(a)

the ‘Annual Accounts of the European Communities’ (1) which comprise the ‘Consolidated financial statements’ (2) and the ‘Consolidated reports on implementation of the budget’ (3) for the financial year ended 31 December 2007; and

(b)

the legality and regularity of the transactions underlying those accounts.

(a)

Management's responsibility in respect of the ‘Annual Accounts of the European Communities’ includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies, on the basis of the accounting rules adopted by the Commission's accounting officer (5); and making accounting estimates that are reasonable in the circumstances. According to Article 129 of the Financial Regulation, the Commission approves the ‘Annual Accounts of the European Communities’ after the Commission's accounting officer has consolidated them on the basis of the information presented by the other institutions (6) and bodies (7) and established a note, accompanying the consolidated accounts, declaring, inter alia, that he has reasonable assurance that they present a true and fair view of the financial position of the European Communities in all material aspects.

(b)

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

(a)

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

(b)

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

(c)

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

(d)

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

(e)

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

(a)

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

(b)

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