Report from the Commission to the Council on the follow-up to 2007 Discharge Decisions (Summary) - Council Recommendations submitted pursuant to Article 276 of the EC Treaty, Article 180b of the Euratom Treaty, Article 147 of the Financial Regulation for the general budget and Article 119(5) of the EDF Financial Regulation - {SEC(2009) 1700}
Date: 2009-12-10
Institutions: European Commission
Subjects: budgetary discharge, financial year, general budget (EU), implementation of the budget

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.12.2009 
COM(2009) 682 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 

on the follow-up to 2007 Discharge Decisions 
(Summary) - Council Recommendations submitted pursuant to Article 276 of the EC 
Treaty, Article 180b of the Euratom Treaty, Article 147 of the Financial Regulation for 
the general budget and Article 119(5) of the EDF Financial Regulation  

{SEC(2009) 1700} 

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TABLE OF CONTENTS 

REPORT FROM THE COMMISSION TO THE COUNCIL on the follow-up to 2007 
Discharge Decisions (Summary) - Council Recommendations submitted pursuant to Article 
276 of the EC Treaty, Article 180b of the Euratom Treaty, Article 147 of the Financial 
Regulation for the general budget and Article 119(5) of the EDF Financial Regulation 
{SEC(2009) 1700} ..................................................................................................................... 1 

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

I. 

Council Recommendation on the General Budget....................................................... 4 

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

B) Chapter 1 - The statement of assurance (DAS) and supporting information (Commission 

staff working document, points 3-4) ............................................................................ 4 

C) Chapter 2 - Commission Internal Control (Commission staff working document, points 5-

12) ................................................................................................................................ 4 

D) Chapter 3 - Budgetary management (Commission staff working document, points 13-20) 5 

E) Chapter 4 - Revenue (Commission staff working document, point 21)................................ 5 

G) Chapter 6 - Cohesion (Commission staff working document, points 26-29) ....................... 6 

H) Chapter 7 - Research, Energy and Transport (Commission staff working document, points 
30-35) ........................................................................................................................... 7 

I) Chapter 8 - External aid, Development and Enlargement (Commission staff working 

document, points 36-47) .............................................................................................. 7 

J) Chapter 9 - Education and Citizenship (Commission staff working document, points 48-53)8 

K) Chapter 10 - Economic and Financial Affairs (Commission staff working document, points 
54-58) ........................................................................................................................... 8 

L) Chapter 11 - Administrative and other expenditure (Commission staff working document, 

points 59-65) ................................................................................................................ 8 

II. 

III. 

IV. 

Court of Auditors' special reports (Commission staff working document, points 66-
85) ................................................................................................................................ 8 

European Development Funds (Commission staff working document, points 86-88) 8 

Requests concerning individual agencies (Commission staff working document, 
points 89-90) ................................................................................................................ 9 

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PREAMBLE 

As the Treaties and Financial Regulations require, the Commission has prepared Follow-up Reports 
to the 2007 discharges, which relate to the Council Recommendation of 10 February 2009 and the 
Resolutions  voted  by  the  European  Parliament  on  23 April  2009.  The  present  Follow-Up  Report 
deals with the requests made by the Council. A separate Follow-up Report deals with the requests 
made by Parliament. 

The Commission has identified a total of 90 requests made by the Council to the Commission in the 
context of the 2007 discharge. The Commission considers that for 44 requests the required action 
has already been taken, though in some cases results of the actions will need to be examined. For 
another 46 requests the Commission agrees to take the action requested by the Council.  

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

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I. 

COUNCIL RECOMMENDATION ON THE GENERAL BUDGET 

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

The Commission agrees that simplification has a key role to play in reducing errors occurring in the 
implementation  of  EU  policies.  However,  a  certain  degree  of  complexity  in  rules  and  eligibility 
criteria is unavoidable as these are often fixed in order to achieve desired policy objectives, and are 
the  outcome  of  a  complex  legislative  procedure.  Improvements  have  been  incorporated  into  the 
2007-2013 legal bases. Further simplification measures for Structural Funds, such as the possibility 
to declare costs on the basis of flat rates, unit costs and lump sums, were decided in May 2009. The 
impact of simplification of eligibility rules on the rate of error is expected to become visible in the 
medium- to long-term. In the area of agriculture the Health Check, agreed upon in November 2008, 
has  also  brought  further  simplification  to  among  other  things  the  rules  regarding  entitlements. 
Moreover,  the  Commission  issued  in  October  2009  a  report  with  the  reactions  to  the  39 
simplification suggestions which Member States jointly submitted to the Commission in April. The 
report will be discussed during the Agriculture Council in December 2009. 

The  Commission  is  currently  working  to  identify  possible  areas  of  further  simplification  in  the 
context of its preparatory work for the triennial revision of the Financial Regulation. It could focus 
in particular on grants, in particular eligibility rules; management methods, whose provisions have 
become  increasingly  complex  and  which  are  crucial  to  improve  the  efficiency  and  delivery  of 
external aid in particular; and control measures. It will also study principles for further simplifying 
sectoral legislation for the next round of basic acts, those to come into force from 2014. 

The  degree  of  complexity  of  the  eligibility  rules  has  a  direct  link  with  the  intensity  and  cost  of 
controls  required  to  gain  reasonable  assurance  on  the  legality  and  regularity  of  transactions.  If 
simplified  eligibility  rules  are  decided  and  effectively  implemented  (e.g.  increased  use  of  lumps-
sums  and  flat  rates,  acceptance  of  the  use  of  national  eligibility  rules  in  case  of  co-financing  by 
Member States) the underlying transactions will be less prone to error, which will allow to perform 
less extensive controls (controls can be focussed on output rather than input) and ultimately reduce 
the cost of controls. 

B)  Chapter  1  -  The  statement  of  assurance  (DAS)  and  supporting  information  (Commission 

staff working document, points 3-4) 

On  the  accounts,  the  Commission  will,  as  always,  take  due  account  of  the  remarks  and 
recommendations of the Court to improve its systems. With regard to the information on financial 
recoveries, a new IT tool was put in place during 2008 to improve the reliability and completeness 
of  information  on  the  correction  of  errors,  including  those  relating  to  payments  of  earlier  years. 
Under  the  Structural  Funds  action  plan,  the  Commission  has  also  stepped  up  action  to  ensure 
reliable information from Member States on financial corrections and recoveries they carry out for 
funds under shared management. 

C) Chapter 2 - Commission Internal Control (Commission staff working document, points 5-

12) 

An impact report on the action plan towards an integrated internal control framework was adopted 
by  the  Commission  in  early  2009  (COM(2009)43).  As  of  year  end  2008,  13  of  the  16  original 
actions had been completed whereas three could not be implemented or were taken forward in other 
ways. 

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The 2008 Annual Activity Reports of the Commission services also contain action plans to improve 
the effectiveness of specific internal control systems. Delivering on commitments undertaken in the 
2007  Synthesis  Report,  the  Commission  took  further  steps  to  ensure  that  reports  and  declarations 
present a consistent assessment of supervisory and control systems, with clear explanations made of 
the reasons and control processes leading to the absence, presence or removal of reservations. 

As regards funds managed by the Member States under shared management, the Commission will 
continue to work with Member States to add value to the Annual Summaries. For the financial year 
2008,  all  Member  States  were  able  to  comply  with  the  legal  obligations.  Seven  Member  States1 
have followed the suggestion in the Commission guidance note to append a statement of assurance 
to the annual summaries for structural actions. Value added elements, such as this statement, can be 
considered  useful  in  building  up  assurance  on  the  effective  functioning  of  systems.  The 
Commission  has  again  revised  the  guidance  note,  extending  the  part  on  the  overall  analysis  and 
explaining the incentives to use this option. 

The Commission considers that the concept of a tolerable risk of error will provide a clear view on 
the  cost-effectiveness  of  the  overall  control  system,  and  is  taking  this  forward  in  the  light  of  the 
positive reaction in the 2007 Discharge resolution. The nature of the work required and timing will 
vary according to the different policy areas and their multi-annual execution: for Cohesion policy 
the aim will be to study 2010, the first year when the majority of expenditure will be governed by 
the  strengthened  control  provisions  in  the  2007-13  legislation.  As  the  statistics  on  the  costs  of 
control  from  this  programming  period  will  become  available  over  the  next  two  years,  the 
Commission  plans  to  provide  analyses  of  the  tolerable  risk  of  error  for  the  different  policy  areas 
progressively  in  the  time  period  until  the  end  of  year  2012.  The  Commission  will  make  concrete 
proposals for tolerable risk in the areas of research, energy and transport and rural development in 
the  first  half  of  2010  and  on  external  aid,  development  and  enlargement  and  administrative 
expenditure in the latter half of 2010. 

D) Chapter 3 - Budgetary management (Commission staff working document, points 13-20) 

The  Commission  continues  striving  towards  realistic  and  sufficient  budgeting  already  from  the 
stage of the preliminary draft budget. This includes careful analysis of Member States' expenditure 
forecasts in order to improve their usefulness for budgeting purposes. In the Cohesion policy area, it 
is also examining the Member States' descriptions of their management and control systems for the 
2007-2013 period, accompanied by a compliance assessment from an independent audit body, with 
the necessary rigour before interim payments can be made. 

The Commission has further improved its reporting on implementation of Community programmes 
and  outstanding  commitments  (RAL).  More  complete  and  reliable  recovery  figures  have  been 
presented in the 2008 accounts. 

E) Chapter 4 - Revenue (Commission staff working document, point 21) 

The  Commission,  working  in  close  cooperation  with  Member  States,  recently  introduced 
management visits to look at long-standing reservations regarding the VAT own resources. These 
targeted  activities  have  already  led  to  the  lifting  of  several  reservations,  including  some  of  the 
oldest. 

F)  Chapter  5  –  Agriculture  and  Natural  Resources  (Commission  staff  working  document, 
points 22-25) 

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BG, CY, CZ, HU, LT, RO, SK. 

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In  the  area  of  rural  development,  Member  States  are  obliged  to  ensure  that  all  measures  are 
verifiable  and  controllable  as  well  as  to  making  sure  that  rules  for  eligibility  are  respected.  In 
addition, for the post-2007 period the management and control system for the expenditure has been 
aligned to the EAGF system of the first pillar of the CAP2. Thus, the recognized advantages of the 
EAGF system will also cover the rural development expenditure. 

Regarding IACS, Greece has complied with its action plan and has created a new, operational LPIS. 
The  new  system  will  be  used  by  the  Greek  authorities  for  the  first  time  during  the  2009  claims 
procedure. The Commission will continue to closely monitor the IACS procedure in Greece. 

Member  States  are  required  to  recover  from  the  final  beneficiaries  irregular  payments  identified. 
However, recovery from the final beneficiaries is often not possible because the problems identified 
relate  to  deficiencies  in  the  Member  States'  management  and  control  systems.  In  these  cases,  the 
financial corrections imposed on Member States through the conformity clearance mechanism are 
an important incentive for Member States to improve these systems and, thus, to prevent or detect 
and  recover  irregular  payments  to  final  beneficiaries.  The  conformity  clearance  thereby  also 
contributes to the legality and regularity of the transactions at the level of the final beneficiaries. 

The  Commission  welcomes  the  Council's  support  for  the  application  of  the  50/50  rule,  which 
provides  a  strong  incentive  for  Member  States  to  ensure  an  expeditious  and  effective  recovery  of 
irregular payments from the final beneficiaries, and the support for conformity clearance as a tool to 
shielding  the  Community  budget  from  expenditure  that  should  not  be  charged  to  it.  The 
Commission  also  welcomes  the  Council's  acknowledgement  of  the  improvements  in  the 
accountability of Paying Agencies and the progress made. 

G) Chapter 6 - Cohesion (Commission staff working document, points 26-29) 

Improving  the  effectiveness  of  the  control  system  for  Cohesion  Policy  continues  through  both 
preventive  and  corrective  action.  For  the  closure  of  the  2000-2006  programmes  the  focus  is  on 
removing irregular expenditure through financial corrections and on the work of winding-up bodies 
to ensure that the residual risk of irregular expenditure in closed programmes is low. For the 2007-
2013 period the preventive phase is continuing with the completion of the compliance assessment 
procedure  for  the  new  programmes,  the  provision  of  guidance  and  training,  and  simplification  of 
operating conditions.  

A number of simplifications have been introduced, e.g. concerning revenue-generating projects and 
the use of flat rates and lump sums for certain outputs. Further simplifications were introduced to 
allow  quicker  disbursement  of  Cohesion  policy  funds  in  response  to  the  economic  downturn 
(Regulation 284/2009). Where necessary, the Commission is issuing guidance on application of the 
simplified provisions, for example on flat rates and revenue-generating investments. 

Under the Action Plan to strengthen its supervisory role, the Commission has taken action to speed 
up  its  procedures  and  reduce  unnecessary  delays  in  the  application  of  payment  suspensions  and 
financial  corrections  following  detection  of  significant  deficiencies  during  audits.  This  has  been 
reflected in a large increase in the number of suspension decisions and in the volume of financial 
corrections in 2008 compared to 2007. 

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H) Chapter 7 - Research, Energy and Transport (Commission staff working document, points 

30-35) 

The Commission has devised a control and audit strategy aimed to ensure the legality and regularity 
of expenditure under the research Framework Programmes on a multiannual basis. It is based on the 
detection and correction of errors which could not be identified before making the payment. This is 
achieved  by  ex-post  auditing  and  recovering  amounts  found  to  be  overpaid,  including  for  non-
audited contracts with the same beneficiaries where the same problems have been identified.  

important 
The  seventh  Framework  Programme  (FP7)  has  brought  about  a  number  of 
simplifications.  The  introduction  of  the  "participants  guarantee  fund"  allowed  a  considerable 
reduction in the numbers of ex-ante financial checks and the use of protective measures. It replaces 
the collective financial responsibility of the contractors as laid down in FP6. The introduction of the 
"Certification on the Methodology" in FP7 contributes to the reduction of required certificates and 
will  limit  ex-post  controls.  The  e-FP7  initiative  will  achieve  the  gradual  introduction  of  fully 
electronic  systems  for  the  whole  process  of  proposal  and  grant  management.  Measures  have  also 
been taken to reduce payment times. 

The  Commission  agrees  to  the  general  need  for  more  profound  simplifications  and  asks  the 
legislator  to  support  the  adaptations  to  the  legal  basis  that  would  be  necessary  (revision  of  the 
Financial  Regulation,  Framework  programme  participation  rules)  for  the  preparation  of  the  8th 
Framework Programme (FP8). 

I)  Chapter  8  -  External  aid,  Development  and  Enlargement  (Commission  staff  working 

document, points 36-47) 

The Commission has started further work on measures to support implementing organisations and 
beneficiaries  of  EC  external  aid  projects  in  the  management  of  EC  funds,  including  through  the 
development  of  a  Financial  Management  Toolkit  for  use  by  beneficiaries  of  EC  external  aid 
projects.  The  Terms  of  Reference  for  verification  missions  were  agreed  between  the  UN  and  the 
Commission in April 2009, and the Commission also believes that the efforts made to explain the 
operation  of  the  verification  clause  in  Contribution  Agreements  with  the  UN  -  including  through 
training  -  will  help  to  ensure  that  misunderstandings  are  avoided  in  UN  country  offices  and 
delegations. 

The  availability  of  standard  terms  of  reference  for  financial  and  systems  audits  since  1st  October 
2007 is a major step forward in the process of obtaining better quality audits. Guidelines for Audit 
Task  management  became  available  in  November  2008  and  an  advanced  training  module  was 
developed and delivered (twice) in 2008.  

As  regards  budget  support,  guidelines  are  currently  being  revised  to  improve  the  design  and 
assessment of eligibility conditions and of specific results oriented indicators in order to achieve a 
more rigorous results oriented approach. 

For Enlargement, national authorities have implemented the required segregation of functions and 
staffing  levels  have  increased  substantially.  Constant  monitoring  and  further  follow-up  of  the 
systems remain key priorities for the Commission. As regards the follow-up of closure audits, some 
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. 

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J) Chapter 9 - Education and Citizenship (Commission staff working document, points 48-53) 

The  design  of  the  new  programmes  2007-2013  has  taken  into  account  the  recommendations  of 
previous years to simplify the rules and allows extensive use of lump sum financing. 

All ex-ante and ex-post declarations of assurance from National Authorities have been received and 
analysed and open qualifications have been followed-up systematically. More precise guidelines for 
the yearly declarations were issued and specific meetings with the National Authorities organised. 

The results of audits launched since the beginning of 2008 are entered into the ABAC tracking tool, 
which  facilitates  the  sharing  of  audit  results.  Further  measures  to  closely  monitor  and  improve 
payments times have been taken. 

The  necessary  steps  have  been  taken  to  improve  ex-ante  control  for  communication  expenditure, 
including the development of appropriate check-lists.  

K)  Chapter  10  -  Economic  and  Financial  Affairs  (Commission  staff  working  document, 

points 54-58) 

Most  observations  and  conclusions  of  the  Court  of  Auditors  in  this  area  concerns  the  research 
framework  programmes  and  are  therefore  covered  by  the  Commission's  control  strategy  aimed  to 
ensure the legality and regularity of expenditure under the framework programmes on a multiannual 
basis, see above under chapter 7 for further details. 

L) Chapter 11 - Administrative and other expenditure (Commission staff working document, 

points 59-65) 

As requested by the Council, the Commission provides detailed information on the Communities' 
pension  expenditure,  building  needs  and  the  budgets  of  the  agencies  with  the  preliminary  draft 
budget each year. 

The Commission offers wide-ranging assistance to decentralised agencies in several areas, such as 
financial management, accounting and training, and agencies are encouraged to sign service-level 
agreements  with  the  horizontal  Commission  Directorates-General  for  support  services.  The 
Commission will take into account the results of the  Interinstitutional Working  Group  in  order to 
adjust  its  assistance  further.  The  Council  and  the  European  Parliament  are  also  involved  in  the 
evaluation of EU decentralised agencies through the Reference Group. The results of the evaluation 
should be available by end 2009. 

II. 

COURT  OF  AUDITORS'  SPECIAL  REPORTS  (Commission  staff  working  document, 
points 66-85) 

The  Council  has  made  a  number  of  requests  to  the  Commission  concerning  special  reports 
published by the Court of Auditors in 2007 and 2008. The Commission's replies to these requests 
are set out in the Commission staff working document (points 66-85). 

III. 

EUROPEAN  DEVELOPMENT  FUNDS 
points 86-88) 

(Commission 

staff  working  document, 

As  regards  the  reliability  of  the  EDF  accounts,  an  independent  study  has  shown  that  the 
assumptions underpinning the Commission's estimates of invoices to be received are correct in the 
vast majority of cases, but also recommends a different approach in a limited number of cases. The 
Commission will implement these recommendations for the 2009 accounting year. 

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As  regards  budget  support,  the  Commission  fully  agrees  on  the  need  to  adhere  strictly  to  the 
conditions  set  out  in  the  Cotonou  Agreement  and  in  Financing  Agreements.  In  addition  to  the 
information already published regularly on EDF matters in general and budget support in particular, 
the  Commission  intends  to  provide  more  in-depth  coverage  of  budget  support  issues  in  future 
annual reports on the "European Community's Development and External Assistance Policies and 
their Implementation". This should provide information on results, analysis and assessment of risk 
and will draw on available public finance management (PFM) diagnostics. 

IV. 

REQUESTS  CONCERNING  INDIVIDUAL  AGENCIES (Commission staff working document, 
points 89-90) 

The  Council  has  made  requests  to  the  Commission  concerning  handover  of  activities  from  the 
European Agency for Reconstruction and the GNSS Supervisory Authority to the Commission. The 
Commission's  replies  to  these  requests  are  set  out  in  the  Commission  staff  working  document 
(points 89-90). 

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