Information note. Annual reports concerning the financial year 2004

Transcription

1 Annual reports concerning the financial year 2004 EN 2004

2 FOREWORD This information note provides an overview of the contents of the Court's 28 th Annual Report on the implementation of the general budget of the European Union, as well as its Annual Report on the European Development Funds presented in the same document. Readers are requested to refer to the full text of the Annual Report - as well as the replies of the institutions - for further details. The European Court of Auditors is the independent audit institution of the European Union. The Court audits the EU's revenue and expenditure and, through its work, aims to improve the quality of financial management. The Court's audit reports form an essential element in the European Parliament's oversight of the Commission's management of the budget. In addition to its Annual Report - which mainly comprises the results of the Court's financial audit work in the form of the Statement of Assurance - the Court publishes Special Reports on audits of specific budgetary areas or management topics, largely covering sound financial management issues. The results of the Special Reports published over the past 12 months are also summarised in the Annual Report. All Court reports that are published in the Official Journal of the European Union can be found on the Court's website from the day of publication. For more information, please contact: European Court of Auditors - External Relations 12, rue Alcide De Gasperi L-1615 Luxembourg Tel (+352) Fax (+352) euraud@eca.eu.int 1

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4 ANNUAL REPORT ON THE IMPLEMENTATION OF THE BUDGET 3

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6 General introduction This document, covering the 2004 financial year, comprises the Court's 28 th Annual Report on the implementation of the general budget of the European Union, as well as its Annual Report in relation to the European Development Funds. The document follows the structure established for recent Annual Reports: the Statement of Assurance is presented in Chapter 1; key observations on budgetary management are given in Chapter 2; Chapters 3 to 9 cover revenue and activities financed from different parts of the budget, reflecting the headings of the financial perspective, while Chapter 10 covers financial instruments and banking activities. The replies of the Commission - or other EU Institutions where appropriate - are presented with the reports. In relation to the Annual Report on the implementation of the general budget, the chapters covering revenue and the major areas of expenditure have the following elements: detailed analyses and results of the audit work carried out in the context of the Statement of Assurance in the form of specific assessments; results of follow-up of progress made on implementing recommendations of the Court and the Budgetary Authorities arising from previous audits; summaries of the Special Reports published by the Court since the last annual report. The specific assessments are based on: an evaluation of the operation of the principal supervisory and control systems governing revenue and each expenditure area; the results of the Court's testing of underlying transactions; an analysis of the annual activity reports and declarations of the Directors-General; and the results of the work of other auditors where relevant. The Court's overall appraisal of these elements forms the basis for the Statement of Assurance set out in Chapter 1. In addition, the Annexes to Chapters 4 to 9 set out elements used for monitoring and evaluating the financial management of the EU budget was marked by the accession of ten new Member States on 1 May 2004, the biggest enlargement in the EU's history. Reform of the Commission's financial management continued to be consolidated, with 2004 the first year when the budget was wholly decided and implemented under the Activity Based Budgeting (ABB) format. This has resulted in a change in the way that financial information is presented, with details now being given in the budget by ABB policy area. The Commission continued to prepare for the introduction of full accruals-based accounting - representing a fundamental reform in the way that the accounts are kept and financial information presented - for the 2005 financial year. Chapter 1 of this report (see paragraphs 1.21 to 1.45) gives the results of audit work undertaken on 5

7 this on-going process, particularly the key process of establishing opening balances. The Court's work shows that further efforts are needed in order that the Commission can provide accurate accounting information for the 2005 year-end. Since the reform process was initiated in 2000, the Court has noted an improvement in the way the Commission organises itself and manages the EU budget. There have been improvements in the controls undertaken by the Commission on expenditure it manages directly. However, significant effort is still required, notably in those areas of the budget coming under shared management with Member States. It is of critical importance that the Commission and Member States work together to identify the weaknesses in the design and operation of schemes, and introduce appropriate remedial action. In April 2004 the Court issued its Opinion No 2/ on the 'single audit' model which included a proposal for a Community internal control framework. The Opinion was based on the experience gained by the Court in its audit work over a number of years - in particular the weaknesses identified in internal control systems at both European institution and Member State levels which result in material incidences of error in underlying transactions over much of the budget. The Court proposes that current or new systems be developed and applied at the Commission and Member States in a coordinated manner and following common principles and standards. In addition, control systems should be designed to ensure an appropriate balance between the cost of controls, and the benefits they bring in terms of managing the risk of irregularity. The Commission has reacted positively to the Court's Opinion and, in its Communication of June , proposes a 'roadmap' to an integrated internal control framework. The Commission recognises that it is essential that the citizens of the Union have reasonable assurance that European public funds are managed in a legal and regular manner. Furthermore, clearly defined standards and objectives of internal control systems would provide an objective basis against which the Court could assess their design and operation when auditing them, thereby increasing the efficiency of its work. 1 OJ C 107, COM(2005) 252/4 of 15 June

8 Chapter 1 - The Statement of Assurance and supporting information Reliability of the accounts In the Court's opinion, the "Consolidated reports on implementation of the budget and consolidated financial statements" of the European Communities were drawn up in accordance with the provisions of the Financial Regulation of 25 June 2002 and with the accounting principles, rules and methods set out in the annexes to the consolidated financial statements. Except for the effects of the observation in the following paragraph, they faithfully reflect the revenue and expenditure of the Communities for the year and their financial position at the year end. In the absence of effective internal control procedures for miscellaneous revenue and advances, the Court cannot be certain that the transactions relating to the sundry debtors item have been correctly and completely recorded. Without calling into question the opinion expressed above, the Court wishes to draw attention to the following: (a) As has been the case in the past, the accounting system used to draw up the 2004 accounts was not designed to ensure that all assets and liabilities are recorded. (b) Following its action plan for the modernisation of the European Communities' accounting system, the Commission has achieved significant progress towards introducing accrual based accounting by However, adaptations and validations necessary to ensure the full implementation of the new accounting framework have been delayed. (paragraphs ) Legality and regularity of underlying transactions On the basis of its audit results, the Court is of the opinion that in areas where the supervisory and control systems are implemented and allow for an adequate risk management, i.e. revenue, commitments, administrative expenditure and preaccession strategy, the transactions underlying the consolidated annual accounts of the European Communities, taken as a whole, are legal and regular. Moreover, for Common Agriculture Policy (CAP) expenditure the Court's audit shows that, where properly applied, the integrated administration and control system (IACS) is an effective system to limit the risk of irregular expenditure. Without calling into question the opinion expressed in the paragraph above, the Court emphasises that, in the area of pre-accession strategy, risks of varying degrees still exist at the level of implementing organisations in the candidate countries for all programmes and instruments. 7

9 A greater effort is needed to effectively implement the supervisory and control systems and to address their weaknesses, so as to improve the handling of the attendant risks in the following areas, where payments are still materially affected by errors: (a) In the case of CAP expenditure, the Court found recurrent evidence that expenditure which is not subject to IACS, or where IACS has been inadequately applied, poses greater risk because control systems are not as effective. Post payment checks for CAP subsidies not covered by IACS do not provide reasonable assurance as to compliance with Community legislation. The Court concluded that CAP expenditure, viewed as a whole, was still materially affected by errors. (b) In the case of structural measures, the Court again found weaknesses in the management and control systems which show the need, in varying degrees, for improvement in order to fully comply with the regulatory requirements for effective day-to-day management checks and/or independent sample checks of operations for the programming period. For both programming periods ( and ), numerous errors of legality and regularity were detected in the expenditure included in the declarations leading to payments by the Commission. (c) In the case of internal policies, despite the progress made in certain areas, the Court's audit findings related to the supervisory and control systems and the underlying transactions do not provide sufficient assurance as regards the legality and regularity of payments. It is likely that the risk of errors will persist unless the legal framework is changed so as to simplify cost reimbursement systems and clarify the procedures and instructions governing the different programmes. (d) In the case of external actions, the improvements of the Commission's supervisory and control systems have not yet had an impact at implementing organisation level, where a relatively high number of errors at the level of payments in terms of frequency and financial impact were detected which were linked to the lack of a comprehensive approach to the supervision, control and audit of these organisations. (paragraphs ) Commission's internal control system The Court's audit work on the 2004 synthesis report of the annual activity reports shows improvement but that further progress is required to support the "globally satisfactory" conclusion given. In respect of the annual activity reports of the Directors- General the Court found that the Commission guidelines have improved, although better indicators for legality/regularity are required, that the presentation of reservations has improved, but common materiality thresholds should be established 8

10 and that some significant weaknesses identified in supervisory and control systems have not been identified in Director-General declarations. The Court notes the progress made by the Commission as regards the reform of its internal control system and the positive impact on the legality and regularity of the Commission's internal management of expenditure. However, progress is still required in terms of operational effectiveness. (paragraphs ) Chapter 2 - Budgetary Management In its analysis of the implementation of the budget for 2004, the Court found improved information on the state of implementation of Community programmes, although it considers that more complete explanations are needed in certain important areas. (paragraphs ) The budget increased due to Enlargement, but remained within the revised financial perspective ceilings. 98 % of appropriations for commitments were used. and the spending rate for payments was 95 %, with increased spending in all areas, particularly structural operations. The budget surplus was 2,7 billion euro - around half that of reflecting the higher spending and improved management. Member State expenditure forecasting improved, but over-forecasting still remained high at 6,5 billion euro. (paragraphs ) In 2004, the multiannual spending programmes which cover a large proportion of the budget - largely reached the planned annual level of spending, although this only allowed a limited reduction in the level of outstanding commitments. The Commission experienced significant problems and delays in the closure of the previous ( ) programming period. (paragraphs ) Outstanding budgetary commitments increased by 4,5 % to 110 billion euro - 2,2 years equivalent of payments at the 2004 spending rate - with the increase largely due to Enlargement. For the current Structural Fund spending programmes, outstanding commitments are 3,7 billion euro higher than the revised predictions of the Commission in (paragraphs ) Total unspent legal commitments for the Structural Funds were 136 billion euro - representing five years worth of payments - requiring a high level of spending and/or significant decommitments until the end of the payment period in However, experience shows that spending rates fall towards the end of the cycle, and closure is problematic, risking delays for the current and new programmes. The year n+2 rule - intended to reduce the risk of a high level of outstanding budgetary commitments - has resulted in little decommitment so far. (paragraphs ) The budgetary outturn for Structural Funds in 2004 was largely satisfactory However, budgeting over the life of the spending programmes doesn't take sufficient account of the ability of Member States to absorb the funds within the timing foreseen, and 9

11 results in underspending and growing levels of outstanding budgetary commitments. (para ) Conclusions and recommendations Information provided on spending programmes could be further improved. Improved management by the Commission has resulted in higher spending rates and a reduced surplus. Outstanding budgetary commitments continued to rise and those for the Structural Funds are in excess of the revised forecasts. The ability of the Commission to manage actively the implementation of the budget for multiannual spending programmes is limited. Without specific attention, the increased time lag between commitments and payments will continue into the future. (paragraphs ) Chapter 3 - Revenue Traditional own resources The Court found that the Commission's review of Member State supervisory and control systems was soundly based. Collection systems were found to be generally satisfactory, but B accounts continued to be unreliable in some Member States. (paragraphs ) In the land frontier posts in eight Member States, procedures were found to be generally satisfactory. An examination of electronic customs clearance systems in 12 Member States did not identify substantial shortcomings. However, in some cases: back-up procedures need to be planned and tested; input control procedures improved; and risk analysis for targeting customs inspections applied more completely and consistently. (paragraphs ) Testing of underlying transactions The gross balance for B accounts - revenue due to the Commission but not yet made available because it is unsecured or under appeal - fell by 19 % in 2004, largely due to the resolution of an important case relating to the importation of New Zealand butter. In the absence of sufficient methodological information, the Court could not confirm the write-down against the B account balance, and also found systematic problems with the B accounts in several Member States. (paragraphs ) In its audit of sugar levies, the Court concluded that the calculation system operated in a generally satisfactory manner. However, the Court found that: certain ambiguities 10

12 in the calculation method need to be resolved; the amount of levy was understated by some 6 million euro; the Eurostat database was in some cases inaccurate; Member States communications are not systematically checked by the Commission; and reconciliation between revenue and expenditure cannot be undertaken from the Commission's accounting system. (paragraphs ) VAT/GNI own resources VAT/GNI own resources are based on macroeconomic data which cannot be audited directly. The Court's audit covers the establishment of the annual budget and its implementation in respect of the monthly payments by Member States, as well as Commission supervisory and control systems which are intended to provide assurance that the EU revenue is correctly calculated. (paragraphs ) Evaluation of supervisory and control systems In respect of VAT own resources, the Commission's inspections in Member States were of good quality. However, there is a high number of reservations on unsettled issues and insufficient progress in dealing with them. (paragraphs ) For GNI own resources, there is still insufficient direct verification by the Commission of National Accounts data. However, the Commission has started to set up a specific unit that will undertake such verification. The reports by Member States on the quality of GNI data - submitted for the first time in had shortcomings in terms of content and format. (paragraphs ) The Commission has improved its approach to its controls on ESA 95 inventories - country-specific descriptions of methods and procedures used for the calculation of GNI aggregates - in setting up a systematic and structured tool for carrying out its checks. However, the Commission did not check whether the systems and methods described were actually applied in practice, and documentation of the checks was incomplete. (paragraphs ) The Court found that Member States' GNI estimates were not fully comparable as only a few Member States had complied with the requirement to include illegal activities. In two out of the eight Member States audited, no adjustments were made for intermediate consumption in respect of purchases of low value. (paragraphs ) The audit of supervisory and control systems for GNI calculation at national statistical offices in seven Member States showed significant differences in terms of risk analysis, interservice agreements, production of quality reports, documenting of checks and performance of internal audits. This could lead to varying degrees of reliability, comparability and exhaustiveness of National Accounts. (paragraphs ) 11

13 Analysis of annual activity reports The annual activity reports and declarations of Directors-General for DG Budget and Eurostat were examined and were found to give insufficient information on control activities, reservations and other important issues. (paragraphs ) Conclusions and recommendations For traditional own resources, the results of the Court s work on the reliability of the accounts and legality and regularity of underlying transactions are satisfactory, subject to the limitations of scope in the audit. Taking into account the scope of the audit, the Court concludes that the GNI and VAT resources have been correctly calculated, collected and entered in the accounts, but makes recommendations on improving the quality of supervisory and control systems. (paragraphs ) Chapter 4 - The common agricultural policy Specific assessment in the context of the Statement of Assurance Evaluation of supervisory and control systems The working of the integrated administrative and control system (IACS) the key management and control tool for area aid and animal premium schemes covering 59 % of expenditure was examined in five paying agencies. Except in Greece, where there are significant problems with input of data and the quality of checks, the checks were found to be generally satisfactory, although there remains scope for improvement. (paragraphs ) The Court examined the Commission s monitoring of 4045/89 checks postpayment checks of commercial documentation for a range of CAP subsidies covering 37 % of expenditure and found Member State analysis of limited value, as well as checks which were sometimes of inadequate quality and/or delayed. (paragraphs ) In its evaluation of the physical checks of subsidised exports of agricultural products by Member States, the Commission found weaknesses in some Member States. However, it does not provide sufficient information on the results of this work within the annual activity report. (paragraphs ) 12

14 The Court examined the clearance of accounts procedure - designed to ensure that CAP payments have been legal and regular and appropriate amounts are definitively charged to the Community budget. In respect of the financial clearance process, the Court endorses the Commission's conclusions that the quality and content of certifying bodies' reports are generally satisfactory, although further attention is needed in a number of areas. In its examination of conformity decisions, the Court found that while three decisions were taken by the Commission in 2004, clearance was not complete for any year later than (paragraphs ) Analysis of annual activity reports The Court found that the sources of information on which the declaration by the Director General for Agriculture within the annual activity report is based, provide only limited coverage of, and assurance on, the legality and regularity of 2004 expenditure. Reliable information would require certifying bodies to extend their checking to final beneficiaries, or Commission staff to undertake appropriate checking. The Court can only derive limited assurance from the Director-General's declaration because it relates to expenditure which may subsequently be the subject of financial corrections. It should make a distinction between verified and non-verified expenditure. The Director-General has no reliable basis on which to assert that a sum equivalent to the total sum of irregular payments is recovered through the clearance of accounts procedures and the recovery procedures in the Member States. (paragraphs ) Four out of the eight internal controls standards examined showed room for improvement. (paragraph ) Assessment of areas of CAP spending In terms of area aid schemes (39 % of expenditure), the error rate of 1,6 % found by Member States within IACS checks provides a reasonable estimate of the likely error in claims paid. The Court s testing of transactions found most payments to be error free, one third to have minor errors of measurement and a small number to be affected by larger errors (albeit of lower impact than in previous years). (paragraphs ) For animal premium schemes (20 % of expenditure), IACS checks found relatively low error rates (except in Greece and Italy).The Court s direct testing of transactions did not reveal significant errors. (paragraphs ) Subsidies paid on the basis of quantities produced (9 % of expenditure), pose particular risks which need to be counteracted with effective control mechanisms. The Court s audit identified a number of deficiencies in Greece and Spain in respect of olive oil. (paragraphs ) Rural development schemes (12 % of expenditure), are frequently difficult and costly to check, and therefore at high risk. The Court found verification can rarely lead to reasonable assurance of the legality and regularity of expenditure at a reasonable cost. (paragraphs ) 13

15 For other expenditure, the Court found that the Commission s monitoring of post payment checks could have been more extensive, and that there were deficiencies in the checks themselves. (paragraphs ) Conclusions and recommendations Overall, the Court found expenditure to be still affected by significant errors, albeit with different degrees of risk and weaknesses attached to the different categories of expenditure. IACS - when properly applied - is effective in limiting the risk of irregularity, but there are serious deficiencies with the functioning of the system in Greece. Expenditure not covered by IACS is at greater risk;. The Court makes a number of recommendations on how supervisory systems and controls can be improved. (paragraphs ) New Member States: transition Of the 11 paying agencies in the New Member States, only seven have been granted accreditation - two of them for a limited period of time - with the others having significant weaknesses in four or more areas. (paragraphs ) For SAPARD - the Special Accession Programme for Agriculture and Rural Development in ten beneficiary countries of Central and Eastern Europe - a high number of applications was processed in a short time, reducing the quality of the assessments thereon, and increasing the payment risk. The Court found the SAPARD systems to be well documented and generally working in practice, although some problems were noted. (paragraphs ) Follow-up to previous observations In following up its 2002 Special Report on the CMO in the banana sector, the Court found that the Commission has not yet completed its evaluation of the scheme. This limited the usefulness of the Commission's report of February 2005 to the budget authorities, which itself presented no proposals or alternatives on the operation of the regulation. (paragraphs ) In following up its 2003 Special Report on prefinancing of export refunds, the Court found that the Commission has not complied with the Parliament s request to abolish the scheme, although since the Special Report refunds paid have fallen by over two thirds. (paragraphs ) In following up its 2001 Special Report on potato and cereal starch, the Court found that the Commission has simplified and clarified its calculation methods, but other recommendations - particularly concerning physical checks - have not yet been followed. (paragraphs ) 14

16 Special Reports The report provides summaries of the Court s latest Special Reports on forestry measures within rural development policy (No 9/2004) and control of agri-environment expenditure (No 3/2005). (paragraphs ) Chapter 5 - Structural measures Specific assessment in the context of the Statement of Assurance Evaluation of management and control systems The Court reviewed the implementation of the key internal control standards relating to the legality and regularity of expenditure and found the situation in DG REGIO and DG EMPL to be largely satisfactory, although in both cases the number of on-thespot checks of projects should be increased. However, for DG FISH and DG AGRI, further improvements are required in order to meet baseline standards. (paragraphs ) The Court examined the operation of management and control systems in Member States based on a sample of operational programmes. The audit identified significant failures to respect regulatory requirements such as: unclear definition, allocation and separation of functions; and failure to provide a sufficient audit trail; failures to carry out adequate checks at both management level and on certifying statements of expenditure. Inadequate checks increases the risk of errors of legality and regularity. (paragraphs ) The Court reviewed, on a sample basis, the Commission's closure action for the programmes, and found weaknesses and delays in closing the programmes. In some cases, the Commission closed programmes despite incomplete information in the closure statements submitted by the Member States. Delays were caused by poor quality documentation, slow response by Member States to enquiries and failure by the Commission to take timely action. The quality of DG REGIO ex-post audits - which found significant levels of error in programmes in nine Members States - was satisfactory. (paragraphs ) Testing of underlying transactions In its substantive tests of projects, the Court found many instances of declaration of ineligible expenditure, expenditure declared twice, non-respect of rules relating to State aid schemes and public procurement, inadequate supporting documentation and failure to use duly justified and equitable methods for allocating overhead expenditure to projects. (paragraphs ) 15

17 Work of other auditors A report by a working group of the Supreme Audit Institutions of nine Member States identified sufficient audits trails in most countries and compliance of the execution of sample checks with the regulations. However, it concluded that the legal framework allows ambiguous or contradictory interpretations. (paragraphs ) Analysis of annual activity reports In their annual activity reports and associated declarations, the Directors-General again recognise the risk of inadequate systems in Member States. The Director- General having responsibility for DG REGIO declared he has reasonable assurance on the legality and regularity of expenditure and, for the first time, quantified the reservations given, albeit based on limited testing. For DG EMPL there were insufficient checks to support the conclusions given on the systems for No quantification is given of systems weaknesses. The annual activity report of DG FISH improved, but remains incomplete, and DG AGRI continues with its reservation on expenditure. No reservations are given for any DG in respect of the period. (paragraphs ) Conclusions and recommendations The Commission continued to improve internal controls, although further measures are required. Weaknesses were found in management and control systems across all programmes in the Court's sample, as well as numerous errors of legality and regularity. Delays and weaknesses in closing programmes. Improved annual activity reports and declarations, although further efforts are required concerning the scope and impact of reservations. Generally satisfactory, but sometimes delayed, action taken on previous Court observations. Recommendations are given on improving management and control systems at both the Commission and in Member States. (paragraphs ) Follow-up to previous observations In following up its 2002 Special Report on the Community Initiative Employment - Integra, the Court noted that the final evaluation report on the Initiative corroborated its findings in relation to weaknesses in the programme's evaluation structures and the absence of an adequate feedback mechanism. According to the evaluation report the weaknesses resulted in a probable loss of knowledge being transferred between implementing organisations. (paragraphs ) In following up its 2002 Special Report on local actions for employment, the Court found that the Commission's action in implementing its recommendations - to undertake a 16

18 comprehensive assessment of the added value to the policy and improve financial management procedures - was satisfactory. (paragraphs ) Chapter 6 - Internal Policies including Research Specific assessment in the context of the Statement of Assurance Evaluation of supervisory and control systems The Court, based on its review of the implementation of key internal control standards, found that they were generally applied at the specified minimum ('baseline') level, but further improvements are needed, particularly in respect of risk management and adequate management information at DG RTD, and internal audit and reporting exceptions at DG SANCO. (paragraphs ) In respect of the management and control procedures of the sixth framework programme for RTD, neither a common nor an integrated IT system was fully operational, thereby affecting the efficient operation of internal controls. The Court also found ineligible costs in declarations that had been audited by independent external auditors. (paragraphs ) For the European Refugee Fund, the Court found that in one Member State visited, checks on supporting documents were not followed by on-the-spot checks, and that tasks had been wrongly delegated to a private company. The Court found additional problems relating to the non-respect of eligibility criteria for expenditure. (paragraphs ) For Community actions in the area of public health and consumer protection, the Court found the procedures introduced in 2004 to be to adequate, but errors detected in underlying transactions show that the procedures hadn t been consistently applied in the past. Furthermore, the financial regulation wasn t complied with in all cases. (paragraphs ) In its analysis of the Commission s ex post financial audits, the Court found that while some DGs have increased the level of audit activity, overall audit activities reduced in 2004 and remain under the 10 % target but recoverable amounts increased. (paragraphs ) An analysis of audits carried out by external audit firms showed the limited scope of the work for example, some items that impact on legality and regularity were not checked and excessive delays in the audit process. Within DG ENV, the Court found delays in making recoveries and inadequate monitoring of contracts. (paragraphs ) 17

19 Testing of underlying transactions The results of the Court s tests on underlying transactions confirmed the systems weaknesses found. At Commission level, over 50 % of payments checked contained errors, including payment delays exceeding one month, no, or inadequate, estimation of interest generated on prefinancing payments, and failure to respect procedures for the reward of grants. (paragraphs ) At the final beneficiary level, a high number of errors was also found, including overdeclaration of costs some of which could have been identified by more effective Commission checks and a frequent absence of sufficient supporting evidence for personnel costs charged. (paragraphs ) Review of annual activity reports The Court noted further improvements in the structure, presentation and quality of the annual activity reports and declarations of Directors-General, but in two cases DG EAC and DG SANCO - reservations that the Court considers justified were not made. (paragraphs ) Conclusions and recommendations Despite progress achieved, baseline requirements of the internal control standards have not yet been fully met. The reduction in the number of ex post audits - which are of importance in remedying systems weaknesses and errors - cannot be justified. Furthermore, the follow-up of audits is often too slow. As in previous years, there is a continuing high incidence of errors affecting legality and regularity. Annual activity reports have improved but further reservations were called for in two cases. Overall, the Court cannot provide assurance on the legality and regularity of underlying transactions, and recommends the Commission to continue its efforts in simplifying and clarifying procedures in order to reduce the risk of error. (paragraphs ) Follow-up to previous observations In following up its 2003 Special Report on the financial instrument for the environment (LIFE II), the Court found that most of its recommendations had been addressed, but objectives still need to be better defined, the scope of audits widened and evaluations improved. (paragraphs ) 18

20 Chapter 7 - External actions Specific assessment in the context of the Statement of Assurance Evaluation of supervisory and control systems The Court examined the compliance of delegations with internal control standards a new requirement for Although EuropeAid considered that all baseline requirements had been met, the Court s audit confirmed the Director-General's indication that improvements are still needed at both Commission headquarters and delegations. (paragraph 7.9) The Court found that DG ECHO has a satisfactory risk self assessment system and a comprehensive approach to auditing implementing partners. In examining audit reports and testing projects audited externally, the Court confirmed the lack of supporting documents as the principal source of errors - although not all cases are reported by the external auditors and found that most audits did not include indepth testing of tenders. (paragraphs ) In its audit of the EuropeAid Cooperation Office at central level, the Court found that many of its observations from 2003 had not yet led to action. The risk self assessment for the annual management plan did not sufficiently cover the implementing organisation level (where the highest financial risks exist), information and reports were not received in some cases, and incomplete in others. Coverage of financial monitoring varied between geographic directorates, and they did not all undertake regular audits of delegations. EuropeAid s audits of implementing organisations were not properly coordinated and information was incomplete. The internal audit capability undertook effective work but should redefine some of its priorities. The low level of errors identified by the Commission s ex post verifications was confirmed by the Court s testing of similar transaction types. (paragraphs ) The Court assessed supervisory and control systems at five delegations and found procedures to be generally sufficient to ensure legal and regular commitments and payments. However, the procedures for appointing external auditors were inadequate and the Court found an absence of terms of reference in some cases. The Court found external audit reports to be of satisfactory quality, although in the majority of cases checked the Court detected errors not reported by the external auditors. (paragraphs ) Testing of underlying transactions The Court found only a low level of errors on payments made to implementing organisations, but identified weaknesses in some of the organisations as well as a material occurrence of errors in projects. (paragraphs ) 19

21 Analysis of annual activity reports The Court reviewed the annual activity reports and statements of authorising officers by delegation, and found them to be accurate. However, the reporting by delegations to headquarters on matters arising from external audits affecting legality and regularity and action taken, was inconsistent. For EuropeAid, there was an inadequate basis for deriving assurance on implementing organisations. (paragraphs ) Conclusions and recommendations Supervisory and control systems continued to improve, but the effects have not yet been completely felt at the implementing organisation level. Only few errors were detected at delegation level, but weak controls and a high level of error was found at project implementing organisations. The Court cannot yet draw assurance from the annual activity report of EuropeAid. The Court recommends improving risk assessments, better verification of information provided by delegations, systematic recording of information relating to audits, and improving instructions to external auditors and management of their audits. (paragraphs ) Follow-up to previous observations In following up its 2001 Special Report on the Commission s management of the international fisheries agreements, the Court found that the Commission considers that the coherence between the objectives of the common fisheries policy and the European development policy should be reinforced. However, the risk of inconsistency remains. The Commission's evaluation system is not yet finalised. No evaluations of either fishing stocks or the fisheries agreements themselves have been undertaken. Not all observations on effective use of fishing opportunities have been properly followed up. (paragraphs ) Special Reports The report provides summaries of the Court s latest Special Reports on devolution of EC external aid management to the Commission delegations (No 10/2004), and the Commission s management of economic cooperation in Asia (No 4/2005). (paragraphs ) 20

22 Chapter 8 - Pre-accession strategy This chapter reports on the Phare and Turkey programmes. The audit results on other Pre-accession programmes are reported in the related expenditure chapters. Specific assessment in the context of the Statement of Assurance Evaluation of supervisory and control systems The Court found that at DG Enlargement there is a need for improved project design, and that commitments for programmes in Bulgaria and Romania were authorised despite known weaknesses in the management capacity of the national authorities. The Commission's system of closure audits was found to: have improved, although the follow up is still somewhat delayed; not cover national cofinancing expenditure in sufficient depth, despite the risks involved; exhibit slower progress than in 2003; and lack sufficiently clear instructions to contracted auditors. (paragraphs ) At the delegation level, the Court considered the ex ante approval to have generally worked well. However, the quality of the approval process is at risk when contracting is rushed, which is not unusual in Bulgaria and Romania. (paragraphs ) In terms of the management and control systems in new Member States and candidate countries, the Commission carried out its EDIS - Extended Decentralised Implementation System - verification audits satisfactorily. EDIS was granted to nine out of the ten new Member States. For Turkey, systems under DIS -Decentralised Implementation System - were accredited, but implementation was delayed. Turkish authorities could have done more to make use of the experience transferred from DIS implementation in Phare countries. (paragraphs ) The Court's examination of the operation of systems for the control of national co-financing agreements showed that improved reporting requirements have been introduced, but final declarations are submitted late. Commission information on project amendments is incomplete, reducing the effectiveness of checks. There are no clear rules defining eligible expenditure for parallel national co-financing resulting in divergent practices in respect of VAT, and there is insufficient verification of parallel co-financing at national level. (paragraphs ) The Court concludes that overall the supervisory and control systems provide a reasonable level of assurance on the legality and regularity of underlying transactions, apart from the parallel co-financing requirements. (paragraph 8.29) 21

23 Testing of underlying transactions The Court undertook substantive tests on 13 projects at implementing level and found that, overall, payments were legal and regular, corroborating its assessment of the supervisory and control systems. (paragraph 8.30) Analysis of annual activity reports The Court agrees with the reservation given by the Director-General for Enlargement, but considers that future risks should be reported within the risk assessment rather than treated as a reservation. (paragraphs ) Conclusions and recommendations In respect of Phare and Turkey programmes: while the control systems have improved overall, those in Bulgaria and Romania remain weak; the audit did not reveal material errors in the transactions tested; and supervisory and control systems remain weak in terms of: scope of closure audits; insufficient transfer of Commission experience; and delays and incomplete and incorrect application of rules. (paragraphs ) In respect of Pre-accession instruments as a whole: supervisory and control systems were basically sound and worked in practice, although risks continue to exist at the level of implementing organisations for all programmes; no material errors in transactions were identified. (paragraphs ) Chapter 9 - Administrative expenditure Specific assessment in the context of the Statement of Assurance Evaluation of supervisory and control systems Although improvements were identified in all institutions, no institution has yet fully implemented the internal control standards. The new system for calculating staff pay introduced in 2004 presented weaknesses which resulted in miscalculations and overpayments (subsequently recovered in 2005). In some institutions the staff regulations are not being properly applied in respect of travel allowances. A number of problems - in some cases significant - were noted in the transfer of part of staff 22

24 emoluments. Control procedures over pension payments are inadequate in some institutions, and in most institutions weaknesses were noted in systems covering procurement. (paragraphs ) Testing of underlying transactions The Court found several errors of long-standing financial impact linked to the systems weaknesses identified. (paragraphs ) Analysis of annual activity reports Improvements were noted in the annual activity reports and declarations of authorising officers by delegation. However, in two cases the reports were only approved after the conclusion of the Court's audit. (paragraph 9.13) Specific observations In respect of the European Parliament, problems were found with validation of procurement expenditure as well as weaknesses in supervisory and control systems related to the payment of MEPs' allowances. (paragraphs ) The Council had not set up the required minimum internal controls standards or charters for the accounting officer and imprest administrator. Compensation was paid on retirement for overtime not taken, despite this not being allowed by the Staff Regulation. (paragraphs ) At the Commission, systems weaknesses were found at the Publications Office resulting in overpayments and price revisions foregone. (paragraph 9.19) The Court of Justice adopted the internal control standards, but did not implement them all. Weaknesses were noted in the systems relating to indexation of rents, and the internal auditor exercises tasks not compatible with his principal function. (paragraphs ) The Court of Auditors is audited by an independent external audit firm which reported no material problems with the financial statements or systems and procedures. (paragraph 9.22) Neither the Economic and Social Committee nor the Committee of the Regions yet fully comply with all the internal control standards. There are no observations for the European Ombudsman or the European Data-Protection Supervisor. (paragraphs ) 23

25 Conclusions and recommendations The supervisory and control systems do not adequately address the risks posed by the new financial and staff regulations, as well as the new salary and pension systems. The Court identified frequent errors - mostly of a formal nature - which did not materially affect administrative expenditure as a whole. (paragraphs ) Special Reports The report provides a summary of the Court s latest Special Reports on the management of the European Anti-Fraud Office OLAF (No 1/2005), and interpretation expenditure incurred by the Parliament, the Commission and the Council (No 5/2005). (paragraphs ) Agencies and other decentralised bodies The Court identified shortcomings pertaining to the respect of budgetary principles, staff recruitment and procurement procedures. In addition, the Court found that in some instances internal control systems needed improvement, especially in the area of monitoring of fixed assets. For some agencies and decentralised bodies preparing accruals-based accounts, some weaknesses were noted in the identification of amounts to be regarded as charges for the financial year. (paragraphs ) Chapter 10 - Financial instruments and banking activities The Commission's monitoring of it financial shareholdings The Court audited the Commission's monitoring of its capital shareholdings of respectively 30 % and 3 % in the European Investment Fund (EIF) and the European Bank for Reconstruction and Development (EBRD). The Court concluded that in respect of the monitoring of the EBRD, the level of information available is more detailed than for the EIF, and that this information provides the Commission with reasonable assurance that the EBRD activities are in compliance with EU policies and legislation. The situation regarding the EIF should be improved. (paragraphs ) Overview of assets held by financial institutions on behalf of the Commission The Court found that the Commission does not have a complete and up-to-date overview of assets held by financial institutions on its behalf. Such an overview would ensure assets are subject to adequate monitoring. (paragraphs ) 24

26 The Guarantee Fund for External Actions The Court concluded that the Guarantee Fund was managed satisfactorily during 2004, although the definition and documentation of checks should be improved. (paragraphs ) The European Coal and Steel Community in liquidation (ECSCiL) The external auditor of the ECSCiL once again gave an unqualified audit opinion. The Court obtained reasonable assurance on the proper implementation of the provisions governing ECSCiL. However, the Court notes that the Commission should fully comply with the applicable guidelines regarding maturity restrictions and rating limits for all securities. (paragraphs ) 25