Select Committee on European Scrutiny Twenty-Third Report


COM(01) 691

Amended draft Council Regulation on the Financial Regulation applicable to the General Budget of the European Communities.

Legal base:Article 279 EC; consultation; unanimity
Document originated:  21 December 2001
Forwarded to the Council: 4 January 2002
Deposited in Parliament 4 February 2002
Department:HM Treasury
Basis of consideration: EM of 26 February 2002
Previous Committee Report: None; but see (21749) 12598/01: HC 28-xiii (2000-01), paragraph 5 (2 May 2001) and HC 152-iv (2001-02), paragraph 9 (7 November 2001)
To be discussed in Council: Not known
Committee's assessment:Politically important
Committee's decision:Cleared


  13.1  The Financial Regulation is the instrument which lays down rules for all aspects of the budget of the European Communities. It covers the establishment of the budget, the implementation of its provisions concerning revenue and expenditure, the definition of the role and responsibility of those involved in implementation, and the monitoring and control of implementation. The present Regulation, which was adopted in 1977, has been amended piecemeal on numerous occasions.

  13.2  In July 2000, the Commission adopted a proposal for the revision of the Financial Regulation. The previous Committee, which requested an opinion from the Committee of Public Accounts on the proposal, considered the proposal on a number of occasions. We cleared it on 7 November. The Court of Auditors, the European Parliament and the Council have also expressed views on the proposed Regulation.

The document

  13.3  The current document is an amended proposal, taking into account the positions expressed by the various institutions.

  13.4  In her Explanatory Memorandum of 26 February 2002, the Economic Secretary to the Treasury (Ruth Kelly) provides a helpful summary of the document:

    "The revision of the Financial Regulation has been introduced as part of the wider reforms to the European Commission and the way it conducts its business. Reform of the budgetary rule-book was seen as a vital component in the process, because it could help create a greater sense of ownership, responsibility and accountability among senior Commission officials, help to link expenditure to results, and rationalise the budget structure to provide much needed simplification and so reduce errors.

    "The proposal divided into two parts: the main part, part one, deals with common provisions and covers the following areas:

  • budget principles;
  • establishment and structure of the budget;
  • implementation of the budget;
  • procurement;
  • grants;
  • presentation of accounts; and,
  • external audit and discharge.

    "It was intended that the new Regulation be confined to stating the broad principles and basic rules governing all budgetary matters referred to in the Treaties, while the detailed provisions should be moved to implementing rules, thus making the Financial Regulation easier to understand. Key to this was the section on budget principles. These were the general guidelines for the rest of the document and any future amendments, they are therefore the foundation on which the other parts of the Regulation are built.

    "The seven principles are:
  • unity. This makes clear that the budget is the instrument which forecasts and authorises both the revenue and the expenditure considered necessary for the Communities;

  • annuality. That the budget be authorised for the financial year I January to 31 December;

  • equilibrium. That revenue and payment be in balance and no loans may be raised to cover a deficit;

  • unit of account. That the budget be drawn and implemented in euros;

  • universality. That revenue covers total payments;

  • specification. That expenditure should be earmarked for specific purposes; and;

  • sound financial management. That expenditure decisions should be taken with regard to economy, efficiency and effectiveness.

    "As part of the commitment to sound financial management, the new Regulation introduces the concept of Activity Based Budgeting (ABB). This is the way in the future that expenditure will be linked to results, akin to the Public Service Agreements in the UK. The new Regulation also makes it a requirement for institutions to evaluate their policies and actions and use that information in future decision making.

    "The financial rules have been simplified in the new Regulation. They are expressed and explained more clearly than in the previous version, some of the complicated concepts have been removed and there has been a substantial reduction in the number of exceptions.

    "The new Regulation redefines the roles of the financial actors. Under the previous system a financial controller had responsibility to authorise and audit expenditure. The financial controllers were often far removed from the policy detail and had to rely on the advice of others. Under the new system:

  • authorising officers are made fully responsible for all revenue and expenditure operations executed under their authority and must be held accountable for their actions, including where necessary through disciplinary proceedings. Advance approval of revenue and expenditure operations by the financial controller are to be ended;

  • the accounting officer continues to be responsible for the proper execution of payments, the collection of revenue and the recovery of receivables. The accounting officer also manages the treasury, keeps the accounts and is responsible for drawing up the financial statements of the institutions. The role of the financial controller in checking that payments constitute valid discharge will be ended thereby increasing the power and responsibility of the accounting officer; and

  • the internal auditor will provide the institution with reasonable assurances concerning the proper functioning of the management and control systems put in place by the authorising officer. The internal auditor will thus not be an actor involved in the financial operations.

    "The European Court of Auditors remains responsible for external audit. While Member States will continue to provide necessary information throughout the audit procedure, it is the Commission which is fully responsible for the implementation of the budget."

  13.5  The Minister continues:

    "The institutions which have delivered opinions on the Financial Regulation have broadly endorsed it. There was general support for its simplification, the introduction of ABB, and the new role for financial actors. A large number of amendments were proposed. These included the following:
  • the European Parliament proposed a number of amendments to have the Community budget include expenditure on European security policy, the Community agencies and the EDF. The Commission did not accept these amendments, arguing that the Financial Regulation was not the appropriate legal instrument. The Government supported the Commission s view;

  • the Court of Auditors criticisms focused on the exceptions to the budgetary principles. They were concerned that negative expenditure and the negative reserve were incompatible with the principle of transparency, and they were concerned that the carryover of appropriations was incompatible with the principle of annuality. On grounds of operational convenience and practicality, the Court's concerns have not been fully reflected in the amended document;

  • both the Court and the Parliament were concerned to ensure that, with the ending of the role of financial controller, the Regulation should contain definitions of situations in which authorising officers would be liable to disciplinary action and payment of compensation. These views have not been fully reflected in the amended version, as a consensus it yet to be reached on the balance of such provisions between the Financial Regulation, the implementing rules and the Staff Regulations; and

  • on external actions the Commission had proposed more time for the conclusion of contracts than applied to ordinary operations, the deadline being 31 December of the year N+3, N being the year when the budget commitment is made. The ECA found this too short a period, while the Council found it too long. The proposal therefore remains unchanged and arguments from experts are being heard in Budget Committee."

The Government's view

  13.6  The Minister says:

    "The recast Financial Regulation will bring the EC budgetary rules more in line with systems in the UK. The clear separation of roles between authorising and accounting officer should engender a greater sense of responsibility and accountability into the system. Of particular benefit will be the new way of negotiating the budget. By linking proposed expenditure with clear objectives and ensuring that all expenditure proposals be backed with evaluation evidence, Activity Based Budgeting should lead to improved effectiveness and greater value for money. This Regulation is therefore a key part of the reform process and should lead to genuine improvements in the management of EC funds."


  13.7  The previous Committee concluded that the earlier draft Regulation moved financial management of EU matters in the right direction, but further improvements were necessary, such as increasing personal accountability. The amended proposal provides a clearer separation of roles between the authorising and accounting officers, which according to the Minister should introduce a greater sense of responsibility and accountability into the system. We welcome the improvements and clear the document.

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Prepared 22 April 2002