The National Audit Office of Denmark

Copenhagen, 6 February 2004 RN SEKR01/04

 

 

Factual Memorandum to the Public Accounts Committee about the European Court of Auditors’ Annual report, Statement of Assurances and special reports for the 2002 financial year

Summary

1. The purpose of this memorandum is to inform the Public Accounts Committee of the European Court of Auditors’ (ECA) annual report and the special reports for the 2002 financial year. The annual report includes the Statement of Assurance of the ECA for the 2002 financial year and the results of the examinations which the ECA carried out within the various areas of management.

2. With the exception of a few observations, it is the opinion of the ECA that the European Community accounts for 2002 faithfully reflect the revenue and expenditure for the financial year. The ECA points to a number of areas in the report wherein the accounting system may be improved. The Commission works on improving the accounting system and it is expected that the work of reforming the financial management in the Commission will result in improvements.

The overall budget surplus has decreased which the ECA finds positive but increased focus on the budgets will reduce the budget surplus even more.

3. The ECA carried out an examination of customs collection of EU’s own resources of all Member States and the national accounting systems. The ECA pointed to a problem with settling of accounts in Denmark. The Central Customs and Tax Administration has subsequently rectified the problem. The ECA also examined the procedures for customs clearance in airports. The ECA found minor errors in Denmark. The Central Customs and Tax Administration has subsequently ensured that the legislative basis was clarified. The ECA found that EU’s common agricultural policy, which is the largest area of expenditure, had high percentages of errors. The ECA examined the result of the inspections of the areas where the Member States use the integrated management and control systems. The ECA concluded that the risk of errors is lower when using the system. The ECA concluded that the integrated management and control system works satisfactorily in Denmark.

The ECA took a test sample in Denmark showing a single error where the beneficiary had to return DKK 2.000. The Directorate for Food, Fisheries and Agri business has subsequently verified the overall aid of the beneficiary in question.

I find it satisfactory that the number of cases, whereto the management in Denmark receives critical comments, is limited.

Preface

4. The ECA’s Spanish President Juan Manuel Fabra Vallés presented the annual report for the 2002 financial year for the Budget Control Committee of the European Parliament on November 17, 2003. The ECA published the annual report on November 18, 2003.

The ECA’s presentation of the annual report is the initial step to approving the EU annual accounts. Hereafter the European Parliament must, at the latest on April 30 the following year, report discharge to the Commission for the budget’s implementation upon recommendation from the Council. As part of the discharge procedure the Member States must respond to the comments in the annual report which concern their management of EU funds.

In Denmark, the Ministry of Finance assembles comments from the relevant ministries and presents an overall response to the comments made of the Danish conditions. The Ministry of Finance forwarded the answer to the Commission on January 14, 2004.

I notified the Public Accounts Committee about the European Parliament’s pre­sen­tation of discharge for the 2001 financial year in my memorandum of August 20, 2003.

Figure 1. Discharge procedures (approval procedures for the 2002 financial year)

 

Figure 1 shows the process right from the Commission presents the annual accounts for 2002 to the European Parliament’s final approval hereof – the so-called discharge procedure.

5. In the following, I will refer to the overall comments in the annual report of the ECA including the Statement of Assurance, the comments to the Commission’s reform and the budgetary management. Hereafter I will refer to the chapters in the annual report where Denmark has been mentioned. I will include ECA letters and Danish authorities’ reactions to the audit results. I will comment on the cases wherever relevant. I will also comment on matters which concern Denmark and which have been dealt with in 7 of the 2002 special reports of the ECA.

Annex 1 is a review of the special reports of the ECA for the 2002 financial year. Annex 2 is a review of the visits of the ECA in Denmark pertaining to the 2002 financial year. The National Audit Office of Denmark has participated in these visits. I will discuss 4 of the visits which relate to cases mentioned in the ECA annual report.

The Statement of Assurance – overall assessment of the accounts (Chapter 1)

6. With the exception of a few observations, it is the opinion of the ECA that the European Community accounts for 2002 faithfully reflect the revenue and expenditure for the financial year, and the financial position at the year-end. The ECA underlines that most of the reservations have previously been observed. The ECA finds that most of the discovered weaknesses to a large extent are due to the Community accounting systems. The system was not designed to ensure that the Community assets are fully recorded.

The ECA finds it satisfactory that the Commission in the end of 2002 adopted a plan of action for modernising the accounting system.

7. When giving discharge for the 2001 accounts, the European Parliament requested that the Statement of Assurance was made, so that the areas of performance to a greater extent could be assessed individually. Furthermore, the European Parliament requested an instrument which would enable the discharge and budget authority of comparing and supervising progress within the financial management and control. To respond to these requests, the audit now takes its point of departure in specific examinations within the individual budget areas and is now based on the following four areas:

• Assessment of the internal control systems
• Using the work of other auditors
• Annual activity reports and statements of the directors-general
• The ECA’s substantive test (test sampling) in the individual areas.

On this basis, the ECA makes an overall statement on the EU accounts and comments on the individual main areas. Hereby the ECA clarifies its audit assessment on the various areas of activities. The system also makes it possible to compare conclusions within the individual area from one financial year to the next.

Reform of the Commission’s financial management

8. The reform of the Commission’s financial management begun in 2000. The reform comprises a number of ambitious and fundamental measures including a new Financial Regulation (a budget guideline). The Commission has since 2000 carried out a number of measures as part of the reform, among other things, changing the accounting system, expanding the responsibility for the internal control, establishing and applying internal control standards, introduction of activity-based management and introduction of a central internal audit service.

I mentioned the reform in my memorandum of the ECA’s annual report in 2001 of January 7, 2003.

9. The Commission adopted on December 17, 2002 a plan of action for modernising the accounting system. The plan responds to many comments previously observed by the ECA. The accounting system will among other adhere fully to the principles of accrual accounting. The Commission expects the accounting system to be fully effective from the 2005 financial year.

The ECA finds it satisfactory that the Commission up-dates the accounting system, however, the time schedule may be too ambitious.

10. The ECA also finds it satisfactory that internal control standards have been established. The standards shall contribute to ensure sound financial management in the Commission. The standards are to be used when establishing the internal control systems in the Commission’s Directorates-General. There are 24 internal control standards within the following areas: control environment, performance and risk management, information and communication, control activities and audit and evaluation. The standards shall ensure for that the underlying transactions are legal and regular.

At the year-end of 2002, the audit of the ECA showed that the standards were not applied on the minimum level in all the Directorates-General even though they should have been implemented a year earlier. The ECA underlined that it is important that the standards are used efficiently and fully.

Budgetary management (Chapter 2)

11. The comments to EU’s budgetary management were previously found throughout the annual report. According to the Parliament’s request, the ECA now gives a summary analysis of the budgetary management.

Compared to the 2001 financial year, the traditional own resources (customs and agricultural duties etc.) decreased by 23 % in 2002 whereas the GNP-resource increased by 32 % compared with 2001. The budget surplus has decreased from 15 billion euro to 7.4 billion euro hereof 4.9 billion euro from structural measures.

The ECA finds that the budget surplus is still too high, which indicates systematic problems. However with an active policy, where the budget is changed whenever necessary, a better balance between revenue and expenditure will be achieved, and hereby limiting the budget surplus. As a consequence of a systematically overestimation of the expenditure, the unredeemed obligations on the structural fund area grew in volume. At the end of the 2002 financial year, the obligations were more than 66 billion euro, which was almost 10 billion euro more than the year before. The payments appropriations were basically better used compared to previously.

The ECA recommends a more realistic estimate from the Member States and that a reduction of the revenue be made, if the appropriations are not fully used. The ECA pointed out that under spending of, for instance, the structural programmes for 2000-2006 may now result in an accumulation of appropriations, which may be difficult to use at the end of the period.

Own resources (chapter 3)

12. The ECA’s audit of EU’s own resources comprised systems for registrations of established customs and a special examination of custom authorities’ control of goods on arrival in airports. For the VAT and GNP-resources the audit concentrated on setting the budget and its implementation in respect of these resources with specific attention to the balances and adjustments to balances deriving from these resources and the refunds to Member States. The audit also included Member States’ collection of VAT.

The ECA concluded that the audit basically demonstrates satisfactory results for both traditional own resources as well as for VAT and GNP-resources taking into consideration the extent of the audit. This is however not true for B-accounts – cf. below.

13. The ECA reviewed the Commission’s accounts for traditional own resources, analysed the flow of duties from all the Member States and examined the national accounting systems in 11 Member States, including Denmark. The ECA visited Denmark in November 2002.

Traditional own resources are established by the Member States’ customs authorities or other designated authorities and are first entered in the national accounting systems – A-accounts. As long as the amounts remain unpaid and unsecured, or are secure and are under appeal, then the amounts are entered in the so-called B-accounts.

The audit of the ECA showed that 7 Member States, including Denmark, did not fully conform to the requirements for completing A and/or B-accounts statement. It has no effect on the amount that are transferred, but it reduces the Commission’s possibility for monitoring and analysing the data development ongoing. The ECA found that 4 Member States, including Denmark, have systematically errors and deficiencies in keeping the B-accounts. The ECA also established several unusual circumstances in the reporting of the B-accounts’ balances in 6 Member States, including Denmark.

The Central Customs and Tax Administration replied to the ECA comments that B-accounts will be established, so that the guidelines, which EU has recommended for administering accounting of the impounded goods that have not been part of the free turnover, are followed. In addition, the Central Customs and Tax Administration issued internally messages on how to book keep amounts in B-accounts, so that smuggled goods no longer are entered in the B-accounts.

I find it satisfactory that the Central Customs and Tax Administration on the basis of the established problems with the B-accounts have changed and intensified the guidelines for book keeping of B-accounts. The Central Customs and Tax Administration are presently considering the audit assessment of reporting own resources.

As I have previous reported in my memorandum to the Public Accounts Committee on March 17, 2003 concerning report number 18/01 on the audit of the state accounts for 2001, I will follow the case.

14. The ECA’s examination of customs clearance through airports in 11 Member States also included Denmark. The audit included assessments of customs surveillance and customs control. The purpose of the audit is to ensure that all goods are correctly reported and in time and that import duties are correctly established. Goods in air cargo are either indicated by a “C” for Community goods or by a “T” for third country goods.

The ECA made a test sample in Denmark of 30 declarations. The test sample showed that there were minor errors in about 30 % of the declarations. The errors had no financial impact.

In 4 Member States, including Denmark, customs authorities only gain access to edp information about flights from third countries. Flights from the Community countries may, however, also carry non-Community goods in transit.

The Central Customs and Tax Administration informed in their response to the ECA’s comments that Danish customs legislation effective as at January 1, 2004 has been changed; it has been clarified that companies that are in the business of trafficking flights must give the necessary information. Furthermore, the Central Customs and Tax Administration informed that the Danish authorities are aware of and now makes test samples of goods arriving from other EU countries and where goods have not yet been released for free circulation within the EU. Test samples are made of air flights manifests and the actual carried goods.

I find it satisfactory that the Central Customs and Tax Administration has changed procedures and intensified the control.

15. The ECA examined collection of VAT in 7 Member States, including Denmark. The audit showed that calculations of data and amount, which forms the basis for the amount presented in the Member States VAT return, and the composition of the net amount for claimed VAT varied from Member State to Member State. Member States do not present the figures in a homogeneous way and do not use similar terminology. Therefore, it is difficult to verify and benchmark this part of the VAT return.

The ECA visited Denmark in October 2002. The ECA informed in February 2003 that it did not have significant comments to the visit in Denmark.

The Common Agricultural Policy (Chapter 4)

16. The ECA established that the expenditure for the European Agriculture Guidance and Guarantee fund, Guarantee Section (EUGFL), for the 2002 financial year amounted to 45.521. million euro. Direct support to farms, which is determined on the basis of the cultivated land or the number of animals on the farm, is by far the largest part of the expenditure for the common agricultural policy (58 %). Basically, all these expenses are effected by the paying agencies in the Member States.

Similar to previous years, the ECA found that the common agricultural policy was encumbered by a significant percentage of errors. The errors are most frequently found on the level of the final beneficiary.

17. Each Member State shall establish an integrated management and control system in order to reduce the percentage of errors. The system includes an electronic data base of the agricultural farms and claims, a system for identifying fields, a system for identification and registration of animals and an integrated control system for the administrative control and control on the spot. About 58 % of the agricultural expenditure was included by these procedures and systems in 2002. The affected aid schemes – first and foremost area and headage aids are administered by the paying agencies of the Member States, which are to carry out the administrative controls.

The ECA examined the results of the inspections of the integrated management and control system. The ECA concluded that the risk of errors is lower for the aid controlled by the integrated management and control system.

Expenses for aid to arable crops, where the aid is paid on the basis of the reported land area, amounted to 18.266 million euro in 2002. This represents 42 % of EU’s agricultural expenditure. All expenses are covered by the integrated management and control system. In the 14 Member States, which have implemented an integrated management and control system (not Greece), the total percentage of errors were 1.2 %. The percentage of errors for Denmark was 0.4 %. About 10 % of the claims, from the 14 Member States, were examined representing 11.75 % of the areas for which claims were made. In Denmark 10 % of the claims contained errors. For the 14 Member States an average of about 30.4 % of the claims contained errors, varying from 6.4 % in Italy to 89.7 % in Luxembourg.

In connection with the audit examination, the ECA visited Denmark in March 2003. The ECA subsequently forwarded an audit report about the visit to the National Audit Office of Denmark, concluding that the integrated management and control system basically works satisfactorily in Denmark.

18. It may not be seen in the annual report, but the ECA visited Denmark in December 2002 in connection with the Statement of Assurance for the 2002 financial year (DAS 2002). The ECA selected 5 test samples. Errors were established in one of the test samples relating to payment of aid per hectare. The error consisted of an over-declaration for 3 fields (corn) of 0.23 hectare. After the ECA’s visit, The Directorate for Food, Fisheries and Agri business decided to carry out a control of the applicants over all hectare aid for both 2001 and 2002. The result of this examination showed an over declaration of 0.82 hectare for 2001 equivalent to aid per hectare of about DKK 2.000, which the applicant was requested to repay. For 2002 the control show­ed that the land area was reported correctly.

I find it satisfactory that the Directorate for Food, Fisheries and Agri business just after the visit of the ECA carried out control of the applicants overall air per hectare for 2001 and 2002.

The special reports for the accounting year 2001

19. The ECA’s special reports are included as part of the discharge procedure together with the annual report and the Statement of Assurance (see figure 1). I have made some comments to the 7 special reports wherein Denmark is mentioned. In Annex 1, all the titles of the 13 special reports for the 2002 financial year have been mentioned. Reports where Denmark is mentioned is marked by *).

No. 1/2003 concerning prefinancing of export refunds

20. The audit of the ECA comprised prefinancing of export refunds for beef and corn. The audit was carried out in the Commission and in the Member States’ paying agencies, customs authorities and beneficiaries and in harbours and in warehouses. The ECA chose beef and corn, which amounts to about 90 % of the prefinancing. The ECA visited 8 Member States, including Denmark. The ECA examined how the Commission administered the system and how the national authorities implemented the system. In addition, the ECA carried out test samples of 117 payments made in 1999 from the European Agricultural Guidance and Guarantee Fund and examined whether they were legal and regular.

The conclusion of the ECA was that the Commission’s procedures for determining refund rate were not clear enough. This was in particular true for beef and to a minor extent corn.

Denmark is mentioned in two tables wherein it is stated how large a part of the refunds for respectively beef and corn that are prefinanced. The payments of refunds amount to 10.281.015 euro in Denmark whereof 25 % is prefinanced, and the average period for prefinancing is 54 days. Payments of export refunds for corn in Denmark amounts to 37.619.784 euro in Denmark whereof 15 % is prefinanced, and the average period for prefinancing is 118 days.

The ECA’s examination in Denmark showed that some problems existed for beef refunds in respect of timely release of the guarantees held covering the advanced payment of the refund.

Internal audit in the Directorate for Food, Fisheries and Agri business submitted in June 2002 an audit report on this subject. There has previously been a large bulge of export certificates, which had not been conclusively balanced. This is equivalent to the comments of the ECA. The problem was reduced by targeted adding staff to the responsible office in the Directorate for Food, Fisheries and Agri business In the middle of April 2002 the number of certificates being processed had been reduced to 4.908 certificates from 9.118 certificates at the beginning of 2002.

In my memorandum to the Public Accounts Committee of November 21, 2003 it may be seen that the number of unclosed cases from before January 2001 have been reduced to 12.

I find this development satisfactory.

No. 4/2003 concerning rural development: support for less-favoured areas

21. The ECA carried out an examination of the support scheme for less-favoured areas. The examination did not include Denmark, but Denmark is mentioned in several tables where it may be seen that the less-favoured area in Denmark constitutes less than 1 % which is the lowest in EU.

No 6/2003 concerning Twinning as the main instrument to support institution-building in Candidate Countries

22. Twinning is a main instrument for institution-building in the candidate countries of Central and Eastern Europe. Experts from public authorities in EU Member States are typically seconded in the candidate countries in order to support institution-build­ing – this is typically how twinning takes place.

The aim of the audit of the ECA was first and foremost to assess whether twinning as an instrument had been administered efficiently and effective by the Commission, Member States and candidate countries. The audit did not comprise a legal and regular assessment of the obligations and the payments. The ECA based its assessment of the efficiency of the management on an examination of a test sample of 45 projects out of 98 projects, which had been implemented before February 2002.

The ECA concluded that the twinning projects were a significant instrument for strengthening the administrative capacity in the candidate countries of Central and Eastern Europe. The ECA generally found that the targets of the projects were too ambitious, and the results were very limited. On this basis the ECA assessed that fewer targets should be made. The targets should be realistic and focus on weaknesses in the administrative capacity. In addition, the ECA concluded that twinning procedures should be speeded up and made less complex. The ECA also recommended that a network be established, for instance, on the internet, by experts who have already carried out twinning projects, so that their knowledge and experience could be used for future projects.

Denmark is mentioned in a table in relation to the twinning projects, which the Member States participated in as leader or partner. Denmark participated in the period 1998-2001 in 42 projects.

I may add that the National Audit Office of Denmark in the period 2000-2003 participated as partner in 3 twinning projects in Hungary, Lithuania and Slovenia.

No. 7/2003 on the implementation of assistance programming for the period 2000-2006

23. The audit comprised first and foremost implementation of assistance programming within the set objectives of target 1. Denmark is not comprised under target 1 but is mentioned when choosing criteria for selecting target 2 areas.

No 9/2003 concerning the system for setting the rates of subsidy on export of agricultural products (export refunds)

24. The report focuses on how the Commission administer setting the rates of subsidy on export refunds. The purpose of the examination was to answer the central question of whether the Commission sets the rates of export refunds in a rational, consistent and reliable manner. The ECA’s conclusion was that this was not the case. The ECA recommended on that background that the whole prefinancing system was reviewed and that it be considered revoked.

Denmark is mentioned in one of the tables, which include the annual average prices, which the individual Member States have reported to the Commission in 2000.

	Butter	Skimmed Milk Powder	Beef	Weat
	----- Euro/100 kg -----
Denmark	377	245	104	132
Highest	443 (GR)	249 (GB)	208 (GR)	151 (I)
Lowest	252 (I)	214 (E)	81 (I)	119 (F)
Note: From table 2 in the special report.

The prices that have been reported for beef and dairy products vary significantly from Member State to Member State, which makes it difficult to calculate the indicative theoretical difference between EU prices and world market prices. There are no guidelines for fixing the internal EU refund rate based on data sources.

No 11/2003 concerning the Financial Instrument for the Environment (LIFE)

25. The ECA carried out audit in 8 Member States. The examination did not include Denmark, but Denmark is mentioned in a table.

No 12/2003 on the sound financial management of the common organisation of the market in dried fodder

26. The ECA carried out audit in 3 Member States. The examination did not comprise Denmark but Denmark is mentioned in an Annex on the development in the individual Member States’ production of dried fodder.

27. In this memorandum, I have briefed the Public Accounts Committee about the annual report of the ECA, the Statement of Assurances and the special reports for the 2002 financial year. When disregarding a few reservations, it is the opinion of the ECA that the annual accounts faithfully reflect revenue and expenditure of the Com­munities. The Commission’s reform, including modernisation the accounting system, should remedy some of the shortcomings that are the reason why the ECA has reservations to the Statement of Assurance. The annual report shows that the budget surplus is decreasing, but still too big.

28. I find it satisfactory that the number of cases wherein there are critical comments to the management in Denmark, including cases about errors and deficiencies in the recording of the B-accounts, cases of procedures for customs clearance, and a minor error in a test sample in the agricultural aid, is limited, and that the authorities in these cases have taken actions to remedy the criticism.

29. I will brief the Public Accounts Committee once the European Parliament has examined the 2002 accounts.

Henrik Otbo

Annex 1

Review of ECA special reports for the 2002 financial year

• No. 1/2003 concerning prefinancing of export refunds^*)
• No 2/2003 on the implementation of the food security policy in developing countries financed by the general budget of the European Union
• No 3/2003 the invalidity pensions scheme of the European institutions
• No 4/2003 concerning rural development: support for less-favoured areas^*)
• No 5/2003 concerning PHARE and ISPA Funding of Environmental Projects in the Candidate Countries
• No 6/2003 concerning Twinning as the main instrument to support institution-building in Candidate Countries^*)
• No 7/2003 on the implementation of assistance programming for the period 2000-2006 within the framework of the Structural Funds^*)
• No 8/2003 concerning the execution of infrastructure work financed by the EDF (presented pursuant to Article 248(4), second subparagraph, EC)
• No 9/2003 concerning the system for setting the rates of subsidy on exports of agricultural products (Export Refunds)^*)
• No 10/2003 concerning Effectiveness of the Commission's management of development assistance to India in targeting the poor and ensuring sustainable benefits
• No 11/2003 concerning the Financial Instrument for the Environment (LIFE)^*)
• No 12/2002 on the sound financial management of the common organisation of the market in dried fodder^*)
• No 13/2003 concerning production aid for cotton

^*) Special reports in which Denmark is mentioned.

Annex 2

Review of the European Court of Auditors audit visits in Denmark for the 2002 financial year

Audit objects
VAT 2002	21/10-25/10 2002
DAS 2002 customs	18/11-22/11 2002
Management of irregularities	25/11-29/11 2002
DAS 2002	4/12-10/12 2002
Audit of the integrated management and control system	17/3-25/3 2003
Preparation of examination of the common market scheme for field seeds	16/6-18/6 2003