Thank you for your Explanatory Memorandum OJ C 273 regarding the Annual Report of the European Court of Auditors regarding the EC Budget for the year 2006. The Memorandum was considered by Sub-Committee A on 21 January and cleared from scrutiny. The Sub-Committee expressed their regret that another year has passed without a positive statement of achievement being issued.

  The Committee noted your statement in paragraph 79 of the Explanatory Memorandum regarding the proposal to introduce a Statement of the UK's EU expenditure, and would be grateful if you were able to supply more information about this. In particular, the Committee would like to know which will be the first year to be audited, and when will that report be published? You will recall that the Committee recommended this Statement be introduced in its 2006 Report, Financial Management and Fraud in the European Union. The Government's response to that Report supported many of the conclusions. Although few of the conclusions called for direct action by the UK Government, the Committee understood from the response that the Government would put pressure on other EU institutions to take up the suggestions in the Report which applied to them. The Committee would be grateful if you were able to provide an update on any other improvements that have been made to financial management procedures in the EU in the past year.

23 January 2007

  Thank you for your letter of 23 January advising that the EM on the ECA Report on the 2006 EC Budget had been cleared from scrutiny by Sub-Committee A. I share the Sub-Committee's view that it is regrettable that this was another year in which the ECA were unable to provide a positive Statement of Assurance on the majority of underlying transactions in the EC Budget.

  In your letter you ask for an update on the proposal to publish an annual Statement of the UK's use of EU funds and in particular what period the report will cover and when the report will be published. The first Consolidated Statement and Audit Opinion will cover the financial year 2006-07 and the National Audit Office is in the final stages of completing its audit. The intention remains to publish it this Spring as originally announced.

  The UK statement will be prepared under International Financial Reporting Standards applicable to the circumstances and will also disclose EU spend by:

— Major EU expenditure programmes (European Agricultural Guidance & Guarantee Fund, Financial Instrument for Fisheries Guidance, European Social Fund and European Regional Development Fund); and

— Territory (England, Wales, Scotland & Northern Ireland).

  The Comptroller and Auditor General will provide an opinion as to whether the Statement provides a true and fair view of income, expenditure, balances and cash flows. Thfs opinion will be based on the audit work undertaken by the NAO on the Statement and on the underlying data provided by departments used to prepare the statement.

  The Netherlands and Denmark have in the past few months published similar statements to that of the UK. At the recent meeting of the ECOFIN Council, Sweden also confirmed continuing work towards production of their initiative and we are continuing to work on persuading others of the merits of such initiatives.

  My officials are in close contact with the European Commission and other institutions regarding the treatment of these national initiatives to ensure that they will be another useful tool in improving financial management of EU funds.

  You also asked whether any other improvements had been made to financial management procedures in the EU in the past year. The main changes made are detailed below.

— An amended version of the financial regulation came into effect on 1 January 2007 in the light of lessons learned since the previous financial regulation was introduced in 2002. This improves upon the previous version, for example it introduces a new article (28a) on effective and efficient internal control systems and defines what this means. Article 33(2) (d) has been expanded and now requires Director Generals to provide more detailed measurable objectives and output information in Activity Statements to justify proposed changes in expenditure levels. Article 53 has been

— Expanded to include more detail on the responsibilities of those concerned in the implementation of the budget.

— Programme regulations are being simplified for the new 2007-13 spending period. A framework is now in place for a single regulation for CAP market support measures (the Single Common Market Organisation (CMO)) to replace the existing regulations for individual products and this is being gradually introduced. Where structural measures are concerned there are now far fewer regulations than there were in force for the 2000-06 Financial Perspective. These regulations were, unlike for 2000-06, introduced in advance of the current programming period, thus allowing those responsible

— Time to understand them before they came into force. These regulations include a requirement for each Member State to appoint an audit authority to oversee the financial management of funds. The Commission has also issued much more detailed guidance on financial control and eligibility criteria. Although these changes will need time to bed in before a direct impact is witnessed, the simplification of regulations should make a positive contribution to reducing the existing rate of error in underlying transactions.

— With effect from this year, all Member States will be required to supply the European Commission with annual summaries of available audits and declarations/financial statements on EAGGF and FIFG and Structural Fund spending. These are:

— Intended to reinforce the chain of accountability between Member States and Commission concerning the use of EU funds under shared management; something the UK strongly supports. These summaries should usefully complement national declarations in encouraging Member States to take a greater degree of responsibility over the management of co-managed EU funds.

— Finally, the Commission will shortly provide its final update on the results of its Action Plan towards an Integrated Internal Framework, the roadmap for which was agreed under the UK Presidency in 2005. This will examine the impact of the different actions taken with the ambition of obtaining a positive statement of assurance and will draw conclusions for the future consolidation of the Integrated Internal Control Framework. The Government will be working to make sure this consolidation takes place and looks forward to the Court of Auditor's assessment of the impact of the Action Plan on the 2007 Budget in its Report next year.

21 February 2008