Legal base	—
Document originated	10 December 2009
Deposited in Parliament	17 December 2009
Department	HM Treasury
Basis of consideration	EM of 6 January 2010
Previous Committee Report	None
To be discussed in Council	Not known
Committee's assessment	Politically important
Committee's decision	For debate in European Committee B, together with the Commission's 2008 report on the fight against fraud, the European Court of Auditors' Annual Report for 2008 and other relevant documents

Background

1.1  Each annual audit of the EU's general and other budgets by the European Court of Auditors is concluded by a discharge given to the Commission by the European Parliament on the recommendation of the Council. But the Commission is required to act on and report back on any observations made by the European Parliament in the discharge decisions and any comments accompanying the Council's recommendation. Any results from action on, and follow-up to, observations comments and recommendations feed into subsequent annual audits.

The document

1.2  This document is a summary report from the Commission about its follow-up to the Council's discharge recommendations in relation to the 2007 budget. The summary is in four parts dealing with recommendations on:

• the General Budget;
• European Court of Auditors' special reports;
• the European Development Funds; and
• requests concerning individual agencies.

The summary cross-references to the Commission's annexed staff working document which gives a much more detailed account of the Commission's responses to the Council's comments.

1.3  In introducing its responses the Commission:

• states that, in response to the 90 requests made by the Council, it agrees to take the action asked for in 46 cases;
• asserts that action has already been taken in 44 cases, although in some instances the results of the actions need to be analysed;
• agrees that simplification will be key to reducing error rates in implementation of EU policies, although some complexity is inevitable, given that rules are the result of complicated legislative procedures and are fixed in line with policy objectives;
• says that it has made improvements to the legal bases for 2007-2013 programmes bases, has introduced some simplification for Structural Funds and is engaging in ongoing simplification efforts in the agriculture area;
• notes that the effect of simplified eligibility rules on error rates will only become apparent in the medium- to long-term;
• says that it is working to identify possible further steps towards simplification in the context of the triennial review of the Financial Regulation and will look at principles for greater simplification of the sectoral legislation for the next round of basic acts (those in force from 2014); and
• comments that simplified and well-implemented eligibility rules would reduce the underlying transactions' vulnerability to error and would thus enable less extensive and costly controls to be performed on them.

1.4  In the summary the Commission says, in relation to the Statement of Assurance, that:

• it will take due account of the European Court of Auditors' recommendations on the accounts;
• a new IT system operative from 2008 will improve the reliability of information on financial recoveries; and
• it has increased its action to ensure reliable information from Member States on financial corrections and recoveries in funds under shared management, working under the Structural Funds action plan.

1.5  On its internal control the Commission says that:

• its Communication Impact report on the Commission action plan towards an integrated internal control framework, adopted in early 2009, detailed that 13 of the 16 original actions had been completed by the end of 2008 and three actions either could not be completed or were progressed by other means;[1]
• it took steps to implement in its services' 2008 annual activity report commitments made in the 2007 Synthesis Report[2] to improve its assessment of supervisory and control systems;
• it will continue to work with Member States to improve the annual summaries provided by the latter on funds under shared management;
• all Member States complied with the legal requirements for these summaries in 2008, with seven adding an additional statement of assurance;
• it considers that these and other elements add value and has revised its guidance note on the summaries to stress the incentives for doing so;
• it will continue its work on the concept of a tolerable risk of error, assessing that this will provide clarity on the cost effectiveness of the overall control system;
• the work required and its timing will vary between policy areas and therefore it plans to provide analysis on a tolerable risk of error for the different areas in steps to the end of 2012; and
• it will make proposals in the areas of research, energy and transport and rural development in the first half of this year with proposals on external aid, development and enlargement and administrative expenditure in the second half.

1.6  On budgetary management the Commission outlines ongoing efforts towards realistic and adequate budgeting of resources, including through analysis of Member States' expenditure forecasts and says that it has improved its reporting on implementation of Community programmes and presented fuller and more reliable figures in the 2008 accounts. On revenue it says that newly-introduced management visits, which are ongoing, have resulted in the lifting of several longstanding reservations connected to VAT own resources.

1.7  The Commission then turns to the areas of expenditure, saying first, of agriculture and natural resources, that:

• for the post-2007 period the management and control system for rural development has been aligned to the European Agricultural Guarantee Fund system for the first pillar of the Common Agricultural Policy;
• weaknesses in Member States' management and control systems make recovery of irregular payments difficult in some cases; and
• the financial corrections imposed on Member States through the conformity clearance mechanism provides an incentive to improve these systems.

1.8  On cohesion policy expenditure the Commission says that:

• for the closure of the 2000-2006 programmes it is focusing on removing irregular expenditure through financial corrections and on ensuring that the residual risk of such expenditure in closed programmes is low;
• to prevent errors in future it is completing its compliance assessment for new programmes in the 2007-2013 period, providing guidance and training, and simplifying operating conditions — this includes the use of flat rates and lump sums in some cases and simplifications to speed up disbursement of Cohesion Funds in the light of the financial crisis;
• the volume of financial corrections in 2008 has increased substantially from 2007, as has the number of decisions on payment suspension; and
• this reflects action taken by the Commission under the action plan to strengthen its supervisory role in this area.

1.9  In relation to research, energy and transport the Commission says that:

• it has introduced a control and audit strategy to improve the legality and regularity of expenditure under the research Framework Programmes each year;
• it has taken steps to simplify the seventh Framework Programme, including introducing a "participants guarantee fund", reducing the certification required and working towards a full electronic system for the whole process of proposal and grant management; and
• deeper simplifications are required and support will therefore be needed to modify the legislative bases for the preparation of the eighth Framework Programme.

1.10  On external aid, development and enlargement expenditure the Commission says that:

• it is taking steps to support implementing organisations and beneficiaries of EU external aid projects in the management of Union funds, including through development of a financial management toolkit;
• it is working with the UN to improve verification systems;
• standard terms of reference for financial and systems audits were made available from 1 October 2007, which should help towards improving the quality of audits;
• guidelines for budget support are being revised to promote a more rigorous, results-oriented approach;
• in the enlargement area national authorities have implemented the required segregation of functions and staffing levels have increased;
• it prioritises constant monitoring and further follow-up in this area; but
• some delays in the follow-up of closure audits are inevitable due to complexity and the need for accuracy.

1.11  In relation to education and citizenship the Commission says that previous recommendations for simplification have been taken into account in the design of the 2007-2013 programmes, all national authorities have provided the required ex ante and ex post declarations of assurance, it issued more precise guidelines for the annual declarations, it has held specific meetings with national authorities and steps have been taken to improve the sharing of audit results and ex ante control for communication expenditure. On economic and financial affairs expenditure the Commission says that as most conclusions from the European Court of Auditors in this area concern the research Framework Programmes, action taken is covered under the research heading of the report.

1.12  Finally, on expenditure, the Commission turns to administrative and other outlays, outlining the information it provides annually to the Council on pension expenditure, building needs and agencies' budgets, its assistance to decentralised agencies and its engagement in the evaluation of EU decentralised agencies, due to report by the end of 2009.

1.13  On the Council requests in relation to the European Development Funds the Commission says that:

• an independent study showed its assumptions on estimates of invoices to be mostly correct;
• it will implement recommendations made for a different approach in some cases for 2009; and
• in future it will provide more detail on budget support issues in future annual reports on the "European Community's development and external assistance policies and their implementation".

1.14  In the summary the Commission notes that the accompanying staff working document details its responses to the Council's requests in relation to European Court of Auditors special reports on capacity development, conservation of fisheries resources, the research and technological development Framework Programmes, major investment projects, binding tariff information, the EU Solidarity Fund, milk quotas in new Member States, EU agencies and rehabilitation aid following the tsunami and Hurricane Mitch and in relation to individual agencies concerning the handover of activities to the Commission from the European Agency for Reconstruction and the GNSS Supervisory Authority.

The Government's view

1.15  The Economic Secretary to the Treasury (Ian Pearson) says:

"This report provides a useful summary of action taken by the Commission in response to the recommendations of the Council on discharge of the 2007 EC Budget. These actions should lead to improvement in the management of the budget. Nevertheless, considerable further effort is required by all concerned, notably the Commission and member states, to continue in their efforts to improve financial management if the European Court of Auditors is to provide a positive Statement of Assurance on the EC budget.

"Looking forward, the Government will continue to engage actively with the Commission to encourage further progress in areas such as effective simplification, and in evaluating the results of those measures taken so far. In the area of tolerable risk, the Government will consider any future Commission proposals in line with the approach set out in [the Government's Explanatory Memorandum of 9 February 2009 on the Commission Communication Towards a common understanding of the concept of tolerable risk of error.[3]

"The Commission considers action at Member State level to be central to improving the level of assurance on EU expenditure. HM Treasury published the second Consolidated Statement, and accompanying NAO Audit Opinion, on the use of EU funds in the UK, in October 2009.[4] The Government will continue to work closely with others to encourage other Member States to undertake similar initiatives."

Conclusion

1.16  This document usefully summarises Commission attempts to improve management of the Community's finances. As such we recommend that it should be debated together with the Commission's 2008 report on the fight against fraud, the 2008 report of the European Court of Auditors and other relevant documents, which we have already recommended for debate in European Committee.[5]

2   (29752) 10696/08: see HC 16-xxvii (2007-08), chapter 26 (16 July 2008). Back

3   (30320) 17592/08 + ADD 1: see HC 19-viii (2008-09), chapter 8 (25 February 2009) and HC 19-xxvii (2008-09), chapter 33 (14 October 2009). Back

4   See http://www.hm-treasury.gov.uk/d/statement_eufunds151009.pdf.  Back

5   (30811) 12139/09 + ADDs 1-2 (30819) -- (30864) 12668/09 + ADD 1: see HC 19-xxvii (2008-09), chapter 2 (14 October 2009), (31051) 14998/09 + ADD 1: see HC 5-iii (2009-10), chapter 2 (9 December 2009), (31188) --: see HC 5-iv (2009-10), chapter 1 (15 December 2009) and (31201) --: see HC 5-iv (2009-10), chapter 2 (15 December 2009). Back