The Court's statement of assurance provided to the European Parliament and the Council
Date: 2008-11-10
Institutions: European Court of Auditors
Subjects: European Commission, European Court of Auditors, European Parliament, audit, auditing, budgetary control, financial year, insurance

10.11.2008

EN

Official Journal of the European Union

C 287/111

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

(2008/C 287/02)

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 finan-
cial 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, manage-
ment (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, implementing and maintaining internal control relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether
due to fraud or error; selecting and applying appropriate accounting policies, on the basis of the
accounting rules adopted by the Commission's accounting officer (5); and making accounting esti-
mates that are reasonable in the circumstances. According to Article 129 of the Financial Regu-
lation, 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 consolidated
accounts, declaring, inter alia, that he has reasonable assurance that they present a true and fair
view of the financial 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 implementa-

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

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

(5) The accounting rules adopted by the Commission's accounting officer are derived from International Public Sector
Accounting Standards (IPSAS) issued by the International Federation of Accountants or, in their absence, Interna-
tional Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board. In accordance with the Financial Regulation, the ‘Consolidated financial statements’
for the 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 princi-
ples to the specific environment of the Communities, 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 finan-
cial situation of the institution (Article 61 of the Financial Regulation).

(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 assurance that the accounts present a true and fair
view of the financial situation of the bodies (Article 61 of the Financial Regulation).

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Official Journal of the European Union

10.11.2008

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

Auditor's responsibility

III.
The Court's responsibility is to provide, on the basis of its audit, the European Parliament and
the Council with a statement of assurance as to the reliability of the accounts and the legality and
regularity of the underlying transactions. The Court conducted its audit in accordance with the IFAC
International Standards on Auditing and Codes of Ethics and the INTOSAI International 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.

An audit involves performing procedures to obtain audit evidence about the amounts and
IV.
disclosures in the consolidated accounts and the legality and the regularity of the transactions under-
lying 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 Commu-
nities, 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 supervi-
sory 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 esti-
mates made, as well as evaluating 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 traditional own resources cannot cover
imports that have not been subject to custom supervision.

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

VI.
basis for its statement of assurance.

Opinion on the reliability of the accounts

VII.
In the Court's opinion, the ‘Annual Accounts of the European Communities’ present fairly, in
all material respects, the financial 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.

10.11.2008

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Official Journal of the European Union

C 287/113

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 frame-
work, 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 (1) 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 super-
visory 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
‘Agriculture and
improve the management of the risk of illegality and irregularity. These areas are:
natural resources’,
‘External aid, Development and
enlargement’ and ‘Education and citizenship’.

‘Research, energy and transport’,

‘Cohesion’,

(a) In ‘Agriculture and natural resources’, the Court found that the transactions underlying the expen-
diture 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 compliance with
EU rules. However, the Court concludes that the Integrated Administration and Control System
(IACS) continues to be effective in limiting the risk of irregular expenditure where properly imple-
mented and if accurate and reliable data are entered into the system.

(b) 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.

(c) 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 overstated
or ineligible costs.

(d) 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 regu-
larity, 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 supervisory and
control systems are only partially effective in providing assurance that expenditure is eligible and
supported by adequate evidence.

(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.

(1) GNSS: Global Navigation Satellite Systems.

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Official Journal of the European Union

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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 esti-
mated to be significantly above.

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

The Court has identified further progress in the Commission's supervisory and control
XII.
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 Commission is not
yet able to demonstrate that its actions to improve supervisory and control systems have been effec-
tive 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