Select Committee on European Scrutiny Twelfth Report


ANNUAL REPORT OF THE COURT OF AUDITORS


(23000)
— 

Annual Report of the Court of Auditors concerning the Financial Year 2000.


Legal base:
Deposited in Parliament: 17 December 2001
Department:HM Treasury
Basis of consideration: EM of 18 December 2001
Previous Committee Report: None
To be discussed in Council: None planned
Committee's assessment:Politically important
Committee's decision:For debate in European Standing Committee B (together with the Commission's report on the fight against fraud and its Action Plan)



Background

  4.1  The European Court of Auditors (ECA) is responsible for the external audit of the Community's public finances. It examines the legality, regularity and soundness of the management of all the Community's revenue and expenditure, and the revenue and expenditure of any body created by the Community. The ECA publishes its annual report in a particular financial year about 12 months after the end of the relevant year. In addition to the annual report, the ECA also publishes, throughout the year, Special Reports on its audits of particular areas of revenue or expenditure. We regularly report on these Special Reports. The Annual Report includes the ECA's Statement of Assurance for the financial year in question and also covers the Sixth, Seventh and Eighth European Development Funds and a Statement of Assurance in respect of them, as these funds are separate from the General Budget.

  4.2  The Annual Report and Statement of Assurance allow the Council and the European Parliament (the two arms of the Community's Budgetary authority) to consider how well the Community budget was implemented, and whether the budgetary processes for the year should be closed by the Parliament granting, on the recommendation of the Council, a "discharge" to the Commission. Article 276 EC requires the Commission to act on any comments made by the Council and the European Parliament in granting the discharge, and to report back on the actions it has taken in response, if requested.

  4.3  While the ECA's Annual Report contains some material relating to fraud and irregularities, it is not primarily concerned with fraud against the EC budget. We report on the Commission's Annual Report, Protecting the Communities' Financial Interests — the fight against fraud and its Action Plan in paragraph 2.

The documents

  4.4  The document is the provisional edition of the ECA's audit of the accounts for 2000.[8] It is 500 pages long. The structure of the Annual Report follows that of the EC Budget, with sections devoted to revenue and each of the six main categories of expenditure (the CAP, structural measures, internal policies, external aid, pre-accession aid and administrative expenditure). It concludes with chapters on financial investments and banking activities, and the Statement of Assurance.

  4.5  In considering the document, we have been assisted by the Explanatory Memorandum of 18 December 2001 from the Economic Secretary to the Treasury (Ruth Kelly). As well as providing the Government's views on the document, it contains a useful summary of each of the subject­specific chapters (EM, paras 9­76). It includes an annex listing references in the document to the UK. It also conveniently summarises the Commission's responses to the issues raised by the ECA and lists the 18 special reports published in 2001. For our part, we wish to identify some positive developments and weaknesses identified by the Court.

  4.6  The Court delivered a positive Statement of Assurance in some areas, such as revenue, the reliability of the accountancy, commitments, administrative expenditure (payments) and expenditure under the European Development Fund. However, it did not deliver a positive Statement of Assurance on non­administrative expenditure (payments) of the general budget. The overall tone of the Document is summarised by the Commission's press release:

    "The Court has concluded in its Statement of Assurance that the financial statements of the European Communities are generally reliable, except for certain matters relating to fixed assets, commitments and the economic result. The Court is able to give assurance on the legality and regularity of underlying transactions in respect of Community revenue, commitments and administrative expenditure of the Community institutions. However, the Court's audit work on operational expenditure revealed once again an unacceptable incidence of error affecting the amounts of the payments, or the reality or the eligibility of the underlying transactions, as well as weaknesses in the functioning of control procedures in the principal systems covering Agricultural Guarantee and Structural Measures expenditure.

    "The Court states that, in general, the Commission needs to improve the definition of the objectives of Community programmes and then undertake effective evaluation of their achievement, in order to ensure sound and efficient use of the European Union's resources."

  4.7  The Court identified some positive developments and some weaknesses. Positive developments identified by the Court included:

    —  the Integrated Administrative and Control System (IACS) has contributed to improved management of large amounts of EU funds and reduced the risk of settling inaccurate claims for agricultural guarantee expenditure,[9]

    —  the milk quota regime has restricted production to the target level;

    —  the Commission's strategy for dealing with BSE was basically sound;

    —  the URBAN Community initiative helped the implementation of many urban development projects and enabled local authorities to access European Union funds;

    —  the Agency charged with the reconstruction of Kosovo was considered efficient and economical;

    —  the take-up by the Commission of some of the Court's proposals for strengthening financial management and control (e.g. on aspects of recasting the Financial Regulation) was good;

    —  the accounts of the European Development Fund, were considered to be reliable, with legal and regular underlying transactions.

  4.8  As regards weaknesses, the Court criticised the Commission for, amongst other things:

    —  not having taken action to modify the budget when it became clear that (mainly as a result of higher than expected revenue and underspending on structural measures) there would be a large budget surplus, which turned out to be _11.6 billion, the largest on record;

    —  not achieving major objectives and having inadequate evaluation of results; for example, the URBAN Community initiative and the structural measures to improve employment were poorly defined;

    —  persistent weaknesses in the checks of Community operations, for example when dealing with export refunds;

    —  insufficient progress to implement the new regulatory control framework (Regulation 2064/97) for structural measures aimed at reducing the amount of ineligible or incorrect expenditure being co-financed by the EU;

    —  insufficient simplification and harmonisation of rules, for example in the fruit and vegetable common market organisation;

    —  not always following the Court's proposals for strengthening financial management and control, for example in recording spending decisions and establishing clear lines of financial authority;

    —  the variable extent and effectiveness of actions taken by the Commission in following the Court's observation; for example the Commission's response may be slow in addressing the recommendations in ECA's special reports or implemented with insufficient staffing, or not accepted at all;

    —  the slow progress in reorganising the Commission's anti­fraud unit (OLAF) caused by constraints over staff recruitment and management as well as inadequate databases;

    —  the poor implementation of pre-accession programmes (ISPA and SAPARD) which had barely started three years after their approval due to the late adoption of the legal framework and delays in setting up administrative structures; and

    —  inadequate control procedures in the ACP Secretariat for ensuring value for money and sound management, especially in view of the risks indicated by previous allegations of irregularities and evidence of mismanagement.

  4.9  Although the ECA's Annual Report is not primarily concerned with fraud, it does contain some material on fraud, which duplicates the statistics contained in the Commission's Annual Report on the fight against fraud. The Court notes that because some information provided by Member States is insufficiently consistent and complete, it cannot be used to compare Member States' ability and efficiency in detecting fraud and other irregularities and recovering any sums involved. The Court works closely with OLAF, the Commission's anti-fraud unit. For example there are established formal procedures to ensure that the relations between the two organisations are efficient and effective and the Court also has links with the Committee established to supervise the work of OLAF.

Government's view

  4.10  In her Explanatory Memorandum, the Economic Secretary to the Treasury (Ruth Kelly) notes that the ECA's document is the first report by the Court to consider the Commission's implementation of the budget since Romano Prodi took office. The Minister says that, although the Court gives some praise where it is due, the Government finds it disappointing that the Court is unable, for the seventh year in succession, to give a positive Statement of Assurance on budget payments. The Minister finds it disappointing that the Court had to criticize the Commission's organisation of anti­fraud work, specifically the slow progress in establishing OLAF. The Minister says that the Government will continue to press for the remaining staff needed by OLAF to be recruited as quickly as possible and for full use to be made of its powers and its independence from the Commission. The Minister also says that the Government is working to improve financial management and control and mentions the Commission's reform programme, which includes measures to improve internal control, strengthen contractual arrangements, and focus more strongly on results and performance measurement and the recasting of the Financial Regulation. The Minister notes that the Court has some criticisms of the UK and says that a full response will be made by the UK to the Commission as part of the normal follow­up procedure.

Conclusion

  4.11  The Annual Report identifies some positive developments in improving financial management. However, as in previous years, the Court identifies such serious weaknesses in the procedures for financial control and management that, for the seventh year in succession, it is unable to give a positive Statement of Assurance on budget payments, which account for about 95% of the EC budget. Unacceptable weaknesses were identified in respect of agricultural and structural expenditure. As the Commission repeatedly says, the Court's criticism concerns all those involved in managing Community funds, not least Member States, which in partnership with the Commission manage some 85% of the Community budget. The need for further improvements in financial management and control is clear. We were especially disappointed, given the widespread use of peer review and bench-marking in other areas, that the Court is still unable to compare Member States' ability and efficiency in detecting fraud and other irregularities and recovering any sums involved. We would like to see greater emphasis placed on achieving this so that the European taxpayer can objectively assess the commitment by individual Member States to fighting fraud.

  4.12  The Commission is rightly criticised for the slow progress in establishing OLAF, the new anti-fraud unit. We are disappointed, given the widespread concern about EC fraud, that the Commission has had to be criticised for its slow progress in establishing OLAF. We welcome the Minister's statement that the Government will press for OLAF to be fully staffed and making full use of its powers and independence as soon as possible.

  4.13  It is customary for the annual report of the Court of Auditors to be recommended for debate. On this occasion we recommend it for debate in European Standing Committee B together with the Commission's report on the fight against fraud and its Action Plan.[10] Such a debate will provide an opportunity for the House to express its views on the continuing weaknesses in financial management and the need for further improvement identified in the Court of Auditors' report.


8  When published in the Official Journal, the final version is expected to simply correct any typographical errors.  Back

9   It should be added that a number of weaknesses remain with IACS, especially in terms of on­the­spot inspections.  Back

10  Paragraph 2 above. Back


 
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