1.1.

Pursuant to Article 248 of the EC Treaty, the Court of Auditors provides the European Parliament and the Council with a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of the underlying transactions (the DAS). Since the financial year 2002, in the wake of the Treaty of Nice, which extended the Court's mandate by authorising it to supplement this statement with specific assessments of each major area of Community activity, the Court has sought to consolidate the basis for its statement by relying more systematically on an examination of the way in which the supervisory systems and controls set up by the Commission in each of these major areas work.

1.2.

The aim of the work on the reliability of the accounts of the European Communities is to obtain reasonable assurance that all the revenue, expenditure, assets and liabilities have been properly registered and that the annual accounts faithfully reflect the financial position at the end of the year.

1.3.

The aim of the work on the legality and regularity of the underlying transactions is to gather sufficient evidence, of a direct or indirect nature, to prove that the underlying transactions are in accordance with the applicable regulations or contractual provisions and that the total amount involved in these transactions has been correctly calculated.

1.4.

With regard to the legality and regularity of the underlying transactions, the Court has based its statement on a number of separate sources:

1.5.

Once again, the Court paid particular attention to the efforts made by the Commission as part of the reorganisation of its internal control system and to the follow-up given to the action plans annexed to the Syntheses of the annual reports and declarations of its Directors-General for the financial years 2001 and 2002 (see paragraphs 1.55 to 1.87).

1.6.

Lastly, overall and for every major area subjected to specific assessment, the Court wished to provide certain key information to serve as a basis for monitoring and evaluating developments in these areas in the longer term. This key information is presented in table form in the annexes to this Chapter and to Chapters 3 to 9.

1.7.

The Court's observations concern the final consolidated annual accounts for the financial year 2003, as drawn up by the Commission in compliance with the provisions of the Financial Regulation of 25 June 2002 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.8.

Pending the implementation of the action plan on the modernisation of the accounting system as of the financial year 2005 (see paragraphs 1.22 to 1.26) and in the absence of a suitable accounting system, the preparation of the year-end financial statements is to a large extent based on records outside the accounts. The evaluations used for this are not linked to the budgetary transactions from which they stem and the central accounting departments are not always able to guarantee their accuracy or their comprehensiveness. Furthermore, the present accounting system, which to a large extent follows cash-based accounting principles, does not make it possible to distinguish between administrative expenditure and capital expenditure, between final payments and prefinancing, or even to determine the amount of debts and receivables. The calculation of the economic out-turn is thus adversely affected. The reservations contained in the declaration of the Director-General for Budgets (flawed presentation of the assets and finances of the Communities and the EDF, and architecture of the accounting system based on two subsystems instead of one integrated system) are confirmed by the Court's findings.

1.8.

The European Communities use cash accounting, as do most other public sector organisations in the world. The Commission is aware of the limitations of this approach, which is why it has undertaken the project for the modernisation of the accounting system and the move to accrual accounting as mentioned by the Court. The Commission aims to comply with International Public Sector Accounting Standards (IPSAS) by 2005, the deadline set in the Financial Regulation, and is addressing the issues mentioned by the Court.

1.9.

Table 1.1 contains a follow-up of the four reservations concerning the reliability of the accounts which were expressed in the 2002 DAS and other points raised by the Court in the Annual Report concerning the financial year 2002, which, according to the Commission, ought to be settled in the context of the modernisation of the Community accounting framework.

1.10.

Despite the progress that has been noted, in particular as regards the presentation of the financial statements and the reduction in the number and scale of the reservations, the Court's audit highlighted the fact that the following problems, already pointed out in previous reports, still persist:

1.10.

a)

agricultural expenditure - modulation: accounting entries have been made against a budget heading which ultimately will not be the one to which the expenditure concerned will be charged (88,9 million euro in 2003), and expenditure which has not yet been implemented (237,9 million euro at 31 December 2003) has been presented in the accounts as already having been effected (see paragraphs 1.13 and 1.14 of the 2002 Annual Report);

a)

As regards the accounting entry of EUR 88,9 million in 2003, the procedure for the entry of amounts deducted under Articles 3 and 4 of Regulation No 1259/1999 has been drawn up in line with Article 1 of Commission Regulation No 1017/2001 (amending Article 2 of Regulation No 296/1996).

b)

ECIP (European Community Investment Partners): the Commission's basis for recording a 100 % write-down in the value of loans, investments and advances (88,5 million euro at 31 December 2003) was a dubious one, as the constituent parts to which it applies are not even identified (see paragraph 1.18 of the 2002 Annual Report);

b)

The value reduction of 100 % was applied because the information required to calculate the exact value of the investments and loans granted under the ECIP instrument was not available. As part of the move to accrual-based accounting (in particular regarding pre-financing) all open files are currently being reviewed. This exercise should be completed by January 2005 and should provide a solid basis for assessing the recoverability of outstanding amounts in the 2004 accounts. Until the completion of this review it is considered both more consistent and more prudent to continue with the 100 % value reduction.

c)

Eurotech Capital, Venture Consort and Joint Venture Programme: in the absence of accurate and detailed information on the amounts invested, the Commission wrote off its participations in full (12,7 million euro at 31 December 2003) even though repayments are still being made (see paragraphs 1.21 and 1.22 of the 2002 Annual Report);

c)

As far as the presentation of the invested amounts in the balance sheet of the Communities is concerned, the Commission considers that a write-down of invested amounts is fully justified on the basis of the principle of prudence. The very nature of investments in risk capital and other high risk business areas such as joint ventures in the central and eastern European Countries and the Newly Independent States carries an inherent potential risk of loss. The Commission notes that it has made good progress since the previous year in finalising and closing contracts which have reached the end of their term.

d)

EAGGF-Guarantee: reservations concerning the exhaustiveness and accuracy of the amounts due to the Commission (905,9 million euro net at 31 December 2003) have been expressed by several certifying bodies (see paragraph 1.25 of the 2002 Annual Report);

d)

With regard to the correct evaluation of the debts, the doubtful debts provision is based on the best estimates of each paying agency involved — this is the same procedure that was used in 2002. This is based on the surmise that the paying agencies are in the best position to evaluate the chances of recoveries.

e)

recording of sundry debtors (3 610,4 million euro at 31 December 2003): the Court is not able to give an assurance as to the correctness and completeness of the sundry debtors (see paragraph 1.23 of the 2002 Annual Report and paragraphs 1.14 and 1.15 of this year's Report);

e)

The Commission continues to improve its methods of dealing with this area using the systems currently at its disposal, as stated in response to the remark 1.23 in the annual report 2002 (for example, the regular reporting of overdue amounts since mid-2003.) However, as also stated in the response given last year, the major improvements in this area can only be made with the introduction of the new accounting system in 2005, in particular the accounting for pre-financing payments.

f)

recording of amounts held by financial intermediaries (included under the sundry debtors — see paragraph (e)) totalling 1 008,6 million euro at 31 December 2003 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78): in the absence of a suitable accounting system, the Court is not able to give an assurance as to the correctness and completeness of the amounts entered as held by financial intermediaries (see paragraph 1.27 of the 2002 Annual Report);

f)

As was indicated in 2002, the Commission has already done significant work in this area. However, such problems can ultimately only be resolved with the introduction of the new accounting system in 2005. Currently the figures are established by a manual exercise based on reports supplied by the financial intermediaries.

g)

Interest on advances paid to financial intermediaries: the Commission is still not able to demonstrate that the interest yielded by advances is recorded systematically and without delay as budget revenue, and this allows doubts as to the exhaustiveness of the records concerning the Community contribution to certain programmes (see paragraph 1.29 of the 2002 Annual Report);

g)

As pointed out last year, while not all interest was recorded as budgetary revenue it was none the less included in the annual accounts. Since the introduction of the new Financial Regulation which requires all interest to be returned to the Commission, the Commission has continued to improve the procedures for recording such interest.

h)

provision for pensions: the current presentation in the balance sheet of the provision for pensions (22 800 million euro at 31 December 2003 according to an actuarial study) and of the corresponding amount receivable from the Member States has the effect of neutralising the impact on the economic out-turn (see paragraphs 1.31-1.32 of the 2002 Annual Report);

h)

As has been discussed in the Accounting Standards Committee, there is currently no international public sector accounting guidance available in this area. Thus until this is available, the current practice will remain in force.

i)

current liabilities: the presentation under this balance-sheet item of some of the payment appropriations carried over (176,5 million euro at 31 December 2003) is inappropriate (see paragraph 1.34 of the 2002 Annual Report).

i)

As replied in 2002, this issue is being analysed as part of the modernisation of the accounting system project, and changes will be made to the current accounting treatment in 2005.

1.11.

Despite the Court's observation in its Annual Report concerning the financial year 2002 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), there is still no indication in the year-end accounts that some transactions are likely to be corrected at a later date by the Commission's departments or by the Member States (clearance of the EAGGF-Guarantee paying agencies' accounts, adjustment of the provisional amounts in the case of the VAT and GNI own resources, closure procedure for projects and programmes relating to Internal policies, External actions and Structural Funds), nor any indication of the possible scale of such corrections. Furthermore, there are other uncertainties which may temporarily affect the accounts, for example the reservations, concerning around 11 300 million euro, issued by the bodies certifying the accounts of the agricultural paying agencies (see paragraph 4.54), and the Commission's postponement of its financial clearance decision for the financial year 2003 of paying agency accounts representing 43 % of the expenditure declared for the financial year 2003, pending further information or the completion of certain audit work (see paragraph 4.69).

1.11.

The annual accounts necessarily present financial information as known at the time of their closure. The reliability of this information will always be subject to the findings of audits under way at that time or undertaken subsequently. The accounts can only recognise the amounts to be recovered when the Commission adopts its decisions under clearance of accounts or similar procedures.

1.12.

According to the new Financial Regulation, applicable as of 1 January 2003, budgetary commitments for actions extending over more than one financial year may be broken down over several years into annual instalments only where the basic act so provides (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). This practice, which has already been applied in the past for structural measures (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), in accordance with the sectoral regulations, is henceforth also expressly provided for in respect of other areas (for example, for international agreements in the fisheries sector and for other external actions). The amounts which, pursuant to the Financial Regulation, have not yet been recorded as budgetary commitments are presented as contingent liabilities. Nevertheless, these differences of definition for commitments from one area to another make it difficult to interpret the figures presented in the statements on the implementation of the budget.

1.12.

The Commission, aware of this issue, has improved the explanatory notes to the financial statements accordingly so as to include a clearer explanation of the treatment of commitments foreseen in the Financial Regulation, in particular making reference to the inclusion of a contingent liability concerning the budgetary commitments of differentiated appropriations not yet made for future years.

1.13.

The established entitlements recorded in the separate accounts, known as the ‘B accounts’, were written down by 1 043,9 million euro on 31 December 2003 resulting in a net amount of 729,3 million euro in the Commission's financial statements. This correction was made in recognition of the fact that recovery of a large number of these claims is doubtful. This write-down was calculated on the basis of statistics and represents an estimated amount.

1.13.

Regulatory amendments providing for an annual estimate by Member States of the amount of the debts in their separate account for which they consider recovery has become unlikely are expected to be formally adopted by the end of 2004.

1.14.

The recording of sundry debtors continues to pose problems (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). Provisional payments are still entered as final expenditure and amounts to be recovered are not entered immediately. In the absence of adequate internal control procedures for miscellaneous revenue in the authorising officers' departments, the Court cannot obtain assurance that the record of amounts receivable is complete and accurate.

1.14.

See also reply to 1.10. e).

1.15.

In spite of the movements noted, in particular following the implementation of the procedure to set off amounts receivable against payments due, the recovery of a large number of amounts receivable is still subject to considerable delay. In addition, interest on arrears is not calculated and charged systematically and there is no end-of-year procedure to calculate and record in the accounts the interest accrued. The Court considers that monitoring of the backlog of arrears should be coordinated more efficiently at central level and that a system should be set up which would enable the departments concerned to ensure that amounts receivable are recorded immediately.

1.15.

The Commission has introduced since the beginning of 2003 the central co-ordination of recoveries and monitors unpaid recovery orders, (‘ROs’), through a quarterly aged balance that shows the amount of the unpaid ROs outstanding per quarter and per authorising officer. The Commission also records in its database the follow-up actions made for each RO, and the indicators which accompany the aged balance.

1.16.

Since the financial year 1999 the Court has made a number of observations concerning the Sincom 2 computerised system. Those relating to security (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) concerned, amongst other things, the payment system used by the Commission's treasury management, which accepted these observations and undertook to solve the problems found (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). In 2002 and at the beginning of 2003, the Internal Audit Capability (IAC) of the Budget Directorate-General and the Internal Audit Service (IAS) carried out audits of the Commission's treasury management and these audits confirmed that the problems highlighted by the Court still exist.

1.17.

In the context of its work on the Statement of Assurance for 2003 the Court carried out a follow-up to its previous observations, which revealed that some points have still not been dealt with, in particular those relating to a number of security problems and the segregation of duties.

1.18.

In order to cope with the existing risks, the security system in place should be improved in respect of the definition and management of user profiles and users' rights of access to the system's various functions. Some users have rights of access to transactions within treasury management which are mutually incompatible. The number of users with system administrator or equivalent rights, allowing them to carry out all transactions in the system, is too high. The profiles of some of these users are generic and not personalised and this makes monitoring their activities difficult. The Court also found that generic users are created ad hoc for specific periods and purposes but are given broad rights of access.

1.18.

The Commission agrees that the number of users with extended access rights was too high. This number has now been significantly reduced. The Commission is developing and will put in place before the end of 2004 a reporting system to enable it to identify such cases in the future.

1.19.

When payments are launched in the central accounting system, files containing all the data on the payments are transferred to a system used for coordination with the banks. The Commission should continue its efforts to guarantee a complete control over the integrity of the data contained in the files which are transferred to the banks.

1.19.

In November 2003 the Budget Directorate-General introduced a new mechanism for the protection of payment transactions between SINCOM2 and the SWIFT network. This new protection mechanism is not yet fully applicable as it does not cover transactions involving small amounts which are more difficult to alter in the base because of their specific format. The Budget Directorate-General plans to expand the new protection mechanism — which is more complicated to implement for this type of transaction — by the end of 2004.

1.20.

In 2003, the Commission modified its technical infrastructure. It finalised a new contingency plan, which has not yet been tested. In the field of treasury management, a test (17 February 2004) to retrieve the bank coordination system using an alternative site, in the event of system failure, showed that improvements needed to be made in the start-up procedure.

1.20.

The SINCOM2 contingency plan was tested in November 2002. A new contingency plan will be needed because of the operational changes and changes in technical infrastructure expected when the Commission's new accounting and financial system (ABAC) comes into operation in January 2005. As regards treasury management, the Budget Directorate-General will improve the procedure for launching the SWIFT contingency plan before the end of 2004 along the lines identified during the test.

1.21.

In addition to the problems identified in paragraph 1.16, other points have still not received an adequate response:

1.21.

a)

the rules governing the management of imprest accounts have still not been applied in the context of the implementation of the new Financial Regulation;

a)

Although the imprest account section in the treasury has not been fully adapted, extra resources have been devoted to it in order, particularly, to verify the bank accounts of all imprest accounts;

b)

a solution still has to be found to the problem of preventing the recording of accounting entries in bank accounts which have been closed, without losing historic data;

b)

An IT procedure exists since the beginning of 2004 which rejects any attempted posting to the general ledger accounts for closed bank accounts;

c)

a clear and formalised description of the tasks and responsibilities within treasury management must be drawn up in order to allow an appropriate segregation of duties, on the one hand, and, on the other, efficient management of the necessary subdelegation of powers.

c)

The formalisation of delegations from the Accounting Officer to treasury staff was completed in September 2004.

1.22.

On 17 December 2002 the Commission adopted the Action Plan for the modernisation of the European Communities' accounting system (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), which was a response to a number of previous observations by the Court and takes into account the provisions of the new Financial Regulation adopted in June 2002 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). This action plan, which is intended to be fully operational as of 1 January 2005, consists of two strands, one concerning the adoption of the new accounting framework (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) and the other the development of the information systems required for its implementation (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). The two committees provided for under this action plan, a project oversight board and an advisory committee for accounting standards, were set up during the first quarter of 2003.

1.23.

The Advisory Committee for Accounting Standards, which is chaired by the Commission's Accounting Officer, consists of representatives of certain institutions (the European Parliament, the Court of Justice and the Commission) and certain satellite bodies (agencies) (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), and also external experts. Its task is to examine international accounting standards (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) and to adapt them to the Community context, as required by the provisions of Article 133(2) of the Financial Regulation. This examination led, in April 2004, to the submission of 15 draft basic accounting rules covering the various subjects likely to be dealt with in the accounts with a view to the presentation of the year-end financial statements in accordance with the principle of accruals-based accounting (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.24.

These basic rules still have to be definitively adopted by the Commission's Accounting Officer, who, in addition, must ensure that they are transposed into charts of accounts applicable in the institutions and bodies whose accounts are to be consolidated (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). As regards the timetable described in the Commission's action plan, the progress made so far with the work would seem to indicate that the planned deadlines are likely to be kept to. The basic accounting rules and the charts of accounts of the bodies whose accounts are required to be consolidated should therefore be available in time for the drawing-up of the accounts for the financial year 2005.

1.24.

All directorates-general were consulted on the draft accounting rules in June 2004, as well as the accounting officers of the Institutions and Agencies (in accordance with Article 133 of the Financial Regulation). Their comments and remarks have been taken into account in the finalisation of these rules. These rules have been used as a basis for preparing the accounting manual. The objective of the manual is to describe the application and operation of these rules and the new accounting system. The directorates-general were consulted on the draft manual in July 2004.

1.25.

As regards the informatics aspect, provision has been made to develop an integrated information system containing, in general (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), all the accounting data needed for the introduction of an accruals-based accounting system on 1 January 2005 in accordance with the Financial Regulation. The progress made concerning accounting standards has made it possible to lay down the architecture and the operating arrangements for this system. The local systems used by the authorising officers by delegation have to be linked to the central information system. Nevertheless, as the Court has already pointed out (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the timetable for the necessary adaptations and validations is very ambitious and there is a risk that the Commission will be forced to make gradual adjustments to the current systems.

1.25.

The project continues to be implemented largely in accordance with the timetable in the Commission's Communication of 17 December 2002, and with the more detailed project plan proposed on 8 July 2003. Subject to the testing of the IT functionalities once their development is completed, the new central IT system, termed ‘ABAC’, is expected to be ready to undertake the transition to accrual accounting in 2005. The essential of the IT developments required of the services other than the Budget Directorate-General has been scheduled over the second half of 2004. According to the self-assessments received by end-June 2004, all expect to complete these developments by the end of 2004. However, given the limited time available, several expect to complete development at a date which leaves no margin for unforeseen circumstances.

1.26.

The operation of drawing up the opening balance sheet as at 1 January 2005 is crucial to the success of the transition from a cash-based accounting system to an accruals-based system. From this perspective, the accounting data must be processed in such a way that the comparative components required to draw up the financial statements for 2005 will be available. For this reason it is essential that the authorising departments be provided with adequate resources to carry out this large-scale operation properly and that provision be made for suitable support and monitoring by the central accounting departments. It is also very important for the accounting officer to ensure that the procedures for initiating and validating accounting operations in the authorising departments are organised in such a way as to guarantee correct booking as soon as they take place, even if, pursuant to the Financial Regulation (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the reliability of the data comes under the responsibility of the authorising officer.

1.26.

The Commission is aware of the importance and scale of the opening balance sheet exercise, which is why it has allocated the appropriate resources to its services so as to accomplish this task. Extra human resources have been given to directorates-general to help identify the opening balances for pre-financings, invoices and guarantees, as well as for creating the new legal entity files. Meetings to provide further information and support have also been arranged with the directorates-general by the central services and there is constant dialogue between the two. Additionally, a frequently asked questions list is maintained on the Intranet.

1.27.

The scope of the Court's work was subject to the limits explained in paragraphs 3.6 and 3.42.

1.28.

Although the transactions examined by the Court were not on the whole affected by material errors, the Court's audit found a number of features in the Members States' supervisory systems and controls and in their traditional own resources accounts which require improvements in order to reduce the risks of incorrect and incomplete sums of Community own resources being made available (see paragraphs 3.59 to 3.62).

1.28.

The Commission will follow up the Court's specific findings with those Member States involved. In the meantime the Commission anticipates that an amendment to the traditional own resources accounting requirements will lead to Member States maintaining more accurate and reliable separate accounts.

1.29.

With the exception of the reservations concerning the supervision of the implementation of preferential trade agreements, the Directors-General responsible declared that the control procedures introduced provide the requisite guarantees as regards the legality and regularity of the underlying transactions, which is corroborated by the Court's audit findings (see paragraph 3.58).

1.30.

The overall situation for the entire sector is stable compared with previous years. However, further progress is required to eliminate the risks with regard to the accuracy of the statistical data used to calculate resources (VAT and GNI) and to the legality and regularity of certain transactions.

1.30.

The Commission takes note of the weaknesses identified by the Court in its conclusions in Chapter 3 and will examine the measures that could be introduced to address them.

1.31.

The Court's audit of the way the supervisory systems and controls in the Member states work revealed that, in general, the IACS is a useful source of information for assessing the legality and regularity of approximately 58 % of the CAP. On the other hand, inconsistencies and control weaknesses were found concerning aid paid in relation to quantities produced (olive oil, cotton, tobacco and dried fodder), rural development aid, export refunds and intervention storage (see paragraphs 4.24 to 4.46).

1.31.

The Commission considers that the supervision and control it exercises over the Common Agricultural Policy (CAP) form a sound basis for addressing the risk of irregularity in the underlying transactions. Errors and deficiencies found in the areas mentioned remain subject to recoveries from the Member States concerned under the clearance of accounts procedure.

1.32.

As already noted by the Court in previous years, CAP expenditure as a whole was significantly affected by error. However, there are variations between the main categories of agricultural expenditure as regards the risk affecting their legality and regularity. Arable crops are less exposed than animal premiums, while the other categories of expenditure are exposed to a more critical level of risk and are subject to less effective checks (see paragraph 4.47).

1.32.

The Commission points out that its budget is exposed to the risk of irregularity in the underlying transactions by the nature of the aid schemes financed by the Community. The Commission endeavours to limit this risk when designing the aid schemes, and through its supervisory systems and controls over the implementation of each scheme. Any control system is a trade-off between the cost of operating the defined intensity of checks on the one hand, and the benefit these procedures bring on the other. In the Community context the benefit involves reducing the risk that funds are wasted and containing the risk of error to a tolerable level, which varies between different budgetary areas, depending on both the cost of controls as well as the inherent risk of transactions containing errors or irregularities. This view is consistent with the Court's opinion no 2/2004 on the ‘single audit’ model.

1.33.

The annual activity report and declaration by the Director-General of the Directorate-General for Agriculture would allow a better assessment to be made of the legality and regularity of the underlying transactions if they were based to a greater extent on the most pertinent existing sources of information, such as the IACS, rather than on information relating to financial years previous to 2003, the usefulness of which is still only limited in the context of the Court's Statement of Assurance (see paragraphs 4.18 to 4.23).

1.33.

The declaration of assurance of the Director-General of the Agriculture Directorate-General is, as far as EAGGF Guarantee is concerned, based on the following elements:

1.34.

Although, with regard to the IACS, the risks affecting legality and regularity are generally better managed, taking agricultural expenditure as a whole there is still some progress to be made in order to rectify the substantial shortcomings found in the supervisory systems and controls. Furthermore, the content of the annual activity report and the drafting of the declaration of the Director-General could be improved with a view to providing a source of information for the Court's Statement of Assurance.

1.34.

The Commission considers the current system of statistical reporting for IACS to be effective. It agrees that, in cases where controls have been poorly executed by Member States (for example certain post-payment checks), improvements should be sought. In any case, discrepancies are investigated and dealt with under the clearance of accounts procedure as appropriate.

1.35.

The Court's audit confirmed that there are still weaknesses in the Member States' systems for the supervision and control of the implementation of the Community budget. With regard to the closure of the various forms of intervention in the 1994-1999 programming, there was found to have been little progress because the Member States had submitted incomplete and inadequate documentation in support of the final payment claims. This is compounded by the difficulties encountered by the Commission's departments when processing files (see paragraph 5.67). The Court's audit confirmed the repetition of weaknesses of the same type as in previous years in the management and control systems for the 2000-2006 period (see paragraph 5.68).

1.35.

The Commission considers that the supervision and control it exercises over the structural measures form a sound basis for addressing the risk of irregularity in the underlying transactions.

1.36.

The results of the Court's audit of beneficiaries revealed the repetition of errors of the same type and with the same frequency as in previous years, which confirms the findings regarding system failures (see paragraph 5.56).

1.36.

The Commission is continuing to devote a large proportion of its audit resources to checking Member States' systems. Where necessary it uses its powers to suspend payments to programmes whose systems show serious weaknesses which place Community funds at risk and applies financial corrections for resulting irregularities. The Commission follows up errors identified in the Court's and its own audits and take measures to correct them.

1.37.

In their annual activity reports and declarations, the Directors-General provided an assurance as to the legality and regularity of the underlying transactions, but the Court found that for all of the structural measures the reservations made were not compatible with the assurance given. Furthermore, it was found that the risks associated with the closure of the 1994-1999 programme period were not the subject of a reservation in the declarations of the Directors-General responsible (see paragraphs 5.57 to 5.62).

1.37.

The assurance given by the four Directorates-General responsible for the resources of the Structural Fund was justified by the progress made in examining and auditing the systems of the Member States. The absence of reservations on 1994-1999 programmes is justified given the rigorous procedures in place in the Directorates-General and the closure audits which are being carried out to verify the reliability of the closure statements.

1.38.

In general, the Court notes that the operation of the supervisory systems and controls for the 2000-2006 programme period has still not achieved a satisfactory level, which is reflected in the large number of material errors still detected in this area.

1.38.

For the 2000-2006 period the Commission is following a multi-annual strategy, which in addition to including a level of audit work on the current period commensurate with the risks, taking account of other priorities, also involves applying the ‘single audit’ approach in order to maximise the effect of its own and Member States' audit work. In addition, the Commission disseminates guidance and good practices to Member States.

1.39.

Shortcomings were identified in respect of the management and control systems of the sixth Framework Programme for Research and of the programme for the European Refugee Fund in the freedom, security and justice field. Furthermore, work must continue on the supervisory systems and controls at Commission level so as to complete the implementation of the internal control standards (see paragraphs 6.4 to 6.16 and 6.41).

1.39.

The Commission fully supports the objectives which the Court lists in the report and pursues them in its day-to-day management. The control systems have been strengthened under the administrative reform and will continue to be subject to strict monitoring.

1.40.

Substantive testing of transactions in the Internal Policies sector revealed weaknesses in the Commission's internal control systems and numerous errors at final beneficiary level, which confirms the Court's previous observations on the legality and regularity of the underlying transactions and corroborates the weaknesses identified in the control procedures applied (see paragraphs 6.17 to 6.26 and 6.42). An analysis of the Commission's ex post financial audits in the Internal Policies sector also showed that a large number of final beneficiaries overdeclared the costs relating to the operations cofinanced by the European Union. In this regard, the Court believes that the corrective measures provided for in the case of the sixth RDT Framework Programme to reduce the risks affecting the legality and regularity of the underlying transactions are inadequate (see paragraphs 6.27 to 6.33 and 6.43).

1.40.

In particular since the implementation of its administrative reform, the Commission is confident that it respects the requirements of the Financial Regulation regarding ex-ante and ex-post controls on directly managed expenditure. The Commission constantly seeks to improve its supervisory systems and controls, and welcomes the recommendations the Court makes to this effect. At the final beneficiaries' level, the analysis of ex-post financial audits by the Commission shows that final beneficiaries make mistakes often due to the complex nature of the fifth Framework Programme model contract. These mistakes are made in two senses, some contractors overstate, and others understate their expenditure. The net impact of the errors on the Commission's budget remains limited.

1.41.

The quality and reliability of the information contained in the activity reports for 2003 had improved, thus making a better assessment of the legality and regularity of the underlying transactions possible. Nevertheless, there are still weaknesses as regards the drafting of the reservations (see paragraphs 6.34 to 6.40 and 6.44).

1.41.

Reservations are drafted after thorough examination of the activities of the DGs and the main factors are contained in their annual activity reports. (Each reservation is covered by an action plan which is systematically followed up)

1.42.

In general, the Court notes that the improvements observed in 2003 in internal control are not yet sufficient to avoid numerous errors at the level of final beneficiaries and weaknesses in the operation of the Commission's own systems (see paragraph 6.45).

1.42.

The Commission is always trying to improve the systems introduced, particularly in the light of the Court's recommendations (see paragraph 6.44).

1.43.

Although 2003 was, in principle, the last year of the devolution process for the geographical programmes (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the reliability and effectiveness of the controls (checks, reviews, inspections, internal audits and audits carried out by external firms) differ markedly between the Delegations and the Directorates in the Europe Aid Cooperation Office (see paragraphs 7.14 to 7.32).

1.43.

The main budgetised geographical programmes were almost all devolved during the period 2001-2003 but devolution of the thematic budget lines has taken place during 2004. The gradual implementation of devolution explains to a large degree the difference between Delegations and between the different directorates of EuropeAid.

1.44.

A small number of errors which had no significant financial impact were found at the level of the Commission's central departments and Delegations (see paragraph 7.36). On the other hand, the Court's audit revealed the existence of weaknesses in the internal control systems and a relatively large number of irregularities at the level of the bodies responsible for implementing the final beneficiaries' projects and in the actual projects (see paragraphs 7.37 to 7.39).

1.44.

The Commission agrees with the Court that the observance of tender and procurement procedures by project management units and NGOs remains an area of concern. With the devolution of projects stricter controls can be applied on the spot by the respective delegations. Moreover, since June 2003, in line with the revised grant contract provisions, the project accounts are subject to an audit before the final payment is made.

1.45.

The Directors-General responsible declared that the control procedures introduced provide the requisite guarantees concerning the legality and regularity of the underlying transactions. The annual activity reports of the Humanitarian Aid Office and the EuropeAid Cooperation Office describe the internal control systems in place. However, in the case of the EuropeAid Cooperation Office the Court noted that the systems for supervising the legality and regularity of the expenditure underlying the financial statements presented by the bodies responsible for implementation are not yet able to guarantee the legality and regularity of the payments made by these bodies.

1.45.

Essential supervisory systems and controls for EuropeAid were operational in 2003. These controls were considered as adequate for the purpose of deriving overall assurance in the context of the Director-General's declaration. See also the replies to paragraphs 7.45 and 7.48.

1.46.

With regard to the field as a whole, some elements required for the supervision and control of the systems and expenditure were already in place in 2003. Nevertheless, it is essential for these components to be made operational with a view to improving the legality and regularity of the underlying transactions, which is still necessary, at the level of the organisations responsible for implementing projects and at that of final beneficiaries.

1.46.

Over recent years, the utilisation of standard contractual documents (contracts, grants and financing agreement) has contributed to improve the level of control by the Commission. Payments and the verification of supporting documents are made as required by the financial regulations. Contract provisions for ‘certification audits’ have also been improved (see replies to paragraphs 7.30 and 7.32). Moreover, the external audit strategy has been strengthened through the establishment of annual audit plans – on the basis of a risk assessment — of audits to be launched by headquarters and delegations.

1.47.

In spite of the improvements noted, the evaluation of the supervisory and control systems further identified a number of weaknesses in the audits carried out by the Commission of the management and control systems in the candidate countries. These weaknesses must be corrected in order to reduce the risk resulting from the removal of the Community Delegations' ex ante controls (see paragraphs 8.40 to 8.43).

1.47.

The Commission is following up the findings of the Court for pre-accession aid and will take every appropriate action. The Commission provided extensive support and guidance to the accession countries and carried out substantial audit work to help them improve their management in accordance with EU rules. It is continuing its work to ensure that the countries that have now joined the European Union have appropriate systems for managing the Structural and Cohesion Funds.

1.48.

The Court's checks on payments revealed errors. Furthermore, there is a risk that national obligations as regards parallel co-financing may not be met (see paragraphs 8.30 to 8.34).

1.48.

The Commission considers that a number of errors identified by the Court do not have a financial impact and are formal in nature.

1.49.

In their annual activity reports and declarations, the Directors-General provided an assurance as to the legality and regularity of the underlying transactions, whilst expressing significant reservations concerning Phare and ISPA (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). The Court believes that the risk of non-compliance with cofinancing obligations on the part of the applicant countries is sufficiently important to justify a reservation in the 2003 declaration accompanying the annual activity report of the enlargement Director-General (see paragraph 8.36).

1.49.

The Commission considers that the Director Generals' Annual Activity Reports clearly set out risks attaching to pre-accession aid.

1.50.

Notwithstanding the fact that, in 2003, the candidate countries made real progress in creating management structures and setting up internal control mechanisms, efforts still need to be made with a view to getting them to work efficiently so that there is positive progress in the situation regarding the legality and regularity of Community expenditure and due account is taken of the removal of the Delegations' ex ante controls. The in-depth audit carried out by the Court in 2003 revealed that, in general, the situation regarding the Commission's own supervisory systems and controls is unsatisfactory, which is reflected in the number of errors detected at transaction level. These errors confirm the risk already identified in 2002, which results from the weaknesses identified in these systems.

1.50.

The Commission is aware of the need for further improvement in the management and control systems in the new Member States and the accession countries. It continues to support these improvements, inter alia through its own audit work.

1.51.

In spite of the efforts made in 2003, the Court's audits revealed that the changes required to fully implement the new internal control framework laid down in the Financial Regulation had not yet been implemented in their entirety by the majority of the institutions (see paragraph 9.65).

1.51.

The Commission has considered implementation of the reform as one of its first priorities. So, by the end of 2002 all services conducted a detailed Readiness assessment which indicated that services were ready for implementing the requirements of the new Financial Regulation.

1.52.

The Court's audit did not reveal any significant problems affecting the legality and regularity of the transactions examined taken as a whole (see paragraphs 9.66 and 9.68).

1.53.

The annual activity reports of the majority of the institutions' authorising officers by delegation and the declarations of the Directors-General provided reasonable assurance as to the legality and regularity of the administrative expenditure (see paragraphs 9.16 to 9.17,9.24,9.29,9.34,9.46,9.53,9.63 and 9.67). However, in his declaration the Commission's Director-General for external relations expressed two reservations concerning the implementation of the internal control standards in the Community Delegations (see paragraph 9.64).

1.53.

The Commission notes that it is one of the institutions whose authorising officers by delegation provided reasonable assurance.

1.54.

Although examination of the transactions showed a stable situation compared with previous years, the institutions must still work towards reinforcing the supervisory systems and controls in order to minimise the risks entailed by the existing weaknesses for the legality and regularity of the underlying transactions.

1.54.

As far as the supervisory systems are concerned, the Commission considers that supervision is really executed in the services but, as stated in the overview of the state of the internal control systems (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), acknowledges that there is still room for improvement in order to evidence that supervision. The Commission plans to have specific workshops on this issue in the second half of 2004.

1.55.

In the context of its Statement of Assurance (DAS) for the financial year 2002, the Court examined the progress of the administrative reform of the Commission (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) by carrying out an initial evaluation of the Commission's new internal control system, as well as of the guarantees it provided as regards the legality and regularity of the transactions underlying the budgetary payments (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.56.

In 2003 the Court continued its evaluation of the Commission's internal control system. On the one hand the Court examined the extent to which the management representations contained in the annual activity reports and declarations by the Directors-General and in the Commission's Synthesis are confirmed by the Court's audit findings and could be taken into account, where necessary, for the DAS. On the other, the Court examined the progress made in implementing key elements of the revision of its internal control system (White Paper actions, action plans annexed to the Synthesis of the 2002 and 2001 annual activity reports and declarations by Commission Directors-General and minimum internal control rules).

1.57.

According to Article 274 of the EC Treaty, the Commission is responsible for implementing the budget. Nevertheless, not all the transactions are subject to the same management system and the impact of the reform of the Commission varies from sector to sector. With regard to expenditure, the Financial Regulation distinguishes between the following cases (Article 53):

a)

the Commission implements the budget on a centralised basis (administrative expenditure and internal policies). In this case, implementation tasks are performed either directly by its departments (direct centralised management), or indirectly when the Commission resorts to agents (indirect centralised management) In the case of the first category, the reform affects all the procedures for implementing expenditure. In the second category, the reform has a particular impact on those aspects concerning the definition, supervision and implementation of the tasks concerned;

b)

management of the transactions is assigned to the national authorities in the Member States (EAGGF-Guarantee and Structural Funds). This is shared management and the Commission must verify that the national authorities act in compliance with the applicable rules. In this case the reform of the Commission only affects activities concerning the monitoring of implementation;

b)

The Commission has developed an audit strategy based on the single audit approach which aims to improve the management and control systems in the Member States.

c)

the Commission can entrust implementation of certain aspects of its operations to beneficiary countries after having carried out an ex ante check (pre-accession aid). Management is then termed decentralised and the reform affects most of the aspects of management, in the same way as in cases of delegation by the Commission to an agent in the context of centralised management.

1.58.

By means of its 2003 Synthesis of the annual activity reports (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the Commission is continuing its efforts at transparency as regards its obligation to render an account of its management (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). The Court found that for the first time the Commission had presented an analysis of the degree of assurance provided by the supervisory systems and controls with regard to the legality and regularity of the underlying transactions. In this way, as an institution, it assumes responsibility for the implementation of the budget as provided for in the Treaty (Article 274) by adopting as its own the Authorising Officers by delegation's management representations.

1.58-1.60.

As in previous financial years (see section 5.3.3 of the 2002 synthesis (COM(2003) 391) for shared management), when adopting the 2003 Synthesis of Annual Activity Reports the Commission gave an overview of the assurances given by the various authorising officers by delegation and introduced corrective measures at institution level in the case of recurrent weaknesses in certain sectors.

1.59.

The Commission states that is not yet in a position to provide assurance without qualification with respect to one important area of shared management (Structural Funds). Moreover, it notes that, in spite of a satisfactory level of assurance in the areas of direct and indirect centralised management, there is still a problem with regard to grants based on the partial reimbursement of costs declared by the beneficiaries. In fact, reservations concerning the frequency of errors have been issued by most Directorates-General managing these types of programme. All the above-mentioned statements are confirmed by the Court's audit findings (see paragraphs 5.66 to 5.69 and 6.41 to 6.45).

1.59.

See replies to paragraphs 1.35 to 1.38.

1.60.

However, the Commission has not stated its position on the situation regarding the Common Agricultural Policy, which is the most important area in which management is shared. The same applies to centralised management (Own resources and Pre-accession aid) and joint management (External aid).

1.60.

See reply to paragraph 1.58.

1.61.

The new circular (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) on the 2003 Annual activity reports, which for general matters refers to the guidelines for drawing up the 2002 annual activity reports and to some aspects of shared management (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), introduces changes and some new elements:

1.62.

These elements, plus peer review, helped to improve the quality of the annual activity reports. Thus, in general, the corresponding annual activity reports noted the follow-up to the action plans adopted in the context of the annual activity reports and the Commission's 2002 Synthesis (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) and the monitoring of the measures taken as a result of the internal and external audit recommendations. The introduction of a specific circular on these action plans (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), which are incorporated into the Commission's annual management plans, enabled progress to be monitored more effectively. However, the Court feels that this whole exercise requires further consolidation if it is to be implemented effectively.

1.62.

The Commission considers that the annual activity reports are a useful management tool for supplying information on the weaknesses detected and providing an effective remedy. It feels that substantial improvements have been made to these reports and to the declarations accompanying them in 2003 and will continue its efforts along these lines.

1.63.

In their declarations attached to the annual activity reports, the Directors-General state that the internal controls carried out in their departments offer reasonable assurance that the underlying transactions are legal and regular. In the event of internal control weaknesses or irregularities, they make reservations and draw up action plans which include deadlines for implementation.

1.64.

In order to establish the actual scope of the reservations, the Directors-General are asked to specify their criterion for defining the materiality threshold. Apart from materiality based on nature or context, the guidelines establish the threshold as a function of the budget for the activity in question, i.e. 2 % of the value of the activity concerned (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). The Court feels that this notion of materiality is not in itself adequate to identify systemic weaknesses (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.64.

In order to highlight only the most serious management weaknesses (management by exception), the term ‘reservation’ has been restricted to those shortcomings which have a real and verifiable impact — i.e. not those with only a potential risk — on the assurance to be given that the control procedures introduced provide the requisite guarantees as to the legality and regularity of the transactions carried out during the reference year. Now that the term ‘reservation’ has been defined in this way, progress still has to be made on the precise determination by the authorising officer by delegation of the impact which the reservations expressed have on the assurance given.

1.65.

The Directors-General may depart from this criterion if they feel that the context requires such a decision or if the shortcoming is intrinsically significant. In such cases, the choice of a new threshold or of another materiality criterion must be justified in the annual activity report. Where appropriate, this choice should take account of the risks intrinsic to each of the areas considered. In this connection, the Commission should define a more suitable, specific policy for establishing materiality thresholds based on the nature of the transactions concerned and on the risks that are acceptable for the area in question and for determining the resources to be allocated to checks (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.65.

The Commission is willing to consider the possibility of introducing a certain degree of flexibility when determining the materiality thresholds for the various areas of management.

1.66.

All the Directors-General stated that they had obtained reasonable assurance that the resources allocated to them had been used for the specified purposes and that the internal controls which they had introduced had ensured that the underlying transactions were legal and regular. 21 of the 39 declarations contain reservations limiting the assurance given by the Directors-General. Thus, as in the previous year (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the Director-General for Budgets upheld the reservations concerning imperfections in the Commission's accounting systems (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) (see paragraph 1.8).

1.66.

See Commission's reply to paragraph 1.8.

1.67.

The main reservations are shown in Table 1.2 . Of the 49 reservations expressed in 2003 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the majority concern weaknesses already brought to light in 2002 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). The other reservations had generally already been mentioned in various connections in the annual activity reports of the Directorates-General for the previous year (see paragraphs 3.58, 4.18, 5.57 to 5.62, 6.36, 7.47, 8.35, 8.37 and 9.64). This shows that the weaknesses identified can be eliminated only in the medium term (see paragraphs 1.73, 1.76 and 1.79).

1.67.

Although it does not agree with the Court's criticisms in Table 1.2 on the impact and the scope of reservations, the Commission takes note of the Court's observations and will continue to enhance the information so that the Court can use it more effectively in support of its declaration of assurance.

1.68.

The guidelines for the annual activity reports and the Charter for Authorising Officers by Delegation (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) specify that the reservations must not make the declaration meaningless and that, in extreme cases (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the Director-General may not be able to provide the required assurance.

1.69.

For 2003, the extent of the reservations expressed by some departments (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) is not compatible or sufficiently justified in view of the assurance provided in the declarations (see Table 1.2 and paragraphs 5.57 to 5.62, 7.48, 8.36 and 8.38). The impact of the reservations on the assurance given in the declarations was nevertheless defined more clearly than in the financial year 2002.

1.69.

Determination of the impact of reservations on the assurance is improving as the practice becomes routine. The Commission considers that, at present and increasingly so in the future, determining the consequences of the reservation for the area in question already makes it possible to establish — and will make it even clearer in future — that the assurance to be given by the authorising officer by delegation is totally justified.

1.70.

The Court's work shows that the supervisory systems and controls in several areas of the financial perspectives have not yet reached a satisfactory level and that further efforts are required in order to strengthen them. Thus, some weaknesses singled out by the Court during its audits should have been included in the declarations of the Directors-General (see Table 1.2 and paragraphs 4.22, 5.62, 6.37, 7.48 and 8.36). In addition, the Declaration by the Director-General of DG Agriculture is not based on an examination of the transactions belonging to the financial year 2003 (see paragraphs 4.19 and 4.20).

1.70.

See answers to paragraphs 1.33, 1.37 and 1.67 and to the specific paragraphs mentioned by the Court.

1.71.

In spite of some improvement, the Court believes that the annual activity reports and declarations of the Directors-General cannot yet systematically serve as a useful basis (see paragraph 1.4) for its audit conclusions in the various areas of the financial perspectives (see Table 1.2 ).

1.71.

Through its work to improve the content of declarations and its monitoring of compliance with the standards on which the declarations are based, the Commission is endeavouring to make the annual declarations into a reliable indicator of its performance and its strategy for dealing with the risks identified, in order that the Court can use them as a basis for its assurance.

1.72.

In general, the Commission states in its Synthesis that 2003 saw substantial progress in the area of administrative reform, that practically all of the actions of the White Paper had been completed and that most of the action plans envisaged by the 2001 and 2002 Syntheses had been completed or had made significant progress. However, the Court's audits show that this assessment is very optimistic. Furthermore, the Commission itself acknowledges in the various sections of its Synthesis that some areas will still require monitoring in the years to come, thereby corroborating the Court's audit findings in the following areas:

1.72.

The significant progress made in 2003 does not rule out the need to implement the corrective measures in the various sectors identified in the 2003 synthesis report. In some cases, the problems underlying these operations will only be resolved effectively and satisfactorily in the medium term. Thus, every year the synthesis of annual activity reports takes stock of the progress achieved and sets out and updates all the actions to be conducted at Commission level.

1.73.

The Court shares the Commission's view that the aforementioned points are already covered by the actions envisaged in the syntheses for previous years. It stresses the importance for the Commission of successfully consolidating all the horizontal action plans and notes the Commission's willingness to consider the recommendations contained in its opinion on the single audit model (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.74.

As part of its monitoring of progress in the area of administrative reform, the Commission announced that, of the 36 actions listed in Chapter V of the White Paper (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) on ‘Audit, management and financial control’, 32 had been completed in 2003. A progress report on the White Paper was thus drawn up (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) to include a full account of the objectives still to be attained and of the measures still to be implemented.

1.74-1.76.

Once the instruments aimed at by the various measures have been installed, the settlement of outstanding issues will be covered each year by the synthesis reports (see reply to paragraph 1.72). Within this framework, the Commission considers that most of the actions mentioned by the Court had been achieved at 31 December 2003.

1.75.

The Court notes the progress made by the Commission as regards the design of the new regulatory control framework but believes that the results as far as implementation and actual procedure are concerned are not yet satisfactory. Thus, of the 18 out of 36 actions under Chapter V of the White Paper that had still not been completed at the end of the financial year 2002 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), eight actions were still being implemented (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) as at 31 December 2003. For eight of the 10 other areas where actions have theoretically been completed, the objective has not yet been fully achieved, implementation is not yet satisfactory or there is no guarantee that they are permanent (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.75.

The Commission would make two comments on Action 83:

1.76.

Many of the unfinished actions are also covered in the synthesis of the annual activity reports and declarations (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) (see paragraphs 1.77 to 1.79) and require departments to change their habits or necessitate the introduction of new activities (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). Full completion of these actions, which will enable the attendant objectives to be achieved, is feasible only in the medium term (see Table 1.3 ).

1.77.

The synthesis of the annual activity reports and declarations of the Directors-General (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) for the financial year 2002 takes stock of the reform of the Commission's internal control system and launches a new action plan to rectify the weaknesses observed. This action plan comprises 25 corrective measures in addition to the action plans set out by the Directors-General in their annual activity reports and the follow-up of the action plan envisaged in the 2001 Synthesis (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). Of the actions which are likely to have an impact on the legality and regularity of the underlying transactions (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78), the Court found that the horizontal actions (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) had not been completed (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) by 31 December 2003.

1.77.-1.78.

In line with what was set out in the reply to paragraph 1.72 — that the actions to be undertaken are updated each year and the actions established by previous syntheses disappear — the actions in the 2001 and 2002 syntheses which were not completed at 31 December 2003 have been taken over and updated in the 2003 synthesis.

1.78.

Similarly, the follow-up of the action plan envisaged in the 2001 Synthesis reveals that most of the actions which had not been completed by the end of the financial year 2002 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) were still being implemented (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) on 31 December 2003. In two of the areas covered by actions which had, in principle, been completed, the objective has not yet been achieved in full, implementation is not yet satisfactory or there is no guarantee that they are permanent (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). In two other areas, the actions are incomplete and the objective has been partially achieved (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.78.

With regard to the actions on shared management, the Commission refers to its reply to paragraph 1.77.

1.79.

The Court encourages the Commission to implement the unfinished action plans so that the new internal control system can actually function, in particular in the areas of shared management, management risk assessment and debt recovery (see Table 1.3 ).

1.79.

The Commission is investing considerable effort and interest in progressing on the three issues highlighted by the Court (i.e. shared management, risk management and recovery) as reflected in both the Synthesis of the 2003 and 2002 annual activity reports and the Overview of the state of internal control systems.

1.80.

The Court analysed the application of internal control standards (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) by 16 of the Commission's Directorates-General (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). The aim was not only to measure the degree of implementation but also to evaluate the Commission's application of the standards so as to assess the legality and regularity of the underlying transactions in the area concerned.

1.81.

The Court found that, in general, the scope and substance of the systems and basic controls underlying the standards set out in 2003 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) are not easy to compare with those defined in 2002.

1.81.

The fact that baseline requirements defined in 2003 are not entirely comparable with those defined in 2002 is consistent with the philosophy of those requirements. In fact, the baseline requirements were initially introduced in 2000 to make the 24 Internal control standards more concrete in practice by defining the minimum requirements at that time. Each year the baselines are updated in order to consider any additional requirement from any relevant Commission's decision/communication adopted in the meantime.

1.82.

The Commission declared that 91 % of the baselines had been complied with by 31 December 2003 (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78). Of these baselines, 26 % seem to have been introduced since the end of September 2003 when the Directorates-General reported on their ability to meet the deadline of 31 December 2003 for complying with all of the baselines (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.82-1.83.

As indicated by the Court, Directorates-General assessed in December 2003 that overall 91 % of the baselines were achieved against 65 % reported by September 2003. It should be noted that in many cases those baselines not fully implemented by September 2003 were ongoing actions, where important progress had already been made and where there was only a little work required to finalise them.

1.83.

In the Court's view, it is hard to see how this rate of progress can have an immediate impact on the actual workings of the internal control system upon which the legality and regularity of the underlying transactions is based. As regards the introduction of procedural rules or control instruments, more time is needed to ensure that these standards are actually applied. Thus, in most cases the Court's audit aimed to establish whether the practices of the Directorates-General complied with the internal control baselines (see paragraphs 4.23, 6.5, 7.40 and 7.41 and 9.55).

1.84.

As regards the internal control standards examined at the Directorates-General selected, the Court found that the information presented was balanced insofar as it referred more to the existence and compliance of the internal control mechanisms than to their actual workings (see Table 1.4 and paragraphs 4.23, 5.10, 6.5, 7.43 and 9.55). Overall, this degree of implementation cannot yet be considered sufficient to enable the Commission's internal control system to provide reasonable assurance as to the legality and regularity of the underlying transactions.

1.84.

The table 1.4 differs from the Commission's services' own assessment, which concludes that the internal control standards were 91 % applied at 31 December 2003. The incomplete application largely concerned areas with little effect on the risk of irregularity.

1.85.

In general, the 2003 annual activity reports contain information on the results achieved (in terms of economy, efficiency and effectiveness) by the Directorates-General as regards political activities and the management of the resources allocated.

1.85.

The aim of the annual activity reports is to take stock of the achievement of the objectives laid down in line with the Commission's priorities and the resources required for this purpose. They represent an instrument for monitoring the results of activities in relation to the objectives laid down, the risks involved, utilisation of the resources allocated and operation of the internal control system.

1.86.

However, the Court's analysis reveals that the design and use of this information by the Commission (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) is still not sufficient (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) to measure the quality of the internal control system and aspects of the legality and regularity of the underlying transactions (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78).

1.86.

The monitoring aspects are therefore highlighted in the annual activity reports. The overview mentioned above in paragraph 1.53 gives a more detailed account of internal control systems at the Commission.

1.87.

The Court believes that the production of information for monitoring the legality and regularity of the underlying transactions should be a priority for the Commission. In the context of the strategic planning and programming cycle, this information would be an essential management tool for guaranteeing the quality of the revenue and expenditure and for assessing the progress made (1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78) if it concerned the extent to which key aspects of the supervisory systems and controls had been implemented and the frequency, nature and impact on the budget of the errors which these systems and controls had not detected and rectified.

1.87.

Continuous improvement of its performance and the assumption of responsibility by its managers to achieve the objectives laid down and implement an efficient internal control system are Commission priorities.

2.1.

This chapter discusses the implementation of the EU budget in 2003, the last full year before enlargement of the Union and half way through the 2000-2006 financial perspective.

2.2.

The annual budget of the European Union is approved by the budgetary authority (Parliament and Council) on the basis of proposals presented by the Commission. The Commission implements the budget in cooperation with Member States and other beneficiary states in the case of expenditure on agriculture, structural operations, external actions and pre-accession aid.

2.3.

There are separate budgets for commitments and payments. Most expenditure on structural operations and on internal and external policies takes the form of programmes managed over a number of years (e.g., 2000 to 2006 for the Structural Funds current programming period), in which budgetary commitments — reflecting legal commitments to spend — are made in one year but paid off (‘liquidated’) over a number of years (‘differentiated appropriations’) (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37).

2.4.

Detailed information on budgetary implementation for 2003 can be obtained from the Commission document entitled ‘Report on budgetary and financial management — Financial year 2003’. Article 29 of the Financial Regulation requires this report to be published in the Official Journal of the European Union. This was not done for the 2002 report but the document was made available on the Commission's website (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37). The 2003 version is available at the same location. The Court notes the efforts made to improve the document as compared with 2002 but considers that the overall analysis could be made more useful by including information on the cumulative state of implementation of Community programmes and on the speed with which Member and beneficiary States make payments to final beneficiaries.

2.4.

The Commission appreciates the Court's statement regarding the improved ‘Report on budgetary and financial management’ and agrees with the observation of the Court that there is still room for further improvements. With regard to payments to final beneficiaries, the regulations (for example, Regulation (EC) 1260/1999 for the Structural Funds, Regulation (EC) 1663/95 for EAGGF Guarantee) require Member and beneficiary States to reimburse final beneficiaries promptly. In future the Commission could distinguish, in the information provided on the Structural Funds in its ‘Report on budgetary and financial management’, between advances, paid at the beginning of the period and serving to constitute a rolling fund with which to pre-finance expenditure, and reimbursements of expenditure declared by final beneficiaries. The amount of advances (for the Structural Funds, 7 %) can be taken to be equivalent to the maximum level of payments by the Commission not yet paid to final beneficiaries.

2.5.

For 2003, total payment appropriations in the approved initial budget (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) increased by 1,9 % compared with the final 2002 budget. Commitment appropriations increased by just 0,3 %. According to the Commission the virtually static level of commitment appropriations ‘demonstrates the determination of [the] budgetary authority and [the] Commission alike to tackle the problems of outstanding commitments still awaiting payment’ (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37).

2.6.

Commitment and payment appropriations remained respectively 2,6 billion euro and 5,4 billion euro below their annual financial perspective ceilings (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37). The margin in respect of commitments mostly relates to agriculture: the other expenditure areas are at, or near, their respective ceilings. For payments, the financial perspective ceiling applies to the budget as a whole and not by area.

2.7.

Table 2.1 gives an overview of the budgetary outturn for the 2003 financial year for both commitments and payments. In 2003 the proportion of commitment appropriations used (the implementation rate for commitments) was 99 %, similar to the 98 % rate in 2002. The proportion of payment appropriations used (the spending rate for payments) was 92 %, which represents an increase on the 86 % achieved in 2002. This increase was primarily due to higher spending on structural operations — 90 % of payment appropriations were spent, compared with 74 % in 2002 (see paragraphs 2.27 to 2.30).

2.8.

These overall spending rates do not tell the whole story about budget implementation for two main reasons. Firstly, only a small proportion of the commitments made in a particular year result in payments during the same year (see paragraphs 2.3 and 2.16 to 2.22). Secondly, ‘payments’ as defined in the Commission's accounts include advances made to Member and beneficiary States administrations' or other intermediaries to be used for payment to final beneficiaries. In some cases, such as Sapard (see paragraph 2.43), payment of the funds to final beneficiaries can take considerably longer.

2.8.

In the case of Sapard, payments are made upon receipt of eligible claims, where the beneficiaries have to demonstrate that eligible project expenditure has been incurred. This process can be lengthy. The Sapard countries generally experienced technical and procedural difficulties during the initial period of implementation, resulting in delays in the processing of applications and payment claims. Although there are still certain problems in some countries, overall the situation has improved substantially.

2.9.

For 2003 the surplus (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) of the budget totalled 5,5 billion euro — for analysis see Table 2.2 . While still large in absolute terms, it represents a fall compared with 7,4 billion euro in 2002 and 15,0 billion euro in 2001.

2.10.

In respect of the 2002 financial year the Court criticised the Commission for failing to take action on substantial underspending, although the situation was foreseen before the year end (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37). In 2003 specific measures were taken by the Commission to improve the forecasting of the use of the budget, taking into account information from Member and beneficiary States. The improved information received permitted the Commission to bring forward the amending budget referred to above whereby it reduced payment appropriations by 5 billion euro, with a commensurate reduction in revenue.

2.11.

The Commission's action during 2003 represented a significant improvement in budgetary management as compared with the previous year. However, despite the action taken, the large remaining surplus (5,5 billion euro) indicates that there was scope for a substantially greater reduction in appropriations.

2.12.

Table 2.3 shows the level of gross underspending, and its consequences, for the past five years. Over this period underspending has caused 39,9 billion euro of payment appropriations to be cancelled. Over the same period the budget has increased by 16,3 %, representing a cumulative total of 53,6 billion euro of extra appropriations.

2.13.

The Court notes that it is unrealistic to expect 100 % implementation of the budget. Expenditure must be legal and regular and respect the principles of sound financial management. In the shared management areas of the budget (over 80 % by value) if requests are not forthcoming from Member States or other intermediaries the Commission cannot make payments. Even with directly managed expenditure the Commission often depends on claims from beneficiaries. The consequence of continued underspending is an increase in the build-up of outstanding commitments (see paragraphs 2.16 to 2.22) and a concentration of payments at the end of the programming period which is difficult to manage.

2.14.

As the Court pointed out in its 2002 Annual Report (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), the carryover of appropriations from one year to another complicates the management, accounting and reporting of the budget unnecessarily. The carryover of payment appropriations from 2002 of 5,0 billion euro, which considerably reduced the reported surplus in that year, was significantly in excess of the carryover in previous years (see Table 2.3 ). Of the amount carried over, 3,3 billion euro represented appropriations for the settlement of final claims on the 1994 to 1999 programming period for the Structural Funds. In its 2002 annual report (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) the Court warned that it was unlikely that the Commission would be able to liquidate these appropriations, and this proved to be the case: 1,9 billion euro of these credits were cancelled in 2003, adding to the surplus.

2.14.

The Commission considers that the carryover procedure set by the regulatory framework is expedient, fairly simple, practical and transparent (see Commission's reply to the 2002 annual report, paragraphs 2.11 and 2.48).

2.15.

The carryover of payment appropriations from 2003 to 2004 is 2,2 billion euro, comprising 1,2 billion euro in respect of the operational budget and 1,0 billion euro in respect of third party funds (see paragraph 2.37). Compared with 2002 this represents a more realistic level of carry forward of credits.

2.16.

At the start of the programming cycle for expenditure subject to multiannual programmes it can take Member and beneficiary States a considerable time to set up the required administrative and control procedures, identify and approve suitable projects for EU financing and provide the necessary national co-financing. Other than the payment of first advances, which precede underlying expenditure on a project, it is therefore often difficult for the Commission to make substantial payments from the budget until well into the programming cycle. The budget for payment appropriations should be more realistic by taking better account of the programme cycle and the ability of Member States to absorb expenditure. Commitments are made at the beginning of the programme (except in the case of the Structural Funds where they are made on an annual basis — see paragraph 2.33) and are carried forward (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) until the corresponding payments are made.

2.16.

The Commission recognises that the budget for payment appropriations should be more realistic by taking better account of the programme cycle and the ability of Member States to absorb expenditure. The payments budgets presented by the Commission represent its best estimates of the actual payment needs. As reliance on Member States' payment forecasts led to an over-estimation of needs, the Commission has resorted to budgeting more in line with its own estimates, based on recent patterns in implementation and foreseeable trends. As a result, implementation rates have improved in the last few financial years.

2.17.

The higher the value of the outstanding commitments, the greater is the demand on the payments budget in future years. The lags inherent in the budgetary process are illustrated by Table 2.4 . For ‘differentiated’ expenditure (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), payments in 2003 in respect of commitments made during 2003 totalled only 5,7 billion euro out of the 49,6 billion euro committed, or some 11 %. In practice commitments can take many years to clear, and others never result in payment and have to be cancelled — see paragraph 2.21.

2.17.

The time lag between commitments and payments of ‘differentiated’ expenditure, which is responsible for the ‘RAL’, is inherent in the budgeting of this expenditure. As noted in the reply to the previous point, the pattern of such expenditure is smoothed over time by the overlap of financial perspective periods.

2.18.

At the end of 2003 outstanding commitments totalled 104,8 billion euro — see Table 2.4 . This is equivalent to 94 % of the commitment budget for 2004 (EU25) and represents an increase of 5,0 % compared with 2002. The increase took place despite:

—

decommitments of 4,1 billion euro, 2,7 billion euro of which related to a special procedure (see paragraph 2.21);

—

a near-static commitments budget in 2003 (see paragraph 2.5); and

—

the inclusion in the budget of additional payment appropriations specifically intended to alleviate the problem.

2.18.

The comparison of the level of outstanding commitments between 1996 and 2003 should be seen in the light of a changed system for both annual commitments and payments for the Structural Funds.

2.19.

However, the balance of outstanding commitments does not represent the full extent of legal commitments of expenditure made by the Union, due principally to the effect of the Structural Fund commitment process (see paragraph 2.33). The balance of expenditure legally committed at the end of 2003 on the 2000 to 2006 programming period, and disclosed as off balance sheet items in the annual accounts, but not yet appearing as commitments in annual budgets, amounts to some 95 billion euro (see paragraph 2.34). Taking this into account' total commitments outstanding some three years before the end of the current programming period therefore stand at around 200 billion euro, or five years of payments at the current rate (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37). Although the time limit for making payments goes beyond the end of the programming period (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), a high level of outstanding commitments will put pressure on the payments budget and may possibly delay the closure of the programmes. These factors risk influencing the budgetary implementation of the early years of the next programming period as has been the case in the past.

2.19.

The Commission refers to its answer to paragraph 2.48.

2.20.

Graph 2.1 shows the value of outstanding commitments on differentiated expenditure over the past ten years, compared with the commitment budget for each year. Over the last five years there has been a 47 % increase in the value of outstanding commitments for differentiated expenditure. This was due to two factors: firstly, the years 2000 to 2003 are the start-up period for major programmes (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) (see paragraph 2.16); and secondly, continued underspending of payment appropriations (see paragraphs 2.12 and 2.13).

2.21.

For a number of years the Court has been highlighting the need for the Commission to identify and take action on old and dormant outstanding commitments which may never result in payments. At the end of 2002 in a joint declaration the Budgetary Authority and the Commission undertook to deal with ‘potentially abnormal’ outstanding commitments (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) by the end of 2003. During 2003, of the 17,3 billion euro identified as ‘potentially abnormal’, payments were made on 4,0 billion euro, 2,7 billion euro were decommitted and 10,6 billion euro were found to be valid and therefore maintained.

2.22.

The current budget data and its analysis provides little information on the consequence of the high level of outstanding commitments, as well as on the cumulative state of implementation of the different Community programmes. The high level of outstanding commitments represents a significant demand on future payments which may be difficult to manage in the context of the budgetary process, and in terms of respecting the financial perspective ceiling.

2.22.

For the Structural Funds the Commission already provides information, inter alia, on the cumulative state of implementation in its annual ‘Analysis of the budgetary implementation of the Structural Funds’. The Commission is, however, ready to provide further information (see reply to paragraph 2.50). The demand on future payments should be reduced by the ‘n+2’ rule (see reply to paragraph 2.48).

2.23.

Table 3.1 summarises Community revenue for 2003 and Graph 3.1 shows the distribution of the different types of revenue. Graph 3.2 illustrates the evolution of actual revenue over the period 1989 to 2003. In particular, traditional own resources and the VAT resource declined in importance; the Gross National Income (GNI) resource rose. Amending budget No 6/2003 of 4 December 2003 reduced the amount of the revenue required for 2003 by 5,0 billion euro.

2.24.

The amounts of the VAT-based resource collected fell by 5,0 % compared with 2002 due to adjustment of the VAT bases of previous years, the fluctuations in the pound sterling/euro exchange rate and a lower-than-previous uniform rate of call. In addition a decrease of 2 % of the GNI forecasts impacted the VAT resource through the capping procedure (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37).

2.25.

Total available appropriations for commitment and payment for agriculture in 2003 amounted to 44,9 billion euro and 45,1 billion euro respectively (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), an increase of 1,2 % compared with 2002. Final expenditure was 44,5 billion euro for commitments (99 % implementation rate) and 44,4 billion euro for payments (98 % implementation).

2.26.

The lowest rate of spending (64 %) was on a variety of measures which collectively accounted for 3 % of the total authorised appropriations, including export refunds on processed products, food programmes and veterinary measures (‘ancillary expenditure’). The underspending was mainly due to delays in implementing veterinary and plant health measures. Such expenditure also comprises the bulk of the amount carried over to 2004. Implementation in the other areas of the budget, including rural development (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), was almost total.

2.26.

In veterinary and plant health measures for 2003 commitments were made for 99,7 % of the commitment appropriations. The reason why a large amount of the payments were carried over to 2004, is that according to the legal base, Member States have time until some point in year n+1 (2004) to request for payment on activities agreed with the Commission and carried out in year n (2003). For the Commission these payments are covered by the commitments made in year n (2003).

2.27.

The commitment budget for the year increased by 0,4 % compared with 2002. The payment budget increased by 3,2 % compared with 2002. The overall spending rate for payments (after the cancellation referred to in the following paragraph) was 90 %, which represents a significant increase on implementation in 2002 (74 %).

2.28.

Gross underspending compared with the original budget was 8.3 billion euro, a similar level to 2002 (see Table 2.2 ). However the effect on the overall surplus was reduced by the cancellation of 5,0 billion euro of payment appropriations that the Commission realised could not be spent (see paragraph 2.31). Despite the net underspending of 3,3 billion euro for structural operations overall, a large increase in spending took place in respect of Objective 2, where the rate of implementation increased from 48 % in 2002 to 91 % in 2003 (based on a 1,1 % higher budget).

2.29.

For Community Initiatives, which are programmes carried out in Member States at the initiative of the Commission, implementation in 2002 was only 25 % and the budget was reduced by 2 % in 2003. The spending rate in 2003 was 48 %, largely due to delays in the closure of the 1994 to 1999 period programmes (30 % spending rate) because of the late submission of final claims by Member States. For payments in 2003 related to the 2000 to 2006 period the spending rate was 75 %.

2.30.

For on-going payments under the current Structural Fund programmes (2000 to 2006 period), which represent about 74 % of the total initial budget for the area, the spending rate was around 96 %, an increase on the 91 % achieved in 2002. The spending rate was much lower for the closure of the 1994 to 1999 programmes. Some 11,0 billion euro of payment appropriations were available for the year: only 3,5 billion euro (32 %) were used (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37). The Commission responded by cancelling 5 billion euro of payment appropriations relating to the pre-2000 programmes in an amending budget which increased the overall spending rate (see paragraph 2.27).

2.30.

In addition to payments for 1994 to 1999 programmes of EUR 3,5 billion, some EUR 2,8 billion were decommitted. The combined effect of payments and decommitments reduced the ‘RAL’ for 1994 to 1999 programmes from EUR 15,4 billion at the end of 2002 to EUR 9,1 billion at the end of 2003, a reduction of 41 %.

2.31.

In its 2002 Annual Report (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) the Court highlighted poor forecasting by Member States as one of the main reasons for the Commission not being able to take appropriate and timely action on underspending. Efforts were made in 2003 to improve the forecasting process and the overall forecasting error for the Structural Funds fell from 73 % to 50 %. However, this still represents a difference between forecast and actual payments of 13,0 billion euro. For the 2000 to 2006 programmes the best Member State estimate was 12 % higher than actual needs, and the worst estimate was over two-and-a-half times actual needs — five Member States had forecasting differences of over 1 billion euro.

2.31.

The Commission refers to its answer to paragraph 2.16.

2.32.

Despite measures to ensure that applications for payments are received from Member States evenly throughout the year (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), during 2003 over half of the payments were made between September and December, and one quarter in December alone. This concentration of processing of transactions at the year end makes an unreasonable demand on the Commission's management resources.

2.32.

The Commission has little influence on the pattern of expenditure declarations by Member States. The Regulation asks for payment claims to be submitted three times a year, the third one by the end of October, but does not provide for sanctions. The ‘n+2’ rule has an impact in both directions: it encourages Member States to file large payment claims just before the year-end; on the other hand, the Commission's regular reminders of the situation of programmes with regard to the rule encourages them to accelerate claims.

2.33.

The commitment appropriations for the 2000 to 2006 Structural Fund period have to be entered in the budget according to the allocation of the financial perspective, as determined by the European Council meeting in Berlin. The overall allocation for the seven-year period is 230,2 billion euro (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) (both Structural Funds and Cohesion Fund together). Of the 210,6 billion euro relating to the Structural Funds, 201,1 billion euro (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) were allocated to Member States (i.e., legal commitments were made) through expenditure programmes agreed between 2000 and 2002. Budgetary commitments are then made annually over the seven-year programming period. Because of the delays in adopting the new programmes the planned level of legal commitments could not be made, so the financial perspective ceilings from 2002 onwards were increased by the appropriations not used in 2000 and 2001.

2.34.

For the 2000 to 2002 period net underspending on structural operations payment appropriations totalled 26,6 billion euro (2000: 8,0 billion euro; 2001: 10,5 billion euro; 2002: 8,1 billion euro). Outstanding commitments for structural operations increased by 2,5 billion euro to 69,3 billion euro in 2003; nearly two-and-a-half years worth of payments at the 2003 spending rate. In relation to the 2000 to 2006 programming period outstanding commitments increased by 19 % to 53,2 billion euro — 2,3 times current spending. Moreover legal commitments made following the European Council meeting in Berlin, but not yet transformed into budgetary commitments (see paragraph 2.33), total 95 billion euro (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), giving a total outstanding commitment equivalent of over 164 billion euro, or nearly six years of payments.

2.35.

For the 2000 to 2006 programming period, new rules were introduced to decommit commitments automatically for which no payment has been made within the two years following the year the commitment was made. The decommitments in 2003 following these rules amounted to just 31 million euro, representing 24 million euro for ESF and 7 million euro for EAGGF-Guidance. No decommitments were made for ERDF because intermediate expenditure claims were made by Member States. However, there is a risk of Member States claiming expenditure that is ineligible, in order to avoid the cancellation of commitments.

2.35.

The Commission recognised the risk to which the Court refers and took action by increasing its checks on payment claims.

2.36.

Expenditure falling within the Internal policies category of the financial perspective is mostly directly managed by the Commission and is dominated by research and technological development, which represented 58 % of payments in 2003. The approved payments budget showed an average 0,8 % increase on 2002, with a wide variation between the various headings. For example research and technological development expenditure was subject to a 2,7 % reduction in appropriations, whilst for Trans-European networks there was a 12 % increase. Approved commitment appropriations increased by an average of 3,4 %.

2.37.

The payment spending rate was 78 %, representing a fall compared with 2002 (83 %). However, this underspending, which contributed 626 million euro to the overall surplus, is in large part explained by the special arrangements for ‘earmarked third party revenues’ (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37). When third countries contribute to Community programmes the contributions are recorded in the year of receipt as both commitments and payments appropriations, even though the time needed to implement projects means that demand for payments is spread over several years. Unused payment appropriations are carried forward automatically until the funds can be used, which has a corresponding downward effect on the spending rate. Of the 1,6 billion euro gross underspending for the year, 0,8 billion euro was contributed by the third party revenue-linked expenditure (27 % spending rate), and utilisation of the standard budgetary appropriations — with a spending rate of 93 % — contributed the balance.

2.38.

Outstanding commitments at the end of the 2003 financial year amounted to 12,2 billion euro — an 8,9 % increase on 2002 — which represents over two years of payments at the current spending rate. This reflects the higher increase in commitments than payments for the year (3,4 % versus 0,8 %) and is partly explained by the fact that 2003 was near the beginning of the 6th framework programme (FP6) for research and technological development (2002 to 2006).

2.39.

Expenditure on external actions is mostly directly managed by the Commission and comprises a large number of different headings, with no single heading representing more than 16 % of the total. The approved budget for commitments was 3,0 % higher than in 2002. In the case of payments the increase was 3,8 %. The spending rate for payments was 87 %, similar to that in 2002 (89 %), which indicates that the extra budget was absorbed, but no more.

2.40.

At the end of 2003 the outstanding commitments amounted to 12,9 billion euro, an increase of 1,0 % compared with 2002. The balance of outstanding commitments represents three years' worth of payments at the current spending rate.

2.41.

Pre-accession aid comprises amounts paid to accession and candidate countries to the European Union and is mostly managed in cooperation with the beneficiary states. Only 67 % of payment appropriations were spent in 2002. In the 2003 budget, commitment and payment appropriations increased by 1,7 % and 4,3 % respectively. In 2003 payments totalled 2,2 billion euro, representing a spending rate of 80 %. Underspending, though proportionately less than in 2002, contributed 0,5 billion euro to the overall surplus.

2.42.

For phare expenditure was 1,5 billion euro, representing a spending rate of 94 %, and a substantial increase from the 69 % rate in 2002.

2.43.

Sapard (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37), the smallest of the three pre-accession instruments, received a year-on-year increase in payment appropriations of 20 % (73 million euro out of the overall 112 million euro increase), despite a spending rate of just 34 % in 2002. Payments made to beneficiary states in 2003 increased to 264 million euro (a rate of 61 %), but not by nearly enough to absorb the increased budget. Implementation depends on requests for payment from the beneficiary states, and these were received later than expected. By the end of 2003, 323 million euro had been transferred to final beneficiaries. This represents a substantial increase over 2002 (34 million euro) but cumulative payments to final beneficiaries of Sapard until the end of 2003 still only represents 15 % of available funds (2 % by the end of 2002).

2.43.

The Commission's answer to paragraph 2.39 of the Court's 2002 annual report sets out the reasons for the under-utilisation of the budgets for Sapard, one of which was that greater priority was given to firm management of appropriations.

2.44.

The ISPA (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) spending rate of payment appropriations fell from 79 % in 2002 to 60 % in 2003. The low rate of implementation was due to a higher than needed budget and slower than expected project implementation. Delays were encountered in tendering and contracting procedures and in beneficiary state administrations making requests for first advance payments following project approval.

2.44.

Tendering procedures were protracted in some cases because of the need to ensure a fair and transparent process. The Commission encouraged beneficiary state administrations to request their first advance payments quickly, but they were sometimes slow in doing so.

2.45.

At the end of 2003 outstanding commitments on all pre-accession aid totalled 9,5 billion euro, representing over four years worth of expenditure at the current rate (the highest of any budgetary area). Despite the payments budget being increased to help reduce the level of outstanding commitments, the balance rose by 13,2 % compared with 2002.

2.45.

The Commission refers to its reply at paragraph 2.48.

2.46.

Administrative expenditure mostly comprises staff and building costs. Two thirds of the budget is used by the Commission, with the other institutions and agencies making up the balance. For 2003 the budget increased by 3,5 % (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37) to meet the effects of inflation and prepare for enlargement, with the Commission receiving a 2,1 % increase, the other institutions a 4,5 % increase and pensions a 6,3 % increase. The increase for the Commission was moderated by the front-loading of expenditure on enlargement in the 2002 budget (1 2 3 4 5 8 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37); without this measure the budget would have exceeded the financial perspective ceiling. The implementation rate was 87 %, a small decrease on 2002 (89 %).

2.47.

On the basis of implementation of the 2003 budget, management by the Commission can be judged a partial success: estimates were improved, underspending was reduced and action was taken to reduce appropriations before the year end. However, the surplus of the year of 5,5 billion euro (and the underlying underspending) remains large, and shows the potential for further improvement.

2.47.

The annual payment budget is principally established through a ‘bottom-up’ procedure. For each commitment, the corresponding payment profile is determined, as a rule assuming a normal rate of implementation. Accordingly, unforeseen delays and downward adjustments of programmes lead to an under-implementation (i.e., an over-budgeting) of appropriations.

2.48.

The value of outstanding commitments continued to grow in 2003 and reached 104 billion euro by the year end, despite measures taken by the Commission such as the provision of additional payment appropriations and specific action on all ‘potentially abnormal’ commitments. Furthermore, this balance does not reflect 95 billion euro of legal commitments entered into for the Structural Funds. The increasing time gap between commitments and payments, the likely extra demand on administration at the end of the current programming periods, and the potential demand on the future programming period are all areas that require urgent attention.

2.48.

The time lag between commitments and payments of ‘differentiated’ expenditure, which is responsible for the ‘RAL’, is inherent in the budgeting of this expenditure.

2.49.

The continuing underspending should be contrasted with recurring increases in the budget over the same period. It is contradictory to increase the budget each year when there is not the ability to absorb the resources on multi-annual programmes within the timescale foreseen. The Court recommends that in the budgetary process realistic account of the ability to make payments is taken when setting both the commitment and payments budgets.

2.49.

Past absorption problems are only one criterion in forecasting payments. For example, past delays in implementation may actually imply a need for future increases of appropriations.

2.50.

The Court recommends that the Commission continues to improve its information on budgetary implementation. Its budgetary analysis should provide clear information on the cumulative state of implementation of Community programmes, taking into account the use of commitments, the level of payments to final beneficiaries and commitments still to be made. These improvements will require a considerable investment by the Commission and Member States in providing the necessary information. However the increased transparency should help improve management of the budget and improve accountability for the use of EU funds to the citizen.

2.50.

The Budgetary and Financial Management Report has focused on annual implementation. In addition, the Commission has, in certain areas, provided more comprehensive reports. For the Structural Funds, the Commission prepares annually the document ‘Analysis of the budgetary implementation of the Structural Funds’, covering inter alia the cumulative state of implementation.

3.1.

The revenue of the budget of the European Union consists of own resources and other revenue. As shown in Table 3.1 , Graph 3.1 and Graph 3.2, own resources are by far the main source of financing for budgetary expenditure (89 %). There are three categories of own resources: traditional own resources (customs duties, agricultural duties, and sugar levies) (13 %), own resources calculated on the basis of value added tax collected by Member States (26 %), and own resources derived from the Member States’ gross national income (61 %). As regards budgetary management of own resources see paragraphs 2.23 and 2.24.