems for the External Borders Fund (EBF) were only
provided (12) to the Commission in the last quarter of 2007, the
Commission could not assess the Member States’ systems by the
end of the year 2007. As a consequence there were no transfers
of funds to the responsible authorities in Member States during
the financial year 2007 (13).

Ex-ante checks for Communication expenditure

9.22. Before reimbursing the declared expenditure for interim
and final payments to projects, the Commission performs desk
checks of the cost statements submitted by beneficiaries.

Ex-ante checks are performed for all payments in the area of

9.22.
communication expenditure.

In the case of Communication expenditure, where most
9.23.
of the sampled payments were interim or final payments subject
to a higher risk, the Court found that 7 out of the 12 errors it
detected should have been identified by the Commission’s ex-ante
checks.

9.23. These errors will be monitored and the necessary corrective mea-
sures taken. In relation to the system as a whole, DG COMM had
already entered a reservation in its Annual Activity Report because of the
lack of supervision and had adopted the necessary measures to improve
matters, starting with the establishment on 1 November 2007 of a
monitoring unit which now incorporates the second level ex-ante con-
trol. This unit is also expanding its work in relation to ex-post controls,
including on-the-spot controls.

Conclusion on Supervisory and Control Systems

9.24. The Court’s assessment of the supervisory checks carried
out by the Commission (see paragraphs 9.12 to 9.23) for Educa-
tion and Culture expenditure and ERF II is that they are partially
effective. For the EBF no conclusion can be given as the descrip-
tions of Member States’ supervisory and control systems were not
provided to the Commission in good time. The system for ex-ante
checks for Communication expenditure is assessed as not being
effective (14). A summary of the results of the Court’s assessment
of selected supervisory and control systems may be found in
Annex 9.1.

(12) With the exception of Italy, Luxembourg and Malta who had not pro-

vided the required documents by December 2007.

(13) The payment appropriations for 2007 amounted to 95 million euro.
(14) A system for ex-post controls was only put in place in November
2007. Communication DG has created from 1 November 2007 a
centralised ex-post control function and has started carrying out
on-the-spot checks in 2008.

9.24. The assessment of the ex-ante declaration for the LLP is the
starting point of a process that will be completed by the assessment of
the yearly declaration from 2008 onwards and the full implementation
of the set of supervisory controls.

The Court’s assessment of non-effectiveness of the ex-ante checks for
communication expenditure is based on an analysis of, mainly, interim
and final payments, while 63 % of the payments selected for the policy
group Education and citizenship are advance payments. This assessment
should be seen in light of the fact that final payments are subject to a
higher risk than advance payments which are eligible as soon as the con-
tract is signed.

Measures have been, and will continue to be, taken in order to improve
the general level of checks.

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Overall conclusion and recommendations

9.25. Based on its audit work the Court concludes that pay-
ments underlying the policy group Education and Citizenship are
affected by a material level of error of legality and/or regularity.
The Court’s assessment of the supervisory and control systems is
that they were partially effective.

9.25. Many errors found by the Court related to payments of actions
under the former framework programmes in the area of education and
culture. The design of the new programmes for 2007-2013 in this area
has taken into account the Court of Auditors’ recommendation to sim-
plify the rules and to make extensive use of lump sum financing. This
should further reduce the error rate in the future. The lack of supervision
concerning communication expenditure was known by the Commission
and a reservation was introduced in the Annual Activity Report. Ex-post
controls have now been introduced, including on-the-spot controls.

9.26. The Court recommends the Commission to take the fol-
lowing actions:

9.26.

(a)

improve its preliminary assessment of supervisory and con-
trol systems set up by Member States for the LLP and ERF (15),
through more monitoring visits that focus on the existence
and implementation of management procedures and checks
as described by Member States;

(a) For the Refugee Fund II, an action plan defined in the 2007 Annual
Activity Report of DG JLS’s Authorising Officer by Delegation is
being carried out in order to finalise by September 2008 those vis-
its not carried out in 2007.

(b)

improve over time the quality of ex-ante checks carried out
in respect of Communication expenditure through adequate
check-lists to be used consistently.

As regards the Lifelong Learning Programme, the implementation
of this recommendation is an integral part of the multiannual
supervisory strategy started in 2007. The cycle will only be com-
pleted with the analysis of the yearly declaration of assurance in
2008 and related checks.

(b) Check-lists are already used. In order to use them more consistently
and to improve the quality of their checks before initiating a pay-
ment, more training will be provided for the authorising officers by
sub-delegation, the heads of administration and the operational
staff.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

9.27. The results of the Court’s follow-up of key observations
in recent Statements of Assurance are given in Annex 9.2. The
observations concern the absence of a reliable management infor-
mation system for late payments at DG EAC and the sharing of
results of ex-post checks which can increase their efficiency and
effectiveness.

9.27. The Commission refers to its replies in Annex 9.2.

(15) In 2008 the ERF II will be followed by the ERF III.

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ANNEX 9.1

Assessment of Supervisory and Control systems

Assessment by
the Commission
of the ex-ante
declaration of
assurance

N/A

N/A

Key internal control

Ex-post
declaration of
assurance

Ex-ante checks
on payments

Ex-post
checks/audits

Overall
assessment

N/A

N/A

N/A

N/A

could not be assessed

N/A

N/A

N/A

System concerned

Education and Culture Programmes (2000-2006)

Lifelong Learning Programme (2007-2013)

External Borders Fund

European Refugee Fund II

DG COMM

Legend:

Effective

Partially effective

Not effective

N/A

Not applicable: does not apply or not assessed

Result of transaction testing

Sample estimate of the proportion of transactions affected
by an error

21 %

Error rate

Between 2 % and 5 %

ANNEX 9.2

Follow-up key Statement of Assurance observations

Court observation

Action taken

Court analysis

Commission reply

1.

Late payments by Commission

1.1. DG EAC has no reliable management information on
its late payments

(Annual Report concerning the financial year 2004, para-
graph 6.27; Annual Report concerning the financial year
2005, paragraph 7.10; Annual Report concerning the finan-
cial year 2006, paragraph 7.29 and Annex 7.1)

Indicators’

Since early 2007, DG EAC has prepared a
report which
‘Financial
includes a section on late payments. This
monthly report is sent to the Directors’
board.

DG EAC should ensure that appropriate
and timely action is taken resulting from
the information contained in this report.

In addition to statistics on payment delays shown in ABAC, i.e. after
the actual payment has taken place, a report of payments still to be
made is presented to the Task Force Directors together with an analy-
sis by operational units. This monthly reporting has contributed to a
considerable reduction of late payments both in number and amount.

2.

Sharing of results of the ex-post checks can increase their efficency and effectiveness.

2.1 As with the ex-ante desk-reviews, sharing of the results
of the ex-post checks can increase their efficiency and effec-
tiveness. The Court found out that DG EAC do not systemati-
cally disseminate results to other DGs and have not established
any procedures. In November 2006 the Commission intro-
duced an audit tracking system to enable results of audits per-
formed by all Commission departments to be registered in a
central database accessible to all Directorates-General. The
Court examined the use of the tool and found that is not being
used yet by DG EAC.

(Annual Report concerning the financial year 2006, para-
graphs 7.18 to 7.23)

As a response to the Court’s observation
and as part of the Action Plan towards an
integrated internal control framework, the
Commission decided to integrate the audit
data within its financial and accounting
system in order to facilitate coordination
of the audits and sharing of the results
between DGs. In 2007, however, DG EAC
had not yet put in place the necessary pro-
cedures. In April 2008, they were still to
be formalised, to include retroactive shar-
ing of results of ex-post audits closed in
2007 via the ABAC system.

DG EAC should complete as soon as pos-
sible the sharing of the results of all ex-post
audits closed in 2007 and ensure the con-
sistent application of this procedure for
ex-post audits undertaken in the future.

Staff has been trained to use the ABAC tool and has received access
to it. Audit information can now be input in the system, as required
at Commission level.

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CHAPTER 10

Economic and Financial Affairs

TABLE OF CONTENTS

Overview

Specific assessment in the context of the Statement of Assurance

Introduction

Audit scope

Specific characteristics of the policy area

Main risks to legality and regularity

Audit Findings

Legality and Regularity of underlying transactions

Assessment of supervisory and control systems

Overall conclusion and recommendation

Monitoring elements

Results of the Audit of the Guarantee Fund for External Actions

Results of the Audit of the ECSC in liquidation

Follow-up of previous observations

Paragraph

10.1

10.2-10.35

10.2-10.15

10.4-10.5

10.6-10.9

10.10-10.15

10.16-10.31

10.16-10.19

10.20-10.31

10.32-10.34

10.35

10.36-10.39

10.40-10.42

10.43

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OVERVIEW

10.1. Chapter 10 consists of four parts. It firstly contains the
specific assessment in the context of the Statement of Assurance
(see paragraphs 10.2 to 10.34) followed by the results of the
recurrent audits on the Guarantee Fund for External Actions (see
paragraphs 10.36 to 10.39) and the European Coal and Steel
Community in Liquidation (see paragraphs 10.40 to 10.42). The
Chapter concludes with a follow-up of previous years’ observa-
tions.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Introduction

10.2. This Chapter covers the Court’s findings on policy group
Economic and Financial Affairs, which comprises the following
policy areas: 01-Economic and Financial Affairs; 02-Enterprise;
03-Competition; 12-Internal Market; and 20-Trade. In 2007
commitments totalled 697 million euro (639 million euro in
2006) and payments totalled 490 million euro (501 million euro
in 2006). The distribution of payments by policy area is given in
Graph 10.1. More detailed information on spending for the year
is provided in Annex I of this report.

Graph 10.1 — Economic and Financial Affairs — breakdown of payments by policy area

Source: 2007 annual accounts.
Note: Title 03 - Competition actually amounts to 0,1 %.

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THE COMMISSION’S REPLIES

10.3. The two principal areas of activities in terms of payments
are policy areas Enterprise (266 million euro) and Economic and
Financial Affairs (208 million euro). Budget implementation for
the financial year 2007 included new multiannual programmes in
the context of the 2007-2013 Financial Framework. Payments for
these new programmes are, however, still limited but will gradu-
ally increase during the coming years.

Audit scope

10.4. The specific assessment is based on:

(a)

substantive testing of a representative statistical sample of
one commitment transaction and 55 payment transactions
made by the Commission in 2007. This included the evalu-
ation of call for proposal and call for tender procedures;

(b) an assessment of the following supervisory and control sys-

tems:

— ex-ante desk checks for payments for procurement con-

tracts made by the Commission;

— ex-ante desk checks for payments for grants made by the

Commission;

— audit certification of project cost statements provided by

independent auditors;

— ex-post controls in the context of the Common sixth

Framework Programme (FP6) Audit Strategy.

10.5. The representative statistical sample of 55 payment trans-
actions included 15 advances and 40 interim, final or single pay-
ments; out of the 40, eight payment transactions were audited at
the level of the beneficiary. For these interim and final payments
sufficient evidence could only be gathered on the spot. The
remaining payment transactions could be audited on the basis of
documentation available at the level of the Commission.

Specific characteristics of the policy area

10.6. The audit covered payments made for many different
policy areas or (sub-)programmes. Table 10.1 shows all of those
with payments above 20 million euro (1).

(1) No such payments were made under policy areas Competition, Inter-

nal Market, and Trade.

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Table 10.1 — Payments above 20 million euro made for main policy areas or (sub-)programmes
in the policy area audited in 2007

Budg. title

Policy area or
(sub-)programme

Payments 2007
(million euro)

Relative to total payments

02

01

01

02

01

02

01

02

Sixth Framework Programme for research and technological develop-
ment

Financial instruments under the Multiannual Programme (MAP)

Financial instruments under Competitiveness and Innovation Frame-
work Programme (CIP)

Funding of traditional Agencies

EIF capital increase

Seventh Framework Programme for research and technological devel-
opment

Macroeconomic Assistance

Interoperable Delivery of pan-European eGovernment Services to pub-
lic Administrations, Businesses and Citizens (IDABC)

75,60

71,60

71,40

52,40

30,63

28,01

20,21

20,16

15,4 %

14,6 %

14,6 %

10,7 %

6,3 %

5,7 %

4,1 %

4,1 %

Total

370,01

75,5 %

10.7. Most of the payments are grants to final beneficiaries.
However, for a significant part of the payment transactions
audited, the underlying expenditure is incurred after the comple-
tion of procurement procedures. Within the substantive testing
sample of payment transactions, 29 of the payment transactions
selected related to grants and a further eight payment transactions
related to fiduciary accounts under the Multiannual Programme
(MAP) and the Competitiveness and Innovation Framework Pro-
gramme (CIP). Payments of contracts based on procurement rep-
resented 15 of all payment transactions audited. The participation
in the capital increase of the European Investment Fund (EIF)
accounted for the other three payment transactions audited.

10.8. The expenditure is mostly managed on a direct centralised
basis. However, the main programmes in policy area Economic
and Financial Affairs, i.e. the financial instruments under the MAP
and the CIP, are run using the indirect-centralised or joint man-
agement methods, respectively. These programmes are managed
by the EIF under ‘Fiduciary and Management Agreements’.

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10.9. Due to the specific nature of these financial instruments,
the audit of payments from the Commission to the EIF was lim-
ited to the transfer of the funds to fiduciary accounts (2). These
fiduciary accounts are used by the EIF to execute the programmes.

10.10. The risk that beneficiaries make cost overstatements largely
stems from the inherent complexity of the funding mechanisms provided
by the applicable regulatory framework, which are based on the reim-
bursement of actual costs. Resulting errors can mainly be detected by car-
rying out on-the-spot audits and desk controls. Therefore the Commission
has adapted its internal control system to increase assurance on the legal-
ity and regularity of the expenditure on a multiannual basis through a
higher number of audits and significantly increased coverage in terms of
budget.

The impact of the multiannual audit programme will gradually increase
over the four-year implementation period.

Main risks to legality and regularity

10.10. Certain grants are paid on submission of cost statements
by the beneficiaries (3). The main risk to legality and regularity of
grants is that cost statements are overstated and that this is not
detected by the Commission’s controls.

10.11. This risk is considered to be high. Because of the signifi-
cant number of cost statements, the Commission is not in a posi-
tion to check each one on the spot at the level of the beneficiary.
This mainly relates to research projects financed by policy area
Enterprise under the fifth and sixth Framework Programmes. See
also Chapter 7 of this Annual Report for other research expendi-
ture.

10.12. A different risk assessment applies for other grants
within the sample. Macroeconomic Assistance grants are paid to
national budgets of third countries showing successful progress of
their economic programmes. There is no requirement for cost
statements to be presented to the Commission. In this case the
risk of illegal or irregular payments is limited.

(2) These programmes comprise financial guarantee and investment
activities for small and medium enterprises (SMEs). For the execution
of the programmes, funds are transferred from the General Budget to
fiduciary accounts to cover possible future payments. These payments
may occur at some time during the duration of the programme which
can be several years after the initial funding of the fiduciary accounts
and may be subject to special audits of the Court. See also Annual
Report concerning the financial year 2003, paragraphs 10.5 to 10.27
(OJ C 293, 30.11.2004).

(3) In the payment transactions audited, this related to grants under the
fifth and sixth Framework Programmes and to one grant financed
under the MAP.

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10.13.
Similarly, the payments to fiduciary accounts for the
financial instruments under MAP and CIP and the funding of
agencies, in terms of legality and regularity, are not considered
high risks.

Procurement contracts usually foresee payment of fixed
10.14.
prices on delivery of goods and on rendering of services (e.g. the
main payments for IDABC). The main risks are that goods are not
delivered or services not rendered as contractually agreed and that
this is not detected by the Commission’s controls. This risk is not
deemed to be high due to the existing control measures.

10.15.
Finally, the payments for the participation in the EIF
capital increase are also not considered high risks in terms of
legality and regularity.

Audit Findings

Legality and Regularity of underlying transactions

10.16. The Court identified legality and/or regularity errors in
four of the 55 payment transactions audited. In three payment
transactions, the Commission’s ex-ante desk checks could not
have identified the errors (see paragraph 10.24). These three erro-
neous payment transactions were financed either under the fifth
or the sixth Framework Programmes for research and technologi-
cal development. In all three payment transactions serious quan-
tifiable errors as well as non-quantifiable errors were found (4).
Types of errors identified in this context are consistent with the
errors reported on in Chapter 7.

10.17. The errors occurred in the context of a complex legal
framework with numerous (not always clear) cost eligibility cri-
teria (5). The errors detected in the three transactions were due to:

— inadequate or missing supporting evidence to justify the cost
claimed (e.g. appropriate time sheets to evidence personnel
costs incurred or adequate evidence for travel costs);

(4) An error is considered ‘serious’ if the amount of the error is equal to

or above 2 % of the transaction value.

(5) See Annual Report concerning the financial year 2006, paragraph 7.11

(OJ C 273, 15.11.2007).

10.16. The Commission agrees that the three quantifiable errors in
research Framework Programme payments are material. The Commis-
sion underlines that the Court considers all errors equal to or above 2 %
‘serious’.

The Commission is taking the necessary action to recover the amounts of
funding relating to the ineligible costs.

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THE COMMISSION’S REPLIES

— the use of budgeted figures which does not comply with the

contractual requirements to use actual cost;

— claiming costs incurred outside the eligibility period;

— claiming costs not directly related to the funded project; and

— inclusion of various ineligible costs (e.g. value added tax).

10.18. The fourth payment related to a procurement procedure
for which the award decision was annulled by the Court of First
Instance in March 2008 (6). This annulment has given rise to a
financial risk for the European Community. This financial risk
was therefore considered a non-quantifiable error.

10.19. Overall, the commitment and payment transactions
audited were free from material error of legality and regularity.
The Court identified errors in four out of 55 payments transac-
tions audited. The financial impact is, however, below the mate-
riality threshold of 2 %.

Assessment of supervisory and control systems

Financial circuits and ex-ante desk checks on procurement
contracts

the
10.20. The Court assessed the financial circuits of
Directorates-General mainly involved in the implementation of
the policy areas Economic and Financial Affairs, Enterprise and
Internal Market (7). The consistent application of the financial cir-
cuit and adequate ex-ante desk checks were audited for each of the
15 payment transactions based on procurement procedures (see
paragraph 10.7) as well as for the payment transactions for the
EIF capital increase. Additional tests of controls were performed
at the Directorate-General which is mainly in charge of policy
area Internal Market as there were no transactions sampled relat-
ing to that policy area.

(6) Case T-345/03.
(7) The audit was confined to the two Directorates-General of the largest
policy areas and to one of the small policy areas. The other two small
policy areas Competition and Trade will be audited in the coming
years.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.21. The Court found that the financial circuits and the
ex-ante desk checks for procurement contracts are generally
designed in such a way as to prevent illegal and/or irregular pay-
ments. Although in one case the ex-ante controls did not detect
the error identified by the Court, the supervisory and control sys-
tems in respect of procurements were effective.

10.21. The Commission agrees that the financial circuits and the ex-
ante desk checks for procurement contracts are generally designed in such
a way as to prevent illegal and/or irregular payments and that the super-
visory and control systems in respect of procurements were effective.

Ex-ante desk checks for the main grant programmes

10.22.
For interim and final payments of grants based on cost
statements, the Commission performs ex-ante desk checks of the
cost statements submitted by beneficiaries before reimbursing the
declared cost. For grants not based on cost statements compliance
with the grant conditions are checked. The Court’s assessment
covered the ex-ante desk checks performed for each of the pay-
ment transactions involving interim or final payments of grants
within the sample (23 payment transactions).

10.23. The assessment showed that adequate checklists and cal-
culation sheets were used for grants based on cost statements (8)
which assisted in identifying errors as regards accuracy and to a
lesser extent eligibility and occurrence.

10.24.
Especially in the case of projects financed under the
Framework Programmes the ex-ante desk checks are inherently
limited and therefore constitute a weakness in the system. Con-
sequently, the Commission has to rely on an audit certification
and/or ex-post controls as regards eligibility and occurrence (see
paragraphs 10.11, 10.16 and 10.27 to 10.31).

(8) This relates to audited payment transactions financed under the Mul-
tiannual Programme (1 payment transaction), the fifth Framework
Programme (1 payment transaction), and the sixth Framework Pro-
gramme (7 payment transactions).

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

10.25. The Financial Regulation stipulates that the same cost
may not be financed twice by the General Budget (9). For projects
financed under the Framework Programmes which are based on
cost statements, the Commission is currently not in a position to
perform a coherent ex-ante desk check in this respect. A complete
and Commission wide database with all beneficiaries which would
allow better checks is not yet established.

10.25. Applicants under the research Framework Programmes (1)
have to declare that the proposed project does not receive other commu-
nity co-financing for the same actions. Should the declaration of the ben-
eficiary prove to be false, the beneficiary could (2) be excluded from all
contracts and grants financed by the Community and may also be sub-
ject to financial penalties (3). A beneficiary can participate in more than
one project and charge different costs to each of the projects. Costs
declared under other projects are in no case eligible.

While the Research DGs do share data on participants, given the setup
of FP6 the Commission is not convinced that the establishment of a
database for ex-ante checking such as that proposed by the Court would
eliminate the risk of a cost being financed twice. The proposed database
would require every line of every cost statement, for all Community funded
projects, including those under different forms of management, to be
encoded for all participants. The details would need to record, for
instance, hours worked on each day on each project for each project,
where this cost information is required under the contract. The informa-
tion needed in the database is not included in the normal contractual
reporting of the beneficiaries and would need to be requested specifically
by the Commission as it is only available during on the spot audits. The
cost of encoding, updating and verifying these data would be prohibitive.

For these reasons the Commission mitigates this risk with ex-post
on-the-spot audits. The Commission has implemented a data sharing
module for audits which allow the research DGs to exchange informa-
tion on planned and completed audits and which helps them to
co-ordinate their work, including the detection of possible duplicate
charging of costs.

10.26. As regards other grants and payments to fiduciary
accounts in the sample (10), the Court found that adequate check-
lists and calculation sheets exist. Ex-ante desk checks performed
generally ensure legal and regular payments.

(9) Article 111 of the Financial Regulation.
(10) This relates to audited payment transactions financed under the Com-
petitiveness and Innovation Framework Programme (4 payment
transactions), the Multiannual Programme (5 payment transaction),
and Macroeconomic Assistance (5 payment transactions).

(1) In application of the Financial Regulation (Article 111), which applies to all
applicants for Community funding, not just research program applicants.
(2) In accordance with Articles 94 and 96 of the Financial Regulation and in
Article 134(b) of its Implementing Rules, such as 94(b) on false declarations.

(3) Under article 134(b) of the Implementation Rules.

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THE COMMISSION’S REPLIES

Audit certification of project cost statements

10.27.
In general, the EU financial rules require that cost state-
ments above a certain threshold have to be accompanied by an
audit certificate. Within the policy area audited this is particularly
applicable to the sixth Framework Programme. In these cases,
cost statements are to be certified by an external auditor indepen-
dent from the contractor or by a competent public officer in the
case of certain public bodies. These audit certificates are a key
control for the Commission in research projects as the ex-ante
desk checks of the Commission are limited by nature (see para-
graph 10.24).

10.28. The Court assessed in each of the projects audited at the
level of the beneficiary and for which audit certificates were pro-
vided whether this control is effectively reducing the risks as
regards errors of eligibility, occurrence and accuracy.

10.29. The Court found that in three projects audited at the
level of the final beneficiary audit certificates were required. All of
those projects were financed under the fifth or sixth Framework
Programmes. In all three cases the certifying auditor issued an
unqualified opinion whereas the Court detected serious quantifi-
able errors. In addition, the independence of the auditor was ques-
tionable in one of these cases as the person was certifying
accounts partially prepared by himself.

10.29. The Commission agrees that the three quantifiable errors in
research Framework Programme payments are material.

The Commission has informed the beneficiary about the requirements of
FP6 concerning the independence of certifying auditors and invited him
to ensure that his cost statements are certified by an independent audi-
tor.

10.30. This finding is consistent with the previous year’s
results (11) and with results of the Commission’s own assessment.
The Commission found that in 95 contracts audited ex-post for
policy area Enterprise, 38 cases showed errors at the level of the
beneficiary although audit certificates were provided (12). This
indicates that audit certificates only partially function as a reliable
control.

10.30. The Commission agrees that the reliability of FP6 audit cer-
tification is not fully satisfactory, considering the remaining level of errors
noted in audits. Nevertheless, the overall level of errors in FP6 is lower
than the errors noted in uncertified cost claims related to FP5. This indi-
cates that audit certificates do contribute to improving the accuracy of
cost claims.

(11) See Annual Report concerning the financial year 2006, para-

graph 7.17.

(12) Figures are taken from an internal Commission database on the result
of ex-post audits finalised in 2007 for policy area Enterprise for
projects financed under the sixth Framework Programme.

As regards FP6, there is no compulsory certificate model. Nevertheless
the proposed model has been followed in most of the audit certificates
submitted.

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THE COMMISSION’S REPLIES

For FP7 the Commission has further improved the reliability of audit cer-
tificates by using ‘agreed upon procedures’, setting out in detail the audit
work to be performed by the certifying auditors and encouraging optional
certification of the cost methodology.

Ex-post controls in the context of the Common FP6 Audit
Strategy

10.31. The Court’s findings concerning the projects financed
under the sixth Framework Programme in policy area Enterprise
are similar to the findings reported on in Chapter 7.

Overall conclusion and recommendation

10.32. Based on its audit work the Court concludes that the
policy group economic and financial affairs is free from material
error. However, the Court draws attention to errors set out in
paragraphs 10.16 and 10.17 which, while not being material to
the legality and regularity of transactions for the policy group as
a whole, merit further attention.

10.33. The Court’s assessment of the supervisory and control
systems for policy group economic and financial affairs is that
they are effective. However, the Court draws attention to weak-
nesses set out in paragraphs 10.24 and 10.25 as well as 10.27
to 10.31 which, while not being material to the effectiveness of
the systems for the policy group as a whole, merit further atten-
tion.

10.34.
action in the conduct of payments for research contracts to:

In general the Commission should take appropriate

10.34.

— implement simplified financial rules as regards eligible costs;

— The Commission agrees that further simplification is needed with
regard to cost eligibility issues, particularly for personnel and indi-
rect costs. It draws attention to the legal limitations of FP7 and to
the difficulties to define lump sums and flat rates which are repre-
sentative.

Furthermore the ex-ante certification of cost calculation methodol-
ogy introduced in FP7 is a major step towards simplification.

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THE COMMISSION’S REPLIES

As regards the development of alternative funding mechanisms for
the future (such as lump sums and results based financing), the
Commission is open to discussions with the Court and other stake-
holders.

— continue to provide support to beneficiaries and certifying
auditors for the audit certification process and ensure the
effective implementation of the measures introduced to
improve the certification of cost statements for FP7;

— For FP7 the Commission has improved the reliability of audit cer-
tificates by using ‘agreed upon procedures’, setting out in detail the
audit work to be performed by the certifying auditors.

The Commission is also encouraging the optional certification of the
cost methodology on the basis of implementing measures, which are
currently being finalised.

— remind beneficiaries that auditors chosen shall be indepen-
dent and shall not certify cost statements which were fully or
partially established by themselves;

— The Commission accepts this recommendation.

— establish a database allowing coherent checks of whether the

same cost is financed twice by the General Budget.

— While the Research DGs do share data on participants, the Com-
mission is not convinced that the establishment of a database for
ex-ante checking such as that proposed by the Court would elimi-
nate the risk of a cost being financed twice given the current state of
the technology. The proposed database would require every line of
every cost statement, for all Community funded projects, including
those under different forms of management to be encoded for all
participants. The details would need to record, for instance, hours
worked on each day on each project for each project, where this cost
information is required under the contract. The information needed
in the database is not included in the normal contractual reporting
of the beneficiaries and would need to be requested specifically by the
Commission as it is only available during on the spot audits. The
cost of encoding, updating and verifying these data would be pro-
hibitive and the data protection implications would be serious.

For these reasons the Commission mitigates this risk with ex-post
on-the-spot audits. The Commission has implemented a data shar-
ing module for audits which allows DGs to exchange information
on planned and completed audits and which helps them to coordi-
nate their work, including the detection of possible duplicate charg-
ing of costs.

Monitoring elements

10.35.

See Annex 10.1.

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THE COURT’S OBSERVATIONS

THE COMMISSION’S REPLIES

RESULTS OF THE AUDIT OF THE GUARANTEE FUND FOR
EXTERNAL ACTIONS

the Guarantee Fund for External
10.36. The purpose of
Actions (13) (‘the Fund’), which guarantees loans to third coun-
tries, is to reimburse the Community’s creditors (14) in the event
of a beneficiary’s defaulting and to avoid direct calls on the Com-
munity budget. The administrative management of the Fund is
carried out by Directorate-General for Economic and Financial
Affairs (ECFIN) while the EIB is responsible for its treasury man-
agement (15). At 31 December 2007, the Fund’s total resources
were 1 152 million euro compared to 1 379 million euro at
31 December 2006. The difference is mainly due to the repay-
ment to the General Budget of 261 million euro because of the
accession of Romania and Bulgaria to the EU on 1 Janu-
ary 2007 (16).

10.37.
From 1 January 2007 onwards, the provisioning of the
Fund was changed from an ex-ante to an ex-post mechanism and
only includes one annual payment to the Fund. In order to avoid
high payments from the General Budget due to defaults on loans
or guaranteed loans, a smoothing mechanism was introduced
which should limit annual budget payments to the Fund
to 200 million euro. No guarantee calls were made to the Fund
in 2007.

10.38. The EIB applies a benchmark index to the Guarantee
Fund. Although the annual performance of the Fund portfolio in
2007 amounted to 3,1 %, this is – 0,16 % below the benchmark
index.

10.38. The severe financial crisis which has perturbed markets since
August 2007 has had an unavoidable impact on market values and thus
performance. During the current crisis bond portfolios with a higher
credit risk than their benchmarks suffered relative losses because of the
widening of spreads caused by the ‘flight to quality’ into triple-A gov-
ernment bonds.

Although the benchmark index was not achieved, the positive absolute
annual performance of 3,1 % compares favourably with large privately
managed global bond funds where a number experienced negative total
performances.

(13) Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994
establishing a Guarantee Fund for external actions (OJ L 293,
12.11.1994, p. 1), as last amended by Regulation (EC, Euratom)
No 89/2007 (OJ L 22, 31.1.2007, p. 1).

(14) Principally the EIB, but also Euratom external lending and EC macro-

financial assistance (MFA) loans to third countries.

(15) Management agreement between the EIB and the European Commu-
nity, as last amended on 28 April 2002 and 8 May 2002. A new
supplementary agreement was signed on 25 February 2008.

(16) As loans and guarantees for Member States are not covered by the
Fund, the amount relating to the accession countries had to be repaid
to the General Budget.

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THE COMMISSION’S REPLIES

10.39. The Court found that the Guarantee Fund was managed
during 2007 in a satisfactory manner.

RESULTS OF THE AUDIT OF THE ECSC IN LIQUIDATION

10.40. 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 (17). Their net worth, referred to as the European Coal and
Steel Community in Liquidation (ECSC i.L.),
is allocated to
research in the coal and steel industry.

10.41. The winding-up of the financial operations of the ECSC
i.L. is proceeding in compliance with the relevant legislation,
including the multiannual financial guidelines.

10.42. At 31 December 2007, the total assets of the ECSC i.L.
was 2 152 million euro compared to 2 174 million euro at
31 December 2006. The net profit for 2007 was 5,3 million euro
compared to 23,8 million euro in 2006. This was mainly due to
a loss on sales of available-for-sale bonds and other financial
charges (18). The performance of the ECSC i.L. portfolio was
2,13 % for the whole year 2007 while the benchmark, serving as
reference rate for the ECSC i.L., was 2,75 %. The relative annual
performance was thus – 0,62 % and therefore outside the accept-
able range of – 0,44 % defined by the Commission.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

10.43.

See Annex 10.2.

(17) 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).

(18) Variation of net present value on new Member States’ contribution of
the Coal and Steel Research Fund and negative change of fair value of
financial derivatives.

10.42. The decrease of profit (18 million euro) referred to the wind-
ing up operations (ECSC in liquidation) and is mainly due to the decrease
of the total amounts of cancelled commitments linked to the operating
budget (7 million euro) and the increase of other financial charges
(11 million euro), linked to net present value calculations.

The spread range is a management monitoring mechanism designed to
assess the behaviour of the ECSC i.L. portfolio compared to its bench-
mark in normal times.

In a crisis context, such as the current ‘sub-prime crisis’ which began in
August 2007, spreads should be expected to behave abnormally and
thus fall outside ranges calculated on the basis on historical data from
non-crisis times.

Although the benchmark index was not achieved, the positive absolute
annual performance of 2,13 % compares favourably with the large pri-
vately managed global bond funds where a number experienced negative
total performances.

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ANNEX 10.1

Assessment of the supervisory and control systems

Key internal control

Audit
certification

N/A

N/A

Ex-post control

Overall assessment

N/A

N/A

System concerned

Adequate
checklists

Ex-ante checks

Procurements

Grants other than research projects

Grants for research projects

Legend

Effective

Partially effective

Not effective

N/A

Not applicable: does not apply or not assessed

Results of transaction testing

Sample estimate of the proportion of transactions affected
by an error

Error rate

7,3 %

Below 2 %

ANNEX 10.2

Follow-up of the Court’s previous observations

Court observation

Action taken

Court analysis

Commission reply

Phasing out of risk capital operations

In its Annual Report, concerning the financial year 2005,
paragraphs 11.6 to 11.13, the Court reported on the
Phasing-out of five risk capital operations: The European
Community Investment Partners
(ECIP) managed by
DG AIDCO,
the MEDIA programmes managed by
DG INFSO and three programmes managed by DG ECFIN
(Venture consort, Eurotech Capital Programme and Joint
Venture Programme). Main observations of the Court were
as follows:

ECIP Programme

The Commission did not make significant progress in the
closure of the programme and 1 276 of most problematic
files were still open. Key financial information was missing
for numerous files. Erroneous payments were not followed
up and recovery orders were either not followed up or not
issued. In March 2006 DG AIDCO estimated that the
amount still to be recovered is 21 million euro.

MEDIA programmes

The loans and subsidies granted to the audiovisual industry
were subject to particularly complex conditions which
require constant monitoring over a long time. Up to 2005,
the MEDIA II programme was administered by a Technical
Assistance Office (TAO) on behalf of the Commission. The
Court found that, for financial operations before 2001, the
Commission services had no detailed accounting informa-
tion for the programme nor a specific auditor’s certificate for
the financial operations involved. For more recent transac-
tions, documentation was often incomplete and there was
inadequate follow-up, leading, in certain instances, to recov-
ery orders not being issued in a timely manner.

In its reply the Commission announced that at the end of
2006 all files will be reviewed and that the Commission
will be able to provide complete and reliable financial
statements.

In the meantime, new and simplified checklists for closing
were implemented. As at 31.12.2007, 77 ECIP files were
still pending for a global amount of 6,1 million euro, cov-
ered by 4,7 million euro of value reduction.

Despite the progress made in the closure of the files, the
Court is still not yet able to confirm the reliability and the
completeness of the financial statements linked to ECIP
mainly due to uncertainties linked with the closure of the
actions (pending legal actions, Financial Intermediary hav-
ing lost contact with a beneficiary) and inconsistencies in
the valuation, mainly due to incorrect value adjustments.
No ending date for the liquidation of the ECIP programme
can be given.

The liquidation of ECIP has continued during 2007 and the first
part of 2008. End May 2008 there remained 30 actions to be
closed compared to the more than 1 700 files open in March
2005. Since then the Commission has recovered more than
31,5 million euro. Tracing certain partners requires complex
inquiries and has taken a considerable time.

We have been prompted to revise the figures as a result of infor-
mation obtained from partners during these inquiries. These fig-
ures are often called into question and we update the accounts only
if an acceptable degree of confidence is attained.

The management of the MEDIA programme files were
taken over by the new Education Audiovisual and Culture
Executive Agency (EACEA) on 1 January 2006.

The EACEA has set up specific procedures, enhanced the
monitoring framework, ensured the standardisation of the
files’ documentation and built a database which should
provide the detailed financial situation of each file.

The database used to manage MEDIA programmes,
amounting to 35,5 million euro covered by a related value
reduction of 24,85 million euro, is a major achievement.
However, inaccuracies have been found in this database
and improvements are still necessary.

The Commission takes note of the Court’s comment about the
establishment of the database. The Commission recognises that the
Court’s findings have led to the valuation of potential entitlements
being reduced from 35,5 million euro to 35,0 million euro. The
Commission intends to review these entitlements in order to deter-
mine whether their ‘potential’ status should not lead to any changes
in the accounting principles which applied hitherto.

2
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.

Court observation

Action taken

Court analysis

Commission reply

ECFIN programmes

The audit of three programmes managed by DG ECFIN
(Venture Consort, Eurotech Capital Programme and Joint
Venture Programme) showed weaknesses in the manage-
ment, follow-up and closure of the programmes.

In its reply, the Commission referred to the implementa-
tion of a proactive and overall strategy of closure of the
remaining files and that it considers to have reasonable
assurance on the accuracy and completeness of the figures
related to the three programmes.

At the end of 2007 the Eurotech Programme was entirely
closed. For Venture Consort there are two projects open
for an original contribution of 0,4 million euro and for
Joint Venture Programme there are four open projects for
an initial investment of 1,1 million euro. The amounts are
completely written down and the accounts were confirmed
by the Court.

The Commission agrees with the Court’s analysis for the situation
at end 2007. Meanwhile, in 2008, the Commission has closed
two further projects, one under Venture Consort and another under
the Joint Venture Programme.

.

1
0
1
1
2
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5

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CHAPTER 11

Administrative and other expenditure (1)

TABLE OF CONTENTS

Introduction

Specific characteristics of administrative and certain operational expenditure

Specific assessment in the context of the Statement of Assurance

Audit scope

Specific observations

Multiplication factor applicable to salaries

Parliament

Council

Commission

Court of Justice

Court of Auditors

European Economic and Social Committee

Committee of the Regions

European Ombudsman

European Data Protection Supervisor

Overall conclusions

European Union Agencies

European Schools

Paragraph

11.1-11.4

11.3-11.4

11.5-11.25

11.5

11.6-11.25

11.7-11.11

11.12-11.13

11.14

11.15-11.18

11.19

11.20

11.21

11.22

11.23

11.24

11.25

11.26-11.27

11.28-11.29

(1) See paragraph 11.1.

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THE COURT’S OBSERVATIONS

INTRODUCTION

11.1. This chapter covers the Court’s findings on the adminis-
trative expenditure of the institutions, as intended in Article 1 of
the Financial Regulation (2), included in heading 5 (‘Administra-
framework’ (3),
tion’) of the ‘financial
further administrative
expenditure of the Commission not included in the above-
mentioned heading 5 (4), and the operational expenditure relative
to titles 24-27 and 29 of the Commission section of the general
budget (5). In 2007 payments totalled 8 230 million euro. The
distribution of payments among the abovementioned domains is
given in Graph 11.1 and the subdivision by institution in
Table 11.1.

In addition, the chapter covers the Agencies and other

11.2.
decentralised bodies, and the European Schools.

Specific characteristics of administrative and certain
operational expenditure

11.3. The appropriations relating to the administrative expen-
diture are managed directly by the institutions and are used to pay
the salaries, allowances and pensions of persons working for the
institutions, as well as rent, purchases and miscellaneous
expenses.

11.4.
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 Annex 11.2.

(2) European Parliament, Council, Commission, Court of Justice, Court of
Auditors, European Economic and Social Committee, Committee of
the Regions, European Ombudsman, European Data Protection Super-
visor.

(3) Interinstitutional Agreement between the European Parliament, the
Council and the Commission on budgetary discipline and sound finan-
cial management (OJ C 139, 14.6.2006).

(4) Article 41(2) of the Financial Regulation requires that in the Commis-
sion section of the general budget the administrative appropriations of
a title be grouped in a single chapter. This is done in chapter 01 of
each title. Not all these administrative appropriations relate to the
administrative expenditure included in ‘heading 5’, some relate to
other headings of the Financial Framework.

(5) Title 24 concerns ‘fight against fraud’, title 25 ‘Commission’s policy
coordination and legal advice’, title 26 ‘Commission’s administration’,
title 27 ‘budget’ and title 29 ‘statistics’.

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Graph 11.1 — Payments by domain

Source: 2007 annual accounts.

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

Heading 5 of the Financial Framework

Table 11.1 — Payments in 2007

(million euro)

1 329

558

4 333

265

107

109

68

7

4

6 780

932

518

8 230

Commission’s administrative expenditure under other headings (1)

Commission’s operational expenditure (1)

(1) For 2006 this expenditure was covered by other chapters of the Court’s Annual Report concerning that year.

Total

230

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THE COURT’S OBSERVATIONS

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE
STATEMENT OF ASSURANCE

Audit scope

11.5. The Court examined the legality and regularity of the
transactions underlying the accounts of the expenditure defined
in paragraph 11.1, in order to provide a specific assessment in the
context of the statement of assurance. The audit included the
examination of a representative statistical sample of 56 transac-
tions drawn from all of the abovementioned expenditure, as well
as the examination of supplementary samples of transactions
concerning subjects where specific risks had been identified dur-
ing previous audits (6). The Court also assessed the supervisory
and control systems applied by each institution to determine
whether they satisfy the requirements of the Financial Regulation.

Specific observations

In 2007, all the institutions operated satisfactorily the
11.6.
supervisory and control systems required by the Financial Regu-
lation and the transactions tested were free from material error of
legality and regularity. However, the Court draws attention to the
findings set out below, which, while not being material to the
overall conclusions set out in paragraph 11.25, should be taken
into consideration by the institutions concerned.

Multiplication factor applicable to salaries

11.7. Article 7 of Annex XIII to the Staff Regulations (SR), in
force since 1 May 2004, provides for a progressive application of
new salary scales, using a multiplication factor that reduces, with
respect to the new, higher, salary scale, the monthly basic salary
payable to an official recruited before 1 May 2004.

11.8. Article 5(5) SR states that ‘identical conditions of recruit-
ment and service career shall apply to all officials belonging to the
same function group’. The findings set out below show that this
is not the case for the application of the multiplication factor.

(6) The subjects are: the application of the multiplication factor in calcu-
lating staff’s pay, the employment of contract staff and payments on
carried over appropriations.

11.7-11.11.

THE REPLY OF THE EUROPEAN PARLIAMENT

Article 7 of Annex XIII to the Staff Regulations introduced a complex
mechanism, of which multiplication factors are an essential part, for
ensuring the transition between the old and new salary scales applicable
to the permanent and temporary staff of the European institutions. The
inherent complexity of the mechanism in question was compounded by
its being enshrined in a text which is singularly opaque (and even self-
contradictory) and thus admits to no single unambiguous interpretation.
While Parliament would have welcomed interinstitutional guidance or
consensus as to the operation of this mechanism in 2005, when it had
to devise rules for its own pending promotions, no such guidance or con-
sensus was forthcoming. In applying the system as it did, Parliament was
mindful of the enormous difficulties and anomalies inherent in an over-
lengthy transitional period (and of the Commission’s pre-reform explana-
tory document, which envisaged an end of the dual salary system

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THE COURT’S OBSERVATIONS

11.9. A new multiplication factor is calculated after the first
promotion and, henceforth, recalculated every two years in accor-
dance with the salary increases resulting from the salary scale. At
institutions other than the Parliament, the staff do not receive the
full amount of salary shown on the salary grid as long as the
recalculated multiplication factor is less than 1. The Parliament
applies a multiplication factor equal to 1 two years after the first
promotion to everyone having, after promotion, a multiplication
factor less than 1. There were 503 such cases in 2007. This pro-
cedure resulted in higher expenses as compared to the applica-
tion of the procedure followed by the other institutions.

11.10. When a multiplication factor greater than 1 is calculated
after a promotion, the Economic and Social Committee maintains
this multiplication factor two years after the promotion, when the
first advancement in step takes place, whilst the other institutions
reduce the multiplication factor to 1 after the first advancement
in step, and translate into seniority in step the part of the multi-
plication factor exceeding 1. By continuing to apply a multiplica-
tion factor higher than one, instead of converting into seniority
in step the balance over 1, the Economic and Social Committee
grants its staff a financial advantage which the other institutions
do not grant.

by 2006). While it is now clear that other institutions have followed a
different approach, Parliament considered the goal of shortening the
transition to be a worthwhile objective. It has to be noticed that the two
systems tend to converge relatively quickly, especially when the impact of
second promotions is taken into account. In any event, an adaptation of
the current practice may well give rise to considerable legal problems.

The Secretary-General, however, will appoint an administrative working
group which will be charged to examine the subject in depth and to pro-
pose, if necessary, adequate adaptations.

11.10.

REPLY OF THE ECONOMIC AND SOCIAL COMMITTEE

The Committee understands that some other institutions’ practice is to
convert a multiplication factor greater than 1, after the first advance in
step, into an ‘equivalent’ seniority. It is however not convinced that this
practice is the best reading of the Staff Regulations.

In this respect, the Committee is aware of several complaints of Com-
mission staff, in accordance with Article 90(2) of the Staff Regulations,
(F-22/07,
and of one
L/Commission).

to the Court of

formal appeal

Justice

Therefore, the Committee continues to apply its current practice while
waiting for the Court’s ruling. In order to preserve the interests of the
institution, all Committee officials concerned have been informed that its
current practice is susceptible to revision. The Committee will then align
its practice, if necessary retroactively, to the said ruling. In this way, pro-
vided the other European institutions do the same, Committee staff will
be treated identically to all other officials of European institutions.

At the Committee, for a total of 237 promotions so far since the entry
into force of the new staff Regulations (years 2004, 2005, 2006
and 2007), there were 25 cases of officials with a multiplication factor
higher than one.

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THE COURT’S OBSERVATIONS

11.11. The provisions of the Staff Regulations concerning the
multiplication factor should be interpreted and implemented by
all the institutions in the same way, so as to ensure a legal and
regular application of the Staff Regulations by all institutions
enabling thereby an equal treatment of their staff.

Parliament

Payments on carried over appropriations

11.12. On 20 December 2006 the Parliament signed a contract
concerning the supply of high definition broadcast cameras for
the D5 building in Brussels. It was stated in the contract that the
final payment of 30 % of the total price had to be made after the
receipt and installation of the equipment. A final payment of
1 486 598 euro, which included the abovementioned 30 %
(637 111 euro) took place on 19 December 2007. Although the
equipment had been received, the document reporting the final
acceptance of the goods, dated 17 December 2007, stated that
the on-site installation would not occur before June 2008. The
final payment (30 %) should not have been made, because it was
not yet required by the contract, the corresponding amount of
appropriations carried over from 2006 should have been can-
celled and, for any payment due in 2008, appropriations from the
2008 budget should have been used.

Follow-up to observations from past Annual Reports

11.13. The audit gave rise to remarks on actions and decisions
taken as a follow-up to observations from past Annual Reports
concerning the reimbursement of accommodation costs incurred
on mission, the allowances for assistance to Members of the Euro-
pean Parliament and the additional pension scheme for Members
of the European Parliament set out in Annex 11.2.

Council

Follow-up to observations from past Annual Reports

11.12.

THE REPLY OF THE EUROPEAN PARLIAMENT

The contract for the purchase of high-definition broadcast cameras for
the D5 building in Brussels provides for the final payment of 30 % of
the contract price after final receipt and installation of the equipment.

Acceptance was confirmed on 17 December 2007, but the installation
was not performed because the building was not available.

The final payment was made on 19 December 2007 taking account of
the following points: checks on the operation of each camera were deemed
equivalent to their installation; the contractual guarantee for two years
from the date of final reception was extended by six months; the supplier
undertook to install the equipment as soon as the building became avail-
able.

The authorising officer considered these points to be sufficient to enable
the final payment to be made using the appropriations carried over from
2006.

11.14. The audit gave rise to remarks on actions taken as a
follow-up to observations from past Annual Reports concerning
payment of additional annual
in
Annex 11.2.

taken set out

leave not

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THE COURT’S OBSERVATIONS

Commission (7)

Rental expenditure (DG RELEX)

11.15. City taxes for an amount of around 44 000 euro relat-
ing to a building rented by a Commission Delegation were paid
on behalf of the lessor on the basis of an oral agreement, whereas,
according to Article 88 of the Financial Regulation, contracts
should be concluded in writing. A request for reimbursement was
sent to the lessor, however not in the form of a ‘debit note’ com-
plying with the requirements of Article 78(3) of the rules imple-
menting the Financial Regulation (in particular, no deadline for
the payment of the debt was set and the debtor was not informed
that, failing payment by the deadline, recovery could be made by
offsetting). Also no recovery order was established. The non-
compliance with the abovementioned rules put the financial
interests of the European Union at risk. Had the Delegation issued
a timely and formally correct debit note, the claim could have
been recovered by offsetting against the payment of the annual
rent for 2008.

Payments on carried over appropriations (OIL)

11.16.
In December 2007, to avoid cancelling carried over
appropriations, OIL paid a fifth advance of 55 000 euro on ser-
vice and maintenance charges for a building. According to the
lease contract only four quarterly advances had to be paid. As the
payment of a supplementary advance did not correspond to ‘an
obligation duly contracted’ (Article 9(4) of the Financial Regula-
tion), it should not have been made and a corresponding amount
of carried over appropriations should have been cancelled.

(7) The Commission departments responsible for most of the administra-
tive expenditure are the following: Directorate-General (DG) for Per-
sonnel and Administration (ADMIN), DG for Translation (DGT), DG
for Interpretation (SCIC), DG for Communication (COMM), DG for
External Relations (RELEX), Office for Infrastructures and Logistics —
Luxembourg (OIL), Office for Infrastructures and Logistics — Brussels
(OIB), Office for the Administration and Settlement of Individual
Entitlements (PMO), European Personnel Selection Office (EPSO) and
Publications Office (OPOCE).

11.15.

REPLY OF THE COMMISSION

The Commission accepts that the Delegation concerned did not follow
adequate administrative and financial procedures. Management and
supervisory systems in the delegation are now the subject of a thorough
review and where necessary appropriate measures will be taken.

Regarding the payment of city charges on behalf of the owner of a rented
building, the Commission agrees with the Court that the Delegation
should have included a specific clause in this respect in the sublease con-
tract.

Regarding the lack of a recovery order and the lack of a deadline for pay-
ment, the observations and comments of the Court are accepted, as
adequate procedures required by the Financial Regulations and its Imple-
menting Rules were not applied.

However, the Delegation followed the matter and recovered the total pre-
paid amount (the total amount equivalent to EUR 44 000, approxi-
mately, was reimbursed to the Delegation by the owner of the rented
building on 14 April 2008). Following this reimbursement, there is, in
practice, no financial incidence for the Commission, in spite of the non-
compliance with adequate procedures.

11.16.

REPLY OF THE COMMISSION

OIL manages only administrative appropriations, which, under
Article 179(1) of the Financial Regulation, are non-differentiated
appropriations. In this connection, appropriations corresponding to obli-
gations duly contracted at the close of the financial year can be carried
over only to the following financial year (Article 9(4) of the Financial
Regulation).

The lease for the building in question provides, as regards cost state-
ments, for four advances and one final statement. At the end of 2007
OIL was informed that the co-owners of this building had rejected the
2006 final statement of costs established by the managing agent of the
building. The amount still payable is estimated at over EUR 55 000.

So as not to doubly affect the budgetary principle of annuality, once in
respect of the 2006 appropriations carried over which would have been
cancelled and once in respect of the 2008 appropriations, OIL wrote
to recover an additional advance of
asking the managing agent
EUR 55 000. At the beginning of June 2008 the final statement for
2006 had not yet been established.

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THE COURT’S OBSERVATIONS

Salary payments (PMO)

Ex-post checks carried out by the PMO showed that, fol-
11.17.
lowing a file processing error, in January 2007 a total amount of
over 365 000 euro was paid to 118 former temporary agents,
even though they no longer worked for the Commission. The
error was not detected by ex-ante controls before the final payroll
run, which illustrates a lack of sufficient control over the pro-
cesses involved in running the payroll. Recoveries are still being
made in 2008.

Follow-up to observations from past Annual Reports

11.18. The audit gave rise to remarks on actions taken as a
follow-up to observations from past Annual Reports concerning
reimbursement of accommodation costs incurred on mission and
family allowances set out in Annex 11.2.

Court of Justice

Contract staff

11.19. The audit noted that the decision of the administrative
committee of the Court of Justice relative to the recruitment and
employment of contract staff does not set out any selection pro-
cedure for ‘contract staff for auxiliary tasks’ (Article 3b of the
‘Conditions of employment of other servants of the European
Communities’). Consequently, there are no formal selection pro-
cedures established by the Court of Justice for the recruitment of
staff under short-term contracts to replace certain persons who
are unable to perform their duties. For example, when language
units at the translation service need to replace translators on
maternity leave, the selection of replacement contract staff is at
the discretion of the relevant head of service. Because of the
absence of specific selection procedures for ‘contract staff for aux-
iliary tasks’ (including, for example, the use of selection commit-
tees) the provisions applied at the Court of Justice do not
in
ensure that

the requirements

in such cases

set out

11.17.

REPLY OF THE COMMISSION

At the time of the incident, most data used in the salary calculations were
transmitted from Sysper (the staff data management system — since
then replaced by Sysper2) to the salary calculation system NAP.

On 28 December 2006, a correction of data in Sysper was itself erro-
neous, leading to errors in the data transmitted. This was not detected
by the ex-ante checks, because these had already taken place at that date,
and was not picked up by the usual last minute control mechanisms, due
to the holiday period and the reduced presence in the services.

The error was detected by mid-January 2007, but the amounts had
already been paid out to the former temporary officials. For most of the
cases the recovery presented no problems, and at this time (July 2008),
9 of the 118 cases are still open (including reimbursements in instal-
ments).

The services involved have been reminded of the operating instructions
concerning deadlines for last minute interventions and the period between
last ex-ante controls and the final payroll run has been shortened.

Given the exceptional circumstances, the Commission is of the opinion
that this does not warrant the conclusion that this incident illustrates the
lack of sufficient control.

11.19.

REPLY OF THE COURT OF JUSTICE

As a general rule, the Court of Justice only recruits ‘Article 3b’ contract
staff either to replace officials or temporary agents who are absent on
maternity or sick leave or, in exceptional circumstances, to bring in addi-
tional staff to help deal with an unusually heavy workload in a particu-
lar area. Such recruitments are usually for brief periods. In addition, most
of these needs are for specialised staff (for instance, lawyer linguists), not
readily available to come to Luxembourg for a brief employment con-
tract.

These two factors — the brevity of the employment contracts and the fre-
quent paucity of qualified candidates — explain why specific selection
procedures have not been formally imposed so far for the recruitment of
‘Article 3b’ contract staff.

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THE COURT’S OBSERVATIONS

Article 82(1) of the ‘Conditions of employment of other servants
of the European Communities’ (8) are fully complied with and any
risk of the appearance of non-objective selection is avoided.

We have no knowledge of any case where it could be said that the deci-
sion to recruit could have been influenced by non-objective elements. As
regards, in particular, the replacement of lawyer linguists on maternity
leave in the translation units, referred to by the Court of Auditors, all
recruitments of ‘Article 3b’ contract staff were decided upon by the
Authority authorised to conclude contracts (i.e. the Registrar of the
Court), on a proposal from the head of unit, the director general for
translation having been consulted. Ad hoc selection procedures were often
put in place. All agents recruited for these auxiliary tasks fulfilled the
requirements for the job as regards legal qualifications, knowledge of lan-
guages and experience in legal translation.

Court of Auditors

11.20. The Court of Auditors is audited by an independent
external audit firm (9) which issued an independent assurance
report concerning the legality and regularity of the use of the
Court’s resources, and the control procedures in place for the
period from 1 January 2007 to 31 December 2007. The report
states that, in the auditors’ opinion, ‘nothing has come to our
attention that causes us to believe that in all material respects and
based on (identified) criteria, (a) the resources assigned to the
Court have not been used for their intended purposes, and (b) the
control procedures in place do not provide the necessary guaran-
tees to ensure the compliance of financial operations with the
applicable rules and regulations’. The report will be published in
the Official Journal.

European Economic and Social Committee

11.21. Apart from the point mentioned in paragraph 11.10,
the audit did not give rise to any significant observations.

Committee of the Regions

11.22. The audit did not give rise to any significant observa-
tions.

(8) ‘Contract staff shall be selected on the broadest possible geographical
basis from among nationals of Member States and without distinction
as to racial or ethnic origin, political, philosophical or religious beliefs,
age or disability, gender or sexual orientation and without reference to
their marital status or family situation’.

(9) PricewaterhouseCoopers, Société à responsabilité limitée, Réviseur

d’Entreprises.

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THE COURT’S OBSERVATIONS

European Ombudsman

11.23. The audit did not give rise to any significant observa-
tions.

European Data Protection Supervisor

11.24. The audit did not give rise to any significant observa-
tions.

Overall conclusions

11.25. Based on its audit work, the Court concludes that the
transactions underlying the accounts of the expenditure referred
to in paragraph 11.1 are free from material error and the super-
visory and control systems in place conform to those required by
the Financial Regulation.

EUROPEAN UNION AGENCIES

11.26. Audits of the European Union’s Agencies and other
decentralised bodies are the subject of Specific Annual Reports
which are published separately in the Official Journal. The Court
audited 27 Agencies for the financial year 2007. Their budgets
totalled 1 243,5 million euro in 2007. The principal data con-
cerning the agencies are set out in Table 11.2.

11.27. The Court issued unqualified opinions on the reliability
of the accounts and the legality and regularity of the underlying
transactions for all Agencies (10) audited except for the European
Police College (11) and the European GNSS Supervisory Author-
ity (12).

(10) The Court’s annual reports on the Agencies accounts are presented on
its site (http://www.eca.europa.eu) and will be published in the Offi-
cial Journal, except for the Euratom Supply Agency.

(11) Qualified opinion with regard to the reliability of the accounts and the

legality and regularity of the underlying transactions.

(12) Disclaimer of opinion with regard to the reliability of the accounts.

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THE COURT’S OBSERVATIONS

EUROPEAN SCHOOLS

11.28. 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’ 2007 budget of 240,7 million euro was financed
mainly by a Commission grant (129,2 million euro) and by con-
tributions from the Member States (51,9 million euro) (13). The
principal data concerning the European Schools are set out in
Table 11.3.

11.29. 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.

(13) Source: General introduction to the 2008 budget of the European

Schools.

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Table 11.2 — EU agencies — Principal data

First year of
financial
autonomy

Budget (1)
(million euro)

Authorised posts

2007

2006

2007

2006

Agencies and other decentralised bodies of the
European Union

Headquarters

Agencies

Euratom Supply Agency

European Centre for the Development of Voca-
tional Training

Luxembourg

Thessalonica

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

Translation Centre for the Bodies of the Euro-
pean Union

Luxembourg

Community Plant Variety Office

Office for Harmonization in the Internal
Market

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

European Railway Agency (3)

European Centre for Disease Prevention and
Control

European Agency for the Management of
Operational Cooperation at the External
Borders (3)

Bramshill

The Hague

Cologne

Lisbon

Parma

Heraklion

Valenciennes

Stockholm

1960

1977

1977

1994

1994

1995

1994

1995

1995

1995

1996

1998

2000

2006

2002

2003

2003

2003

2005

2006

2005

Warsaw

2006

European GNSS Supervisory Authority (3)

Brussels (4)

Community Fisheries Control Agency (3)

Vigo

2006

2007

Executive Agencies

Executive Agency for Competitiveness and
Innovation (3)

Brussels

2006

Education, Audiovisual and Culture Executive
Agency (3)

Brussels

Public Health Executive Agency (3)

Luxembourg

2006

2007

0,3

17,4

20,2

35,1

25,5

13,8

163,1

46,1

13,4

0,2

16,8

19,8

37,1

27

13

139

40,9

11,2

276

211,7

14,9

14,5

250

7,4

18,4

72

48,2

52,2

8,3

16,6

28,9

42,2

7,0

5

6,9

36

4,1

14,1

9,4

271

5

14,7

65,7

44,7

40,2

6,8

14,4

17,1

19,2

7

—

5,6

29,2

—

—

97

94

116

100

82

441

200

42

647

42

46

108

22,5

147

467

153

300

44

116

90

49

39

38

35

83

28

—

95

94

115

105

77

424

189

41

675

40

37

108

22

112

328

132

250

44

95

50

28

30

46

75

—

3 212

(1) Payment appropriations.
(2) Formerly the European Monitoring Centre on Racism and Xenophobia.
(3) Agency having acquired its financial independence in 2006.
(4) Provisonal seat.

Total

1 243,5

1 080,7

3 626,5

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239

Table 11.3 — European schools — Principal data

European School

Country

Office

Luxembourg I

Luxembourg II

Brussels I Uccle

Brussels II (Woluwé)

Brussels III (Ixelles)

Brussels IV

Mol

Varese

Karlsruhe

Munich

Frankfurt

Alicante

Bergen

Culham

Belgium

Luxembourg

Luxembourg

Belgium

Belgium

Belgium

Belgium

Belgium

Italy

Germany

Germany

Germany

Spain

Netherlands

United Kingdom

2007

9,3

35,1

7,0

30,4

29,3

26,2

2,4

11,2

17,9

11,9

18,9

10,3

11,3

9,8

11,1

Budget (1) (2)
(million euro)

Grant received from
the Commission (2)
(million euro)

2006

2007

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

7,5

21,1

2,9

21,0

19,2

16,7

1,8

6,0

8,8

3,5

0,4

3,8

4,2

4,6

5,9

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

School Population (3)

2007

—

3 376

897

3 045

2 893

2 621

172

657

1 317

1 001

1 666

978

1 017

554

827

2006

—

3 285

922

2 954

2 919

2 646

—

654

1 317

964

1 599

937

990

563

832

Total

242,1

231,1

127,4

127,1

21 021

20 582

(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 2007.
(3) Source: 2007 Annual report of the Secretary General to the Board of Governors of the European Schools.
N. B.: Variations in totals are due to the effects of rounding.

ANNEX 11.1

Results of transaction testing of administrative and certain operational
expenditure (1)

Sample estimate of the proportion of transactions affected by error

Error rate

7 %

below 2 %

(1) This table does not include data about Agencies and European Schools.

Court observations

Action taken

Court analysis

Reply

ANNEX 11.2

Follow-up to observations from past Annual Reports

Reimbursement of accommodation costs incurred on
mission

Annual Reports concerning the financial year 2004,
paragraph 9.6, and 2005, paragraph 10.7:

In the meantime, the Council, the European Economic and Social Committee and the
Committee of the Regions have amended their internal rules so as to ensure compli-
ance with the Staff Regulations.

The Parliament and the Commission should
amend their internal rules in order to ensure that
accommodation costs incurred on mission are
reimbursed in compliance with the Staff Regula-
tions, which were amended following a Commis-
sion’s proposal agreed upon by the Parliament.

The European Parliament’s replies

The European Parliament is in a unique situation compared to other institutions in that very large
numbers of its officials have to travel between Brussels, Luxembourg and Strasbourg in the course
of their normal work. Such travelling between the three working places amounts to 91 % of EP
missions and 88 % of the mission expenses. As a measure of sound financial management it is
therefore more practical to apply the flat-rate system for staff travelling between the three working
places. For missions outside the three working places, as foreseen by the Staff Regulations, reim-
bursement on the basis of supporting documents applies.

Since the Court’s previous observations on Parliament’s rules on missions, the institution’s inter-
nal auditor has conducted an audit of the mission regime. The conclusions in his report will give
rise to a number of modifications to be proposed by the Secretary-General.

The Commission’s replies

The Commission’s mission guide has been reviewed in order to take the Court’s remarks into
account. There were delays in adoption of this text owing to several points of disagreement with
the staff representatives, which have now been resolved. The text is expected to be adopted in Sep-
tember 2008 at the earliest.

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 not produce any evidence
of having incurred accommodation costs.

Allowances for assistance to Members of the European
Parliament (MEPs)

Annual Report concerning the financial year 2006,
paragraphs 10.10 to 10.12:

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 documen-
tation to demonstrate that the MEPs have actually
employed or engaged the services of one or more
assistants and that the duties or services 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 presented within reasonable
time, appropriate measures, such as suspension of
payments and/or issuing of recovery orders, should
be initiated for the sums not justified.

The Parliament should:

On 13 December 2006 the Bureau amended the rules governing the Parliamentary
Assistance Allowance. According to the amended rules, which apply to allowances
paid in 2006 and 2007, invoices and fee statements issued by paying agents and ser-
vice providers are no longer required to be submitted by MEPs, but must be retained
by them. Instead, MEPs are required to submit copies of ‘statements of expenditure’ and
‘statements of amounts invoiced’ issued by paying agents and service providers.

The Bureau decided at its meeting of 10 December 2007 that for the period from
July 2004 to the end of 2005 ‘statements of expenditure’ and ‘statements of amounts
invoiced’ would also suffice.

By the end of the Court’s audit for 2007, the vast majority of documents justifying the
2006 and 2007 expenditure had been submitted and regularised by the Parliament’s
administration. Progress had also been made in collecting documents concerning the
2004 and 2005 expenditure.

In 2008 the internal auditor of the European Parliament finalised an audit of the par-
liamentary assistance allowance and reported on weaknesses in this area.

In the resolution of 22 April 2008 on the discharge for 2006, the Parliament called on
its administration to correctly and consistently apply the rules and to improve imple-
menting procedures and communication with MEPs.

In the same resolution, the Parliament also noted that the Bureau had entrusted the
Secretary-General to make contact with the Commission and the Council with a view
to establishing a new set of rules and had charged a working group to assess the opera-
tion of the existing rules and to propose amendments as necessary.

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Court observations

Action taken

Court analysis

Reply

— ensure that all MEPs concerned provide ‘state-
ments of expenditure’ and ‘statements of
amounts invoiced’ for each year;

The European Parliament’s replies

— The administration is doing everything it can to ensure that the documents regularising par-
liamentary assistance expenses are submitted in accordance with the rules. A letter was sent
to all Members concerned in February and March 2008 to inform them of the list of assis-
tants and the amounts to be regularised, as well as the 31 May 2008 deadline for the sub-
mission of documents relating to the 2004 and 2005 financial years.

.

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For the 2007 regularisation exercise, a first reminder was sent to all the Members concerned
in April. At the end of June, all the Members who had not submitted documents or who had
submitted incomplete documents for one or more of these years received a reminder from the
administration, signed by the Secretary-General. Members who did not act on this final
reminder will have payments to their assistants suspended or will have the recovery procedure
provided for in Article 27(3) of the Rules governing the payment of expenses and allowances
to Members initiated against them.

The regularisation exercise relating to parliamentary assistance expenses in 2006 has been
completed. In every case where documentation was absent or incomplete (0,2 % of expendi-
ture), the recovery procedure is under way. The same approach will be adopted for years in
relation to which regularisation is in progress (July to December 2004, 2005 and 2007).

During an ex-post check by the department responsible for managing the payments at the
end of 2007, it was found that in a very limited number of cases the required social security
attestation was lacking. In accordance with Article 14(5)(a) of the Rules governing the pay-
ment of expenses and allowances to Members, the payments concerned were suspended in every
case where full documentation had not been submitted by the deadlines communicated to the
Members concerned.

For the 2004 and 2005 regularisation exercises, the documentary evidence sent by Members
as at 12 September 2008 covered respectively 99,45 % and 99,33 % of the payments made.
For the 2007 exercise the corresponding percentage is 99,63 %. For the three years as a
whole, at this stage in the examination of the documentary evidence by the departments con-
cerned, the documents accepted as providing adequate justification cover some 91 % of the
payments made. Some of the documents received are still being processed and some have given
rise to requests for additional information. Updated data will be sent to the Court before the
15 October 2008 deadline.

— further enhance controls over the parliamen-
tary assistance allowance, including random
checks of invoices that the MEPs have in their
possession;

— The Bureau was informed with the principle of doing more in-depth controls based on ran-

dom checks once the deadline indicated in the last reminder has expired.

— take action to ensure that, when sufficient
documentation to demonstrate that services
paid for have been provided has not been sub-
mitted, appropriate measures, such as the sus-
pension of payments and/or issue of recovery
orders, are initiated for the sums not justified;

— Regarding 2006, from the beginning of 2008 the Secretary-General sent letters to a dozen
Members informing them of the initiation of the recovery procedure provided for in
Article 27(3) of the Rules governing the payment of expenses and allowances to Members on
account of failure to comply with the rules on parliamentary assistance expenses, and ordered
that payments be suspended in around 10 cases.

— further develop the regulatory framework
applied for the parliamentary assistance allow-
ance, in order to address its weaknesses.

— On 10 March 2008 the Bureau, on a recommendation of the Conference of Presidents,
charged the Secretary-General to ensure the consistent application and implementation of the
European Parliament’s internal rules on the reimbursement of Parliamentary assistance
expenses, entrusted the Secretary-General to make contact with the Commission and the
Council with a view to establishing a new set of rules and charged a working group to assess
the operation of the existing rules and to propose amendments as necessary.

On 9 July, as part of the procedure for the adoption of the implementing provisions for the
Statute for Members, the Bureau adopted new rules based on the recommendations of the
working group.

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Court observations

Action taken

Court analysis

Reply

Additional pension scheme for Members of the European
Parliament

Annual Report concerning the financial year 2006,
Table 10.2:

No rules have been established defining the liabilities and responsibilities of the Euro-
pean Parliament and of the members of the scheme in case of a deficit

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.

Appropriate rules should be established defining
the liabilities and responsibilities of the European
Parliament and of the members of the scheme in
the event of a deficit.

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 over-
time, such payments are not in accordance with
Article 56 of the Staff Regulations.

Even though the General Secretariat has taken action in order to gradually eliminate
the stock of compensatory leave for A and B staff granted before 31 December 1997,
payments were still made in 2007 to compensate for additional leave not taken.

The payment of additional leave not taken should
be discontinued.

The European Parliament’s replies

Confronted with an actuarial deficit, as at the end of 2004, of 43 765 745 euro, the issues relat-
ing to the management of the voluntary additional pension scheme for Members were debated by
the Bureau at its meeting of 30 November 2005. On that occasion it approved the conclusions of
its working group on the pension fund, namely:

— that the Rules governing the payment of expenses and allowances to Members should be
amended so as to increase the total contribution rate from 39 % to 45 % with effect from
1 January 2006;

— that a working group should be asked to submit, on the basis of an independent actuarial
study, a report on the financial situation of the Fund following the approval of the Statute for
Members;

— it undertook to take the necessary measures, as part of the implementation of the new Statute,
to guarantee the payment of the additional pensions after the entry into force of the new Stat-
ute in 2009;

— it noted that, once these measures had been adopted, it would be possible to draw up the con-
vention governing the respective relations and responsibilities of the Fund and of Parliament
as mentioned by the Court of Auditors.

As the plan of measures adopted by the Bureau on 30 November 2005 indicates, it is only ‘once
these measures have been adopted that it will be possible to draw up the convention governing the
respective relations and responsibilities of the Fund and of Parliament as mentioned by the Court
of Auditors’. In accordance with this strategy, an actuarial study commissioned by Parliament was
completed at the end of 2007 and has been forwarded to the Bureau working group responsible
for drafting implementing provisions for the Statute for Members. Article 77 of the draft imple-
menting provisions concerns the situation of the pension fund.

At the meeting of 19 May 2008, the Bureau decided to abandon the system whereby Members’
contributions were being deducted from their general expenses allowance. The Secretary-General
sent a communication informing members of the pension fund of the change in procedure before
the summer recess.

On 9 July 2008, the Bureau adopted the implementing provisions, making it possible to proceed
with the next stage. On the basis of what has been decided in these provisions on the future of the
pension fund, the negotiations on a convention governing the relations and responsibilities between
the fund and Parliament will begin soon and will probably be completed at the beginning of next
year.

The Council’s replies

As indicated in the replies to the Court of Auditors’ reports for the previous years, the General Sec-
retariat of the Council is aware of the Court’s position concerning the payment of stocks of unused
compensation days accumulated before 31 December 1997 and fully shares the observation of
the Court about the necessity to bring the ongoing regularisation process to an end as soon as pos-
sible. As the Court has observed, a compulsory system aiming at the complete liquidation of all
remaining stocks by 2009 has been put into place.

In this context, the General Secretariat recalls its opinion that the continuation of the system for
the progressive liquidation of these stocks until its final phase in 2009 is an inevitable conse-
quence of the obligation to respect acquired rights as well as the fundamental principles of Euro-
pean law of legitimate expectations and equal treatment.

Furthermore, the General Secretariat recalls that it has taken measures already in 1997 in order
to prevent any repetition of such a situation in the future.

The General Secretariat has also passed a decision that will prevent any residual payments linked
to compensation days upon retirement. It should also be noted that the General Secretariat intends
to finish work aimed at eliminating during 2009 all non-financial compensations not being in
conformity with article 56 of the Staff regulations.

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Court observations

Action taken

Court analysis

Reply

The follow-up of the different types of allowances is still mainly based on the volun-
tary transmission of information by the staff. In February 2008, there were still
703 cases where the most recent check had been carried out before 2005, represent-
ing more than 37 % of the total of staff based in Brussels receiving the household
allowance and having no dependent children.

Further action needs to be taken by the Commis-
sion to verify family allowances on a regular basis.

The Commission’s replies

Priority is currently given to the verification of the right to household allowances. As of May 2008,
one member of staff is dedicated to this task in order to catch up the delays incurred in the veri-
fication process. At the same time, for the same persons, household allowances received from else-
where are also checked and if necessary, the amounts are corrected retroactively. Other persons
potentially receiving allowances from elsewhere, not recently controlled will follow.

Follow-up of family allowances by the Commission

Annual Reports concerning the financial year 2005,
paragraph 10.12, and 2006, table 10.2:

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 Regula-
tions.

In 2006 the Commission followed up 231 of the
676 cases and planned to follow up the remainder
of these cases within two years.

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10.11.2008

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245

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 nine 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 (IX) 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 2007/436/EC of 7 June 2007 (OJ L 163, 23.6.2007); Council Decision 2000/597/EC,
Euratom of 29 September 2000 (OJ L 253, 7.10.2000); Council Regulation (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); Council Directive 2006/112/EC of 28 November 2006 on the
common system of value added tax (OJ L 347, 11.12.2006); Council Directive 89/130/EEC, Euratom of 13 February 1989 on the harmonisation of
the compilation of gross national product at market prices (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.

(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.

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7.

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 (EAGF 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;

(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;

(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 Regulation (EC, Euratom) No 1150/2000.

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(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 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.
The provisional accounts are forwarded not later than 31st of March of the following year; the final accounts are due on 31 July of that
year.

The 2007 annual accounts of the European Communities are the third set of accounts to be prepared under the accrual-accounting based
rules brought in by the European Communities in 2005. 2007 also saw the updating of the Financial Regulation applicable to the general
budget of the European Communities and the new version came into force on 1 May 2007.

It should be noted, that in the consolidated accounts 2007:

— total assets increased from 67 332 million euro in 2006 to 75 720 million euro, with total liabilities increasing from 131 550 mil-
lion euro to 131 646 million euro. The difference between assets and liabilities will be financed in the short-term from budgetary
funds already voted, or guaranteed by the Member States in the longer-term;

— the economic outturn for the year has increased from a surplus of 197 million euro in 2006 to a surplus of 10 120 million euro in

2007.

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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SOURCES OF FINANCIAL DATA

EXPLANATORY NOTES

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 MemberState — 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

BG

CA

CY

CZ

DA

DE

DIA

DK

Appropriations for commitments

Appropriations for payments

Austria

Belgium

Bulgaria

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-27

FI

FR

FINREG

GNI

HU

European Community(ies)

Estonia

European Economic Community

European Free Trade Association

Greece

Spain

European Union

Total for the 27 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

RO

S

SE

SI

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

Romania

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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BUDGET FOR THE FINANCIAL YEAR 2007 AND BUDGETARY IMPLEMENTATION DURING THE FINANCIAL
YEAR 2007

DIAGRAMS

DIA I

DIA II

DIA III

DIA IV

DIA V

DIA VI

Budget 2007 — Estimated revenue and final appropriations for payments

Budget 2007 — Appropriations for commitments

Appropriations for commitments available in 2007 and utilisation thereof

Appropriations for payments available in 2007 and utilisation thereof

Own resources in 2007 by Member State

Payments made in 2007, in each Member State

CONSOLIDATED ACCOUNTS FOR THE FINANCIAL YEAR 2007

DIA VII

Consolidated balance sheet

DIA VIII

Consolidated economic outturn account

10.11.2008

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Diagram I
Budget 2007 — 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)]

(million euro and %)

estimated EXPENDITURE:
(final appropriations for payment)

estimated REVENUE:

PT

IE

FI

DK

AT

PL

(4)

SE

EL

BE

NL

ES

UK

IT

Total
estimated
revenue:

Total
appropriations
for payment:

113 845,7 (1)

113 845,7 (2)
6 175,7 (3)

120 021,4

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

1 486,8
– 37,7
15 083,8
19 478,6
74 022,0
1 703,7
2 108,6

(1,3 %)
(0 %)
(13,2 %)
(17,1 %)
(65 %)
(1,5 %)
(1,9 %)

Expenditure key
Financial perspective headings:
1. Sustainable Growth
2. Preserv. Manage. of Natural Resources
3. Citizenship, freedom, security and justice
4. EU as a global player
5. Administration
6. Compensation
Appropriations available for other institutions
Appropriations availabe to the Commission
of which operating appropriations

45 461,8
57 019,7
1 356,2
7 779,5
7 959,5
444,6
3 046,6
116 974,8
112 061,9

(37,9 %)
(47,5 %)
(1,1 %)
(6,5 %)
(6,6 %)
(0,4 %)
(2,5 %)
(97,5 %)
(93,4 %)

(1) After amending budgets.
(4) Revenue contribution by CZ, RO, HU, SK, SI, LU, BG, LT, LV, EE, CY,

MT was grouped together.

(2) After amending budgets and transfers between budget headings.
(3) Assigned revenue, appropriations made available again and carried over.

10.11.2008

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257

Diagram II
Budget 2007 — 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 2007 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

130 881,1
million euro

Expenditure key
Financial framework headings:
1. Sustainable Growth
2. Preserv. and Managem. of Natural Resources
3. Citizenship, freedom, security and justice
4. EU as a global player
5. Administration
6. Compensation

56 060,3
58 399,1
1 543,8
7 142,3
7 291,0
444,6

(42,8 %)
(44,6 %)
(1,2 %)
(5,5 %)
(5,6 %)
(0,3 %)

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259

Diagram III

Appropriations for commitments available in 2007 and utilisation thereof

Sections (S) and titles (T) corresponding to the 2007 budgetary
nomenclature and financial framework headings

Financial
Framework

Final appropriations

Utilisation of appropriations

Amount (1)

Rate
(%)

Commitments
entered into

Utilisation
Rate (%)

Carry-overs
to 2008 (2)

Rate (%)

Cancellations

Rate (%)

(million euro and %)

(a)

(b)

(b)/(a)

(c)

(c)/(b)

(d)

(d)/(b)

(e) =
(b) – (c) – (d)

(e)/(b)

Energy and transport (T.06)
Environment (T.07)

Budgetary nomenclature
Parliament (S. I)
Council (S. II)
Commission (S. III) (3)
Economic and financial affairs (T.01)
Enterprise (T.02)

I
II
III
III.1
III.2
III.3 Competition (T.03)
III.4
Employment and social affairs (T.04)
III.5 Agriculture and rural development (T.05)
III.6
III.7
III.8 Research (T.08)
III.9
III.10 Direct research (T.10)
III.11 Fisheries and maritime affairs (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 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

Information society and media (T.09)

(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 Language Services (T.31)
III.40 Reserves (T.40)
IV
V
VI
VII
VIII
IX

Court of Justice (S. IV)
Court of Auditors (S. V)
Economic and Social Committee (S. VI)
Committee of the Regions (S. VII)
European Ombudsman (S. VIII)
European Data-protection Supervisor (S. IX)

1 453,6
650,2
128 183,3
330,3
575,0
74,4
10 908,1
57 040,8
1 884,6
373,9
4 049,5
1 537,0
662,8
958,9
57,3
35 434,0
113,8
1 440,2
204,1
571,9
693,2
3 882,8
73,8
1 409,9

1 133,1
759,3
72,6
177,6

1 048,1
508,8
9,9
130,0
997,5
403,4
666,7
274,7
121,5
116,3
68,2
8,2
5,0

1 379,7
532,4
120 326,5
309,0
537,5
72,0
10 860,9
52 026,7
1 835,7
348,5
3 838,8
1 491,0
401,7
706,5
55,3
34 880,2
100,9
1 326,7
196,9
502,2
626,0
3 782,5
71,6
1 304,9

1 052,6
758,0
68,8
169,4

995,4
499,1
9,1
114,1
994,5
389,8
—
266,0
109,6
106,6
65,7
7,4
4,3

Grand total appropriations for commitments 124 455,0

130 881,1

105,2

122 798,4

Financial Framework (4)
Sustainable Growth
Preservation and Management of Natural
Resources
Citizenship, freedom, security and justice
EU as a global player
Administration
Compensation

1
2

3
4
5
6

53 978,0
55 142,0

56 060,3
58 399,1

1 273,0
6 578,0
7 039,0 (5)
445,0

1 543,8
7 142,3
7 291,0
444,6

54 255,6
53 121,7

1 421,9
6 636,8
6 917,8
444,6

Grand total appropriations for commitments 124 455,0

130 881,1

105,2

122 798,4

Grand total appropriations for payments 122 190,0

120 021,4

98,2

113 953,3

94,9
81,9
93,9
93,6
93,5
96,7
99,6
91,2
97,4
93,2
94,8
97,0
60,6
73,7
96,5
98,4
88,7
92,1
96,5
87,8
90,3
97,4
97,0
92,5

92,9
99,8
94,7
95,4

95,0
98,1
91,8
87,7
99,7
96,6
—
96,8
90,2
91,6
96,2
90,5
86,1

93,8

57,2
107,8
4 531,8
1,3
28,0
1,4
23,0
3 385,7
37,9
13,4
204,4
42,0
260,9
5,3
0,9
135,1
1,8
110,8
1,2
9,4
10,6
36,9
0,9
97,3

77,7
0,8
0,0
3,5

29,1
1,8
0,2
2,0
0,0
8,5
—
1,6
0,3
0,6
0,1
—
—

3,9
16,6
3,5
0,4
4,9
1,9
0,2
5,9
2,0
3,6
5,0
2,7
39,4
0,6
1,5
0,4
1,6
7,7
0,6
1,7
1,5
1,0
1,3
6,9

6,9
0,1
0,0
2,0

2,8
0,3
1,7
1,6
0,0
2,1
—
0,6
0,2
0,5
0,1
—
—

16,6
10,0
3 325,0
19,9
9,6
1,0
24,1
1 628,4
11,0
11,9
6,2
4,0
0,2
247,1
1,1
418,8
11,1
2,7
5,9
60,2
56,7
63,4
1,3
7,8

2,7
0,5
3,8
4,7

23,6
7,9
0,6
13,9
3,0
5,1
666,7
7,1
11,6
9,1
2,5
0,8
0,7

1,1
1,5
2,6
6,0
1,7
1,4
0,2
2,9
0,6
3,2
0,2
0,3
0,0
25,8
2,0
1,2
9,7
0,2
2,9
10,5
8,2
1,6
1,7
0,6

0,2
0,1
5,3
2,7

2,3
1,5
6,4
10,7
0,3
1,3
100,0
2,6
9,6
7,8
3,7
9,5
13,9

4 699,4

3,6

3 383,3

2,6

96,8
91,0

92,1
92,9
94,9
100,0

93,8

94,9

782,9
3 353,5

46,0
273,7
243,3
—

4 699,4

4 603,3

1,4
5,7

3,0
3,8
3,3
—

3,6

3,8

1 021,9
1 923,9

76,0
231,8
129,9
—

3 383,3

1 464,8

1,8
3,3

4,9
3,2
1,8
—

2,6

1,2

(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 framework 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 ceilings of the financial framework headings comprise the adjustement foreseen in the point 48 of the Interinstitutional Agreement of 2006.
(5) The Interinstitutional Agreement of 2006 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 500 million euro at

2004 prices for the period 2007-2013. In 2007 this reduction amounts to 75,8 million euro.

10.11.2008

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261

Appropriations for payments available in 2007 and utilisation thereof

Diagram IV

Sections (S) and titles (T) corresponding to the 2007 budgetary
nomenclature and financial framework headings

Final
appropriations (1)

Payments made in
2007

Utilisation rate
(%)

Utilisation of appropriations

(million euro and %)

Carry-overs to 2008

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 and media (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 and maritime affairs (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 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 Language Services (T.31)
III.40 Reserves (T.40)
IV
V
VI
VII
VIII
IX

Court of Justice (S. IV)
Court of Auditors (S. V)
Economic and Social Committee (S. VI)
Committee of the Regions (S. VII)
European Ombudsman (S. VIII)
European Data-protection Supervisor (S. IX)

1 668,2
741,4
116 974,8
328,7
549,7
81,6
11 664,4
55 802,4
1 142,3
283,9
3 311,8
1 436,4
656,0
1 248,1
63,9
26 693,1
122,9
1 449,8
223,1
582,5
428,4
3 429,3
75,8
1 343,7

1 793,2
764,3
75,0
194,4

1 154,7
517,7
10,8
133,6
997,5
415,9
—
288,0
128,8
127,6
77,7
8,6
6,4

1 329,1
557,6
111 506,5
262,1
369,8
70,7
11 547,4
53 685,2
918,8
231,8
2 678,5
1 226,7
405,9
1 039,0
54,4
26 583,0
84,7
1 260,5
182,8
447,8
258,8
3 264,6
65,1
1 192,8

1 748,5
755,6
59,7
170,2

965,4
497,9
8,9
102,0
994,5
373,4
—
264,7
107,0
109,3
67,5
7,3
4,2

Grand total appropriations for payments

120 021,4

113 953,3

Financial Framework
Sustainable Growth
Preservation and Management of Natural
Resources
Citizenship, freedom, security and justice
EU as a global player
Administration
Compensation

1
2

3
4
5
6

45 461,8
57 019,7

1 356,2
7 779,5
7 959,5
444,6

43 713,0
54 648,4

1 049,8
7 291,8
6 805,6
444,6

Grand total appropriations for payments

120 021,4

113 953,3

79,7
75,2
95,3
79,7
67,3
86,7
99,0
96,2
80,4
81,6
80,9
85,4
61,9
83,2
85,2
99,6
68,9
86,9
81,9
76,9
60,4
95,2
85,9
88,8

97,5
98,9
79,6
87,5

83,6
96,2
83,0
76,4
99,7
89,8
—
91,9
83,1
85,7
86,9
84,0
66,7

94,9

96,2
95,8

77,4
93,7
85,5
100,0

94,9

308,5
163,0
4 092,6
6,9
62,5
8,8
27,9
1 965,0
162,8
23,0
609,4
180,8
238,7
13,1
6,5
14,2
7,9
162,0
20,8
42,6
97,5
67,7
6,4
105,8

19,6
6,9
5,8
18,5

150,9
10,8
1,0
12,6
0,0
36,0
—
14,5
9,1
7,9
6,2
0,6
1,0

4 603,3

1 359,1
1 957,7

162,6
184,0
940,0
—

4 603,3

18,5
22,0
3,5
2,1
11,4
10,7
0,2
3,5
14,3
8,1
18,4
12,6
36,4
1,0
10,2
0,1
6,4
11,2
9,3
7,3
22,8
2,0
8,5
7,9

1,1
0,9
7,8
9,5

13,1
2,1
9,4
9,4
0,0
8,7
—
5,0
7,1
6,2
8,0
6,4
16,0

3,8

3,0
3,4

12,0
2,4
11,8
—

3,8

30,6
20,8
1 375,7
59,6
117,3
2,1
89,0
152,1
60,7
29,1
24,0
29,0
11,4
196,0
2,9
95,8
30,3
27,3
19,5
92,1
72,1
97,0
4,3
45,1

25,1
1,7
9,4
5,7

38,5
9,1
0,8
18,9
3,0
6,5
—
8,7
12,6
10,4
4,0
0,8
1,1

1 464,8

389,7
413,6

143,8
303,8
214,0
—

1 464,8

1,8
2,8
1,2
18,1
21,3
2,6
0,8
0,3
5,3
10,3
0,7
2,0
1,7
15,7
4,6
0,4
24,6
1,9
8,7
15,8
16,8
2,8
5,7
3,4

1,4
0,2
12,6
2,9

3,3
1,8
7,5
14,2
0,3
1,6
—
3,0
9,8
8,2
5,1
9,6
17,3

1,2

0,9
0,7

10,6
3,9
2,7
—

1,2

(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).

Revenue Outturn

(million euro and %)

Diagram V

Own resources in 2007, by Member State

BE

BG

CZ

DK

DE

EE

EL

ES

FI

FR

IE

IT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

RO

SI

SK

SE

UK (1)

EU 27

— Traditional own resources

1 685,1

60,8

178,8

329,8

3 126,8

42,8

229,6

1 290,1

148,9

1 332,5

218,0

1 687,2

46,4

30,9

45,4

19,2

110,9

11,8

1 873,5

201,1

338,4

137,1

159,2

82,5

90,5

438,4

2 657,0

16 573,0

— VAT resources

468,5

46,3

199,9

332,8

3 635,2

26,8

697,9

1 722,8

260,7

3 113,8

276,4

2 030,1

25,0

35,2

47,1

53,2

137,8

9,1

936,3

409,0

508,7

269,4

162,1

55,9

84,6

486,6

3 409,6

19 440,8

— GNI resources

1 985,8

163,0

703,8

1 393,5 14 653,8

95,8

1 946,6

6 073,4

1 087,7 11 215,7

972,2

9 143,7

88,2

118,0

158,3

202,2

546,7

32,5

3 400,6

1 564,9

1 745,6

940,1

681,7

198,3

302,5

1 948,9 12 551,2

73 914,8

— United Kingdom correction

232,5

20,8

84,4

162,9

294,2

11,2

145,8

751,7

132,0

1 326,9

119,6

1 163,2

10,7

14,9

20,1

21,2

74,9

3,6

92,4

43,0

215,8

113,9

86,4

22,6

41,6

41,3 – 5 188,9

58,9

TOTAL

4 371,9

290,8

1 167,0

2 219,0 21 710,0

176,7

3 019,9

9 838,2

1 629,4 16 988,9

1 586,4 14 024,2

170,3

199,0

271,0

295,8

870,2

57,0

6 302,8

2 218,1

2 808,6

1 460,4

1 089,4

359,4

519,2

2 915,2 13 429,0 109 987,5

4,0 %

0,3 %

1,1 %

2,0 %

19,7 %

0,2 %

2,7 %

8,9 %

1,5 %

15,4 %

1,4 %

12,8 %

0,2 %

0,2 %

0,2 %

0,3 %

0,8 %

0,1 %

5,7 %

2,0 %

2,6 %

1,3 %

1,0 %

0,3 %

0,5 %

2,7 %

12,2 %

100,0 %

(1) For the United Kingdom a correction (5 188,9 million euro) is applied to the gross amount of own resources (18 617,8 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.

.

1
0
1
1
2
0
0
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

2
6
3

Payments made in 2007, in each Member State (1)
Note: Payments made in 2007 = payments against 2007 operating appropriations plus payments against carry-overs from 2006.

Diagram VI

Financial framework headings

(million euro and %)

BE

BG

CZ

DK

DE

EE

EL

ES

FI

FR

IE

IT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

RO

SI

SK

SE

UK

Third
Coun-
tries and
misc. (2)

Total

— Sustainable Growth
Competitiveness
Cohesion

— Preserv. of Natural

Resources

999,8
653,0
346,9

161,7
16,8
144,9

952,5
34,2
918,3

214,5
85,3
129,3

5 034,1
722,3
4 311,8

226,8
10,1
216,8

4 704,8
112,2
4 592,6

5 683,7
254,1
5 429,6

400,3
78,3
322,0

3 089,6
640,3
2 449,3

344,5
80,8
263,7

5 055,5
603,1
4 452,5

41,9
7,5
34,4

449,8
12,5
437,2

507,6
42,0
465,5

163,9
150,8
13,1

1 351,6
47,4
1 304,2

54,0
4,9
49,1

578,3
326,9
251,4

401,1
136,4
264,7

4 323,1
106,0
4 217,1

2 552,8
96,8
2 456,1

450,9
29,5
421,4

185,9
23,9
162,0

667,3
32,1
635,2

459,4
155,9
303,5

2 949,7
592,7
2 357,0

1 707,7
1 683,4
24,3

43 713,0
6 739,0
36 974,0

925,6

6,6

717,1

1 173,3

6 905,9

121,6

3 644,5

7 042,6

977,9 10 378,7

1 841,3

6 152,2

61,0

186,4

483,0

55,6

956,4

8,7

1 229,4

1 130,4

3 114,3

1 341,3

24,2

180,3

380,5

1 117,2

4 328,9

163,6

54 648,4

— Citiz., freedom, sec. and

justice

91,0

3,3

18,1

8,7

234,4

— EU as a global player

124,8

279,2

15,5

— Compensation

— 129,3

—

4,4

—

47,5

—

9,3

8,3

—

19,3

27,3

11,0

99,6

4,6

—

21,7

—

1,6

—

18,2

—

7,2

0,8

—

88,4

34,0

—

9,0

7,9

—

10,0

15,8

10,6

37,4

11,4

39,6

26,9

89,2

21,3

4,4

20,8

25,7

—

—

1,3

—

62,5

—

1,7

—

8,5

—

10,9

228,0

1,9

805,7

—

—

— 315,4

9,2

7,7

—

13,9

45,1

42,9

45,7

1 049,8

9,9

—

6,9

—

25,8

5 506,1

7 291,8

—

—

444,6

TOTAL

2 141,2

580,0

1 703,2

1 400,9 12 221,9

366,1

8 373,1 12 775,3

1 390,8 13 586,0

2 193,9 11 330,1

119,8

667,0

1 032,1

231,4

2 407,9

75,8

1 855,8

1 569,3

7 754,6

3 917,3

1 600,6

383,1

1 071,6

1 628,6

7 347,2

7 423,1 107 147,7

2,0 %

0,5 %

1,6 %

1,3 %

11,4 %

0,3 %

7,8 %

11,9 %

1,3 %

12,7 %

2,0 %

10,6 %

0,1 %

0,6 %

1,0 %

0,2 %

2,2 %

0,1 %

1,7 %

1,5 %

7,2 %

3,7 %

1,5 %

0,4 %

1,0 %

1,5 %

6,9 %

6,9 %

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
0
1
1
2
0
0
8

.

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

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t
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e

E
u
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a
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U
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2
6
5

10.11.2008

EN

Official Journal of the European Union

267

Diagram VII

Consolidated balance sheet

31.12.2007

31.12.2006

(million euro)

Non-current assets:

Intangible assets

Property, plant and equipment

Long-term investments

Loans

Long-term pre-financing

Long-term receivables

Current assets:

Inventories

Short-term investments

Short-term pre-financing

Short-term receivables

Cash and cash equivalents

Non-current liabilities:

Employee benefits

Long-term provisions

Long-term financial liabilities

Other long-term liabilities

Current liabilities:

Short-term provisions

Short-term financial liabilities

Accounts payable

Total assets

Net assets

Reserves

Amounts to be called from Member States:

Employee benefits (long-term)

Other amounts

Total liabilities

Net assets

44,0

4 523,0

1 973,0

1 806,0

14 015,0

127,0

22 488,0

88,0

1 420,0

20 583,0

12 051,0

18 756,0

52 898,0

75 386,0

– 33 480,0

– 1 079,0

– 1 574,0

– 1 989,0

– 38 122,0

– 369,0

– 135,0

– 95 380,0

– 95 884,0

– 134 006,0

– 58 620,0

2 806,0

– 33 480,0

– 27 946,0

– 58 620,0

37,0

4 586,0

2 157,0

2 023,0

22 425,0

328,0

31 556,0

115,0

1 426,0

8 055,0

9 796,0

16 384,0

35 776,0

67 332,0

– 32 200,0

– 989,0

– 1 862,0

– 2 020,0

– 37 071,0

– 379,0

– 20,0

– 94 080,0

– 94 479,0

– 131 550,0

– 64 218,0

2 855,0

– 32 200,0

– 34 873,0

– 64 218,0

10.11.2008

EN

Official Journal of the European Union

269

Diagram VIII

Consolidated economic outturn account

31.12.2007

31.12.2006

(million euro)

Operating revenue

Own resource and contributions revenue

Other operating revenue

Operating expenses

Administrative expenses

Operating expenses

Financial revenue

Financial expenses

Surplus from operating activities

Movement in employee benefits liability

Share of net surplus (deficit) of associates and joint ventures

Economic outturn for the year

112 084

9 080

121 164

– 7 120

– 104 682

– 111 802

9 362

674

– 354

– 2 207

– 13

7 462

105 118

8 368

113 486

– 6 619

– 106 803

– 113 422

64

621

– 331

108

– 265

197

10.11.2008

EN

Official Journal of the European Union

271

ANNEX II

List of Special Reports adopted by the Court of Auditors since the last Annual Report:

— Special Report No 6/2007 on the effectiveness of technical assistance in the context of capacity

development

— Special Report No 7/2007 on the control, inspection and sanction systems relating to the rules on con-

servation of Community fisheries resources

— Special Report No 8/2007 concerning administrative cooperation in the field of value added tax

— Special Report No 9/2007 ‘Evaluating the EU Research and Technological Development (RTD) frame-

work programmes — could the Commission’s approach be improved?’

— Special Report No 1/2008 concerning the procedures for the preliminary examination and evaluation of

major investment projects for the 1994-1999 and 2000-2006 programming periods

— Special Report No 2/2008 concerning Binding Tariff Information (BTI)

— Special Report No 3/2008 — The European Union Solidarity Fund: how rapid, efficient and flexible is it?

— Special Report No 4/2008 concerning the implementation of milk quotas in the Member States which

joined the European Union on 1 May 2004

— Special Report No 5/2008 — The European Union’s agencies: Getting results

— Special Report No 6/2008 concerning European Commission Rehabilitation Aid following the Tsunami

and Hurricane Mitch

— Special Report No 7/2008 — Intelligent Energy 2003-2006

These reports can be accessed for consultation or downloading on the European Court of Auditors’ website:
www.eca.europa.eu
A paper copy or a CD-ROM version may be obtained on request to the Court of Auditors:

European Court of Auditors
Communication and Reports Unit
12 rue Alcide De Gasperi
L-1615 Luxembourg
Tel: + (352) 4398-1
e-mail: euraud@eca.europa.eu

or by filling in an electronic order form on EU-Bookshop.

http: //www.eca.eu.int