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# 31996Y1231(04)

**Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1995 together with the Commission's reply, the Parliament's reply, the Council's reply, the Court of Justice's reply, the Economic and Social Committee's and the Committee of the Regions' reply** 
  
*Official Journal C 395 , 31/12/1996 P. 0011 - 0085*

  

Special Report in support of the Statement of Assurance concerning activities financed from the general budget for the financial year 1995 together with the Commission's reply, the Parliament's reply, the Council's reply, the Court of Justice's reply, the Economic and Social Committee's and the Committee of the Regions' reply

NOTE TO THE READER

Those observations which do not constitute reservations concerning the actual Statement of Assurance, but which the Court still considers important, are presented in Chapter 3 of this document thus in italics.

TABLE OF CONTENTS

Paragraph reference

Chapter 1 - The conditions governing the production of the Statement of Assurance (DAS) 1.1 - 1.18

Introduction 1.1 - 1.2

The Court's mandate 1.3 - 1.4

The accounts and transactions covered by the DAS 1.5 - 1.8

The scope and limits of the DAS 1.9 - 1.15

The Court's auditing standards and methodology 1.16 - 1.18

Chapter 2 - Carrying out the audit 2.1 - 2.10

The constraints affecting the audit work 2.1 - 2.2

The audit work carried out 2.3 - 2.10

Chapter 3 - The audit findings 3.1 - 3.139

General conclusion 3.1 - 3.3

Concerning the budget 3.4

Concerning the reliability of the accounts 3.5 - 3.93

The legality/regularity of the underlying transactions 3.94 - 3.139

Chapter 4 - Analyses specific to the main fields of expenditure 4.1 - 4.28

Introductory remarks 4.1 - 4.2

Analysis concerning EAGGF-Guarantee expenditure 4.3 - 4.13

Analysis concerning Structural Fund expenditure 4.14 - 4.28

Chapter 5 - Interpreting the results 5.1 - 5.12

The results of the audit work carried out in support of the DAS concerning underlying operations relating to expenditure 5.1 - 5.12

Chapter 6 - Presentation and publication of the accounts of the Communities 6.1 - 6.4

ANNEXES:

Annex I: Evaluation of the financial significance of the substantial legality/regularity errors concerning the payments

Annex A: Charts and diagrams Nos I to VIII

CHAPTER 1

The conditions governing the production of the Statement of Assurance (DAS)

1.0. TABLE OF CONTENTS

Paragraph reference

Introduction 1.1 - 1.2

The Court's mandate 1.3 - 1.4

The legal bases 1.3

The Court's general objectives 1.4

The accounts and transactions covered by the DAS 1.5 - 1.8

The scope and limits of the DAS 1.9 - 1.16

A global assurance covering all the accounts and underlying transactions 1.9 - 1.10

The DAS and other types of audit 1.11 - 1.12

The DAS and the audit of sound financial management (SFM) 1.13

The DAS and the exposure of deliberate irregularities 1.14

The audit of own resources based on GNP and VAT 1.15

The audit of traditional own resources 1.16

The Court's auditing standards and methodology 1.17 - 1.18

INTRODUCTION

1.1. The European Court of Auditors is now presenting its second Statement of Assurance (hereinafter known as the DAS ()) concerning the reliability of the accounts and the legality and regularity of the underlying transactions for the financial year 1995. The report in support of the 1994 Statement of Assurance () contains a detailed account of the approach and methodology used at this stage in the audit work underlying the DAS () and the reader is referred to this for a full understanding of the Court's audits and conclusions.

1.2. The Court also produces an Annual Report and other Special Reports for the consideration of the Council and the Parliament in the context of the discharge procedure. The Annual Report on the financial year 1995 was published in OJ C 340, 12.11.1996.

THE COURT'S MANDATE

The legal bases

1.3. Pursuant to Article 188C of the Treaty establishing the European Community () (), the European Court of Auditors is required to provide 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's general objectives

1.4. The Court's general objectives were to be able, on the basis of its audit work, to formulate an opinion with regard to the following:

- whether the accounts - the consolidated revenue and expenditure account and the consolidated balance sheet - are globally reliable, in the sense that they provide an accurate picture of the Community's assets, of its financial situation and of total revenue and expenditure for the financial year ending on 31 December 1995, in accordance with the provisions of the Treaties, the Financial Regulation and the provisions for the implementation thereof, as well as with generally accepted accounting principles where these are applicable to the public sector;

- whether the underlying transactions were generally legal and regular with respect to the legal provisions applicable.

THE ACCOUNTS AND TRANSACTIONS COVERED BY THE DAS

1.5. The Court of Auditors has examined the consolidated accounts of the European Union for the financial year ending on 31 December 1995. These accounts, which include the balance sheet and the revenue and expenditure account as at the same date, and the notes in annex, were drawn up under the Commission's responsibility in accordance with the Financial Regulation of 21 December 1977. They are summarized in Volume IV of the document entitled 'Revenue and expenditure account and balance sheet concerning operations financed from the budget for the financial year 1995` submitted by the Commission to the discharge authorities, and to the Court of Auditors on 30 April 1996.

1.6. The DAS covers the consolidated accounts of all of the activities covered by the European Union's general budget, which encompasses all of its revenue and expenditure. Articles 78, 80 and 81 of the Financial Regulation governing the general budget of the European Communities () require the Commission to draw up Volume IV of the Communities' accounts, to which the DAS () relates, plus Volumes II and III, which contain detailed information. These accounts are not published. Charts and diagrams Nos I-VIII () in Annex A summarize the principal budgetary implementation data recorded in these accounts for the financial year 1995.

1.7. The DAS covers all the accounts and all of the underlying transactions, down to the level of taxpayers and final beneficiaries.

1.8. As regards expenditure, the Court has adopted a definition of underlying transactions that has led it to perform its audit tests as far as the level of the final beneficiaries of Community funds. Where necessary, this includes an audit of the relevant aspects of activities in receipt of funding. For the traditional own resources, the audit does not extend to material transactions, but is confined to the supporting documents relating to the amounts owed by taxpayers ().

THE SCOPE AND LIMITS OF THE DAS

A global assurance covering all the accounts and underlying transactions

1.9. The DAS is global in nature. It is not in itself intended to produce a specific assessment or arrive at a quantified conclusion on any particular operational or geographical area of Community activities.

1.10. Nevertheless, the scope of the audits carried out on transactions funded by the EAGGF-Guarantee and the Structural Funds in 1994 and 1995 made it possible, as well as producing the DAS, to analyse certain trends specific to these fields. These are discussed in Chapter 4.

The DAS and other types of audit

1.11. On the basis of the current regulations, transactions in the areas audited by the Court during the production of the DAS are likely to be subject to further verification by other authorities, particularly during the clearance of the EAGGF-Guarantee accounts ().

1.12. Certain audit results from previous work by other auditors have identified cases of irregularity and anomaly which the Court takes into consideration in its final assessment but which it cannot take over unchanged in the context of the statistical method used for the DAS.

The DAS and the audit of sound financial management (SFM)

1.13. The DAS itself contains no conclusions as to the degree of compliance with the principles of sound financial management. This is something which the Court continues to assess separately as part of its other work, in particular in the context of its Annual and other Special Reports ().

The DAS and the exposure of deliberate irregularities

1.14. Certain cases of deliberate irregularity to the detriment of Community finances cannot, by their very nature, be detected by the usual auditing procedures implemented in accordance with generally accepted auditing standards. The Court is not therefore in a position to give any assurance concerning the absence of cases of this type ().

The audit of own resources based on GNP and VAT

1.15. Because of the macroeconomic nature of the statistical data on which the GNP and VAT own resources (accounting for about 80% of Community revenue) are based, the Court concentrated on assessing the suitability of the procedures applied for compiling these data and guaranteeing their reliability.

The audit of traditional own resources

1.16. It is obviously not possible to provide an assurance that all taxable imports have actually been declared and have generated the corresponding revenue.

THE COURT'S AUDITING STANDARDS AND METHODOLOGY

1.17. The Court carried out the tasks conferred upon it to the best of its abilities in accordance with internationally generally accepted auditing standards to the extent that they apply in the Community context. This audit comprised, inter alia, sampling-based auditing procedures designed to determine whether all of the revenue had been collected and all of the expenditure disbursed in a legal and regular manner. The revenue audit was based on the amounts to be recovered and the amounts actually disbursed by the Community. The expenditure audit was based on expenditure committed and payments made.

1.18. The aim of the tests carried out was to ensure that the audit results were statistically representative overall and rested on a solid factual basis. An outline of this approach is given in paragraphs 1.28 - 1.44 of the Special Report in support of the 1994 DAS ().

CHAPTER 2

Carrying out the audit

2.0. TABLE OF CONTENTS

Paragraph reference

The constraints affecting the audit work 2.1 - 2.2

The audit work carried out 2.3 - 2.10

The audit work concerning revenue 2.3 - 2.4

The samples of expenditure transactions audited 2.5 - 2.9

Other work 2.10

THE CONSTRAINTS AFFECTING THE AUDIT WORK

2.1. The constraints affecting the audit work for the financial year 1995 were generally identical to those for the previous year (). The most important were the limited use that could be made of the work of other auditors, the very short period available for carrying out the audit and the lack of easily accessible data concerning the underlying transactions. The Court has contacted the main institutions concerned in connection with each of these aspects with the aim of finding a way of limiting the effects of these constraints. The proposed solutions, should they come to fruition, will only be effective in the medium term.

2.2. Despite certain improvements introduced following the Court's previous observations, the systems applied in Denmark for the management of EAGGF-Guarantee operations, which are still not fully integrated, made it unusually difficult to identify and audit the underlying transactions. Because of this, the audit of the 12 transactions selected in the context of the 1995 DAS imposed an excessive workload as compared with that required for the audit of similar transactions in the other Member States.

THE AUDIT WORK CARRIED OUT

The audit work concerning revenue

2.3. The own resources are divided into two broad categories:

- traditional own resources, which are collected at source and are subdivided into two main categories: customs duties and agricultural levies on the one hand, and sugar levies on the other;

- the VAT and GNP resources, the amounts of which are determined largely by macroeconomic statistical data.

2.4. With regard to the own resources as a whole, exhaustive checks were carried out in respect of the reliability, legality/regularity and accuracy of the Commission's accounts. In the case of the traditional own resources, the Commission's accounts were audited on the basis of a sample of 114 transactions, some of which were regrouped so they could be audited down to the level of the underlying transactions in the Member States. Additional random checks were carried out during the audit of these transactions verifying transactions that had been targeted on the basis of their inherent risks - in particular as regards under-declaration (beginning-of-the-month transactions, zero-rated imports, transit, customs storage and operations entered in the B accounts). For the VAT and GNP resources, the audits looked at the quality of the procedures used to determine the amounts concerned.

The samples of expenditure transactions audited

2.5. For expenditure, as for the traditional own resources, the Court carried out a direct audit of transactions selected at random from the population of transactions entered in the accounts, which had previously been stratified by country and main budgetary fields.

2.6. In the field of expenditure, the total number of final-level underlying transactions audited was 1 753, of which 683 concerned payments, 775 commitments entered into during the financial year and 295 commitments outstanding at the beginning of the financial year. The selection method used produced samples whose structure was representative of that of the total populations they were drawn from in terms of spread throughout the budget areas or geographical regions.

2.7. The audit involved examining the legality/regularity of these transactions, as well as the accuracy of the corresponding accounting entries at all levels of the administration of activities covered by the Community budget, i.e. from central management level at the Commission down, where this was necessary, to the level of the final beneficiaries.

2.8. In financial terms, the audit at the level of the Commission's central management covered a significant volume of the transactions for the financial year. For example, the net total value of the payments examined amounted to approximately 24 409 Mio ECU, i.e. almost 37% of the total value of the payments for the financial year. As regards commitments entered into during the financial year, the net total was around 33 989 Mio ECU, or some 45% of the total amount of the commitments for the financial year. In the area of commitments outstanding from previous financial years, the work covered approximately 8 228 Mio ECU in all, i.e. about 24% of the total value of the commitments still outstanding at the beginning of the financial year.

2.9. At underlying transactions level, the financial volume actually audited was much less, inasmuch as most of the transactions selected at central level were linked to numerous underlying transactions, at least one of which was examined in depth in every case. According to the Court's calculations, the financial volume of the transactions underlying the payments examined at final beneficiary level was thus around 2 169 Mio ECU, or 3,2% of the payments for the financial year.

Other work

2.10. The Court also carried out a series of other audit tasks concerning the general accounting, the consolidated balance sheet and the Sincom computerized accounting system, the main procedures for which were identical to those described under paragraphs 2.18 - 2.22 of the Special Report in support of the 1994 DAS (). It extended its audit work to the files of the Sincom computerized accounting system and the budgetary and accounts information contained therein. It also paid particular attention to following up the observations in support of the 1994 DAS and carried out an enquiry into the oldest outstanding commitments as at the end of the financial year, selecting 126 of these.

CHAPTER 3

The audit findings

3.0 TABLE OF CONTENTS

Paragraph reference

General conclusion 3.1 - 3.3

Concerning the budget 3.4

Concerning the reliability of the accounts 3.5 - 3.93

The consolidated revenue and expenditure account 3.5 - 3.45

The improvements to the consolidated revenue and expenditure account 3.6 - 3.9

The reservation concerning the consolidated revenue and expenditure account 3.10 - 3.27

Accounting commitments that no longer corresponded to actual obligations 3.10 - 3.27

Other observations concerning the consolidated revenue and expenditure account 3.28 - 3.45

Entry of 1994 EAGGF-Guarantee expenditure under 1995 3.29

Non-disclosure of the impact of the agrimonetary system 3.30 - 3.31

Errors affecting the reliability of the accounts 3.32 - 3.37

The Sincom accounting system 3.38 - 3.40

The balance for the financial year 3.41 - 3.45

The European Union's consolidated financial balance sheet 3.46 - 3.57

Improvements to the consolidated financial balance sheet 3.49

Observations concerning the consolidated balance sheet 3.50 - 3.57

Long-term leasing and rental commitments (outside the balance sheet) 3.50 - 3.53

The harmonization of accounting methods 3.54 - 3.57

The Commission's financial balance sheet 3.58 - 3.86

Improvements concerning the Commission's balance sheet 3.58 - 3.66

Claims on Member States related to the clearance of the EAGGF-Guarantee accounts 3.60

Potential claims connected with the establishment of frauds and irregularities 3.61 - 3.64

Multiannual decisions and obligations to commit funds outside the budget 3.65 - 3.66

Reservations concerning the Commission's financial balance sheet 3.67 - 3.71

Reservation concerning tangible fixed assets 3.67

Reservation concerning the separate accounts for traditional own resources 3.68 - 3.71

Other observations concerning the Commission's balance sheet 3.72 - 3.86

Claims concerning own resources deriving from VAT and the GNP 3.72 - 3.73

Collection of revenue 3.74 - 3.77

Disputes/default interest 3.74

Fines, penalties and sanctions 3.75 - 3.76

Revenue to be collected 3.77

Implementation and entry in the accounts of payments 3.78

Participations and loans 3.79 - 3.82

The presentation of participations and ECIP loans 3.79

The accumulation and handling of profits from the Commission's lending and borrowing activities 3.80

The management of 'food aid` loans to the newly independent States 3.81 - 3.82

Actual volume of Union guarantees for lending activities 3.83 - 3.84

Implementation of guarantees given 3.85

Breakdown of the bank accounts in the balance sheet 3.86

The financial balance sheets of the other Community institutions and organizations 3.87 - 3.93

Improvements in the balance sheets of the other Community institutions and organizations 3.87 - 3.88

Reservation concerning tangible assets 3.89 - 3.91

Observation concerning tangible assets 3.92

Observation concerning bank accounts and cash balances 3.93

Concerning the legality/regularity of underlying transactions 3.94 - 3.139

Observations concerning the revenue-related transactions 3.94 - 3.121

Traditional own resources 3.94 - 3.99

Customs duties and agricultural levies 3.94 - 3.95

Sugar levies 3.96 - 3.99

The VAT-based own resource 3.100 - 3.115

Accuracy of the weighted average rate 3.107 - 3.110

Accounting for corrections and compensations 3.111 - 3.113

Overall assessment 3.114 - 3.115

The own resource based on the gross national product (GNP) 3.116 - 3.121

The GNP as an assessment base 3.117 - 3.119

The own resource based on GNP (supplementary resource) 3.120 - 3.121

Reservations concerning expenditure-related transactions 3.122 - 3.139

Cases of expenditure for which the Court cannot provide any assurance 3.122 - 3.124

Particularly unreliable systems which are likely to include errors 3.123

The absence of assurance for miscellaneous reasons 3.124

Cases of expenditure in respect of which the Court can give only partial assurance 3.125

Errors affecting the legality/regularity of the expenditure 3.126 - 3.139

Errors affecting the legality/regularity of the commitments entered into during the financial year 3.127 - 3.130

The substantial aspect of the legality/regularity of the commitments 3.127

Formal legality/regularity errors concerning commitments 3.128 - 3.130

Errors affecting the legality/regularity of the transactions underlying payments 3.131 - 3.139

Substantial legality/regularity errors concerning payments 3.131 - 3.134

Formal legality/regularity errors concerning payments 3.135 - 3.139

GENERAL CONCLUSION

3.1. Subject to the facts summarized in paragraphs 3.10, 3.67, 3.68 and 3.89, the Court's audit enabled it to obtain reasonable assurance () that the accounts for the financial year 1995 accurately reflect the Union's revenue and expenditure and financial situation.

3.2. This audit, which was carried out within the limits specified in paragraphs 1.15 - 1.16, also allowed the Court to obtain a reasonable assurance(16) as to the legality and regularity of the transactions underlying the revenue entered in the accounts for the financial year.

3.3. Although the Court's examination enabled it to obtain a reasonable assurance(16) that the operations underlying the commitments for the financial year were legal and regular, it cannot provide a positive global assurance as to the legality and regularity of the transactions underlying the payments for the financial year by reason of the facts summarized in paragraphs 3.122, 3.131, 3.133, 3.135 and 3.136.

CONCERNING THE BUDGET

3.4. Following a referral to the Court of Justice by the Council, on 7 December 1995 the Court of Justice ruled that the President of the European Parliament's act establishing the final adoption of the European Union's budget for the financial year 1995 was vitiated by illegality, on the grounds that the maximum rate of increase of non-compulsory expenditure calculated by the Commission had been exceeded, and the act of adoption was thus annulled. The Court did, however, add that the details of the 1995 budget should be retained as published in the Official Journal until final adoption of the budget, which eventually took place on 31 January 1996.

CONCERNING THE RELIABILITY OF THE ACCOUNTS

The consolidated revenue and expenditure account

3.5. The consolidated revenue and expenditure account accurately reflects the Union's revenue and expenditure, but, despite the substantial improvements noted by comparison with the financial year 1994, still calls for the reservation expressed in paragraph 3.10.

The improvements to the consolidated revenue and expenditure account

3.6. The Court's audit revealed that improvements had been made since the financial year 1994 with regard to:

- the entry in the accounts of revenue and expenditure in the form of negative transactions (for which two notes on page 10 of Volume IV indicate the amounts in question);

- the entry in the accounts of advances/payments on account;

- the identification of appropriations made available under the EFTA States' contribution;

- the identification of the share corresponding to the EEA agreement in the presentation of the balance for the financial year.

3.7. In the particular case of payments consisting of advances/payments on account, and therefore of commitments remaining to be settled during subsequent years, the accounting information () is more exhaustive and detailed than in the past and now supplies generally satisfactory information on the volume of these advances/payments on account.

3.8. However, the manner in which this information has been presented should be supplemented so as to supply as true a picture as possible of developments during the financial year, in response to the Court's request to the Commission in its Special Report in support of the 1994 DAS (), especially as regards advances/payments on account settled during the financial year.

3.9. Although the Court noted the aforementioned improvements, it would also like to draw attention to the following reservation and observations.

The reservation concerning the consolidated revenue and expenditure account

Accounting commitments that no longer corresponded to actual obligations

3.10. The consolidated summary of budgetary implementation () and the off-balance sheet commitments were overstated because they included commitments that no longer corresponded to actual obligations. Only a system of regular monitoring at close intervals would be able to solve this problem, but this was still all too often unsatisfactory at authorizing officer level.

3.11. In its Special Report in support of the 1994 DAS (), the Court called upon the Commission to step up and extend the effort it had started to set up without delay procedures for the cancellation of accounting commitments which were no longer needed.

3.12. Progress was noted at the level of the Directorates-General budgetary guidelines and financial control. For example, a computing tool had been made available to authorizing officers enabling them to identify commitments no longer likely to correspond to legal obligations. The accounting officer and the Financial Controller regularly invite the authorizing departments to make use of this instrument in order to reduce the 'burden of the past.`

3.13. In order to quantify the progress that had been made at authorizing officer level, from among the total population of commitments which bore a significant risk of no longer corresponding to existing legal obligations, the Court identified and audited on a sample basis those that dated back to before 1991 for which no payments had been made between 1993 and 1995. This audit proved difficult to carry out because the available supporting documentation at the authorizing departments was too often scattered or even non-existent.

3.14. There were in all 2 567 dormant commitments that fulfilled the aforementioned conditions. They represented a total amount of 1 084 Mio ECU. Of these commitments, 526, amounting to a total of 340 Mio ECU, had been entered into before 1985 (i.e. more than 10 years earlier) and 83, representing a total amount of 28 Mio ECU, had been contracted before 1981 (i.e. more than 15 years earlier).

3.15. The breakdown of these dormant commitments by budgetary subsection (see Table 3.1) shows that they mainly concerned the Structural Funds (B2), the field of consumer protection, the internal market, industry and trans-European networks (B5) and external measures (B7).

>TABLE>

3.16. The Court's audit of about 100 transactions selected by sampling from the 2 567 commitments mentioned above produced the following results.

3.17. In the field of the Social Fund (Objective 2), 11 commitments (11,6 Mio ECU) out of the 16 selected concerned measures which were subject either to legal proceedings because of presumed serious irregularities or investigations by the national authorities or the Commission. As a result, implementation had been halted. Of the remaining five commitments, three should have been cancelled (913 507 ECU) and one was affected by an error concerning the exceeding of the time allowed for implementation. For the remaining commitment (1 Mio ECU), the Court could not arrive at a conclusion for lack of information.

3.18. In the fields of the ERDF and transport, out of the 20 commitments selected, nine clearly corresponded to obligations. Of the 11 remaining commitments, all relating to projects decided upon before 1989 and representing a total value of 25,5 Mio ECU, the information available on file provided no justification for their retention. Only one could already be closed (in March 1996).

3.19. In the fisheries field eight of the 20 commitments selected (the former representing 3,5 Mio ECU) should have been decommitted. For three others, the information available - which was too old - showed that the departments responsible for administration had not properly monitored them. This prevented the Court from forming an opinion as to the substance underlying the files in question.

3.20. In the field of the protection of forests, six out of the 20 commitments selected, amounting to a total of 32 944 ECU, should have been decommitted. Nine, amounting to 2,2 Mio ECU, had not been monitored by the managing departments, which prevented the Court from forming an opinion on the substance underlying the files in question. Three others had only been followed up after the Court had announced that its audit was to take place.

3.21. In the field of development cooperation, 14 commitments (36 Mio ECU) out of the 20 selected should have been cancelled. This situation was all the more serious as, in four of these 14 cases, the Court had already drawn the Commission's attention, in 1991, 1992 and 1994, to the need for commitments to be cancelled. It is also alarming because, in four other cases, the technical departments of the Commission had warned the relevant authorizing officers, but to no effect. Certain files had been declared lost. This situation was symptomatic of a monitoring system that was ineffective because it simply did not exist.

3.22. In the field of cooperation with the countries of Central and Eastern Europe, and, in particular in relation to the PHARE Regulation, five of the six commitments selected, amounting to a total of 372 531,98 ECU, should have been cancelled. This situation was due to inadequate monitoring.

3.23. In the field of the EAGGF-Guidance, Innovatory measures and Energy policy, eight commitments (totalling 1,1 Mio ECU) out of the 16 selected should no longer have been recorded in the accounts. Four other projects in the EAGGF-Guidance field (value: 3,2 Mio ECU), in respect of which the decisions were taken under the Integrated Mediterranean Programmes and allowed for a completion date between 1991 and 1992, were extended until 1995. In addition, in four cases out of the five commitments selected under Energy policy, no trace could be found of the original initial accounting documents. In these cases the Court was thus not able to carry out an exhaustive audit.

3.24. In conclusion, on the basis of the above analysis, the Court estimates that at least 30% of the oldest dormant commitments, namely about 1 000 commitments amounting to a total of approximately 300 Mio ECU, should no longer be shown in the accounts and should have been cancelled. As a result of the selection criteria adopted by the Court and because of the existence of numerous cases in which the Court was unable to find information to justify the continued existence of the commitments in question in the Commission's files, the actual overall figure for commitments that no longer correspond to actual obligations is higher than these amounts.

3.25. The existence of these outstanding commitments which should have been cancelled shows, moreover, that the Commission's authorizing officers do not examine files that are due to be closed systematically enough. These files, which are most usually prefinanced with advances or payments on account, thus remain pending, whereas if they had been definitively settled that would have resulted in the payment of a balance, or even in the issue of a recovery order, corresponding to the Commission's clearance of the financings concerned.

3.26. In this connection, other general checks carried out on a sample of commitments that had not been cleared at the beginning of the financial year, plus checks on the payments for the financial year, showed that, on several occasions, and mainly in the field of the Structural Funds, the Commission had charged recent transactions to uncleared commitments that had been provided to cover old obligations. This irregular practice, which the Court had already noted in its Report concerning the financial year 1993 (), not only affects the reliability of the accounts for the financial year but also, in practice, amounts to making use of commitments that should no longer have existed because they should have been cancelled.

3.27. Finally, in its Annual Report concerning the financial year 1993 (paragraphs 13.61 - 13.62), the Court criticized a practice employed by the Commission in connection with its management of the EC Investment Partners financial instrument (ECIP). This practice was subsequently abandoned, but the corresponding uncleared commitments, amounting to 4,2 Mio ECU, were never cancelled.

Other observations concerning the revenue and expenditure account

3.28. The Court's audit also gave rise to the following observations.

Entry of 1994 EAGGF-Guarantee expenditure under 1995

3.29. In its DAS Report concerning the financial year 1994 (paragraphs 3.15 - 3.17), the Court specified the circumstances that led the Commission to understate EAGGF-Guarantee expenditure for the financial year 1994 to the extent of 45,8 Mio ECU (budget heading B1-3700, clearance of previous years' accounts). This automatically led to an entry for the same amount under the financial year 1995, overstating by the same amount the accounts for the financial year. The Commission should have drawn attention to this situation by means of an explanatory note to the accounts for the financial year 1995.

Non-disclosure of the impact of the agrimonetary system

3.30. In its Special Report No 1/89, the Court concluded that 'it is not possible to identify from the budget or accounts in their current form what is the true budgetary impact of the agrimonetary system (whereby certain payments of agricultural subsidies are made by reference to exchange rates between the "green" ECU and national currencies which differ from market exchange rates). The absence of clarity in this regard effectively prevents meaningful interpretation of the accounting data` (). In its reply, the Commission asserted that it was 'prepared to look into the possibility of including remarks in its preliminary draft budget and in the management accounts` (). The Commission does indicate the estimated financial effects of the agrimonetary system in the overview of the preliminary draft budget () and provides further details in its annual report on the impact on EAGGF-Guarantee expenditure (). However, such information is not included in the annual accounts.

3.31. Partly as a result of regulatory changes intended to improve the functioning of the agrimonetary system and partly as a result of price fluctuations, the cost of the agrimonetary system to the Community budget was 456 Mio ECU () in 1994. The Commission estimates that the equivalent figure for 1995 is about 1 988 Mio ECU. The Court considers that it would be appropriate to include in the annual accounts an indication of the total cost and a reference to the Commission's annual report on the impact on EAGGF-Guarantee expenditure, either in the form of a note to the consolidated accounts presented in Volume IV or by means of a comment in Volume I relating to the analysis of financial management.

Errors affecting the reliability of the accounts

3.32. The arithmetical checks of the accounts and the consistency between the latter and the Sincom CB/D system revealed a difference of 18,2 Mio ECU between the figures concerning commitment appropriations presented in Volume II (the Commission's revenue and expenditure account) and those presented in Volume IV (consolidated accounts) as regards Chapters B0-40 and B2-40. It should be noted that these differences offset each other.

3.33. The reliability of the revenue and expenditure account is mainly affected by errors which were detected during the examination of the transactions audited by the Court.

3.34. With regard to the commitments entered into during the financial year, it was discovered, in the field of the Structural Funds, that there were some cases in which the amount of the commitment did not correspond to the amount of expenditure provided for in the financing plan for the annual tranche concerned. In the case of payments, some cases were observed where the sum had been charged to a commitment and/or budgetary heading that bore no relation to the item of expenditure concerned.

3.35. These cases generally result from the non-application of the rule which states that, in the case of multiannual operations, all the resources needed for the financing are to be committed in one initial commitment, to which subsequently all the payments made under the programme in question are to be charged. Such practices, which in themselves distort the presentation of the implementation of the differentiated appropriations, have been criticized repeatedly in previous Court reports (e.g. the 1993 Annual Report, paragraphs 14.9 to 14.11). In practical terms they result in the commitment, not of complete programmes, but only, year by year, of annual tranches of funds made available. Then, as these tranches are rarely fully used up, the Commission, rather than applying the financial rules to the letter and cancelling the outstanding commitments, transfers de facto, in defiance of the Community financial regulations, the residue of outstanding commitments to subsequent financial years and reduces proportionately the commitments corresponding to subsequent tranches. In this way, as indicated in 3.27, it charges, as a priority, the first payments under these subsequent tranches to the outstanding commitments from previous years. As a result, the Community's budgetary accounts no longer give a faithful picture of progress in the field on multiannual programmes financed by the Community.

3.36. Moreover, several cases were detected where payments in the form of advances/payments on account or final payments that had been made were not identified in the Sincom system.

3.37. The cases detected are relatively few (just over 20 commitments and payments in the Court's selected sample) and are difficult to extrapolate owing to the nature of the problems identified. Nevertheless, these 20 or so cases of errors affecting the revenue and expenditure account that were detected in a fairly limited sample of transactions (a selection of around 1 500 commitment and payment transactions) outnumber the cases detected for the financial year 1994, and it is important to ensure that the accounting procedures prevent such errors in the future.

The Sincom accounting system

3.38. The entry of budgetary expenditure in the accounts via the computerized accounting system (Sincom) generally proved reliable.

3.39. The Court's audit work confirmed the favourable impressions pointed out in paragraphs 3.34 to 3.36 of the Special Report in support of the 1994 DAS (). It also enabled the Court to check the reconciliation and internal consistency of the information contained in the main files of the Sincom computerized accounting system.

3.40. Nevertheless, the checks carried out on Sincom revealed that the budgetary implementation for 1995 included 16 payment transactions and one commitment operation which had been entered in the accounts on 29 March 1996 following the Commission's Decision of 27 March 1996 to override the Financial Controller's refusal to grant approval (). In all 17 cases the expenditure had occurred during the financial year 1996, well after any authorized extension periods. However, it was, from the accounting point of view, entered under 1995, which constitutes a clear infringement of Article 16 of the Financial Regulation, which lays down unequivocal, imperative dates by which accounting transactions must be brought to account (31 December for commitments entered into and 15 January for payments made by the accounting officer). In such cases, transactions which had not been formally approved by the end of the financial year ought to have been cancelled in the accounts and should, if appropriate, have been re-introduced under the following financial year.

The balance for the financial year

3.41. The result of the new presentation of the balance for the financial year in the consolidated balance sheet adopted on 31 December 1995 is that the balance for the financial year of the contribution made to the Community budget by the European Free Trade Association (EFTA) countries belonging to the European Economic Area (EEA) is now separate from the European Union's balance.

3.42. However, the debt towards the EFTA countries belonging to the EEA arising from transactions in 1994 was not shown on the liabilities side of the consolidated balance sheet because the EFTA balance for the financial year 1994 had been transferred to the budgetary revenue, along with the EU balance, in 1995. According to the Commission's calculation of the balance for the financial year 1994 of the contribution of the EFTA countries, this debt amounted to 2,1 Mio ECU.

3.43. Article 3(2) of Protocol 32 concerning the financial conditions for implementing Article 82 of the EEA Agreement provides that 'at the time of the closure of the accounts relating to each financial year (n), within the framework of the establishment of the revenue and expenditure account, the Commission shall proceed to the regularization of the accounts with respect to the participation of the EFTA States, taking into consideration:... the final implementation of the appropriations for the financial year, taking into account possible cancellations and carry-overs... `. It follows that the Commission should already have regularized the accounts for 1994 and 1995.

3.44. However, on 30 May 1996 the accounts had still not been regularized. The balance for the EFTA financial year shown in the balance sheet, however, cannot be determined correctly until the accounts have been regularized. According to the balance sheet, the Commission calculated the balance for the financial years 1994 and 1995 with regard to EFTA solely on the basis of the contributions paid by the EFTA countries, on the one hand, and the payments from appropriations for the same financial year, on the other, without accounting for, inter alia, items such as carry-overs of appropriations or cancellations of the same.

3.45. From now on the Commission is asked, in accordance with the Regulation in force, to regularize the accounts when the revenue and expenditure account is drawn up, on 1 May (n+1), so that the position in relation to the EFTA countries can be shown correctly in the European Union's financial statements, and so that regularization can be effected in the context of drawing up the budget for the following financial year (n+2), i.e. by 1 September (n+1), at the latest.

The European Union's consolidated balance sheet

3.46. The European Union's consolidated balance sheet accurately reflects the Union's financial situation, but despite the substantial improvements noted by comparison with the financial year 1994, the following reservations are still called for as regards the balance sheets of the Commission and the other institutions.

3.47. The audit of the consolidation of the balance sheets mainly involves checking the arithmetical accuracy of the transactions and the correct consolidation of the balance sheets of the various Community institutions and organizations which comprise the framework for consolidation. These checks did not reveal any anomalies.

3.48. Any reservations and observations by the Court on the balance sheets of the Commission and other Community institutions and organizations also inevitably affect the consolidated balance sheet.

Improvements in the consolidated financial balance sheet

3.49. The Court's audit revealed that improvements had been made following its Special Report on the DAS for the financial year 1994 as regards the harmonization of accounting methods and, more particularly, the presentation of certain property rights and, except for the ESC/COR, of computer equipment in the financial statements. Despite these improvements, the consolidated balance sheet is still subject to the following observations and further efforts still need to be made in this field.

Observations concerning the consolidated balance sheet

Long-term leasing and renting commitments (outside the balance sheet)

3.50. The Court considers that the presentation of 'long-term leasing and renting commitments` requires further improvement, because, although the Court is aware that the data presented in the 1995 financial statements are the result of a pragmatic selection, pending uniform accounting rules being drawn up in this area, they call for the following observations.

3.51. Long-lease and leasing contracts (of the European Parliament and the Court of Justice, respectively) and standard leasing contacts (of the Court of Justice and the ESC), or even an outstanding balance payable on the purchase of a building (Council), are all presented under the same heading.

3.52. The explanatory notes concerning the long-lease and leasing contracts make no mention of the fact that the amounts are estimated, or of what the amount calculated actually represents (European Parliament). Although significant amounts have already been paid in respect of these contracts by the respective institutions (298,6 Mio ECU by the European Parliament and 53,4 Mio ECU by the Court of Justice), this information is not given in the explanatory notes.

3.53. As regards the standard leasing contracts, in one case the amounts indicated correspond to the annual payments (Court of Justice - 'Palais` building, 2,1, Mio ECU), which is pointed out in the explanatory notes, and in another to the total of the payments due until the respective contracts expire (ESC 33,4 Mio ECU), which is not stated in the notes. The year's rent for 1996 for the various buildings rented by the ESC is, as it happens, estimated at 4,2 Mio ECU. This information concerning the standard leasing contracts also risks misleading the reader of the financial statements, inasmuch as there is no information concerning rents paid by the Commission. It should be noted that the rents paid by the Commission in 1995 amounted to 110,6 Mio ECU for the buildings in Brussels alone (see Annual Report concerning the financial year 1995, paragraph 13.29 ()).

The harmonization of the accounting methods

3.54. The uniform presentation of financial statements and the application of identical accounting methods and evaluation rules by the various entities included in the consolidation are among the conditions that must be met before consolidation can take place. In this connection, Article 136 (10) of the Commission Regulation concerning the rules for the implementation of the Financial Regulation states that the financial statements should be drawn up in accordance with accounting principles which include, in particular, the principles laid down in the Council Directives.

3.55. In the context of the Community's accounts, the Commission has been empowered by Article 21 of the implementing procedures to decide on the accounting methods and harmonize the presentation of the financial statements. Thus, in particular, after the Commission's accounting officer has consulted the accounting officers of the other institutions, the Commission must adopt the accounting methods that are to apply to all the institutions.

3.56. In spite of this, the information included in the financial statements was not always uniform, (for example, as regards the entry of computer equipment in the balance sheet in the case of the ESC and the COR or the conversion into ECU of the value of the tangible assets in the case of the Council).

3.57. The Commission recently took the initiative of commissioning an external consultant to produce a study on the identification and harmonization of the most appropriate accounting standards for drawing up the Union's accounts. The Court feels that the Commission should make the best possible use of the results of this study to ensure, together with the other institutions, that the accounts for the financial year 1996 are drawn up on a uniform basis in accordance with procedures to be adopted before the end of 1996.

The Commission's financial balance sheet

Improvements to the Commission's balance sheet

3.58. The Court's audit revealed that improvements had been made as a result of the reservations and observations in its DAS Report for the financial year 1994, in particular as regards the coordination and planning of the closure of banking accounts at the end of the financial year and the real volume of commitments shown outside the balance sheet.

3.59. Nevertheless, the Court feels that additional improvements are needed as regards the handling of:

(a) claims related to the clearance of the EAGGF-Guarantee accounts;

(b) potential claims linked to the discovery of frauds and irregularities;

(c) multiannual decisions and obligations involving financial commitments outside the balance sheet.

Claims on Member States related to the clearance of the EAGGF-Guarantee accounts

3.60. In its 1994 DAS report, the Court criticized the fact that these claims had not been shown in the balance sheet. As of 31 December 1995, these claims were shown as off-balance sheet commitments (758 Mio ECU). However, as the claims in question were certain, repayable and due, they should have been treated logically in accordance with the Financial Regulation, i.e. they should have been established so that they could be shown on the assets side of the actual balance sheet, and not merely as off-balance sheet commitments.

Potential claims linked to the establishment of fraud and irregularities

3.61. In its Special Report in support of the 1994 DAS (), the Court asked the Commission to improve the information supplied in its financial statements under the heading 'potential claims` so as to supply the reader with an overview of all potential claims related to the uncovering of fraud and irregularities.

3.62. The Commission acceded to this request, insofar as its financial statements () now show potential claims for own resources and structural measures as well as data concerning the EAGGF-Guarantee.

3.63. However, this information is presented in a way which could lead to misunderstandings. For two budgetary fields, the data is described as cases found (Own Resources and ERDF). For another (EAGGF-Guarantee), it is described as amounts actually recovered, whereas it would appear that the amounts in question were still to be recovered.

3.64. The Commission should standardize its presentation so as to give a clear and complete picture of the situation at the end of each financial year, with a breakdown of declared or known amounts pertaining to cases of fraud and irregularity and the chances of their being recovered.

Multiannual decisions and obligations involving extra-budgetary financial commitments

3.65. On 31 December 1995, under commitments entered into (off the balance sheet), the Commission showed an amount of 94 865,2 Mio ECU for commitments relating to the Structural Funds (aid provided for and not committed for the period 1994-99 at 1995 prices) and an amount of 11 204,9 Mio ECU for Community initiatives. These amounts represented the difference between Structural Fund planning for the 1994-95 planning period and the accumulated commitments for 1994 and 1995 as entered in Sincom. However, the commitments entered in Sincom also included some commitments corresponding to the previous planning periods. The result was an understatement of the amounts entered in the off-balance sheet commitments.

3.66. In addition to the improvements noted by the Court, the following reservations and observations should also be noted.

Reservations concerning the Commission's balance sheet

Reservation concerning tangible fixed assets

3.67. The Court must once again express a reservation () regarding the value of the Commission's tangible fixed assets (318,6 Mio ECU for movable property in Brussels, Luxembourg and the Delegations). This reservation cannot be lifted until the sums concerned can be calculated more accurately, i.e. after the completion of the physical inventory procedures currently under way (expected to be completed in June 1996) and the entry into force of a new accounting and regulatory framework.

Reservation concerning the separate accounts for traditional own resources

3.68. The Court reiterates its reservation as to the exhaustiveness of the separate accounts concerning customs duties and agricultural levies.

3.69. In fact, the magnitude of the errors and the problems detected in connection with the separate accounts for customs duties and agricultural levies means that the amount of around 856,4 Mio ECU entered in the balance sheet in this context cannot be considered reliable.

3.70. Each Member State sends the Commission a quarterly statement of its separate accounts showing entitlements established and not collected or guaranteed and entitlements guaranteed but contested.

3.71. The separate accounts kept by the Member States are still affected by errors and omissions. Numerous errors were found in Germany. In Italy, the end of quarter carry-overs to the following quarter were not consistent. The Member States' statements did not always show entitlements that had been collected separately from those that had been written off.

Other observations concerning the Commission's balance sheet

Claims concerning the VAT and GNP own resources

3.72. For the own resources deriving from the VAT and GNP own resources, the annexes to the balance sheet () showed a certain number of claims, the amounts for which were not specified and which had been established and recorded as 'token entries` in the Commission's accounts. The Court's examination of the recovery orders and claims estimates revealed significant discrepancies between the balance sheet and the situation at the end of the financial year 1995.

3.73. Thus, for the GNP balances, 72 cases of reservations in the GNP statements had not given rise to recovery orders or claims estimates and therefore did not appear in the accounts. The same was true of at least 19 cases concerning reservations in the VAT statements. Nor did the annexes to the balance sheet give an exhaustive picture of the number of financial years affected by these claims.

Collection of revenue

Observations on disputes/default interest

3.74. Although a distinct improvement was found in the drawing-up of accounting documents (claims estimates), the audit of the files showed that the procedure for the recovery of traditional own resources affected by disputes was still very slow.

Fines, penalties and sanctions

3.75. In 10 or so cases, compared with the 143 cases outstanding on 31 December 1995, delays that were sometimes considerable were found in the collection of fines. The amounts concerned should be collected within the three months following the notification of the fine, except where the undertaking lodges a security and appeals to the courts. If the amount has not been recovered within three months, the Commission has a fortnight to serve notice on the debtor.

3.76. In several cases, involving around 4 Mio ECU, fines that had not been collected were either not covered by securities or were no longer covered or notice had not been served as required.

Revenue to be collected

3.77. The item 'revenue to be collected` was greatly understated, since some of the Commission's authorizing officers do not systematically issue recovery orders as soon as they have established such revenue. For example, following its audits in 1993 and 1994 concerning direct measures in favour of tourism following the European Year of Tourism (EYT), DG XX identified 43 cases where recoveries were necessary. For 31 of the cases concerned, involving the recovery of around 324 000 ECU, DG XXIII had not yet issued recovery orders.

Implementation and entry in the accounts of payments

3.78. The audit at central level - in the cash management system, bank accounting, general accounting and the bank reconciliation system (Nostro) - of those payment transactions that had been selected as part of the central sample and had resulted in disbursements revealed only some minor errors.

Participations and loans

The presentation of participations and ECIP loans

3.79. With regard to the EC Investment Partners financial instrument (ECIP), the Court maintains its observation concerning the incorrect distribution between participations and loans in its Report in support of the 1994 DAS () and notes the Commission's intention to carry out an independent audit of all the centralized accounts and, from now on, to show in the balance sheet the actual disbursement situation for assets relating to the ECIP instrument.

The accumulation and handling of profits from the Commission's lending/borrowing activities

3.80. Loan activities using borrowed funds in the context of the New Community Instrument (NCI), Euratom, balance of payments aid, medium-term financial assistance and food aid yield a modest return for the Community, which has built up over the years and had produced interest revenue amounting to a total of 69,1 Mio ECU as at 31 December 1995. There is no legal framework to permit the utilization of such unforeseen profits. These amounts should be entered in the budget as revenue and, where applicable, as expenditure, so that their utilization can be monitored transparently. The Commission has already used up some of these funds via extra-budgetary procedures (1,1 Mio ECU in 1995).

The management of 'food aid` loans to the newly independent States

3.81. If the beneficiary of a loan does not meet his payment obligations by the required deadline (whether for the repayment of capital or the payment of interest), he is liable to pay default interest. This is calculated and entered in the accounts by the Commission from the date of the default to the date of the Guarantee Fund's intervention (three months), but no later. The Guarantee Fund ought to calculate and enter the default interest accrued as from the date upon which it intervenes, so that, in the event of a late repayment, these amounts can be charged to the beneficiaries of the loans in question or their guarantors. This default interest, amounting to around 5,7 Mio ECU, was not in the Guarantee Fund's balance sheet as at 31 December 1995 () and, consequently, was not entered in the Commission's financial balance sheet, or in the consolidated financial balance sheet of the European Union. As a result, the financial situation is incomplete as presented.

3.82. The amounts outstanding on these loans to the newly independent States were entered in the accounts as claims, and interest accrued and not overdue was entered under prepayments and accrued income. The risk of some of these loans not being recovered is a real one if one takes into consideration the situation of the debtors concerned. The Guarantee Fund has already had to intervene to counter the effects of defaults amounting to a total of 232,5 Mio ECU as at 31 December 1995. In two cases, there was still an outstanding amount of 65,3 Mio ECU that might never be repaid. Finally, of the 211,5 Mio ECU that should have been paid on 15 January 1996, 37 Mio ECU was still outstanding. In such cases, the accounts should contain notes drawing attention to the existence of debts that can only be recovered with difficulty.

3.83. The statement of commitments outside the balance sheet gives a picture of the potential liability for the EU (18 922 Mio ECU) resulting from the guarantees given by the European Communities on loans granted by third parties, in particular by the EIB (where the Communities could become subrogated to the rights of the main creditor), as well as on borrowings contracted by the Communities themselves. However, this picture is incomplete because none of the guarantees received for these same loans, which are likely to reduce any eventual charge to the Union, are included in the statement and are therefore not evaluated there.

3.84. In the future, it would be desirable for the Commission to draw up, outside the balance sheet, an exhaustive statement of commitments received, including an evaluation of their quality, so as to supply readers of the accounts with a more precise and balanced evaluation of the net financial risk incurred by the Union in the context of these loans.

Implementation of guarantees given

3.85. In November 1995, the Directorate-General responsible for managing the financial instrument for food aid to the newly independent States requested an advance amounting to 211,5 Mio ECU via provisional recourse to the Commission's liquid assets (Article 12 of Regulation 1552/89). This advance, which was intended to finance a payment due on a borrowing on 15 January 1996, pending the settlement of the same payments by the countries that had benefited from the corresponding loans, should have been charged to the 1996 accounting year. As the result of an accounting error, it was charged to the 1995 accounts. As a result, on the one hand, a debt that did not belong in the 1995 balance sheet was shown on the assets side under the heading 'Community budget guarantees` for the amount of 211,5 Mio ECU, and, on the other hand, the bank accounts were understated by the same amount.

Breakdown of the bank accounts in the balance sheet

3.86. During the financial year, bank transactions are entered in one single bank account in the general accounts. When the balance sheet is drawn up at the end of the year, this amount is broken down into credit and debit balances and then into amounts held by the Treasuries, central banks or commercial banks (demand deposit accounts). This breakdown is carried out on the basis of the individual balances of the bank accounts given in the bank accounting, which are confirmed by the Court. When these sums were being broken down for the 1995 accounts, a Treasury account and a central bank account were confused. Consequently, the heading 'Treasury accounts` on the liabilities side of the balance sheet was understated by 118,8 Mio ECU and the heading 'central bank accounts` on the liabilities side of the balance sheet was overstated by the same amount.

The financial balance sheets of the other Community institutions and organizations

Improvements in the balance sheets of the other Community institutions and organizations

3.87. The Court's audit revealed improvements over the financial year 1994 as regards accounting for tangible fixed assets and, in particular, property rights with a purchase option. Nevertheless, the efforts undertaken in this field must be continued.

3.88. Whilst taking account of the improvements observed, the following reservation and observations should be noted.

Reservation concerning tangible fixed assets

3.89. The Court once again expresses a reservation concerning the value of the movable assets (97,9 Mio ECU) entered in the respective balance sheets of the European Parliament, the Economic and Social Committee and the Committee of the Regions.

3.90. With regard to the European Parliament, the amount entered in the balance sheet (91,2 Mio ECU) does not correspond to the amount shown in the IMMO data-base, which serves as the inventory register. In addition, the adjustments to be made following the last physical triannual check completed in 1994 have still not been incorporated into the balance sheet at 31 December 1995.

3.91. As for the Economic and Social Committee (ESC) and the Committee of the Regions (COR), the amount entered in the consolidated balance sheet (6,7 Mio ECU) is not based on the inventory registers. The shortcomings detected with regard to the inventory registers (e.g. entries in various currencies rather than in the equivalent ECU rate, no totals and blank pages) are such that reconciliation with the accounting figure is almost impossible. Moreover, there has been no physical stocktaking at the ESC for at least 13 years.

Observations concerning tangible assets

3.92. The Council's current practice of converting the total amount for movable assets (27 Mio ECU) given in the inventory in Belgian francs at the last ECU conversion rate for the financial year ended results in an overestimate of 2 Mio ECU. This practice is contrary to generally accepted accounting principles and to the accounting principles applied by the Commission when it draws up its own balance sheet and the consolidated balance sheet (see 'Summary of the main accounting principles`, revenue and expenditure account and balance sheet Volume IV p. 6 paragraph 2.2.3.: tangible assets retain their value in ECUs as calculated at the accounting rates in force at the time of purchase).

Observation concerning the bank accounts and cash balances

3.93. The Court cannot express an opinion as to the reliability of the amount of the demand deposit accounts (2,8 Mio ECU) and the cash balance (0,2 Mio ECU) shown on the assets side of the consolidated balance sheet for the ESC/COR, given that the bank and cash reconciliations as at 31 December 1995 had not been established, or were established late.

CONCERNING THE LEGALITY/REGULARITY OF THE UNDERLYING TRANSACTIONS

Observations on revenue-related transactions

Traditional own resources

Customs duties and agricultural levies

3.94. The Court's audit of a sample of underlying transactions uncovered a relatively limited number of errors which involved failure to make entitlements available, unjustified write-offs, the misapplication of the customs tariff, the slow implementation of corrections, delays in making entitlements available or entitlements that were both late and incomplete, delays in making entitlements available that were detected in the Court's audits or incomplete assessments without declarations.

3.95. The relevant audits revealed problems that were sometimes significant if the own resources are to be made available in accordance with the rules. In most cases, the resulting observations refer to the systems or procedures implemented in the Member States:

(a) in one Member State, delays in entering supplementary global declarations in the accounts were found in several customs offices. These delays, which were sometimes significant (up to five months), were the result of the interpretation of the national rules. In another Member State, corrections to assessments were made late. In a further two Member States, systematic delays were found in the establishment of customs debts;

(b) in one Member State, entitlements collected on goods leaving customs warehouses were systematically paid in late to the central accounts. In several Member States, the deadlines for the clearance of incomplete declarations were badly monitored, which led to delays in making the entitlements available;

(c) errors were identified in the separate accounts. In one Member State, there were numerous errors and the separate accounts should be revised. In another Member State, delays were found in the charging of entitlements that had provisionally been entered in a suspense account;

(d) in several Member States the supporting documents necessary for calculating the customs debt for certain transactions audited were not available during the on-the-spot audit visit.

Sugar levies

3.96. With regard to the payment of production levies, it was found that all the Member States except the United Kingdom paid in the balances due pursuant to the rates laid down in Regulation (EC) No 2403/95 () during the month of December 1995. In the case of the United Kingdom, the statement of entitlements established in October 1995 and made available in December 1995 only included storage levies. The Member State in question therefore enjoyed cash advantages amounting to 20 447 318 ECU. This is not consistent with the principle of the self-financing of the Community's sugar production surplus.

3.97. Furthermore, in the United Kingdom, the balance of the production levy for the 1994/95 marketing year was not shown in the accounts as an established entitlement to be recovered as at 31 December 1995. However, the figures concerning the definitive production of sugar and isoglucose are forwarded by the Member States to the Commission by 5 October at the latest (deadline laid down in Regulation (EEC) No 2682/84 ()), and Regulation (EC) No 2403/95 of 12 October 1995 lays down the production levies for the 1994/95 marketing year. This means that, during October 1995, the Commission's departments had all the details necessary (production figures, amounts of levies) for the calculation of this claim.

3.98. It should be noted that the practice followed by the United Kingdom and the accounting procedure adopted by the Commission have already been discussed by the Court in the DAS report concerning the financial year 1994 (paragraph 3.111), when the balance for the 1993/94 marketing year, amounting to 14 974 768 ECU, was not paid over to the Community until January 1995. The Court notes that it made concrete proposals for resolving this problem in its Opinion No 1/94 () on the amendment of Regulation (EC) No 1552/89.

3.99. Furthermore, the Court's audit of a sample of 11 transactions relating to sugar levies did not raise any observations with regard to the legality/regularity of the underlying transactions for inclusion in this Report.

The VAT-based own resource

3.100. According to Article 2(1)(c) of Council Decision 88/376, the VAT own resource derives from the application of a uniform rate (maximum 1,4 %), valid for all Member States, to the VAT assessment base, which is determined in a uniform manner for all Member States according to Community rules; however, the assessment base for any Member State to be taken into account may not exceed 55% of its GNP. The assessment base is calculated by dividing the total net VAT revenue collected by the weighted average rate of VAT according to the method defined in Article 4 of Council Regulation 1553/89. However, the establishment of a uniform VAT assessment base is limited by national particularities in the application of VAT legislation. In the VAT Directives, there are 60 cases where Member States have options, and in about 125 cases Member States were granted derogations by the Commission to deviate from the general principles. Therefore, for the purposes of the VAT own resource, compensations and corrections have to be calculated in order to reconstitute a harmonized base.

3.101. Table 3.2 gives the details for the calculation of the VAT assessment base for 1994 resulting from the VAT summary statements presented by the Member States in 1995.

3.102. From this scheme it is clear that the most important elements are 'net VAT revenue collected` and the 'weighted average rate`. A difference of 1% in these elements will influence the final VAT base, also by 1%.

3.103. The Court's audit objective was to obtain assurance that the own resources accruing from VAT paid over to the European Union by the Member States are accurate, timely and complete and that the annual VAT summary statements - as underlying documents - are legal and regular. Since own resources accruing from VAT for a given year are paid over during that year on a provisional basis and become definitive the following year, the audit work concentrated on Member States' 1994 VAT summary statements, which were presented in 1995.

3.104. Audits were carried out at the Commission and at the relevant central administrations in several Member States.

>TABLE>

3.105. The Court found that not all VAT revenue collected during a given year is necessarily brought to account in that year; and that certain amounts may only be brought to account in the following financial year. This is particularly the case for suspense accounts containing VAT revenue which remain uncleared at the end of the financial year and which are not always brought to account and properly allocated to the appropriate national budget lines of the relevant financial year. This type of accounting treatment occurs because of the different national accounting practices applied by Member States.

3.106. As a consequence, the net VAT revenue figures reported by the Commission for a given year are not accurate and complete to the extent that they do not record all VAT collected and brought to account by all national administrations. Even if the outstanding VAT revenue held in suspense accounts is brought to account in subsequent years and recorded in future VAT summary statements, the result in terms of the VAT own resource will be different because the weighted average rate changes every year.

Accuracy of the weighted average rate

3.107. If more than one VAT rate is applied, Member States are required to calculate a weighted average rate (WAR) to four decimal places. To do this, all transactions which are taxable and which are not entitled to deduction of VAT should be broken down by the applicable VAT rate. This breakdown should be effected by means of data taken from National Accounts (SEC), sources related thereto or any other appropriate source.

3.108. In practice the WAR is calculated on the basis of assumptions, estimates and information which are not as up-to-date as they could be. Thus the quality of the data supplied differs considerably from Member State to Member State, as does also its influence on the calculation of the WAR.

3.109. The breakdown of the transactions per VAT rate applicable improves as the harmonization of the rates improves, but is still - because of a lack of reliable data for an important part of the transactions - of an insufficient degree.

3.110. Audits carried out in five Member States showed that even if the WAR had been calculated with an apparent precision of four decimal places as required by the regulation, it is likely to be surrounded by a certain degree of uncertainty. So far, only the authorities of one Member State have attempted to measure such uncertainty and in their reply to the Court's observations, they indicated it to be in the region of 1,5%.

Accounting for corrections and compensations

3.111. The harmonization of the VAT base results in 'adjustments` being made to the net revenue collected or being applied to the intermediate base. For the 1994 statements these adjustments accounted for almost 5,5% (see Table 3.2) of the total VAT base.

3.112. In general the margin of uncertainty here is likely to be proportionally greater than for the WAR. This is because more assumptions have to be made. Member States therefore have to estimate the volume of the assessment base for the corrections, by reconstituting fictitiously on the basis of statistics, transactions having a fiscal nature. It is likely that for some estimates the degree of uncertainty is higher than 10% of the amount involved.

3.113. The Commission and Member States can seek corrections, even retroactively for three years, to be made to Member States' calculations of the VAT own resource. At the end of 1995 there were at least 105 such claims outstanding. Given the fact that the amounts concerned are not known - not even in all cases whether they have a positive or negative impact on the EU revenue - and that sometimes reserves are outstanding for many years, this again increases somewhat the uncertainty of the reliability of the VAT own resource.

Overall assessment

3.114. As for 1994 (), the Court has found no major problems concerning the calculation of the amounts due by the Member States (twelfths, balances and adjustments to balances) or their collection and accounting, which directly affect the implementation of the budgetary provisions relating to the VAT-resource. However, the amount of the 1994 VAT own resource of 35 792 Mio ECU, as it was fixed in 1995 with the payment of the outstanding balance, is affected by the above-mentioned lack of precision in the determination of the assessment base for the VAT own resource. Although not all Member States have been fully audited there are, from previous audits and controls by the Commission, sufficient indications that this conclusion is valid for the whole.

3.115. Some degree of uncertainty about the VAT-own resource is inescapable, given the problems at national level concerned with the WAR on the one hand and the corrections and compensations on the other hand, all of them often based on estimates, which are necessary to calculate the notionally harmonized base. There should nonetheless be room for improvement in these elements of the process without disproportionate costs being incurred and the Court therefore calls on all parties to take appropriate and cost-effective steps to improve the quality of the national systems for the establishment of the VAT base as regards the aspects of 'comparability of systems between Member States` and 'reliability of each system`, especially as regards the sources and compilation methods of the various kinds of data used (macroeconomic, statistical or technical).

The own resource based on the gross national product (GNP)

3.116. The own resources based on the GNP call for some comments by the Court in respect of the reliability of the calculation and the procedures applied in drawing up the assessment base (see paragraphs 3.117 - 3.119). Apart from these comments, however, the Commission's accounting and the making available of these resources did not give rise to any observations (see paragraphs 3.120 - 3.121).

The GNP as an assessment base

3.117. The GNP is calculated on the basis of the national accounts drawn up in each Member State, using complex statistical and econometric methods, by specialist public bodies which enjoy a monopoly in this area. The data supplied to the Commission by the Member States are checked twice, firstly by the Commission (Eurostat), on the basis of Article 19 of Council Regulation EEC, Euratom No 1552/89 of 29 May 1989 concerning own resources, and secondly, in accordance with Article 7 of Council Directive 89/130/EEC, Euratom of 13 February 1989 concerning the harmonization of the establishment of GNP at market prices, by the GNP Committee, consisting of representatives of the Member States. In October 1995, the GNP committee submitted its opinion on the data concerning the financial year 1994. This stated that the Committee had examined the GNP data forwarded by the Member States and found, on the basis of the explanations supplied by the Member States, that considerable improvements had been made. The Committee also noted that the Commission was monitoring the improvements being made with regard to the shortcomings which existed in the accounts of the Member States and which had been detected during the audit visits carried out in connection with Article 19 of Regulation 1552/89, and it expressed a desire to see this progress continue. The Committee noted with satisfaction the progress already achieved, and still being achieved in the Member States as regards the harmonization of GNP data.

3.118. The audits carried out by the Court were concerned with the Member States' compliance with the regulatory concepts and procedures laid down in Directive 89/130/EEC, Euratom, concerning the harmonization of the manner in which the gross national product is calculated at market prices. Because of the existence of a certain number of reservations (130 cases) that had not been lifted by the Commission (in particular as regards the exhaustiveness of the GNP) and the absence of information as to their potential effects on the GNP resource, it was still not possible to assess the quality of the system.

3.119. In its Annual Report concerning the financial year 1995 (see Chapter 1, Own resources), the Court raised, in general terms, the problem of measuring the quality of the GNP from the points of view of the 'comparability` of GNP data between Member States and the 'reliability` of the data from each Member State. It felt that the development and application of tools for measuring the quality of the GNP would make it possible to clarify the question of its technical validity as an own resource assessment base and would supply the Court with the necessary details for it to be able to form a better opinion.

The own resource based on GNP (supplementary resource)

3.120. As regards the GNP resource, the Statement of Assurance covers the reliability and legality/regularity of the methods leading to the establishment of the GNP own resource. It takes into consideration the following aspects:

(a) the establishment of the own resource ceiling;

(b) the calculation of the uniform call-up rate for the own resource 'supplementary assessment base`;

(c) the calculation of the sums owed by each Member State in respect of this supplementary resource;

(d) the calculation of the monthly twelfths to be paid, and their recovery and entry in the accounts;

(e) the calculation of the annual balances and adjustments to previous balances, and their recovery and entry in the accounts.

3.121. The checks carried out by the Court in respect of the above points did not give rise to any observations concerning the financial year 1995.

Reservations concerning expenditure-related transactions

Cases of expenditure for which the Court cannot provide any assurance

3.122. In several areas, representing about 2,3% of Community payments, the Court is unable to express any sort of opinion. This unsatisfactory situation is due, to the extent of 1,1%, to the unreliability of the systems in place for the management of the transactions the Court was required to audit and to the extent of 1,2% to the inadequacy of the information made available to the Court.

Particularly unreliable systems which are likely to include errors

3.123. For certain specific categories of Community EAGGF-Guarantee expenditure, the Court's audit revealed that the systems which had been put in place to manage the underlying transactions were particularly unreliable and error-prone. Although the individual transactions verified in this area were apparently in order, in these cases it was not possible to carry out a valid audit and the risk that some significant errors might not have been detected is considerable. Out of the total sample of 683 payments, this problem was encountered eight times, which means that, for some 1,2% of the payments made against the Community budget in 1995, it is impossible to give any assurance as to the legality and regularity of the underlying transactions. Community expenditure in 1995 in the specific fields concerned amounted to 500 Mio ECU (rounded figure). This problem cropped up in the following areas:

- in the field of export refunds in Italy, where the forwarding of customs certificates to the paying agency was left to the actual beneficiaries (four cases in an area where the expenditure involved amounted to 356,4 Mio ECU);

- in the cases of subsidies for the production of processed tomato-based products, financial reimbursements for lemon processing and the public storage of alcohol in Italy, where physical quantity controls were too few (three cases in an area in which the expenditure involved amounted to ±135,0 Mio ECU);

- in the case of subsidies to rape, sunflower and soya producers in the German Land of Mecklenburg-West Pomerania, where the paying agency did not carry out enough administrative checks (one case in an area in which the expenditure involved amounted to ±19 Mio ECU).

The absence of assurance for miscellaneous reasons

3.124. For various reasons (timetable difficulties, lack of an audit trail, legal or material obstacles, etc.), the Court was unable to audit eight transactions, i.e. 1,2% of the sample.

Cases of expenditure in respect of which the Court can give only partial assurance

3.125. In 11 other cases the Court was able to obtain partial assurance only, owing to the specific problems encountered during the audit (lack of supporting documents, lack of clear or convincing information concerning apparent anomalies).

Errors affecting the legality/regularity of the expenditure

3.126. Some of the errors detected by the Court related to commitments and others to payments. Some had direct and measurable effects on the amount of the underlying transactions (errors classified as substantial ()), whilst others consisted of infringements of the regulatory and control mechanisms, and whilst they did not have a direct measurable effect on the amounts of the underlying transactions financed by the Community budget they must nevertheless be taken seriously (errors classified as formal(40)). The results of the legality/regularity audit are set out separately, namely:

- results affecting the commitments

substantial aspect

formal aspect;

- results affecting the payments

substantial aspect

formal aspect.

Errors affecting the legality/regularity of the commitments entered into during the financial year

The substantial aspect of the legality/regularity of the commitments

3.127. The Court's audit of the substantial aspect of the legality/regularity of the commitments did not reveal any serious errors.

Formal legality/regularity errors concerning commitments

3.128. The Court is of the opinion that the very rare formal errors affecting the commitments had no significant effect on expenditure during 1995.

3.129. These formal errors mainly affected the rules on decision-making and commitment. They originated mainly at Community institution level.

3.130. They were mainly detected in the field of development cooperation.

Errors affecting the legality/regularity of the transactions underlying payments

Substantial legality/regularity errors concerning payments

3.131. The most probable cumulative amount for the very numerous substantial errors concerning transactions underlying the payments which had measurable implications for the amounts financed from the general budget was around 4 000 Mio ECU (5,9% of the amounts involved).

3.132. Additional information on this financial assessment is given in the table in Annex 1. This extrapolated sum is corroborated by the volume of known errors identified as a result of those errors identified in the sample, as well as outside the sample, during the Court's work in support of the DAS or during its other work. The volume of known errors detected as a result amounted to around 163 Mio ECU.

3.133. The nature of these serious substantial errors varied greatly. The majority of them, however, affected the eligibility of the operations for Community financing. They also affected the reality or the accuracy of the expenditure presented for such financing, the accuracy of the calculation of the amount of the Community contribution, and the existence or quality of the supporting documents on which the payments were based. They occurred in most cases at Member State level (90%), and mainly at the level of the local organizations responsible for managing the operations (22%), and at beneficiary level (54%). Thirty-six per cent of the total amount of these errors concerned the EAGGF-Guarantee and 42% the Structural Funds. In the case of the EAGGF-Guarantee, the Court's global estimate could not, on its own, be used to supply a basis for the recovery, by country and by specific field, of the funds that have been wrongly disbursed. It does however give some clue as to the checks that will need to be carried out during the clearance of the accounts. In the case of the Structural Funds, the estimated value of the errors does not necessarily affect the payments made by the Commission in the form of advances. However, as the underlying transactions were financed with EU funds there is a risk that the general budget will be permanently affected by such errors. The frequency of these errors confirms, as a general principle, the need for an intensified effort both by the Community departments and by the Member States concerned to check that each and every declaration of expenditure is actually based on eligible expenditure.

3.134. These substantial errors were not detected only in the fields of agricultural guarantee and the Structural Funds. They were also uncovered in other areas of Community spending, such as research and development cooperation. The errors detected in the fields of agricultural guarantees and the Structural Funds are analysed in greater detail in Chapter 4.

Formal legality/regularity errors concerning payments

3.135. The Court considers that the frequency of formal errors affecting the payments has continued to be much too high. This frequency reflects above all the inability of the various levels of administration concerned to abide by the management and control procedures, as well as the conditions laid down in the regulations applying to the various measures financed.

3.136. These formal errors mainly concerned the fulfilment of their obligations by beneficiaries or by the organizations involved in implementing the measures, the existence or the quality of the information concerning the measures financed, the procedures for authorization by the budget authority or the authorizing officer and the rules on invitations to tender. These errors originated mostly at the level of the Member States, and chiefly at the level of the central and local organizations responsible for managing the operations.

3.137. These formal errors were detected in most fields of Community expenditure (agricultural guarantees, Structural Funds, development cooperation and cooperation with the countries of Central and Eastern Europe), but were distinctly more frequent in the field of the Structural Funds.

3.138. With regard to the formal errors detected at Community institution level, the following are the main cases:

- absence of supporting documents or inadequate supporting documents;

- invitation-to-tender procedures which did not comply with the rules, particularly with regard to the quality of the information supplied or its dissemination.

3.139. The formal errors detected at Member State level differ from the above and concern mainly the agricultural guarantees and the Structural Funds. They are analysed in greater detail in Chapter 4.

CHAPTER 4

Specific analyses of the main areas of expenditure

4.0. TABLE OF CONTENTS

Paragraph reference

Introductory remarks 4.1 - 4.2

Analysis concerning EAGGF-Guarantee expenditure 4.3 - 4.13

Introductory information 4.3

Substantial errors 4.4 - 4.5

Formal errors 4.6 - 4.7

Identification of an area of particular risk 4.8 - 4.9

Characteristics of the system of management and control 4.10 - 4.11

Remedial action required 4.12 - 4.13

Analysis concerning Structural Fund expenditure 4.14 - 4.28

Substantial errors 4.18 - 4.19

Formal errors 4.20 - 4.21

Analysis of findings 4.22 - 4.26

Conclusion 4.27 - 4.28

INTRODUCTORY REMARKS

4.1. In the two major categories of expenditure (EAGGF-Guarantee and the Structural Funds), the audit results for this second Statement of Assurance were based on a sufficiently high number of checks to enable the Court to carry out a specific analysis of each of these fields and note certain significant phenomena.

4.2. The audit work supporting the DAS is primarily intended to provide sufficient evidence on the Community budget as a whole. Any conclusion relating to a particular budgetary area based on this evidence must therefore be statistically less precise.

ANALYSIS CONCERNING EAGGF-GUARANTEE EXPENDITURE

Introductory information

4.3. EAGGF-Guarantee expenditure represents some 52% (about 34 000 Mio ECU) by value of total budgetary payments and is almost exclusively managed by the Member States, less then 1% being managed directly by the Commission. The analyses presented below relate to errors affecting the legality and regularity of payments detected during the 1995 DAS audit.

Substantial errors

4.4. In 1995 the substantial errors in the EAGGF-Guarantee field originated mainly in the Member States and to a smaller extent at the Commission. About one third occurred at the level of national administrations, one sixth at the level of local administrations and almost half at the level of the final beneficiaries. The rate of substantial error in this area is estimated to be significantly lower than the average rate for the general budget as a whole (see paragraph 3.131).

4.5. Three error types detected by the Court account for the vast majority of substantial errors:

(a) errors relating to the eligibility of the expenditure. These errors concern mainly:

(i) the non-existence of lands claimed under the hectare aid schemes;

(ii) differences between actual and declared quantitative data (land surfaces, produce or livestock);

(iii) non-compliance with quality requirements set by regulations (regarding the nature of produce, the productivity or technical characteristics of land, etc.);

(iv) breaches of additional requirements imposed by regulations (minimal area of set-aside, quotas, minimal retention periods, herd sizes, etc.);

(b) inclusion in the declarations by national paying agencies of amounts not yet paid to beneficiaries (the Court has considered as substantial errors only those items of expenditure charged to the EAGGF-Guarantee budget 1995 for which payment to the beneficiaries did not take place before the end of the budgetary year (15 October 1995));

(c) errors in calculating the amount of Community support. These typically result from the application of incorrect rates (aid rates, exchange rates, depreciation rates, reduction rates for exceeding pre-set base areas per region, penalty rates, etc.).

Formal errors

4.6. There was a significant incidence of formal errors involving breaches of the regulatory and control framework applicable to EAGGF-Guarantee expenditure. Almost all these formal errors occurred in the Member States, mainly at the level of national and local administration, and to a lesser extent at the level of the final beneficiaries.

4.7. The most significant types of formal error relate to:

(a) the inadequate implementation and execution of regulatory controls to be performed by the responsible authorities in the Member States;

(b) the absence of the full documentary proofs required by regulations in support of claims for expenditure;

(c) non-compliance with regulatory deadlines for payments to beneficiaries, quota transfers, release of guarantees, etc.

Identification of an area of particular risk

4.8. The new common agricultural policy which was decided upon in 1992 required the introduction, in two stages and in each Member State, of an integrated system for the management and auditing of certain Community subsidy systems. The time-limit for the entry into force of the second stage, comprising the establishment of an alphanumeric system for identifying agricultural plots, was 1 January 1996 (excluding the three new Member States which were granted a further year). With particular regard to per-hectare aid, where this means of control does not exist, there is insufficient guarantee that one plot will not be declared by several beneficiaries and, what is more, under different aid systems.

4.9. In 1994 and 1995 few Member States had a fully integrated system capable of limiting this risk. Total expenditure in 1995 in this field in Member States who had not introduced a fully integrated system was 8 000 Mio ECU.

Characteristics of the system of management and control

4.10. The regulatory controls to be performed by the national paying agencies for the individual measures generally include administrative checks of supporting documents, physical control procedures on the spot and integrated overall controls including cross checks for double declaration (especially for the hectare-based expenditure and livestock schemes). The high incidence of formal errors relating to an inadequate implementation and/or execution of these control measures implies an increased risk of substantial errors in the total population of underlying expenditure. This increased risk of substantial errors is confirmed particularly in the area of hectare-based expenditure where numerous errors relating to ineligible surfaces/products, or to relatively small differences between actual and declared surfaces, were identified.

4.11. Execution and monitoring of EAGGF measures is characterized by a highly decentralized structure which relies heavily on the quality of the administration and the control systems of the paying agencies in the Member States. The Commission assumes the overall responsibility over the execution of the EAGGF-Guarantee budget by itself assessing these administrations and control systems at the level of the paying agencies in the context of the clearance of accounts procedure. In past years, the effectiveness of this procedure in correcting past errors was limited, due to a backlog of at least three years before clearance decisions were taken.

Remedial action required

4.12. At the level of the Commission, the quality and timeliness of its monitoring role should be improved. An important step has been taken in that direction by a reform of the EAGGF clearance of accounts procedure, which should be implemented for the budget year 1996. The Commission now defines more clearly the data which it requires from the paying agencies and whereby it intends to obtain, by 30 April of the following year, the results of newly introduced annual audits of paying agencies carried out by independent external auditors. These audits will cover both the accuracy of the declarations made to the Commission and the adequacy of the internal control procedures applied by the paying agencies with regard to the legality and regularity of the underlying transactions. This new procedure, when properly operational, should allow the Commission to conclude its clearance of accounts procedure on a sounder basis and in a more timely manner, although the Commission's own complementary assessment of compliance with EU regulations will still be completed at a considerably later stage (up to two years later).

4.13. At the level of the Member States, the control procedures required by the regulations for each individual measure need to be implemented more rigorously. These controls should be considered as minimal requirements to secure an efficient and effective execution of the EAGGF budget. The effectiveness of both administrative controls and physical inspections on the spot needs to be increased. In the field of hectare based schemes, the proper implementation of a mandatory system of integrated controls is essential for the purposes of ensuring that fraudulent duplicate declarations are prevented or detected.

ANALYSIS CONCERNING STRUCTURAL FUND EXPENDITURE

4.14. The Structural Funds account for about 19 000 Mio ECU, or some 29% by value, of total payments from the general budget.

4.15. Most budgetary payments in this area are effected through the use of advances/payments on account. As such, definitive expenditure to final beneficiary level will not necessarily have been made at the time audit work is undertaken. Accordingly, and for the purposes of reaching an audit conclusion on underlying expenditure as required by the Treaty, underlying transactions are often identified from populations of transactions of expenditure declared and certified by Member States, used to trigger the advances being audited.

4.16. The errors found in the underlying transactions call into question the validity of the expenditure contained within the Member State certificates, but, as explained in paragraph 3.133, not necessarily the regularity of the individual advances when made by the Commission. Such errors always indicate the existence of elements which will need to be detected, and excluded from the expenditure financed on a definitive basis, when the Commission makes final balancing payments or recoveries of excessive advances.

4.17. The analysis provided below refers to errors of legality/regularity on payment transactions detected in the course of the 1995 DAS audit.

Substantial errors

4.18. Almost all of these substantial errors in the Structural Funds field originated in the Member States. In 1995, about one sixth of these occurred at the level of national administrations, about one sixth at the level of local administrations and about two thirds at the level of the final beneficiaries. The rate of substantial error in this field is estimated to be significantly higher than the average rate for the general budget as a whole given in paragraph 3.131.

4.19. Four error types account for the vast majority of substantial errors detected by the Court:

(a) the declaration of expenditure for Community support which does not meet the eligibility criteria for the support. This also includes a significant incidence of expenditure made outside the defined eligibility period, claims for recoverable VAT on expenditure, and expenditure claims for excessive or inappropriate costs, including administrative costs, depreciation, purchase of land and equipment. It also includes cases where eligibility preconditions have not been met;

(b) commissions and taxes withheld by Member States on the payment of Community grants which, in some cases, are wrongly claimed as eligible expenditure, and, in others, are levied on the final beneficiaries receiving EU support;

(c) expenditure being claimed which has not actually been made at the time of the declaration in question. Estimated or accrued expenditure which has not yet been paid is not eligible for subsidy under EU regulations, which provide for substantial initial advances to national authorities to meet bills for work or services actually completed. Further advance payments should therefore only be made when earlier advances have been absorbed to the specified degree by actual payments to beneficiaries or for work done, and not to increase further the initial prefinancing of operations;

(d) incorrectly prepared expenditure declarations, including declaration of expenditure in excess of that incurred and inclusion of unsupported amounts.

Formal errors

4.20. There was a very high incidence of formal errors involving breaches of the regulatory and control framework applicable to Structural Fund expenditure. Almost all these errors originated in the Member States. Half of the errors originating in Member States occurred at the level of national administrations, about a quarter at the level of local administrations and about a quarter at the level of the final beneficiaries.

4.21. Four categories of formal errors account for three quarters of those identified in payment transactions in the Social Fund area:

(a) national and final beneficiary accounting systems which do not provide separate identification of expenditure of EC funds as they are required to by the implementing regulations attached to operational programmes;

(b) a lack of complete or adequate data on underlying transactions;

(c) excessive breaches of regulatory time limits for the forwarding of funds by Member States to final beneficiaries;

(d) irregularities within tendering procedures.

Analysis of findings

4.22. Of particular note in the context of the above findings is the incidence of errors relating to accounting records which fail to identify where and how EC co-financed expenditure is incurred. In addition to violating a regulatory requirement, such a situation makes monitoring, controlling and evaluating the use of such funds extremely difficult - a situation which contributes to the scale of substantial errors found.

4.23. As explained in the introductory information, EU Structural Funds are generally financed through advances and payments on account. The system by which these are managed requires Member States, when claiming an advance, to certify that a given percentage of the previous advance(s) has been utilized. In addition to sometimes containing incomplete and unreliable information produced by the inadequate accounting systems mentioned above, these declarations are often unsatisfactorily prepared and thus include non-existent, ineligible and estimated expenditure. Moreover, Member States are sometimes unable to recreate the contents of declarations at the time the Court's (and the Commission's) audits are made.

4.24. The current system only requires Member States to certify that sufficient eligible expenditure has been incurred. It is the Court's opinion that such a declaration should always be accompanied by a detailed list of the projects and related expenditure underlying the declaration. This would encourage Member States to ensure that appropriate accounting systems are maintained and that the information contained within each declaration is correct.

4.25. The Court is also concerned about the consequences of the imprecise way in which Community regulations are sometimes worded. In particular those covering eligibility criteria can lead to interpretations by Member States which are contradictory to the intentions of the Commission. Furthermore, imprecise definitions hamper the establishment of efficient control systems and can cause inconsistencies between types of expenditure which are considered acceptable by different Member States.

4.26. The Commission depends upon the clearance of Structural Fund expenditure at the time operational programmes are closed to identify, and accordingly reject, ineligible expenditure. The audit work on dormant commitments (see paragraphs 3.10 - 3.24) has shown that this procedure is unsatisfactory due to the significant delays in closing Community financing operations, as illustrated by the large number of open commitments representing projects which should have been closed many years ago. Any clearance work is decreasingly effective as time goes by due to an increased risk of supporting documentation being mislaid, changing personnel, and difficulties in undertaking physical inspection, and thus of failing to recover funds and obtain legal redress.

Conclusion

4.27. The relatively high incidence of errors within the Structural Funds budgetary area points to the need for improved systems and controls within Member States, more rigorous and strictly applied deadlines for the submission of final claims, more timely clearance procedures by the Commission and more complete and clearly drafted regulations covering the management of the funds. Particular attention should be paid to the certification procedure to ensure that declarations of eligible expenditure are correctly prepared and fully supported.

4.28. The Commission and the governments of the Member States should pay particular attention to these findings when exercising their respective responsibilities. For instance, these findings should be discussed in the framework of Phase 3 of the Commission's Sound and Efficient Management ('SEM`) 2000 initiative, which should aim at formulating an action plan for the application of rigorous management to EU Structural Fund expenditure.

CHAPTER 5

Elements of interpretation of the results

5.0. TABLE OF CONTENTS

Paragraph reference

The results of the audit work carried out in support of the DAS concerning underlying operations relating to expenditure 5.1 - 5.12

THE RESULTS OF THE AUDIT WORK CARRIED OUT IN SUPPORT OF THE DAS CONCERNING UNDERLYING OPERATIONS RELATING TO EXPENDITURE

5.1. With regard to expenditure, the Court's audit revealed that the transactions underlying the payments for the financial year contained too many errors for the Court to be able to provide positive overall assurance as to the legality and regularity of the transactions concerned.

5.2. Many of these legality/regularity errors concerning expenditure, whether substantial or formal, are connected with management or control systems that have been in operation for many years. Reducing the volume of these errors will require the Commission and the Member States to adopt effective measures to improve these systems. Nevertheless, given the number and complexity of the systems used to manage Community operations, some time will no doubt be needed before such improvements produce noticeable effects.

5.3. In respect of the legality and regularity of the payments, the substantial errors - quantifiable errors directly affecting the amount of the transactions underlying Community funds disbursed - are estimated to be in the range of between 2 900 and 5 700 Mio ECU, or between 4,3% and 8,5% of total payments: the most likely estimate is 3 971 Mio ECU, or 5,9% of total payments. The fact that the Court could not obtain assurance about some 2,3% of total payments should also be taken into account. For various reasons, some 1,2% of the relevant expenditure could not be audited at all, and almost 1,1% was covered by systems found to be so inadequate that the necessary assurance could not be obtained.

5.4. On the other hand, subject to the possible financial (but unquantifiable) impact of the formal errors (see paragraph 3.135), the Court's audit indicates that it is probably reasonable to conclude that around nine tenths of Community payments are without serious substantial errors with regard to the legality and regularity of the underlying transactions, except to the extent that they might be affected by concealed deliberate irregularities not susceptible of detection through the Court's audit procedures.

5.5. Apart from the formal errors taken into account by the Court for the 1995 DAS, some other errors were identified, to which the Court would, for various reasons, still like to draw attention.

5.6. 17 000 Mio ECU of EAGGF-Guarantee advances were paid out without the Financial Controller's prior approval. This constitutes a serious formal error which could have had significant effects in terms of Community finances if a substantial error had led to the payment of advances that were higher than available appropriations (see, in this connection, the second subparagraph of Article 99(1) of the Financial Regulation). However, since these errors had no impact on the amounts made available to the Member States, they were not included in the calculation of the estimated or known errors.

5.7. The Court noted a very large number of cases in the field of the Structural Funds where certain conditions were not met by the Member States or the beneficiaries (transfers to the beneficiaries within three months of receipt of the funds; rules concerning advertisement of the fact that a programme is being co-financed using Community appropriations). These errors were deemed less serious for 1995, but the fact that they were more frequent gives grounds for concern, in that they may greatly impair the effectiveness of the management and even, in some cases, the fulfilment of the basic conditions concerning the implementation of these programmes.

5.8. There were also errors, detected at institution level, which should be eliminated in the near future. For example, in the case of leasing operations (accounting for some 156 Mio ECU) charged by the administrations of the European Parliament and the Court of Justice to budget headings earmarked for the payment of rents, it would be sufficient for the Budget Authority to amend the budget accordingly.

5.9. Finally, the Court identified eight transactions in the field of development cooperation that were entered into without a legal basis even though there were appropriations in the budget to fund them. In the absence of a legal basis, the Court should have considered these transactions irregular, even though they had been ratified by the budgetary authority. However, it seems that this irregularity was often due to the slowness of the Community's legislative procedure and so the Court has decided not to treat them as serious errors. Nevertheless, in circumstances of this kind, the Commission should establish what was the legislative authority's intention by suggesting the rapid adoption of framework legislation authorizing the item of expenditure in principle and postponing to subsequent legislation the adoption of implementing rules that need more time to prepare.

5.10. The detection of serious substantial errors, amounting to 163 Mio ECU in terms of known error, does not necessarily imply that the beneficiaries concerned deliberately defrauded the Communities of this amount and cannot therefore result in an immediate recovery of the wrongly paid amounts. In the cases concerning the EAGGF-Guarantee, the facts must be taken into account by the Commission when it clears the accounts. In the cases concerning the Structural Funds, where there is no clearance procedure, the question is one of immediately correcting the accounts of current programmes. If there is bad faith on the part of the beneficiary, it is up to the national authorities to recover the amounts concerned. Although the estimate of a far greater foreseeable volume of substantial errors provides an indication of the amounts paid incorrectly, it does not provide a basis that can be used directly to apply any procedures to recover such amounts from the beneficiaries.

5.11. Now that the Court has produced its second Statement of Assurance it is natural that interest should be shown in comparing the results for the 1995 financial year with those of 1994. However, this would not be appropriate; while it may be reasonable to conclude that an apparently higher rate of substantial error for 1995 would at least confirm that the error rates estimated by the Court in 1994 were not exaggerated, it does not necessarily imply that the real incidence of underlying error was higher in 1995 than in 1994, for the reasons stated below.

5.12. The Court's audit for the purposes of the Statement of Assurance is aimed at establishing whether the degree of error detected is low enough to enable it to provide a positive global assurance that the accounts are reliable and the underlying transactions legal and regular. On the basis of its audit results, the Court has no doubt that the situation in respect of transactions underlying payments was unsatisfactory in both 1994 and 1995. It has provided estimates of the rates of substantial error detected in order to support its conclusions. These estimates should be regarded as indications of orders of magnitude, associated with upper and lower limits, rather than as precise measurements. Any attempt to establish trends in error rates could only be based on results over a period of several years during which the Court's DAS audit will have gained in maturity, and certainly not on the simple comparison of the results arising from the first two years' experience.

CHAPTER 6

Presentation and publication of the accounts of the Communities

6.1. The Court's Statement of Assurance relates to the consolidated accounts of the European Union, and specifically to Volume IV thereof (see paragraphs 1.5 - 1.6). These accounts have never been published and are presented to the discharge authorities by 1 May of the year following the financial year in one language only (French). Volume IV, which is in effect a summary of the accounts, used to be translated until some years ago, but this practice was dropped when the Commission introduced its annual Financial Report. This document contains much information, some of which is presented in an annex entitled 'The consolidated accounts of the European Union`, which corresponds closely to information presented in Volume IV. However, it does not form part of the official accounts and is not formally presented to either the discharge authorities or the Court. It is usually made available in September/October of the year following the financial year.

6.2. Under these circumstances the Court decided that it would be useful to readers of its DAS Special Report if that report included annexes containing charts and diagrams extracted from its Annual Report which present certain information related to the consolidated accounts. However, the Court considers that it would be better for all concerned if the accounts of the European Union could be published, preferably in a document which also contained the Statement of Assurance. There is no obstacle to such a step from a regulatory standpoint, but a decision of the Commission would be required on the principle and practice of publication.

6.3. The Commission is prepared to arrange for Volume IV of the accounts to be translated into the various Community languages, but has made it clear that such translations cannot be made available until well after 1 May. The Court therefore invites the Commission to give due consideration to the question, and is prepared to participate in any consultations which the Commission may wish to hold. It would also be useful if the views of the discharge authorities on this subject could be made known and taken into account.

6.4. If the Commission were to decide that publication on the lines described above was desirable, it could also consider proposing an amendment to the Financial Regulation to enable the accounts to be corrected to take account of audit observations before their definitive closure.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 24 October 1996.

For the Court Bernhard Friedmann President

Annex 1

Evaluation of the financial significance of the substantial legality/regularity errors concerning the payments

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Annex A

Charts and diagrams Nos I to VIII

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REPLIES

Commission reply

CONTENTS

Page

Introduction 69

Chapter 3: The audit findings 70

Chapter 4: Analyses specific to the main areas of expenditure 80

Chapter 5: Elements of interpretation of the results 82

Chapter 6: Presentation and publication of the accounts ofthe Communities 83

INTRODUCTION

The DAS represents an important step in the history of auditing the Community budget. The Court's approach of quantifying errors on the basis of a representative sample should lend itself, over a sufficient period of time, to the application of homogeneous standards, and thus to a judgement of the quality of the Community's financial management. This new instrument was first applied for the financial year 1994 and, as the Court observed then, is necessarily experimental.

The Court's overall conclusion on the Community's financial management for the financial year 1995 is that it is globally satisfactory with respect to the accounts, to receipts and to commitments; but that errors are still far too high with respect to payments.

As in its reply to the DAS for the financial year 1994, the Commission accepts the global results. However, in its quality as principal auditee, it also wishes to refer to its previous observations on the methodology and the audit approach more generally, which still apply.

The Commission shares the Court's view that it will be several years before the DAS audit has gained sufficiently in maturity to enable trends in error rates to be identified. This implies that the statistical results in themselves do not yet indicate how the financial management of the Community has evolved.

Indeed, as the Court observes in its interpretation of the results, the numerical estimates relating to errors in payment transactions should not be understood, at this stage, as precise measurements, but rather as orders of magnitude, and should not be used to draw comparisons between successive years. In statistical terms, there is nothing to suggest that errors in the financial year 1995 were significantly different from 1994.

The Commission nevertheless welcomes the fact that the Court has been able to refer in its audit to changes in management practices that have been introduced during 1995. The Court refers to a number of improvements which have been initiated or implemented since the appearance of its last DAS. To a significant degree these improvements originate in observations made by the Court for the financial year 1994.

The Commission also welcomes the Court's new approach in the DAS for 1995 involving a more detailed account of particular policy areas. The first account relates to the issues which require particular attention in the two policy areas which are by far the most important in financial terms, i.e. the EAGGF-Guarantee and the Structural Funds. As the Commission notes with interest, the Court intends to pursue this sectoral approach which will allow more account to be taken of the complexity of the Community budget by drawing broader samples from individual policy areas. This approach will also establish even more clearly at what level of responsibility an error occurs, a distinction of great operational importance.

Within both the EAGGF-Guarantee and the Structural Funds specific procedures and practices exist which reduce considerably the budgetary impact on the Community budget of substantial errors found in underlying transactions: advances to Member States under the EAGGF-Guarantee are subject to a clearance of accounts procedure, in the course of which items unduly charged to the Community budget are recovered. For the Structural Funds, Member States typically declare considerably more expenditure than the sum required to trigger the next advance. In practice, this means that for most cases where the Court has identified some ineligible expenditure, the remaining eligible expenditure would still be more than enough to trigger the next advance, so that no recovery of funds is necessary. The Commission therefore considers that errors of this kind should be categorized separately from the generality of substantial errors.

The Commission will pursue its efforts to improve the Community's financial management in the context of the initiative 'Sound and efficient management 2000` (SEM 2000) which it launched at the beginning of 1995. In view of the fact that more than 80% of expenditure is effectively administered in the Member States, and thus the high incidence of errors which occur at national or subnational level, it will be particularly important to intensify cooperation with Member States.

The European Council in Madrid has expressed its interest in the matter and has invited the Commission to report back to it how financial procedures can be streamlined. The Commission is about to present a broad package of measures to the Council, based mostly on the findings of the Court. This package has been thoroughly discussed with Member States.

CHAPTER 3

The audit findings

CONCERNING THE RELIABILITY OF THE ACCOUNTS

The consolidated revenue and expenditure account

The reservation concerning the consolidated revenue and expenditure account

Accounting commitments that no longer corresponded to actual obligations

3.10 3.27. The Commission recognizes that the clearance of dormant commitments should be of constant concern to its authorizing departments and it will take steps to ensure that even more care is given to monitoring these operations.

As the Court notes in point 3.12 of its report, the first phase - providing the authorizing officers with the Sincom monitoring instruments - has already been completed. This mechanism has now been refined by including a message in the Sincom payments programme to identify commitments whose date of completion has passed when the validation is entered.

As part of SEM 2000, the Commission has already proposed amendments to the Financial Regulation to introduce greater discipline in this area (Articles 1(7) and 7(6) in COM (96) 351 final of 26 July 1996).

The Commission takes the view that the presence of these entries in the budget accounts is not an anomaly affecting the reliability of the accounts, but that, at most, it may reflect a shortcoming in the way the monitoring of the files is organized and that the Court's observation therefore has no place in the Statement of Assurance.

The Commission would argue that the reliability of the accounts could be in doubt only if it is found, in the case of a file shown to have been closed in the accounts (e.g. as a result of payment or through release of the balance), that steps have not been taken to recover any advances which may have been wrongly paid.

3.15. Outstanding commitments for the ERDF at 31 December 1995 totalled ECU 842 million and related to projects which had been approved by the Commission before 1 January 1989 and for which a final payment application had been made by 31 March 1995. The bulk consists of 742 requests for payment presented by the Italian authorities. In the case of projects which were decided before 1 January 1989 but for which a final payment application had not been made by 31 March 1995, the Commission, in accordance with Article 12 of Regulation (EEC) No 4254/88, as amended, automatically cancelled the commitment, without prejudice to projects which had already been suspended for legal reasons. The outstanding commitments thus relate to cases where the commitments correspond in principle to legal obligations. The projects and sub-projects in question (more than 3 000 sub-projects) have not been closed in the accounts since, after analysing the applications, the Commission, in order to reduce the number of budget operations as far as possible, effects the financial clearance of all the projects at the same time so that it can offset debtors against creditors in the way the Court has repeatedly recommended in order to recover amounts owing, in particular in its Annual Report for 1991. This method is applied by each authority responsible. There is a considerable volume of information to be analysed; the Commission intends to close the accounts in the second half of 1996.

3.17. In the two Social Fund cases specifically noted the commitments were cancelled on 16 July 1996 (CUC 300919) and 2 October 1996 (CUC 304455).

3.18. The eleven commitments are being offset against each other (see 3.15 above).

3.19. The fisheries sector is constantly monitored. However, decommitment procedures are complex and often very long. In seven of the cases mentioned by the Court, commitments were cancelled in the course of 1996. In one other case, the procedure for stopping the aid has been initiated; in another case. the decision to suspend aid is now being drawn up and, in the two remaining cases, decommitment has not been possible since legal proceedings are in progress.

3.20. The Commission will pay particular attention to the cases raised by the Court. In the six cases specifically referred to, four commitments mentioned by the Court have already been cancelled. The decommitment procedure has now been initiated in the other two cases.

3.21. Most of these commitments will be cancelled by the end of 1996.

3.22. The Commission has begun systematic monitoring of contracts under the PHARE headings. The cases mentioned by the Court will be dealt with accordingly.

3.23. In the research sector, the Commission has begun a systematic examination and control of commitments and dormant contracts.

As regards the EAGGF Guidance Section, four commitments under Regulation No 1760/78 had not been cleared when the Court of Auditors conducted an audit at the Commission. One of these commitments has since been cleared; the three others are still outstanding.

In addition, the commitment of a project under Article 8 of Regulation No 4256/88 could not be cleared as the beneficiary was bankrupt. The Commission must carry out a number of checks before it can take any further action to clear this case.

Even older appropriations still exist, since the legislation, in particular Article 10 of Regulation (EEC) No 4256/88 which provides for the decommitment of old projects, makes an exception for projects suspended for legal reasons; these cannot therefore be closed.

3.26. The Court of Auditors criticizes the rule for the charging of payments used by the Structural Funds. However, Regulation (EEC) No 4253/88 lays down detailed rules for both payments and commitments.

As regards commitments, each programme is covered by a legal commitment covering the whole of the period of implementation, which is generally six years. However, Regulation (EEC) No 4253/88 also states that budget commitments are to be effected in annual instalments as set out in the corresponding financial plan. The objective of this requirement is to stagger budget commitments and effect them only as operations progress. At the same time, in accordance with the rules of payment, the objective is to guarantee optimum management, implementation and monitoring of the operational programmes. The purpose of the Regulation is to set up an operational aid system; it was not the intention to issue accounting rules.

The accounting rules actually come from the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities. The Court of Auditors is therefore of the opinion that the EAGGF Guidance Section has not applied the rules laid down by this Regulation. In criticizing the way the EAGGF Guidance Section charges payments to commitments, the Court of Auditors refers to Article 47(b) of the Regulation, the first part of which requires that 'the payment order agrees with the commitment of expenditure and that the amount thereof is correct`. However, Article 47(b) goes on to say 'taking account of the principles and requirements of sound financial management referred to in Article 2`.

The EAGGF Guidance Section, the financial administrator of operations at Community level, has taken this factor into consideration. The other aspect which it has taken into consideration is that the Financial Regulation states in various articles, such as Article 23 which is also referred to in the abovementioned Article 47, that the Community accounting system does not merely involve recording payments against commitments. Indeed, the information which could be drawn from this procedure would be insufficient to provide a good overall picture of Community expenditure. Various aids from outside the accounts are necessary and these could vary in each DG, depending on the type of operation or method used (paper, computer support, etc.).

The general objective of the whole system of accounts is to provide a clear picture of the Community's annual expenditure at budgetary level (this is guaranteed by the Sincom system) and allow more detailed monitoring of operations through aids from outside the accounts. The EAGGF Guidance Section currently achieves this through the FEORIENT computer system.

The advantage of the FEORIENT system used by the EAGGF Guidance Section, which the Court often takes as an example, is its flexibility, its comprehensiveness and its simple management, which does not detract from the clarity of the picture it produces. A system of this type is needed to supplement the general system of accounts which has not been designed to cover all the requirements of all the Community departments. Otherwise, the general system of accounts would become too cumbersome and unmanageable. As it is not designed to cope with the complex requirements set out in the legislation governing the reform of the Structural Funds, Community management of the measures adopted in the Operational Programmes would easily triple, (decommitments, additional commitments as a result of these decommitments, recovery as a result of the decommitments, with new payments against new commitments..), without, however, increasing the transparency of Community accounts or the accuracy of the commitments and payments made every year.

Past experience of implementation of the operational programmes shows that these plans are often changed in order to adapt them to the actual conditions of implementation. In practice, the running total for all commitments relating to a modified programme is corrected when the next tranche is committed. As a result, the individual commitments no longer correspond to the annual tranches of the modified programme and there can be no logical rule for posting successive payments to commitments.

The EAGGF Guidance Section therefore adopted the general rule of posting each payment to the oldest commitment still existing for the programme in question. This rule thus guarantees a maximum of simplicity and transparency in the budgetary management of multiannual operations.

As there is no formal procedure for reconciling Sincom data with data from outside the accounts, this is regularly carried out informally within EAGGF Guidance department. This ensures that Article 47(b) is correctly applied. The cases noted by the Court of Auditors are thus not mistakes.

3.27. The ECIP commitments mentioned in the Court's report were made prior to the adoption of the formal written procedure for decisions, in addition to the approval procedure under the internal rules for the execution of the EC budget. This issue is the subject of an intensive review within the Commission which will adopt a definitive line on this matter following the conclusion of the review which concerns other budget headings in addition to the ECIP.

Entry of 1994 EAGGF Guarantee expenditure under 1995

3.29. As already explained last year, the Commission was unable to present the end-of-year transfer between EAGGF Guarantee Section chapters for 1994 within the time limit laid down in Article 104 of the Financial Regulation for technical and administrative reasons.

The year-end time limits laid down for operations of this type border on the impossible. The Commission is examining the possibility of proposing, as part of the revision of the Financial Regulation, that the deadline of 31 December imposed on the Commission for submitting its proposal for a transfer may be exceeded in duly substantiated emergencies, while any change in the three-week time limit for the Council to adopt its decision would remain unchanged.

In view of the legal obligations to repay the declared expenditure to France and Italy, the Commission has taken a decision on the ad hoc clearance of certain expenditure declared by France and Italy and has entered these amounts in accordance with budgetary rules under Chapter B1-37 (Clearance of previous years' accounts).

The Commission undertakes to take every step necessary to prevent similar cases from recurring. If, however, it should find itself in a similar situation despite its best endeavours, it will attach an explanatory note to the revenue and expenditure account, as requested by the Court.

Non-disclosure of the impact of the agrimonetary system

3.30 3.31. Since the Court published its special report in 1989, the Commission has substantially expanded the analysis which it produces and publishes on the budgetary impact of the agri-monetary system. In 1992 and again in 1994, it published studies of the agri-monetary system to accompany the legislative proposals necessary to adapt the system to the needs of the single market. Budgetary considerations were thoroughly covered in those studies and were central to the debate at Council and Parliament which culminated in the adoption of Regulations No 3813/92 and No 150/95. These regulations completely revised the agri-monetary system, and involved notably the elimination of monetary compensatory amounts and the ending of the 'switchover mechanism` which had proved such a heavy burden on the Community budget and whose abolition had been the principal recommendation of the Court in its 1989 special report.

The Commission does not always state the estimated cost of the 'double rate effect` in its preliminary draft budget, but this information is disclosed to the budgetary authority as a support to the annual Trialogue discussions conducted under the Interinstitutional Agreement of 29 October 1993. Included in the preliminary draft budget itself is information on agri-monetary costs relevant to Article 11 of Council Decision 94/729 of 31 October 1994 on budgetary discipline. In conformity with the decision on budgetary discipline, the Commission later furnishes an annual report to the budgetary authority setting out its estimates of the impact of these same factors on actual expenditure. The 1995 report contained an exhaustive 17-page breakdown of these amounts by agricultural sector, and even by individual measure.

While the Commission must continue to respect the requirement that it report on agri-monetary costs to Parliament and the Council in the context of budgetary discipline, it accepts that it could be useful to make reference to the matter in the management accounts also. This will be done in future.

Errors affecting the reliability of the accounts

3.32. The ECU 18,2 million should indeed have been entered in the reserve in Chapter B0-40. However, this incorrect classification, which involves only commitment appropriations, in no way affects the total amount of appropriations available.

3.34 3.35. The Court takes the view that the reduction of an annual instalment of an operational programme as a result of reprogramming should lead to a reduction in the accounts of the corresponding commitment. The Commission's approach is designed to avoid the accounting problems which this would involve. If, when a financial plan for a programme is changed, the commitments already entered in the accounts exceed the new amounts entered in the new plan, the Commission makes an adjustment in the next commitment by offsetting the surplus. This approach is justified by the fact that the Structural Funds intervene via multiannual operational programmes. For financing purposes, the indicative financial plan for the programme is divided into instalments and the commitments and advance payments are cleared overall in relation to the expenditure actually declared by the Member States in its final claim and not in relation to each individual operation covered by the programme. The Commission takes the view that this practice is fully justified.

The Court's idea of avoiding these problems by means of an initial commitment for the whole period covered by the financial perspective is intellectually interesting but not feasible in practice. The Commission considers that the solution it has chosen responds more effectively to the requirements resulting from the various rules.

3.36. The classification in Sincom of payments as either advances or final payments is not always correctly indicated. The accounting officer will address a written reminder to authorizing officers of the precise instructions which exist.

The Sincom accounting system

3.40. The Commission takes note of the Court's observations, which are justified. In order to follow them up and in order to ensure that the cases are dealt with in the accounts as rigorously as required, the Commission has already proposed an appropriate amendment of Article 39 of the Financial Regulation to establish a time limit (15 February of year n+1) for the adoption of the institution's decisions to overrule the Financial Controller (COM(96) 351 final of 26 July 1996).

The balance for the financial year

3.41 3.45. The Commission regularized the 1994 EFTA accounts in July 1996. The balance of the 1995 EFTA accounts will be regularized in the course of 1997.

The European Union's consolidated balance sheet

Observations concerning the consolidated balance sheet

Long-term leasing and renting commitments (outside the balance sheet)

3.50 3.53. The Commission plans a more precise presentation of data on long-lease, leasing and standard leasing contracts when it closes the accounts for 1996.

Harmonization of the accounting methods

3.54 3.56. The new rules on the management of inventories were presented to the meeting of the institutions' Accounting Officers on 28 November 1995; it was concluded that full harmonization of the measures could not be achieved until the 1997 accounts.

However, for the presentation of accounting data for 1995, the Commission's Accounting Officer addressed a number of recommendations to his colleagues in the other institutions on:

(a) the evaluation of fixed assets and stocks;

(b) entry in the inventory;

(c) leasing contracts;

(d) separate presentation of computer equipment.

The Commission will continue its efforts to achieve a harmonized consolidation of operations involving fixed assets, leasing, inventories, the entry of non-tangibles and the rules for depreciation.

3.57. The conclusions of the study conducted by the Commission's accounting departments on accounting principles and the information value of the financial statements will be discussed with the Court of Auditors so that they can soon be used to achieve a homogeneous presentation of the institutions' accounts and continue to improve the reliability of financial information. The Accounting Officer's departments therefore plan to produce a manual for the financial departments of the Commission and the Accounting Officers of the other institutions.

The Commission's financial balance sheet

Claims on Member States related to the clearance of the EAGGF-Guarantee accounts

3.60. Following the Court's comments in its 1994 report on the Statement of Assurance, the Commission has drawn up forecasts of entitlements relating to amounts which have been covered by a clearance decision but which will be collected in future financial years.

In future, the Commission will endeavour to record these data in the balance sheet by drawing up entitlement vouchers in a non-budget account.

Potential claims linked to the establishment of fraud and irregularities

3.63 3.64. The Commission undertakes to include far more detailed explanatory notes in the revenue and expenditure account on potential claims linked to the establishment of fraud and irregularities.

Multiannual decisions and obligations involving extra-budgetary financial commitments

3.65. The Commission recognizes the justification of the Court's comment and will make the necessary corrections. However, the following three factors must be taken into account.

(i) Chapter B2-18 (Transitional measures and innovation schemes under the Structural Funds) can finance expenditure under old programmes, with 1% of the appropriations earmarked for this purpose over the period 1994-1999.

(ii) The RETEX Community initiative (Item B2-1433) was implemented at the end of the previous programming period and it was already intended that operations should continue over the period 1994-99. The Arinco numbers for this initiative are therefore the same as those used in 1992 and 1993. The commitments made under this heading therefore actually relate to the period 1994-99.

(iii) Finally, the authorizing departments have since cancelled many of the commitments made in respect of earlier programming periods.

Reservations concerning the Commission's balance sheet

Reservation concerning tangible fixed assets

3.67. In early 1995 the Commission undertook a comprehensive reform programme in respect of the management of its assets. This programme is based partly on a complete physical inventory of its assets and partly on the introduction of new management rules and procedures allowing more efficient management of assets in future.

The physical inventory of assets completed in June 1996 covered all the institution's movable assets in Brussels and Luxembourg.

The Commission adopted a new Inventory Regulation on 21 December 1995 to ensure that the data obtained from the physical inventory operation remain reliable. The rules for implementing this Regulation are now being drawn up and, in particular, allow the inventory of assets to be decentralized from 1 January 1997. Some 100 000 cases must therefore be dealt with before 31 December 1996.

The reliability of the inventory data will be checked by means of periodic physical inventories in accordance with the Financial Regulation which makes provision for a physical inventory every three years.

In practice, the work involved in physical inventories will be divided up by carrying out one or more inventories each month.

Reservation concerning the separate accounts for traditional own resources

3.68 3.69. The Commission has noted the observations made by the Court of Auditors which broadly confirm the findings of its own inspections in recent years. It is aware of the shortcomings which sometimes arise from the keeping of a separate account for traditional own resources and shares the Court's doubts about the reliability of the totals entered.

As regards the one-off problems noted in connection with these accounts, including identification of the amounts written off by the Member States, the Commission expects a clear improvement in the situation following the entry into force on 14 July 1996 of Regulation (Euratom, EC) No 1355/96 () amending Council Regulation (EEC, Euratom) No 1552/89, () which requires uniform presentation of the quarterly statement of the separate accounts.

It has also stepped up its on-the-spot checks and monitoring operations in line with the Court's specific comments.

3.71. As regards the errors noted in Germany and Italy, the Commission will contact the Member States concerned about the remedial measures to be taken, if necessary.

Other observations concerning the Commission's balance sheet

Claims concerning VAT and GNP own resources

3.72 3.73. The Commission will ensure that the reservations made to the Member States and the claims estimates always match.

From 1997 onwards, the Commission will include information in the revenue and expenditure account so that changes in the number of reservations may be evaluated.

Collection of revenue

Disputes/default interest

3.74. The Commission is aware of the slowness of the national procedures for collecting own resources. This is partly due to the slowness of judicial procedures which sometimes extend over a long period. National enforcement procedures following an administrative or court decision are indeed extremely time-consuming. Furthermore, these procedures vary considerably.

By issuing questionnaires and organizing seminars, the Commission is continuing its analysis of enforcement practices in the Member States. At the end of 1996 it intends to send a communication to the budgetary authority containing proposals for strengthening the legal framework in order to improve this situation.

Fines, penalties and sanctions

3.75 3.76. As the Court notes, only a limited number of cases are involved. The considerable delays noted in connection with recovery affected 0.64% (ECU 4.043 million) of total outstanding fines (ECU 627.842 million). This figure has since been reduced to only 0.25% of the total volume of fines for which recovery has been delayed (i.e. ECU 1.513 million).

It should also be pointed out that, in practice, the immediate and automatic initiation of enforcement procedures is not always the best way of recovering the sums due.

Revenue to be collected

3.77. The Commission accepts that there has been an unreasonable delay in concluding its examination of these 31 outstanding cases which relate mainly to subsidies given for pilot projects in 1991 or 1992.

However, it should be noted that, while the DG XX report identified cases where payment recoveries seemed on initial examination to be necessary, it recognized that a more thorough examination was needed. This further examination is under way and has already shown that a recovery order is not justified in a number of cases.

The obligation to establish entitlements laid down in Article 28 of the Financial Regulation has been repeatedly stressed, in particular in the joint instructions from DG XX and DG XIX (see 22nd edition of 5 March 1996 of the Internal rules on the implementation of the budget, Annex 3; Manual of budgetary procedures, October 1995), and in the monthly modular training sessions held under 'SEM 2000`.

Participations and loans

The presentation of participations and ECIP loans

3.79. The Commission conducted the audit mentioned in the second quarter of 1996. The results should be known by mid-1997.

The accumulation and handling of profits from the Commission's lending/borrowing activities

3.80. Loan activities using borrowed funds are not recorded in the general budget.

For the sake of clarity in the accounts, the Commission's financial statements contain a detailed presentation of the out-turn of these operations and the use to which the corresponding funds are put.

The profits are partly used to cover the legal fees and study costs involved in opening new contracts.

As for the establishment of a precise legal framework for the utilization of these profits, the Commission will consider producing proposals which will take account of the specific features of this type of operation.

The management of 'food aid` loans to the newly independent States

3.81. The Commission proposes to include default interest in the revenue and expenditure account and the consolidated financial statements of the European Union beginning with the 1996 financial year.

3.82. The Commission proposes, again from 1996, to include an explanatory note in the balance sheet on the potential risk involved with some third country debts when these countries are unable to make the annual loan repayments on the due date.

Actual volume of European Union loan guarantees

3.83 3.84. The Commission agrees with the Court that the guarantees obtained from third parties are a factor which limits budget risk.

For that reason, the Commission proposes to include a note in the balance sheet at the close of 1996 indicating the loans guaranteed in full or in part by third parties.

Implementation of guarantees given

3.85. This advance was recorded under the wrong date at the end of 1995. However, the corresponding funds were actually paid with a value date of 15 January 1996. This early entry in the accounts did not lead to any financial loss and had no effect on the balance for 1995 as this was a non-budget operation.

Breakdown of the bank accounts in the balance sheet

3.86. The incorrect breakdown mentioned by the Court in no way affects the total for the treasury accounts heading in the consolidated balance sheet.

THE LEGALITY/REGULARITY OF THE UNDERLYING TRANSACTIONS

Observations on revenue-related transactions

Traditional own resources

Customs duties and agricultural levies

3.94. The Commission has taken note of the errors mentioned by the Court. It will examine these cases in collaboration with the Member States concerned.

3.95 (a (c) The Commission shares the Court's concern about delays in the making available of traditional own resources. Appropriate contacts have already been made in a number of cases and will be made as soon as possible in the others.

As regards the observations about the separate accounts, the Commission would refer to its reply to paragraphs 3.68-3.69, where it discusses the improvements foreseeable in the near future.

(d) The Commission will remind the Member States concerned of their obligation under Article 3 of Regulation (EEC, Euratom) No 1552/89 to keep the supporting documents relating to the establishment and making available of traditional own resources for at least three calendar years following the end of the reference year. On this occasion, their attention will be drawn to the need for these supporting documents to be available for inspection by the competent Community bodies.

Sugar levies

3.96 3.98. As it considers that sugar levies are sometimes not guaranteed, the United Kingdom has entered them in the separate account. Although the other Member States have intentionally and systematically entered establishments of sugar levies in the accounts, as requested by the Commission, the previous wording of Article 6(2)(b) of Regulation (EEC, Euratom) No 1552/89 actually allowed amounts which were not expressly guaranteed to pass through the separate account. As the version of the Regulation as amended by Regulation (Euratom, EC) No 1355/96, () which has been applicable since 14 July 1996, states that established sugar levies should be entered in the accounts provided for in Article 6(2)(a), the establishment procedure has now been harmonized for sugar levies and the procedure applied by the United Kingdom is no longer possible.

The VAT-based own resource

3.105 3.106. The Commission is aware of the accounting situation referred to by the Court. It involves small amounts of VAT receipts which are collected by the Member States in a specific year but which cannot be entered in the accounts until the following year. As these national accounting arrangements, which are very difficult to change, are structural and repetitive, the negative effects of one year's suspense accounts are normally offset by the positive effects of the entry that year of the previous year's suspense accounts.

Overall, the Commission considers that this situation has a negligible financial impact and that any change in the level of a Member State's weighted average rate would affect only the positive or negative balance of the amounts in question.

Accuracy of the weighted average rate

3.108. The Commission checks that the Member States always use the most recent data available and it has already intervened on many occasions to ensure that the Member States comply with this statutory obligation. At all events, each Member State is called upon to use the statistical sources which will allow it to obtain the level of detail necessary for its calculations. This explains why sources other than the national accounts are used in support.

3.109 3.110. The Commission would stress that, as a result of its controls, the Member States have all made a considerable effort to improve the reliability of their calculations of the weighted average rate.

However, some margin of uncertainty is inherent in this type of calculation, which has to be based on macroeconomic data, although the Commission doubts whether this can be quantified.

Accounting for corrections and compensations

3.112. The Commission would point out that the number of adjustments made to the national VAT bases is far lower than in the past.

In each case, the Commission ensures that the most recent and most reliable data are used in order to limit the margin of uncertainty which will always result from statistical sources.

3.113. The Commission considers that the number of corrections it requests to national VAT resource bases shows how serious its control work has been in this sector.

It would point out that the amounts involved in each correction cannot be quantified until the Member States present their basic data and ad hoc calculations for the Commission's inspection.

Overall assessment

3.115. The Commission would point out that the rules on VAT own resources have already been repeatedly amended and improved in the light of experience.

In recent years, the Member States have appeared unwilling to accept further amendment of these rules.

Furthermore, in view of work programme which the Commission recently presented to achieve a genuinely common system for the application of VAT and in view of the fact that Member States are allocated receipts in line with their share of total taxed consumption within the territory of the European Union, it is obvious that the VAT own resource will have to be readjusted in the more or less near future.

Given this prospect, the Commission sees no overriding need to propose that the Member States start the fairly complicated exercise envisaged by the Court to achieve a substantial improvement in the current system for calculating the national VAT bases, especially as the favourable outcome expected by the Court is by no means certain.

GNP as an assessment base

3.117 3.119. Since the Communities' fourth resource (also known as the GNP-based resource) was introduced, a special effort has been made within the GNP Committee to improve the quality of statistical GNP and its components.

In its report on application of the GNP Directive sent to the Council and Parliament on 28 March 1996 (COM(96) 124), the Commission describes the measures which have been taken to examine and improve the national accounts. Special attention is given to examining and improving the exhaustiveness of the GNP estimates.

Substantial progress has been made and all the Member States have made a real effort in response to the Commission's reservations on certain aspects of their method for calculating GNP.

At all events, the Commission has undertaken to complete all ongoing activities to improve the Member States' GNP estimates by October 1998. The Commission is also in the process of preparing a decision on the subject which has been endorsed by the GNP Committee.

Reservations concerning expenditure-related transactions

Particularly unreliable systems which are likely to include errors

3.123. The EAGGF departments are aware of this procedure. Corrections have been proposed as part of the 1993 clearance. The EAGGF has also asked for this procedure to be changed so that the Dipartamento Compartimentale per le Contabilità Centralizzate (Finance Ministry) is recognized as a paying agency under Regulation (EEC) No 1663/95.

The tomato-processing case will be dealt with during clearance of the 1995 accounts.

The case involving financial compensation for the processing of lemons in Italy will be discussed with the Italian authorities during clearance of the 1995 accounts.

The increases in public stocks of alcohol in Italy emerged from the monthly declaration for April 1996. The EAGGF departments will conduct an inspection in November 1996.

The EAGGF controls in the Land of Mecklenburg-Western Pomerania uncovered problems which will be dealt with during the clearance of the compensatory payments in respect of the Land's 1994 harvest.

Cases of expenditure in respect of which the Court can give only partial assurance

3.125. In cases involving the EAGGF, corrections will be proposed during the clearance of the accounts, subject to the replies from the Member States.

Errors affecting the legality/regularity of the transactions underlying payments

Substantial legality/regularity errors concerning payments

3.133. Errors categorized by the Court as 'substantial` and occurring in the Member States in the area of the Structural Funds may well have no impact on the Community budget. This is because of the way in which operations under the Funds are co-financed by the Community.

The Structural Funds mainly co-finance programmes by means of advances from the budget. Advances are paid on the basis of declarations of expenditure presented by the Member States. Weaknesses in Member State systems may mean that these declarations contain some items of ineligible expenditure. However, the Member States habitually declare considerably more expenditure than the sum required to trigger the next advance. This means that even if a declaration contained some ineligible expenditure, the eligible expenditure would be more than enough to trigger the advance. This is the case, for example, with 30 out of the 31 error cases presented by the Court in the area of the European Regional Development Fund and the Cohesion Fund. In these cases the Commission advance was therefore regular and correct, there was no adverse effect on the 1995 budget or accounts, and no recovery of funds is necessary.

The Commission therefore considers that errors of this kind should be categorized separately from the generality of substantial errors.

The Commission wishes to emphasize, however, the seriousness with which it regards these errors occurring in the Member States. All errors which it discovers or which are drawn to its attention are immediately corrected, usually by requiring the Member State to correct its next declaration of expenditure. The Commission also does everything in its power, given the human resources available (and likely to be available) to it, to ensure that effective audit and control systems are in place in the Member States and that these function correctly in practice, with the aim of reducing such errors to the minimum level possible.

Formal legality/regularity errors concerning payments

3.135. The Commission agrees with the Court that error rates with respect to payments need to be decisively improved, and that this involves all levels of administration, given the fact that the great majority of these errors seems to occur at national or subnational level. As a matter of fact, in the context of its initiative 'Sound and efficient management 2000` (SEM 2000), the Commission is currently exploring ways, in cooperation with Member States, to improve performance at national and subnational level. The focus is inter alia on clarifying eligibility rules, on ensuring minimum standards in control systems and on improving the audit trail.

CHAPTER 4

Analyses specific to the main areas of expenditure

ANALYSIS CONCERNING EAGGF GUARANTEE EXPENDITURE

4.3 4.9. The Commission has noted the specific substantial errors pinpointed by the Court. It does not recognize the relevance of all these errors, since some of them (1% of their total impact) are based on interpretations of the Regulations which the Commission cannot accept. In other cases (3% of the total impact), it has not received any information about the Member States' replies to the Court.

The specific cases which are not disputed will be dealt with during the clearance of accounts. The Court merely extrapolates all its control findings and this cannot serve as a basis for determining the financial consequences arising from clearance of the Member States' accounts. However, the Commission does not rule out more substantial financial corrections during clearance of the 1995 accounts if the audit of the system of management and control reveals obvious shortcomings. Since the clearance of the 1992 accounts, the Commission has been using the parameters set out in document VI/216/93 to propose flat-rate corrections if controls have been inadequate, if no evidence is forthcoming or if other basic factors have been omitted when applying the rules.

The Commission notes that most of the errors noted by the Court originate in the way the Member States apply the rules and that the Commission is responsible for 5% at most of the substantial errors (the Member States are responsible for 100 % of the formal errors).

The Commission also notes that most of the errors mentioned by the Court relate to the aid for arable crops introduced as part of the reform of the CAP and that the 1995 financial year marked the second stage of the entry into force of this reform.

As for the Court's comments about the progress made with the integrated system in 1995, it was understandable that few Member States had a full integrated system at their disposal in 1994 and 1995.

Although the integrated system came into force on 1 February 1993 a later date of 31 December 1996 is being fixed as the deadline for the establishment of the computerized database and the identification system for agricultural parcels. This was necessary given the complexity of the tasks in some Member States. However, Member States were obliged to use these elements of their systems as they became operational even before this deadline. In addition to administrative cross-checks Member States were also obliged to carry out on-the-spot controls on a sample of claims chosen on the basis of a risk analysis. In cases where significant irregularities occur in a particular region or part of a region they are obliged to increase the level of control for the year in question as well as the percentage of controls to be carried out in the following year.

The Commission would point out that, with the reform, more than 10 million farmers lodged an application, or more than one application if they operated in a number of sectors, leading to more than 10 million underlying operations. It is impossible to appoint a controller for every farmer; Community law has designed a system of control based on an integrated system of management and control which is largely preventive and is meant to serve as a deterrent and which uses the most advanced techniques (remote sensing, data-processing, etc.).

An initial computer check of all the requests for aid picks out a large proportion of anomalies: duplicate applications, ineligible beneficiaries, dates of presentation, cross-checks with other files such as the olive oil register.

The rules also require on-the-spot controls for 5% of the applications for per hectare aids and 10% of applications for livestock premiums, with severe penalties for false declarations.

As regards EAGGF Guarantee, the Member States will be asked to recover any amounts wrongly paid in connection with the 50 substantial errors extrapolated by the Court and in the 24 substantial errors 'identified`. Any failure to recover these amounts will be dealt with during the clearance of the accounts along with the other errors attributable to a Member State when the Commission agrees with the Court's interpretation.

Characteristics of the system of management and control

4.10 4.13. Under the reform of the clearance of accounts procedure described by the Court in paragraph 4.12, the Commission has monitored the establishment of all the criteria required for the approval of the paying agencies since July 1995. This has involved these paying agencies in a major overhaul of their systems of management and control and their payment procedures.

The result has been:

(a) improved bookkeeping of the computerized systems' accounting registers;

(b) establishment of written procedures, instructions and control reports;

(c) recruitment of staff for the establishment of an internal audit department and the development of audit plans and programmes;

(d) preparation and introduction of control lists for each measure and for each payment;

(e) establishment of audit trails and reconciliation procedures;

(f) central management of bank guarantees and amounts to be recovered;

(g) safeguards for the computer systems;

(h) a search for certification bodies to certify the paying agencies' accounts.

All the Member States have, albeit unexpectedly, completed their efforts to bring the paying agencies into line with Community legislation. However, the Commission may find that the certification of some agencies' annual accounts for 1996 could prove inadequate.

The EAGGF has also warned the Member States that the paying agencies are obliged to extend their controls to all the control bodies involved in the application of the measures they pay for.

ANALYSIS CONCERNING STRUCTURAL FUND EXPENDITURE

4.15. In the area of the Structural Funds, Community financing takes the form of advances which mainly finance future expenditure, whereas the transactions audited by the Court have already taken place. There is therefore no clear, direct and quantifiable relationship between advance payments and expenditure declared.

4.16. The Commission would refer to its observations on paragraph 3.133.

Substantial errors

4.18. As mentioned under paragraph 3.133, these errors in the Member States had, in the typical and major case of the ERDF and the Cohesion Fund, no adverse effect on the 1995 budget or accounts, with one possible exception; all the cases are being closely monitored by the Commission.

4.19. In the area of expenditure co-financed by the ERDF and the Cohesion Fund the Commission's own on-the-spot checks discover the same kinds of error as the Court. The Commission requires these errors to be corrected. The Commission and the Member States are currently making a major joint effort, in the SEM 2000 initiative, to clarify the rules on eligibility of expenditure under the Structural Funds.

Formal errors

4.21. The Commission agrees that many of these Member State errors are characteristic.

Analysis of findings

4.22 4.23. The Commission is aware that in a number of cases, accounting systems at the level of beneficiaries or intermediate Member State authorities do not provide a complete and accurate view of the expenditure incurred for the implementation of the Community co-financed operations; it has addressed recommendations to the Member States in this respect. Accounting problems often result from difficulties in adapting the accounting systems applied in the Member States to the Community requirement for reporting on an actual payment (not an accrual) basis. In many cases, the establishment of separate accounts for ERDF reporting purposes creates difficulties in the identification of the supporting documents, which relate to two different sets of accounts.

4.24. The Commission notes the Court's opinion that declarations of expenditure presented to the Commission should always be accompanied by a detailed list of the projects and related expenditure underlying the declaration. It is the clear responsibility of the Member States under the regulations to ensure the accuracy of the expenditure declarations which they certify and present. The normal accounting practice in multi-level management systems is that only summary information is reported upwards. However, a proper audit trail through the various management levels should exist and the justifying documentation should be available to the Commission on request, for example in the context of its on-the-spot checks. The scope for improving the situation in these respects is being examined by the Member States and the Commission in the SEM 2000 exercise, which is focusing inter alia on ensuring minimum standards in control systems and on improving the audit trail.

4.25. As mentioned under point 4.19, the question of eligibility rules is being pursued in the SEM 2000 exercise.

4.26. The prime responsibility for discovering and rejecting ineligible expenditure remains with the Member States and such rejection must take place before expenditure declarations are presented to the Commission. However, where the Commission discovers, or its attention is drawn to, ineligible expenditure which a Member State has failed to reject, it requires the matter to be corrected without waiting for the closure of the programme.

Conclusion

4.27 4.28. The Commission agrees that there remains considerable room for improved systems and controls, especially in the Member States. As the Court is aware, the scope for achieving improvements in this area is one of the main subjects under discussion with the Member States in the context of the SEM 2000 initiative. Relevant themes of the initiative include clarifying the eligibility rules, ensuring minimum standards in control systems and improving the audit trail.

CHAPTER 5

Elements of interpretation of the results

THE RESULTS OF THE AUDIT WORK CARRIED OUT IN SUPPORT OF THE DAS CONCERNING UNDERLYING OPERATIONS RELATING TO EXPENDITURE

5.6. Financial Control approves all provisional commitments under Article 99 of the Financial Regulation. These provisional commitments are accompanied by a non-budget payment order for the same amount. This payment order had not indeed been approved by Financial Control, as the Court notes, for the period in question.

Since April 1995 (expenditure from February 1995), Financial Control also approves the non-budget payment orders. However, Financial Control points out that it has always checked and signed the annexes to the payment orders indicating the amounts to be paid to each Member State.

5.9. The Commission has presented proposals for the following legal bases in the cooperation sector:

(a) 5.10.1995: proposal for a Council Regulation (EC) on development cooperation with South Africa (Item B7-5070);

(b) 11.7.1995: proposal for a Council Regulation (EC) on decentralized cooperation (Item B7-5077).

These proposals have been before the Council and Parliament since then. The Commission expects the legislative procedure to be completed within a reasonable period. As for the absence of a legal base for operations promoting human rights and democracy in the developing countries (not only Article B7-522, but also the other headings of Chapter B7-52), the Commission would point out that all questions relating to legal bases were dealt with in the communication of 1 July 1994 (SEC(94) 1106/4) which it adopted on 6 July. In this communication, the Commission explained the code of conduct to be followed in this connection and, in accordance with this code, indicated the budget headings for which it felt it had to propose a legal base. As regards humanitarian aid, the Commission presented a proposal for a regulation to the Council on 1 June 1995 which was adopted by the Council on 20 June 1996.

5.10. All the errors mentioned by the Court will indeed be specially followed up in line with the information provided by the Court of Auditors.

5.11 5.12. The Commission agrees with the Court on the overall results, i.e. that they are globally satisfactory with respect to the accounts, to receipts and to commitments; and that decisive action is necessary to improve rapidly error rates with respect to payments.

The Commission also agrees with the Court that the numerical estimates should be interpreted with great caution and should not, at this stage, be used to establish trends.

CHAPTER 6

Presentation and publication of the accounts of the Communities

6.1 6.3. In accordance with the Financial Regulation, the revenue and expenditure account and consolidated balance sheet of the European Union is sent to Parliament, the Council and the Court of Auditors by 1 May of the following year.

Article 82 of the Financial Regulation does not require publication of the accounts in the Official Journal of the European Communities.

However, in order to provide information for a broader section of the public, the Commission has taken the initiative since 1987 of distributing a financial report on the out-turn of the European Union's financial activities, in particular the general budget.

This report is published in all the Community languages and contains the main financial statements found in Volume IV of the consolidated revenue and expenditure account.

Again in order to provide more information to the general public, the Commission will examine the best way of publishing these annual accounts in the Official Journal of the European Communities.

As regards the 1995 accounts, the Commission has had Volume IV of the revenue and expenditure account translated into all the Community languages and distributed this volume to Parliament, the Council and the Court of Auditors in October 1996.

6.4. The Commission would point out that the accounting departments put in considerable extra work to prepare for the Court's audit in connection with the Statement of Assurance.

With the rules as they stand at present, even though there is no legal obligation in this connection, the Commission now conducts an intermediate and provisional closure of these accounts. The different versions of the revenue and expenditure account and the financial balance sheet allow the Court's auditors to conduct a very detailed control at a far earlier stage of the year. Their audit findings are then sent to the Commission so that they can be taken into consideration before the final closure of the accounts on 1 May the following year.

Reply from the European Parliament

3.89 and 3.90. The European Parliament has already made all the necessary arrangements to ensure that the IMMO database is reconciled with the institutions's physical inventory and the final stages of this process are currently under way.

Parliament intends to carry out another inventory during the first half of 1997 in order to ensure that the matter is fully resolved before the end of 1997.

The inventory will be conducted in accordance with the new provisions of the Financial Regulation and on the basis of an interinstitutional model devised by the Commission.

5.8. Parliament intends to table an amendment at the first reading of its 1997 budget in order to alter the nomenclature of heading 2000 in accordance with the Court's comments.

Reply from the Council

3.56 and 3.92. The computers and computer programs currently used for keeping the inventory do not make for easy ECU-conversion of the currencies used for purchases (mainly Belgian francs). This is why the inventory has traditionally been kept in Belgian francs. Admittedly this may result in under or over-valuation of immovable property when the annual ECU-conversion takes place for the purpose of establishing the budget.

A study is under way on inplementing a specific program which would enable the accounting officer to provide the inventory department electronically with the ECU-conversion rate to be used for each fixed asset.

As soon as the study has been completed, the findings will be implemented so that the inventory can be kept in ECU.

Reply from the Court of Justice

5.8. Use of Article 200 (Rent) Booking to Article 200 (Rent) is justified by the fact that the Court has concluded an agreement with the Luxembourg Government, Article 8.4 of which provides that the property in the buildings is not to be transferred to the European Communities until the purchase price has been paid in full. Until then, the Court is to be regarded as the lessee of the buildings, as is also apparent from Articles 1 and 11 to 14 of the contract.

Furthermore, it is undeniably advantageous for the Court to be treated as the lessee, since the cost of substantial works, which normally has to be borne by the owner of a building, falls, under that agreement (Article 8.4), to be paid by the Luxembourg Government. The Court is of course conscious of the fact that the subject-matter of the agreement is the purchase of buildings in the long term, and that the rental payments made are to be regarded as advance purchase payments (Article 8.1). For that reason, it has no objection to the creation, during the next budget procedure, of a new article entitled 'Advance payment for the purchase of buildings`.

Replies from the Economic and Social Committee and Committee of the Regions

3.49. The Committees are aware of the omission of informatics equipment from the 1995 balance sheet and undertake to take appropriate steps to identify this same equipment in the 1996 balance sheet.

3.53. In the interests of transparency the Committees decided to present in the table listing leased property not only the rent paid in 1995 but also the cumulative multiannual effects of commitments undertaken as regards buildings.

Although reading errors cannot be ruled out, the Committees consider that the information presented is necessary in order to give a true picture of the financial situation of Section VI.

3.91. The Committees are aware of the remarks made by the Court of Auditors regarding the discrepancies between data in the balance sheet and stock books. The Internal Affairs Department intends to improve the present situation. A physical inventory (partially introduced at present) is currently under way; this involves noting the contents of offices and other premises, recording them in a stock book, listing them on individual notices in each office and updating them in real time (particularly movements and decommissionings).

ECU calculations of the value of furniture are for the moment only available from 1995 onwards, while total values will not be worked out until 1997 (after the 'relocation` of decommissioned goods). The Internal Affairs Department is unaware of any 'blank pages` in the physical inventory.

3.93. For exceptional reasons, bank and cash reconciliations had not been made in due and proper form at the time of the Court's first visit. However, these reconciliations (with the exception of a single bank account) were available at the time of the Court's last visit.

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